Court File and Parties
COURT FILE NO.: FS-22-103476 DATE: 20230501
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Sherif Gerges, Applicant AND: Sandra Gerges, Respondent
BEFORE: The Honourable Justice Tzimas
COUNSEL: Geoffrey Wells, for the Applicant Kristen Normandin, for the Respondent
HEARD: February 21, 2023
E N D O R S E M E N T
INTRODUCTION
[1] The Applicant brought an urgent motion to vary the court’s Preservation and Non-Dissipating Order of November 21, 2022, (Preservation Order), made under section 12 and 40 of the Family Law Act, R.S.O. c. F.3, as am. The Applicant would like to terminate paragraph 1 of the Order, or in the alternative vary it to permit the purchase of three pharmacies and the sale of two others, in response to the five buy-sell offers initiated by the third party, Niam Pharmaceuticals Inc.
[2] The Applicant is prepared to have the net proceeds of approximately $900,000 that he receives from the sale of the two pharmacies to be held in trust on a without prejudice basis, pending further agreement of the parties or court order. Finally, the Applicant would like the court’s permission to respond to other future buy/sell offers from third party business partners, on notice to the Respondent, with full particulars, and in the event of other sales, the net proceeds of such disposition to also be held in trust, on a without prejudice basis, pending further agreement of the parties or court order.
[3] The Respondent opposed the motion and asked for its dismissal. In addition, she asked that “all funds”, including but not limited to all sale proceeds and repayment of shareholders and intercompany loans owing to the Applicant in relation to the sale of the five pharmacies be paid into Court directly from the purchaser, Niam Pharmaceuticals Inc. and be exempted as collateral from the Applicant’s other loans / debt. Finally, the Respondent submitted that any other variation of the current Preservation Order will prejudice her claims for equalization, joint family venture, damages, child support, section 7 expenses, and spousal support, (Respondent claims).
[4] For the reasons that follow, on the evidence before the court, I am not satisfied at this time that the Applicant has enough security to be able to meet his anticipated obligations to pay the Respondent claims, such as they may be determined to be. On a balance of probabilities, in light of the various discrepancies related to the Applicant’s net worth and his income, it remains impossible to determine with any certainty the magnitude of the various claims that the Respondent is advancing, much less whether the Applicant will be able to meet them. Recognizing that the Applicant was completely silent on the quantum of child and spousal support, section 7 expenses, joint venture claims, and damages, on his own estimate of an equalization payment, I have serious concerns that the Applicant is already overleveraged. Until these concerns are addressed, I see no basis for a variation to the Preservation Order.
[5] At the same time, I am mindful that preservation orders are intended to be temporary, that the parties have a number of commercial interests and going concerns and that third parties stand to be impacted by the existing preservation order. Although the Applicant has much more work to do to satisfy the court of his bona fides intent and ability to meet his anticipated Respondent claim obligations, the Respondent is also cautioned that once the additional disclosure is forthcoming and there is greater clarity over the Applicant’s actual financial situation, she cannot use the Preservation Order as leverage for an ultimate judgment. Especially given the interests of third parties, the Respondent’s own resistance to anticipated renewed requests for buy/sell transactions, may lead those third parties to take steps to protect their interests that have the net effect of an involuntary dissipation of assets.
[6] In the result, although the Applicant’s motion is dismissed, it is without prejudice to its possible renewal, if the Applicant is able to address the concerns raised below. The most appropriate next steps will be to schedule a case management conference before me to discuss a timetable for specific steps to be taken to manage the progress of this case. Dates for such an attendance are discussed in my concluding paragraphs below.
BACKGROUND FACTS
[7] The parties were married on January 31, 1998 and separated on February 6, 2021. They have four children, whose ages range from 16 to 23. The eldest is working full time. The next two are in university studying pharmacy, and the youngest is in high school and resides with the Respondent.
[8] The Applicant commenced his Application on May 16, 2022. He left the matrimonial home in July 2022. In the fall of 2022, the Respondent sought an urgent motion for a non-dissipation of assets by the Applicant. That request resulted in an urgent early case conference before me, the scheduling of a motion for December 21, 2022, and the issuing on October 31, 2022, on consent, of a temporary and without prejudice, preservation and non-dissipation of assets order, (Preservation Order). The order was varied on November 21, 2022 and the parties agreed that they would not seek to argue the motion and accordingly, they vacated the motion date for December 21, 2022.
[9] On December 29, 2022, a third party, Niam Pharmaceuticals triggered five buy/sell offers for 5 pharmacies. In accordance with the order of October 31, 2022, as amended on November 21, 2022, the Applicant required the Respondent’s consent to proceed with the proposed transactions. The Respondent refused to consent. Ultimately, this resulted in the motion that is the subject of this endorsement.
ANALYSIS
[10] The starting point to this analysis is the recognition that the parties consented to the specific terms of the Preservation Order of October 31 / November 21. That order was made on the basis of the sections 12 and 40 of the Family Law Act, R.S.O. c.F.3, which provide as follows:
12 In an application under section 7 or 10, if the court considers it necessary for the protection of the other spouse’s interests under this Part, the court may make an interim or final order, (a) restraining the depletion of a spouse’s property; and (b) for the possession, delivering up, safekeeping and preservation of the property. R.S.O. 1990, c. F.3, s. 12.
40 The court may, on application, make an interim or final order restraining the depletion of a spouse’s property that would impair or defeat a claim under this Part. R.S.O. 1990, c. F.3, s. 40; 1999, c. 6, s. 25 (18); 2005, c. 5, s. 27 (21).
[11] The court in Wright-Minnie v. Minnie, 2020 ONSC 5573, at paragraph 8 reviewed the authorities that have addressed the manner in which sections 12 and 40 of the FLA should be applied and distilled them to the following general principles:
a. The object of sections 12 and 40 of the FLA is the protection of a spouse’s interests under the FLA by helping to ensure that there will be assets available to satisfy the entitlements of a spouse who is successful in obtaining relief under the Act. Relevant to that exercise is an assessment of the risk that assets in existence prior to trial will be dissipated. [1] b. Drawing analogies to principles applied when considering to grant interim or interlocutory injunctions, but without intending to lay down explicit and/or rigid formula or guidelines for the granting of such discretionary relief, courts applying sections 12 and 40 of the FLA frequently have regard to the following factors: the relative strength of a claimant’s case; the balance of convenience or inconvenience; and the potential for irreparable harm. [2] c. The court accordingly will consider how likely it is that the claimant will be entitled to an equalization payment and/or support, as well as the effect the granting or not granting of such orders will have on the parties. [3] d. Preservation and restraining orders generally should be restricted to specific assets, (as opposed to an all-encompassing order binding all of a party’s property in a general manner), and a claimant seeking such an order should show, on a prima facie basis, that he or she is likely to receive an equalization payment or support equal to the value of the specific assets. [4] e. Restraining orders granted pursuant to section 40 of the FLA usually are made when there is evidence that the party obliged to pay support is not complying with a support order or there is other evidence of blameworthy conduct. The recipient spouse cannot rely on bare allegations or assumed beliefs; i.e., there must be something more than an “unsupported concern”. [5]
Having consented to the Preservation Order, the parties effectively conceded these principles.
[12] On the motion before me, the only question to be answered is whether the Respondent’s interests will remain protected if the Applicant’s requested transactions were allowed to proceed. In other words, will the purpose of s.12 of the FLA continue to be met if the court were to amend the Preservation Order to allow for the proposed transactions to go forward? Practically, that translates into the question of whether the Applicant has enough security to cover the payment of his anticipated obligations on account of the Respondent’s claims.
[13] The Applicant estimated that he would owe the Respondent an equalization payment of $3,431,625.55, subject to various post-separation adjustments. He contended that he ought to be able to satisfy such a payment out of the proceeds of sale of the matrimonial home to pay the equalization payment and went further to argue that there was “no scenario in which his share of the net proceeds of sale of the matrimonial home would not pay the equalization payment, support and costs”. Although in his factum the Applicant made some passing references to potential support obligations and costs, he did not suggest any figures or acknowledge the potential magnitude of those obligations and how they would be satisfied.
[14] The Respondent disputed the suggested figure for the equalization payment and highlighted the absence of any estimates for child and spousal support, both for such past and future obligations, section 7 expenses, and other related spousal claims. Counsel submitted that the parties were nowhere near the point where they could determine the Applicant’s payment obligations to the Respondent, much less whether those obligations could be satisfied because the Applicant’s disclosure to date remained woefully inadequate. In support of that contention, counsel highlighted no less than eight reasons to question the reliability of the Applicant’s evidence. She expressed the strong concern that on the evidence that was produced, the Applicant may have leveraged his assets, including his anticipated share of the matrimonial home to such an extent, that he may already not be in a position to meet his obligations to the Respondent.
[15] In my review of the parties’ evidence and respective positions, I am most concerned that the evidence before me is incomplete, contradictory, and makes it impossible to arrive at reliable estimate of the Respondent’s claims and therefore the Applicant’s anticipated obligations, and the sufficiency of the Applicant’s assets, to satisfy his obligations, as they may determined. Those are essentially the two key variables that must be determined to decide whether the existing Preservation order may be varied. Although I appreciate that it may be premature to arrive at conclusive figures, I would expect, at the very least to be provided with a measure of their magnitude. To date, that has not been forthcoming.
[16] To begin with, as of the date when this motion was argued, the Applicant’s disclosure regarding his income and his business valuation was incomplete. The scope limitations to both reports and the enumeration of 23 assumptions and restrictions to the expert’s analysis left me with serious concerns over the reliability of the various proposed figures and the resulting conclusions. The letter in response from the Respondent’s expert of February 14, 2023 requesting no less than 16 additional items of information underscored my concerns and offered a measure of the Applicant’s outstanding disclosure.
[17] Although the productions to date confirm that at least numerically, the Respondent shall be entitled to a substantial equalization. Without making any pronouncement on entitlement, absent other considerations, the disclosure also suggested that the Applicant would be faced with substantial child and spousal support obligations, both retroactive and into the future, as well as section 7 expenses. But that is as far as the evidence before me would permit me to go. That is problematic because without reliable evidence on what those inputs are likely to be, it is difficult to assess how much security may be required to preserve the Respondent’s entitlements.
[18] This difficulty is compounded by the discrepancies related to the Applicant’s net worth. The Applicant produced a personal net worth statement from the Canadian Western Bank Maximum Financial file, (CWB) that was clearly dated and therefore unhelpful. If anything, it amplified the concerns over the Applicant’s actual financial situation and the extent to which he may already be insolvent. To begin with, even without any review of CWB’s file or any GSAs, the very fact that the matrimonial home is listed in the Applicant’s net worth suggested to me that CWB views that as an exigible asset either because it was used as collateral, or the Applicant gave a personal guarantee(s).
[19] Then, the Applicant provided the court with varying valuations for the matrimonial home. The CWB statement gave the home a value of $45 million. In his affidavit at paragraph 24, the Applicant suggested a value of $35 million. Then at paragraph 27 of the same affidavit, he implied that $20 million might be a possible figure to consider, albeit in a worst-case scenario. In her materials, the Respondent speculated that matrimonial home would likely sell for something between $18 – 22 million. For equalization purposes, the Applicant said that the value as of the date of separation was $35 million, with each party being a 50% owner. But it was not clear how that figure was obtained or if it represented an accurate assessment. This discrepancy has implications both for the determination of equalization and potentially puts into question the actual quantum of the Applicant’s share that may be available to satisfy his obligations.
[20] The difficulties over the value of the matrimonial home were compounded by the contradictions over the question of whether or not the Applicant has already used the matrimonial home as collateral for his various commercial transactions. As much as the Applicant denied that he had done so, he offered no explanation in reply to the Respondent’s evidence of the General Security Agreement the Applicant entered into on May 25, 2022, without the Respondent’s knowledge, where the Applicant listed the matrimonial home as security for a loan to SSMJ Drugs Ltd. o/a Total Health Pharmacy. This discrepancy is highly problematic and put into serious doubt his contention that there would no scenario under which the Respondent would not receive her entitlements. Absent other information or clarifications, this GSA, and possibly others might suggest otherwise.
[21] As if these concerns were not enough, the question of whether or what personal guarantees the Applicant may have given to CWB in the financing of the various pharmacies either in the past or into the future remained an enigma. In his own affidavit, at paragraph 40, the Applicant indicated that CWB would not require any cross guarantees, spousal guarantees, or real estate collateral for the financing in the sum of $1.6 million for the three pharmacies he would like to purchase. He said that CWB will rely on the information on file for the Applicant, as well as their long history to advance the requested financing. But then, the response to an inquiry by the Respondent’s lawyer indicated that the security for the financing “is the existing GSA and personal guarantees. The personal guarantees are joint and several amongst the partners. To be clear, the other partners are consenting to the financing. CWB did not request any personal residences as collateral.”.
[22] Counsel for the Applicant argued that if CWB were not worried about financing the Applicant’s intended transactions, neither should the court. With respect, given the reference to personal guarantees and the inclusion of a $45 million dollar home as part of the Applicant’s net worth, I can take no comfort from such an argument. For starters, for such an argument to have any merit, the court would have had to be provided with a comprehensive explanation of CWB’s assessment, something that was not produced. The production of a dated net worth statement could not possibly be adequate. To the extent that Applicant was asking the court to rely on CWB’s assessment, it would have been for the Applicant to produce such reassurance and not be critical of the Respondent for not speaking to CWB’s representative.
[23] But leaving aside what was or was not produced from CWB’s file, CWB would likely not be asking for the home to be put up as collateral if it already secured personal guarantees and a GSA with the matrimonial home as collateral. In the same vein, the argument that the Respondent is overreacting and should not be worried about the financing if CWB is not asking for anything more is rather simplistic and naïve. If anything, the suggested ease with which CWB is willing to advance the additional funds heightens the scrutiny over the full scope of the security they may already have to protect their interest. While it is not this court’s business to evaluate CWB’s practices or the risks it is prepared to assume, it does suggest very clearly that a) this court is not being provided the complete picture; and b) the Applicant may not be able to use his share of the net proceeds to the matrimonial home to satisfy his obligations as he wishes the court to believe.
[24] Before I move on to the additional concerns, I do want to comment on the submission that the Respondent, and her counsel chose not to speak to the CWB representative and that somehow that stance impacted on their ability to satisfy themselves that the proposed financing to acquire the three pharmacies would not prejudice her interests. With respect, if the Applicant wished to be transparent, he would have agreed to authorize CWB to release the file, or at the very least the relevant portions, to the Respondent and her counsel. I fail to see what would be gained from a conversation with the CWB representative. Whatever he would say would have to be supported by the corresponding documentary evidence. Absent that, he would run the risk of being drawn into a disagreement over what he did or did not say. There are already enough discrepancies in the various figures to run the risk of adding to the confusion and adding third parties into the dispute.
[25] That brings me to the issue of the Applicant’s debt and how it figures in his overall financial situation. The Personal Net Worth Statement from the CWB file confirmed that the Applicant holds approximately 17 million of debt across the pharmacies for which he has an interest. The Applicant denied that and suggested in his Reply affidavit that the “17,000,000 is the amount of debt held by all 23 pharmacies and four commercial properties, which the Respondent is a co-owner of 10 pharmacies and one commercial building. The debt is held corporately, secured by the corporate assets (effectively a mortgage on each pharmacy) and each partner signed a General Security Agreement including the Respondent. The Respondent has been signing the same general security agreements for 20 years. There is no security by way of any other assets, other than the general security agreements.”.
[26] My difficulty with the Applicant’s statement is that he failed to reconcile that statement with the evidence that at least one GSA listed the matrimonial home as collateral, that all the GSAs on file with CWB were the same, and his own counsel’s communication already highlighted above that confirmed that the financing will be secured by way of a GSA and a personal guarantee. Added to these unexplained personal financial commitments is the communication of June 21, 2022 from the representative of CWB alerting the Applicant to a loan being in arrears and reminding him that “the loans are also personally guaranteed and the way guarantees and general securities agreements work is a default on one loan is considered a default on all”.
[27] Against the sum of these statements, the Respondent, and by extension this court, has good reason to be very much concerned over any additional leveraging of the matrimonial home and whether the Applicant’s net share of the home proceeds could offer sufficient security for the anticipated payments to her.
[28] The next area of concern lies with the discrepancies in the valuations of the Applicant’s share in the various pharmacies and his net worth. For the Concession Street Property in Hamilton, the CWB Net Worth Statement attributed a net value of $391,500. The Applicant, in his NFP gave it a value of $192,000. For THP104, the Applicant’s CWB Net Worth Statement indicated that the Applicant had a 50% share. In his NFP, the Applicant said he had a 33.33% share. Equally troubling are the different figures relating to the Applicant’s net worth. CWB suggests a net worth of $31,259,204. In his sworn Financial Statement of May 16, 2022, the Applicant calculated his NFP to be $15,371,906.24. Finally, although the Applicant says that the pharmacies he is seeking to purchase are “not highly leveraged at all”, the 2021 balance sheets as of December 31, 2021 show that GSV held a loan payable of approximately $1,350,000 and the TH Guestville held a loan payable of $630,000.
[29] Cumulatively, these discrepancies undermine the ability to identify the equalization payment and whether the Applicant’s estimate is accurate. In light of these difficulties, I am unable place any faith in the Applicant’s conclusion that the equalization payment would come to approximately $3.5 million, much less that there is no scenario in which his share of the net proceeds of sale of the matrimonial home would not pay the equalization payment, support, or costs.
[30] That concern brings me to the subject of support and the Applicant’s income. The discrepancies are substantial and unexplained. In his financial statement of May 16, 2022, the Applicant indicated that his income was $731,027. He maintained that position in his financial statement of February 2023. In his financial statement sworn January 18, 2022, the Applicant’s income was said to be $256,087.48. But remarkably, the Income Report prepared by the Applicant’s expert confirmed that his income for $1,660,000.
[31] Quite apart from the fact that the Applicant made only a passing reference to support obligations but suggested no approximate figure, the discrepancies in the reporting of the income makes it impossible to assess his likely exposure and his ability to pay for that liability out of the matrimonial home proceeds. What is certain is that an income of $1.6 million as compared to $256,087 or $731,027, absent other considerations or set-offs, would result in very substantial obligations, certainly, at the very least for child support. Cumulatively, it also suggests that the value of the Respondent’s claim may be far greater than the suggested $3.5 million.
[32] To be clear, as I already noted, I am making any pronouncement on the support figures or the entitlement to same as there was virtually no evidence, and in any event those issues were not before me. But absent other considerations, given the family profile, it would not be wrong to recognize that there may be a sizeable sum owing to the Respondent and that until there were clarity over that figure, a Preservation Order would be necessary to protect the payment of such obligations.
[33] Finally, I note in the submissions the various threats by the Applicant to the Respondent, the evidence that the Applicant would have known about the buy/sell provisions for the various pharmacies in which he has business interests prior to agreeing to the preservation order, and the possibility that the Respondent’s refusal to vary the order may be driven by her wish to force the sale of all five pharmacies. Whatever the underlying currents and reactions, telling the court that the Respondent’s concerns are absurd does little to resolve the discrepancies in the figures and the Applicant’s persistent lack of transparency. What I do see is a deliberate effort to be as minimally transparent as possible, together with a “drip, drip, drip” approach to the rearrangement of assets, if not their complete depletion or movement to other jurisdictions, where enforcement of a judgment might be exceptionally difficult to pursue. I rely on the excerpted paragraphs of Mr. Vora’s affidavit in the Respondent’s affidavit at paragraph 36 for this conclusion.
CONCLUSION
[34] Ultimately, as I noted in the beginning of my analysis, for the purposes of this motion, given the existing Preservation Order, I have to be satisfied that the Applicant has enough security to cover his obligation to pay the Respondent’s claims as those may be determined. On a balance of probabilities, given the various discrepancies and conflicting evidence that I enumerated above, I am unable to make that determination with any confidence. The two critical variables to this analysis remain unknown. The Respondent has various spousal entitlements but they have yet to be quantified given the Applicant’s inconclusive evidence concerning his income and the business valuations. Clarity over these figures will identify, what security the Applicant would have to set aside to satisfy his obligations, pending their determination or settlement. Similarly, in the absence of a truthful and transparent explanation of the Applicant’s actual net worth, it is impossible to evaluate what security the Applicant actually has to satisfy his anticipated obligations. Until there is clarity over these variables, I see no basis for a variation of the Preservation Order.
[35] That said, as I indicated in my introductory remarks, Preservation orders are intended to be temporary. It is essential that both parties work together to identify the various figures and obtain some clarity over the Applicant’s finances. Absent such clarity, the continued existence of the Preservation Order may prove to be counter-productive and harm both parties, if third parties were to take steps to secure their own financial interests. The concern is very real, given the Applicant’s cumulative defaults, as enumerated by Mr. Vora in his affidavit. If either he or CWB were to act on the security already in place, the Respondent may realize the Applicant’s threats to leave her penniless by operation of the Preservation Order.
[36] Insofar as the Respondent asked for a dismissal of the motion, as well as an order that all funds owing to the Applicant that may be paid to him be paid into court, I am not prepared to agree to that request. Given the preservation order, the Applicant ought not to be selling anything to Niam Pharmaceuticals Inc. and/ or Adesh Vora. If he did, he would be defying the Preservation Order and facing the prospect of a contempt.
[37] In light of these concerns, although the Applicant’s motion is dismissed, it is without prejudice to its renewal if necessary. In terms of next steps before the court, with the benefit of this decision, a case management conference is to be scheduled as soon as possible. My available dates are in the week of May 8. Kindly contact the trial office to firm up a date. Such attendance is to be in person. I would suggest we set aside two hours to work through the various issues with a view to working towards clarity and a future variation of the Preservation Order. The parties should also be considering mediation as an alternate tool to reaching either a settlement over the specific transactions or the Applicant in its totality.
[38] As to the costs of the motion, the Respondent is entitled to costs. Although I note the sum claimed in the bill of costs, given the indication by both sides that offers to settle the motion were exchanged, I will require submissions so that I might make my costs determination. Unless the parties are able to reach an agreement, I can hear the cost submissions at the case management conference. Alternatively, if the parties may make submissions in writing. Either way, I will require written submissions to support the respective positions, limited to two pages each, in addition to attaching the offers(s) to settle.
Tzimas J. DATE: May 1, 2023