Court File and Parties

COURT FILE NO.: CV-20-387 DATE: 2024/11/29 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: NAMMARRA DOKKEN-GEORGE, 1178448 ONTARIO INC. and KINGSTON HUB GROUP REALTY INC. (Plaintiffs / Responding party)

AND

FRANCOIS TONGE, SCOTT MACPHERSON, GREG STEVENSON, PAUL OWEN, 1073639 ONTARIO INC., KINGSTON HUB GROUP INC., MNP LLP, JEFF HANLEY and CARA CHESNEY. (Defendants / Moving parties)

BEFORE: Justice A. Kaufman

COUNSEL: David M. Adams, Counsel for the Defendants / Moving Parties Francois Tonge, Scott Macpherson, Greg Stevenson, Paul Owen, 1073639 Ontario Inc. and Kingston Hub Group Inc.

R. Steven Baldwin, for the Plaintiffs / Responding Parties Nammarra Dokken-George, 1178448 Ontario Inc. and Kingston Hub Group Realty.

HEARD: August 19, 2024

ENDORSEMENT

[1] Francois Tonge, Scott Macpherson, Greg Stevenson, Paul Owen, 1073639 Ontario Inc., and Kingston Hub Group Inc. (collectively, the “moving parties”) bring this motion for partial summary judgment to strike the plaintiffs’ derivative claim, to appoint independent counsel for Kingston Hub Group Realty Inc. (“Realty Inc.”), and for leave to amend their Statement of Defence and Counterclaim.

Background

[2] The essential facts are as follows: In 2007, a group of businessmen incorporated two entities—Kingston Hub Group Inc. (“Hub Group”), which operates three successful bars and restaurants in Kingston, Ontario, and Realty Inc., which owns the real estate from which these businesses operate. Brian George was a principal investor in both corporations. The plaintiff, Nammarra Dokken-George, is Brian George’s widow. Mr. George passed away in 2012.

[3] Prior to his passing, Brian George held 70% of the shares of Realty Inc. and 45% of the shares in Hub Group through his holding company, 1178448 Ontario Inc. The remaining shares were held by the moving parties.

[4] Ms. Dokken-George inherited Mr. George’s shares in both corporations. The moving parties sought to acquire Mr. George’s shares pursuant to the terms of a Unanimous Shareholder Agreement, which stipulated buyout rights for shareholders in the event of death. The moving parties commenced an application in this Court, however, the parties subsequently reached a settlement in 2013. Under the terms of the settlement, Ms. Dokken-George sold all of Mr. George’s interest in Hub Group to the moving parties and 20% of his shares in Realty Inc.

[5] As a result, Ms. Dokken-George owns 50% of Realty Inc., while the moving parties hold the remaining 50%, and they own 100% of Hub Group.

Dispute Regarding Rental Income

[6] The primary dispute between Ms. Dokken-George and the moving parties concerns the rental payments that Hub Group is obligated to make to Realty Inc. According to the moving parties, it was always understood that Hub Group would pay Realty Inc. rent sufficient to cover its mortgage servicing costs only, thereby operating on a profit-neutral basis. They contend that only upon the discharge of Realty Inc.’s mortgages, Hub Group would commence payment of market rent to Realty Inc.

[7] This arrangement, however, has proven unsatisfactory to Ms. Dokken-George. Following the settlement reached in 2013, she owns 50% of Realty Inc., a corporation that holds real estate valued at several million dollars. Despite this ownership, she receives no dividends from Realty Inc. and she is required to pay half of Realty Inc.’s property taxes from her personal funds.

[8] In 2018, Ms. Dokken-George demanded that Hub Group pay Realty Inc. market rent. She contends that any previous agreement to pay rent limited to covering mortgage costs may have been reasonable while Mr. George was a shareholder in Hub Group, as any reduction in rent payable to Realty Inc. would have provided a corresponding benefit to Hub Group. However, she asserts that she no longer has any stake in Hub Group.

[9] Realty Inc.'s mortgages were satisfied in 2022, and the moving parties acknowledge that Hub Group is now obligated to pay Realty Inc. the market rent. However, the parties remain in disagreement regarding the amount of market rent, having obtained competing appraisals that reflect a significant disparity.

This Action

[10] Ms. Dokken-George commenced this action on December 15, 2020, in her name, on behalf of her holding company, and on behalf of Realty Inc. The action asserts an oppression remedy and a derivative claim in favor of Realty Inc. Additionally, she has advanced claims against Realty Inc.’s accountants, but these claims are not pertinent to the motion currently before the Court.

[11] Ms. Dokken-George alleges that the moving parties failed to remit proper rental payments to Realty Inc. since December 1, 2011. She contends that the defendants, as tenants and 50% shareholders of Realty Inc., engaged in self-dealing that prioritized their interests and those of Hub Group over her interests and those of Realty Inc. Specifically, she alleges that the defendants:

a) Declared dividends to themselves and not to her from the common share equity of Realty Inc., which had the effect of diminishing Realty Inc.’s equity;

b) Failed to pay interest on amounts owed by Realty Inc. to her;

c) Unilaterally reduced the rent owed by Hub Group to Realty Inc., effectively subsidizing the operations of Hub Group at the expense of Realty Inc.

[12] Ms. Dokken-George sought leave of the court to bring this action in the name of Realty Inc. for the purpose of prosecuting this action at paragraph 1f) of her claim. She brought a motion to that effect and on June 9, 2021, Justice Mew granted the Order on consent.

ISSUES

[13] This motion raises three issues:

a) Should Ms. Dokken George’s derivative action be dismissed?

b) Should independent counsel be appointed to represent the interests of Realty Inc.?

c) Should Realty Inc. be added as a party to this proceeding to this proceeding to ensure its full participation and representation by independent counsel?

[14] The moving parties’ motion for leave to amend their Statement of Defence and Counterclaim was not opposed, and an order shall issue granting them leave to amend.

1. Dismissal of Ms. Dokken George’s action

[15] The defendants seek the dismissal of Ms. Dokken-George’s action pursuant to Rule 20.01(3)[^1], arguing that there is no genuine issue requiring a trial. They present two primary arguments: First, they contend that her derivative action is a nullity because Justice Mew’s June 9, 2021 Order did not grant leave to bring the derivative action nunc pro tunc. Second, they argue that the action does not serve the interests of Realty Inc. and, consequently, cannot be sustained.

a) Validity of Justice Mew’s Order

[16] Section 246 of the Business Corporations Act (the “OBCA”) permits a complainant to apply to the court for leave to bring an action in the name and on behalf of a corporation. Justice Mew granted that Order. Paragraph 1 of the Order reads:

THIS COURT ORDERS that the plaintiff, Nammarra Dokken-George, is hereby granted leave to bring and maintain this action in the name of and on behalf of Kingston Hub Group Realty Inc., for the purpose of prosecuting the action on behalf of Kingston Hub Group Realty Inc., pursuant to sections 245 and 246 of the Business Corporations Act, R.S.O. 1990 c. B. 16.

[17] The Order also allowed the moving parties to plead and assert any claims or defences available to them.

[18] The moving parties argue that Ms. Dokken-George’s derivative action is a nullity because a complainant must obtain leave before instituting a derivative action. They assert that, in circumstances where the action is commenced prior to obtaining the necessary leave under section 246 of the OBCA, a nunc pro tunc order can be sought. The defendants further contend that since Justice Mew did not grant leave nunc pro tunc, the action is therefore a nullity.

[19] I would not give effect to this submission. The defendants consented to Ms. Dokken-George’s motion for leave to initiate and maintain the derivative action. Their argument effectively claims that they consented to an order that is without any legal effect. It is evident to the Court that, by consenting to the order granting the plaintiff leave to maintain this action, the parties intended for the order to have the requisite retroactive effect.

b) Is the derivative action in Realty Inc’s interests?

[20] A complainant bringing a derivative action must satisfy the court that:

(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;

(b) the complainant is acting in good faith; and

(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.[^2]

[21] On November 15, 2023, the plaintiffs brought a motion to wind up Realty Inc. by listing its properties for sale and requiring Hub Group to vacate those properties. That motion was stayed pending the outcome of this motion. The defendants contend that the plaintiffs’ motion for a wind up has fundamentally altered the landscape, and that it is now clear that that the plaintiff is not pursuing the derivative action in Realty Inc.’s interest.

[22] The Court notes that an order for the winding up of Realty Inc. was specifically pleaded in paragraph 1(j)(viii) of the Statement of Claim. Despite the plaintiffs’ request for this relief, the defendants consented to the order granting the plaintiffs leave to pursue the derivative action. However, it does not appear that this relief was brought to Justice Mew’s attention. The Court also observes that the moving parties’ themselves seek an order to wind up Realty Inc., if necessary, in their Counterclaim.

[23] The moving parties argue that, notwithstanding Justice Mew’s Order, this Court retains jurisdiction to oversee the propriety of derivative action after a complainant has been granted leave, especially when the complainant acts contrary to the interests of the corporation on behalf of which the claim is brought. In D’Amore v. Russ, it was held that such power is implicitly recognized under section 245 of the OBCA:

16 Although the derivative action sections in the O.B.C.A. do not expressly empower a court to remove a complainant/court nominee, the concepts of good faith and best interests of the corporation in s.245, and the ability of the court to authorize “any other person” to control the conduct of the action in s.245, imply that the court has jurisdiction to replace a complainant/court appointed nominee. To suggest otherwise, would mean that once a complainant demonstrated good faith and was appointed under s.245, that a court would be powerless to replace the complainant who failed to diligently prosecute the action; acted against the interests of the corporation; or acted in bad faith. It would also mean that in the event that the complainant who had the conduct of the derivative action, became too ill to continue to act or died, the derivative action would not be prosecuted as the court could not appoint a replacement.[^3]

[24] The defendants assert that Ms. Dokken-George’s motion to wind up Realty Inc. serves her personal interests and is contrary to the corporation’s interests. They argue that her motion does not seek to advance the interests of the corporation but its demise.

[25] A complainant need only meet a relatively low threshold to satisfy the Court that the proposed derivative action “appears to be” in the interests of the corporation. Some courts have determined that this test is satisfied when the intended action “does not appear frivolous or vexatious and could reasonably succeed” or presents an "arguable case."[^4]

[26] While a corporation’s interests may encompass a variety of factors,[^5] I agree with the moving parties that seeking the winding up of a commercially viable corporation is not in its interests. A derivative action is pursued for corporate relief, aimed at recovering for wrongs committed against the corporation itself. An order for winding up does not achieve that aim.

[27] Nevertheless, with the exception of the winding-up order, Ms. Dokken-George’s interests align with those of Realty Inc. She alleges that the defendants engaged in non-arms’ length dealings that were detrimental to Realty Inc. She contends that the defendants failed to pay Realty Inc. market rent, which benefited Hub Group while disadvantaging Realty Inc. and herself as a shareholder. The moving parties forcefully dispute these allegations, and it is not the Court's role to assess their validity within the context of this motion. To the extent that her claims hold any merit, the relief sought in this action appears to benefit both herself as a shareholder and Realty Inc. as a corporation.

[28] The Court therefore concludes that the proposed derivative action appears to be in Realty Inc.’s interest, apart from the request for an order to wind up the corporation.

2. Should independent counsel by appointed to represent Realty Inc.?

[29] I concur with the moving parties that the same counsel cannot represent Ms. Dokken-George and Realty Inc. due to a conflict of interest. An order for the winding up of Realty Inc. would benefit Ms. Dokken-George but would be contrary to the interests of Realty Inc. However, I decline to issue an order appointing independent counsel to represent Realty Inc.'s interests.

[30] Pursuant to section 247 of the OBCA, the Court may make any order it deems appropriate, including directives regarding the conduct of the action.

[31] In accordance with this section, the Court orders that the derivative action be stayed until the determination of Ms. Dokken-George’s oppression action and her action against Realty Inc.’s accountants. This order will not prejudice Ms. Dokken-George’s rights, allows her counsel to represent her in the oppression claim without conflict, and promotes the most expeditious and cost-effective resolution of this action on its merits.

[32] Both parties agree that Realty Inc. must be included as a party to this action. The parties are directed to request a case conference before me to discuss whether any modifications should be made to the style of cause as a result of this Court’s order. They may file a case conference brief, not exceeding three pages, at least three days before the case conference.

Amendment of pleading

[33] The moving parties are granted leave to amend their Statement of Defence and Counterclaim in the manner set forth in Schedule “A” to their notice of motion.

Costs

[34] In light of the mixed results obtained in this motion, and considering that the moving parties should have opposed the plaintiff’s motion for leave to initiate a derivative action given that the plaintiff had sought an order for the winding up of Realty Inc. in her Statement of Claim, the Court makes no order as to costs.

A. Kaufman J.

COURT FILE NO.: CV-20-387 DATE: 2024/11/25

ONTARIO SUPERIOR COURT OF JUSTICE

RE: Nammarra Dokken-George, 1178448 Ontario Inc, and Kingston Hub Group Realty Inc. (Plaintiffs/Responding Party)

-and-

Francois Tonge, Scott Macpherson, Greg Stevenson, Paul Owen, 1073639 Ontario inc., Kingston Hub Group Inc., MNP LLP, Jeff Hanley and Cara Chesney (Defendants/Moving parties)

COUNSEL: David M. Adams, Counsel for the Defendants / Moving Parties, Francois Tonge, Scott Macpherson, Greg Stevenson, Paul Owen, 1073639 Ontario Inc. and Kingston Hub Group Inc.

R. Steven Baldwin, for the Plaintiffs/ Responding Parties, Nammarra Dokken-George, 1178448 Ontario Inc. and Kingston Hub Group Realty.

ENDORSEMENT

Justice A. Kaufman

Released: November 29, 2024

[^1]: R.R.O. 1990, Reg. 194. [^2]: Ibid, s. 246(2). [^3]: D’Amore v. Russ, 1991 CarswellOnt 1552, [1991] O.J. No. 749, 26 A.C.W.S. (3d) 1112 (Ont. Gen. Div). at para 16. [^4]: Hevey v. Wonderland Commercial, et al., 2021 ONSC 540, at paras 40-43 and 59. [^5]: Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68, at para 42.```