Reasons for Decision

Court File No.: CV-24-00620
Date: 2025-02-26
Ontario Superior Court of Justice

Between:
Hossein Jalilnattajamiri, Applicant
and
Mahmoud Jalilnattajamiri and Fouka Furniture Inc., Respondents

Applicant Counsel: Alan S. Cofman
Respondent Counsel: Elina Marinosyan and Elen Gasparyan

Heard: December 18, 2024

Justice C.F. de Sa

Overview

[1] The Applicant, Hossein Jalilnattajamiri (“Hossein”), is the son of the Respondent, Mahmoud Jalilnattajamiri (“Mahmoud”). Hossein and Mahmoud were mutual shareholders in the family business, Fouka Furniture Inc. (“Fouka”).

[2] The dispute arises from a transfer of Hossein’s shares in Fouka to Mahmoud and an agreement to repay a shareholder loan made by Hossein to the corporation (Fouka).

[3] To facilitate the above-noted transactions, the Respondents executed promissory notes in favour of Hossein. To date, the Respondents have not paid Hossein the full amount owing under the promissory notes. Accordingly, Hossein is seeking an order for payment of the balance owing under each promissory note being $47,500.00 and $525,000.00, respectively.

[4] Mahmoud Jalilnattajamiri and Fouka Furniture Inc. have brought a motion seeking to convert the present application into an action pursuant to Rule 38.10(1)(b) of the Rules of Civil Procedure.

[5] Mahmoud and Fouka dispute the enforceability of these promissory notes, asserting that they were based on inflated financial projections and misrepresentations made by Hossein during his management of Fouka Furniture Inc. Mahmoud and Fouka assert that the promissory notes should be declared void ab initio as they were executed based on misrepresentations regarding Fouka’s financial status and profitability.

[6] Mahmoud and Fouka further contend that during Hossein’s tenure as manager and director, the company was mismanaged to the point of financial instability, requiring substantial capital injections by Mahmoud to prevent the insolvency of Fouka. It was also discovered that Hossein made unauthorized transfers as a result of which $32,200.00 went missing.

[7] According to the Respondents, the underlying dispute involves complex factual and legal issues, including allegations of mismanagement, financial misrepresentation, and significant financial losses suffered by Fouka Furniture Inc. under Hossein Jalilnattajamiri’s tenure.

[8] These issues necessitate a full evidentiary record and comprehensive procedural safeguards, which are best achieved through an action. Conversion to an action will allow for proper document discovery, examinations for discovery, and a trial to resolve the disputes on a complete factual record.

[9] In the circumstances of this case, I agree with the Respondents that the issues here require a trial. I am not able to make a determination of the matter given the conflicting accounts provided by the parties just on the basis of the materials filed.

[10] The reasons for my decision are outlined below.

Summary of Facts

The Share Purchase Agreement

[11] Fouka is a corporation in the business of selling high quality and custom-made home furniture.

[12] Mahmoud is an acting director, officer and shareholder of Fouka.

[13] Hossein is the son of Mahmoud and a former director of Fouka.

[14] On or about February 17, 2023, Hossein and Mahmoud entered into a Share Purchase Agreement (“SPA”) whereby Mahmoud agreed to purchase twenty-five Common Shares (“Shares”) in Fouka from Hossein for $450,000.00.

[15] Pursuant to the SPA, Mahmoud was to pay for the Shares in various installments as follows:

2.04 Partial Payment. On the Closing Date, the Purchaser shall deliver the sum of one hundred thousand dollars ($100,000) as partial payment (the “Partial Payment”) towards the Purchase Price.

2.05 Balance of Purchase Price. Following the Closing, the Purchaser shall deliver the balance of the Purchase Price, in the sum of three hundred and fifty thousand dollars ($350,000) by installments (the “Balance of the Purchase Price”), all of which must be made on or before December 31, 2023. The Purchaser may make any number of payments to achieve the installment timeline in subsection 2.06. The Purchaser shall deliver on the Closing Date a Promissory Note in respect of the Balance of the Purchase Price to the Shareholder.

2.06 Installment Timeline. The Purchaser shall pay the Balance of the Purchase Price as follows:

(a) By March 31, 2023, the amount of $87,500.
(b) By June 30, 2023, the cumulative amount of $175,000.
(c) By September 30, 2023, the cumulative amount of $262,500.
(d) By December 31, 2023, the cumulative amount of $350,000.

[16] On February 17, 2023, the Shares were transferred from Hossein to Mahmoud. That same day, Mahmoud provided Hossein’s counsel with a certified cheque for $100,000.00 as partial payment in accordance with the SPA and executed a promissory note in favour of Hossein for the balance owing (“Mahmoud Promissory Note”).

[17] The Mahmoud Promissory Note provided that the balance owing for the Shares, being $350,000.00, was to be paid no later than December 31, 2023, pursuant to the same installment timeline set out in the SPA. Further, section 5 of the Mahmoud Promissory Note specified that failure to make timely payment constituted an event of default:

5. Events of Default. The outstanding Principal Amount shall immediately become due and payable without notice or demand upon the occurrence of any of the following events of default (each, an “Event of Default”)

(a) If the Borrower fails to pay any Principal Amount when due and payable hereunder.

[18] To date, Mahmoud has paid the total sum of $402,500.00 for the Shares. Accordingly, $47,500.00 remains due and owing under the Mahmoud Promissory Note and SPA.

[19] On or about January 12, 2024, Hossein’s counsel sent a letter to Mahmoud demanding payment of the outstanding balance of $47,500.00, by no later than January 18, 2024.

[20] Notwithstanding the formal demand for payment, Mahmoud has not advanced the balance of $47,500.00.

The Shareholder Loan

[21] On February 17, 2023, Hossein advanced a shareholder loan to Fouka in the amount of $525,000.00 (“Loan”). That same day, Fouka executed a promissory note in favour of Hossein with respect to the repayment of the Loan (“Fouka Promissory Note”).

[22] The Fouka Promissory Note provided that,

The aggregate unpaid principal amount of this Note shall be due and payable on December 31, 2023 (the “Maturity Date”).

The Borrower shall have a one time option to extend repayment of up to $100,000.00 of the Principal Amount of this Note until January 31st, 2024 (“Extended Maturity”) provided. The Borrower shall pay interest to the Lender on the unpaid principal amount outstanding as of December 31, 2023 from and after January 1st, 2024 to January 31st, 2024 at a rate per annum equal to 15%.

Upon the occurrence and continuance of any of the following events (each an “Event of Default”), the Lender may, at its option and by written notice to the Borrower, declare the entire principal amount of this Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable:

(a) The Borrower fails to pay the Principal Amount, due and owing under this Note by the Maturity Date or the Extended Maturity Date.

[23] Notwithstanding the terms of the Fouka Promissory Note, Fouka has not advanced any funds to Hossein with respect to the repayment of the Loan, nor did it exercise the option to extend repayment of the Loan.

[24] On or about January 12, 2024, Hossein’s counsel sent a letter to Fouka demanding payment of $525,000.00 by no later than January 18, 2024.

[25] Notwithstanding the formal demand for payment, Mahmoud has not advanced any funds to the Applicant for repayment of the Loan.

[26] The Applicant maintains that $525,000.00 plus interest remains due and owing to Hossein under the Fouka Promissory Note.

Background of the Dispute and the Respondents’ Claim

[27] Fouka Furniture Inc. was incorporated on August 15, 2015, and commenced business operations in Canada in October 2019. From October 2019 until April 2022, Hossein Jalilnattajamiri acted as the director of the corporation and managed its business activities.

[28] Mahmoud has very limited English proficiency. This is not in dispute. Given Mahmoud’s limited proficiency in English, from the date Fouka was established in Canada, Mahmoud relied heavily on Hossein to assist with Fouka. Hossein had full authority to manage the family business and handled the company’s finances including the company’s business decisions.

[29] At the start, the company was in the names of Mahmoud and Hossein, and the shares in the company were split 50/50. In 2021, Ali, Hossein’s brother, proposed coming to Canada and being added as a shareholder. At the time, in 2021, Ali and Houra Gorizadeh (Hossein’s mother/Mahmoud’s wife) were both added as shareholders. As a result, all four ended up with a 25% stake in Fouka.

[30] Hossein and Ali do not get along. After Ali joined the company, Hossein’s relationship with the rest of the family became strained. According to Mahmoud, Hossein would frequently send threatening and abusive messages to Mahmoud containing curses and expressions of ill will. These messages and conversations frequently contained threats and extremely hostile behavior.

[31] Given the issues Mahmoud was having with Hossein, it was decided that Ali would start working as General Manager in 2021. Shortly after Ali was made the General Manager, Hossein left for a vacation. According to the Respondents, when Hossein left, Mahmoud and Ali were unable to manage the business as Hossein was the only person authorized to access the accounts. Hossein also held all the information about the other companies Fouka was working with, such as Paystone and Ordorite (a software company).

[32] Given the ongoing conflict between Hossein and the family, it was decided that Mahmoud would purchase Hossein’s 25% share of the company. According to Mahmoud, the amount of $450,000 listed in the Promissory Note was based on the projected revenue of Fouka based on representations made by Hossein about the operations of the company.

[33] Mahmoud maintains that he could not speak or read English and had no information concerning the projected net income of Fouka and relied upon the representations made by Hossein. The shares that were valued at $450,000 were based on the false information conveyed by Hossein regarding Fouka’s financial situation. Hossein had full access to the financial status of Fouka, its debts, liabilities as well as the information on the assets, revenue and projected profits. According to Mahmoud, Hossein misrepresented the state of Fouka’s financial situation, and the projected revenue of the company to maximize the amount Mahmoud had to pay. In fact, Fouka only had limited income in 2022 ($30,249) and sustained substantial losses in 2023. According to Mahmoud, Hossein grossly misrepresented the state of Fouka’s financial affairs and deceived Mahmoud.

[34] After Hossein left the position, it was also discovered that Hossein had mismanaged the company, and had even taken money from the Company in breach of his fiduciary duties. On April 18, 2022, Hossein transferred $33,200.00 from the company’s funds to his personal accounts. Hossein had also entered into agreements that placed the company under severe financial strain. He entered into a lease agreement with 2682113 Ontario Inc. for a warehouse located in the City of Pickering which was unaffordable given Fouka’s financial situation. As a result, 2682113 Ontario Inc. has brought an action against Fouka for $750,000. According to Mahmoud, Hossein also committed the company to monthly liabilities for a store that is located in Whitby including substantial renovations ($900,000) creating significant problems for the Company.

[35] Since July 2, 2024 to October 15, 2024, Fouka has incurred significant losses amounting to a loss of $274,929.23. Mahmoud has been forced to personally invest $302,181.76 of his own funds simply to keep Fouka going. The company also has substantial debts outstanding for payroll (approximately $660,726) and HST as of June 30, 2024 in the amount of $460,376.15. Fouka also has deficits to its suppliers and is making its best efforts to pay the outstanding balance on an ongoing basis.

Evidence of Hossein Jalilnattajamiri

[36] Hossein disputes the statements made by Mahmoud. Hossein takes the position that he contributed substantial amounts of capital to Fouka at the outset and helped the company become established.

[37] Hossein has never had a good relationship with Ali. After Ali joined the Company in 2021, Ali unilaterally reduced Hossein’s salary and stopped paying him dividends. According to Hossein, his family members secretly hired a lawyer and conspired to push him out of the business including limiting his access to suppliers and removing his signing authority over the corporate accounts.

[38] According to Hossein, before he was forced out, Fouka’s financial position was excellent, including having approximately $500,000 in cash. It was actually the Respondents who completed and finalized the problematic agreements – including, in particular, a lease in Whitby. While Hossein had negotiated the Whitby lease, the execution post-dated Hossein’s loss of status as a company representative, director, and authorized signatory.

[39] According to Hossein, the amounts arrived at in the SPA and the Loan were arrived at through extensive negotiation. Mediators were engaged, including Hossein’s uncle (Mahmoud’s brother-in-law) and a professional third-party mediator, Dr. Akram Montazer. After a lengthy mediation process that spanned dozens of meetings, the parties agreed that the Respondents would buy out Hossein’s interest (SPA) and repay him for debts owing to him, including for unpaid salary and his shareholder-loan contributions to the business (Shareholder Loan).

[40] In this connection, Mahmoud requested a valuation report and, accordingly, Hossein had one commissioned by MNP. The resulting report was provided by Hossein to the mediators, who then provided it to Mahmoud and the others.

[41] Hossein is adamant that he never made any representations about the business’s profitability or viability.

[42] A settlement agreement was reached in September 2022, pursuant to which the Respondents would pay Hossein $450,000.00 on account of the shares and $525,000.00 on account of corporate debts to him, including for unpaid salary and other debts.

[43] The Respondents hired a lawyer, Fez Khalil of Khalil Law, who prepared closing documents, which included a share purchase agreement, the promissory notes, and the full and final releases.

[44] After some back and forth with Hossein’s lawyers at Loopstra Nixon LLP, documents were finally executed on February 17, 2023.

[45] The full and final releases release the parties from the following, “without qualification or limitation”:

…any and all actions, causes of action, suits, proceedings, debts, duties, accounts, bonds, covenants, contracts, claims, demands, damages, indemnity, costs, interest, promises, grievances, executions, judgments and liabilities whatsoever, however so rising, both in law and in equity, whether implied or expressed, which may have been or may hereafter be sustained, incidental to or in connection with all claims which were made or could have been made, whether known or unknown, in relation to any amounts that may have been owed by either of the Parties to the other save and except the amounts owing by [Mahmoud and Fouka] to Hossein pursuant to the Promissory Notes.

[46] As set-out in the Application materials, the Respondents did make partial payments.

[47] The Applicant has also filed a mediator’s report from Dr. Akram that the Applicant submits fully substantiates all of the foregoing, up to the signing of the September 22, 2024 agreement. (It was prepared in Farsi, but professionally translated and certified.)

Analysis

General Principles

[48] Under Rule 38.10(1)(b), a judge may order that an application proceed to trial and give such directions as are just. The Rule provides:

38.10.1 (1) On the hearing of an application the presiding judge may,

(a) grant the relief sought or dismiss or adjourn the application, in whole or in part and with or without terms; or

(b) order that the whole application or any issue proceed to trial and give such directions as are just. R.R.O. 1990, Reg. 194, r. 38.10 (1).

(2) Where a trial of the whole application is directed, the proceeding shall thereafter be treated as an action, subject to the directions in the order directing the trial. R.R.O. 1990, Reg. 194, r. 38.10 (2).

(3) Where a trial of an issue in the application is directed, the order directing the trial may provide that the proceeding be treated as an action in respect of the issue to be tried, subject to any directions in the order, and shall provide that the application be adjourned to be disposed of by the trial judge. R.R.O. 1990, Reg. 194, r. 38.10 (3)

[49] An order directing a trial is discretionary and is typically granted where there is conflicting evidence and complex and disputed questions of fact or credibility where oral evidence is required. In determining whether the matter should be converted, the court in Dell v. The Corporation of the Town of Niagara on the Lake et al, 2023 ONSC 1610, paras 21-22 explained:

In determining whether to convert an application into a trial of an issue, the court will consider such factors as: (a) whether there are material facts in dispute; (b) the presence of complex issues; (c) whether there is a need for the exchange of pleadings and discovery; and (d) the importance and the nature of the relief sought by application. The court should consider whether the affidavits and the transcript of the cross-examination is sufficient to decide any credibility issues or whether a trial is required.

See also Przysuskiv v. City Optical Holdings Inc., 2013 ONSC 5709 per Firestone J. at paras. 5-8.

[50] In making such an order, the court should consider whether, if the proceeding had already been commenced as an action and the moving party had brought a motion for a summary judgment, would the court be satisfied that there is no genuine issue requiring a trial, in which case a trial would not be necessary.

[51] The court should keep in mind that there is a prima facie right to proceed by application and the matter should not be converted into an action without good reason. Put another way, if a proceeding is capable of being resolved by application, it should be.

[52] The mere existence of a factual dispute is not sufficient to order that an action be converted into an action. Even where the threshold questions are met, the Court must still consider whether the balance of convenience requires the order.

[53] That said, applications are ill-suited for disputes involving complex factual matters and credibility issues that require extensive discovery and cross-examination.

Application to the Facts of this Case

[54] Mahmoud Jalilnattajamiri and Fouka Furniture Inc. seek to have the promissory notes at issue declared void ab initio due to material misrepresentations made by Hossein in the context of the negotiations.

[55] According to the Respondents, the underlying dispute involves complex factual and legal issues, including allegations of mismanagement, financial misrepresentation, and significant financial losses suffered by Fouka Furniture Inc. under Hossein Jalilnattajamiri’s tenure. These issues necessitate a full evidentiary record and comprehensive procedural safeguards, which are best achieved through an action. Conversion to an action will allow for proper document discovery, examinations for discovery, and a trial to resolve the disputes on a complete factual record.

[56] The Applicant submits that Mahmoud’s bald, self-serving “English” affidavit is not sufficient to create any genuine issue for trial.

[57] The Applicant maintains that the claims are bogus on their face (and time-barred in the case of the fiduciary-duty claims). More importantly, for the purposes of this motion, he also maintains they are barred by operation of the two “full and final” releases.

[58] Hossein submits that this motion is nothing more than an attempt to cause further delay. If countenanced, it would do damage to the administration of justice. It is time for this Court to make a final determination on the merits: the promissory notes are sufficient, and fully supported by the full and final releases.

[59] I agree with the Respondents that the present case involves complexities that militate in favour of conversion to an action:

• Material Facts in Dispute: The parties fundamentally disagree on critical facts, including the valuation of shares and the enforceability of the promissory notes.
• Credibility Issues: The determination of this case turns largely on credibility assessments, particularly regarding the representations about Fouka’s financial health and the reliance of parties on those representations.
• Complex Issues Requiring Expert Evidence: The valuation of shares and the analysis of financial records may involve expert evidence and the weighing of competing evidence.
• Need for Pleadings and Discoveries: Pleadings and discoveries are necessary to properly define the issues, gather relevant evidence, and ensure procedural fairness.

[60] The financial stakes in this case are significant, involving claims exceeding $400,000 and allegations of misconduct that have far-reaching implications for the parties.

[61] It is difficult for me to make determinations on the issues by simply viewing conflicting affidavits. The facts asserted in the affidavits are contradictory on many of the material issues. This is not a case where the materials filed allow the court to make determinations in the absence of cross-examination. The history and pre-existing relationship of the parties makes it difficult for me to assess the credibility of the affidavits filed in the absence of additional evidence.

[62] If the value of the shares, and shareholder debts were based on misrepresentations regarding the financial situation of the company as the Respondents maintain, the validity of the promissory notes will potentially be invalid. If the validity of the promissory notes themselves are at issue, the binding nature of the releases would also be in question.

[63] I recognize that there are risks with further delaying the matter given the current financial situation of Fouka. That said, the financial stakes in this case are significant for all parties, and requiring the Respondents to post additional security would be sufficient to ensure the Applicant is adequately protected from the risk of further loss.

[64] In the circumstances, I order that the Application be converted to an action.

[65] I will hear from the parties regarding a timetable for this matter to proceed to trial on the issue of the validity of the two promissory notes, as well as their position regarding any additional security that should be posted by the Respondents to ensure adequate assets remain in the jurisdiction to satisfy any judgment potentially ordered against the Respondents.

[66] The parties are to arrange a further date before me with the trial coordinator.

Justice C.F. de Sa
Released: February 26, 2025

Endnotes

[1] R.R.O. 1990, Reg. 194.

[2] Dell v. The Corporation of the Town of Niagara on the Lake et al, 2023 ONSC 1610, paras 21-22; Li v. Bank of Nova Scotia, supra note 50, at para. 38.

[3] Numbrs v. AbleDocs, ibid., at para 17; Li v. Bank of Nova Scotia, ibid., at para. 39.

[4] 2516216 Ontario Ltd. o/a NUMBRS v. AbleDocs Inc., 2023 ONSC 4713, para 14.

[5] Niagara Air Bus v. Camerman, supra note 62. See also BPCO Inc. v. Imperial Oil Ltd., [1993] O.J. No. 420 (Gen. Div.).

[6] Li v. Bank of Nova Scotia, supra note 50, at para. 62.