



COURT OF APPEAL FOR ONTARIO

CITATION: Bimman v. Neiman, 2017 ONCA 264

DATE: 20170331

DOCKET: C61412

Juriansz, Brown and Miller JJ.A.

BETWEEN

Alexander Bimman and 2182474 Ontario Inc.

Plaintiffs (Appellants/

Respondents by way of cross Appeal)

and

Arkadi Neiman, Corayana Enterprises Limited,
    1050828 Ontario Ltd., Canadian Investment & Consulting Central Corporation,
    Larwest Canada (Caribbean) Inc., 2182158 Ontario Ltd., 1765350 Ontario Inc.,
    1771636 Ontario Ltd., Edward Poberezkin, Victor Itkine, Roman Shmulik, Alex Glozman
    and Corayana Services Ltd.

Defendants (Respondents/

Appellants by way of cross-appeal)

Igor Ellyn, Q.C. and Evelyn S. Perez-Youssoufian, for
    the appellants/respondent by way of cross-appeal

David A. Shiller and J. Thomas Curry, for the respondents/appellants
    by way of cross-appeal

Heard: February 27-28, 2017

On appeal from the judgment of Justice Arthur M. Gans of
    the Superior Court of Justice, dated April 16, 2015, with reasons reported at
    2015 ONSC 2313.

Brown J.A.:

I.

OVERVIEW

[1]

The
    appellants, Alexander Bimman and 2182474 Ontario Inc. (218), were minority
    investors in the respondent, Corayana Enterprises Limited (CEL), which owned
    several multi-unit residential complexes in Thompson, Manitoba. CEL acquired
    the properties and renovated them, for subsequent sale or lease.

[2]

Bimmans
    company, 218, initially held 20% of CELs issued shares. In early 2010, CEL
    required further funds to renovate its properties. Unable to secure third party
    financing, CELs shareholders made two cash calls  on January 11 and February
    11, 2010. Bimman declined to participate in either cash call; all other
    shareholders participated.

[3]

Relying
    on a provision in their November 3, 2009 Shareholders Agreement (the SHA), the
    majority of CELs shareholders approved the issuance of additional shares to shareholders
    who had participated in the cash calls, thereby diluting Bimmans ownership
    interest in CEL.

[4]

As
    a result of that and other conduct, Bimman commenced an action, in which he
    ultimately sought relief under the oppression remedy provisions of s. 248 of
    the Ontario

Business Corporations Act
, R.S.O. 1990, c.
    B.16. By the time of the trial, the parties had agreed that a parting of the
    ways was required. The main issues for trial therefore became: (i) had the respondents
    engaged in oppressive conduct; and (ii) if they had, how many CEL shares did
    the appellants own and what was their value as of December 31, 2013, the
    agreed-upon valuation date for a buy-out?

[5]

The
    trial judge found, in effect, that the respondents had engaged in conduct that was
    unfairly prejudicial to the appellants interests by issuing too many shares on
    the January and February 2010 cash calls. That finding is not in issue on this
    appeal.

[6]

In
    his Judgment, the trial judge granted declarations (i) specifying the number of
    shares CEL ought to have issued on the two cash calls and (ii) the resulting
    ownership interest of the appellants in CEL, which he fixed at 11.08%. The
    trial judge then valued the appellants shares in CEL as of December 31, 2013
    at $858,468.31, and he ordered the respondents to purchase those shares for
    that amount, plus pre-judgment interest.

[7]

Both
    parties take issue with the trial judges determination of the appellants
    shareholding in CEL and the value of those shares.
[1]


[8]

Both
    raise additional issues.

[9]

The
    appellant, Bimman, submits the trial judge erred in only awarding him damages
    of $112,068 for a deferred management fee; he contends the trial judge should
    have granted him judgment for $250,000. As well, the appellants argue the trial
    judge erred in awarding them only partial indemnity costs of $780,312.50; they
    submit they are entitled to substantial indemnity costs of $1,324,419.70.

[10]

On
    his part, the respondent, Victor Itkine, submits the trial judge erred in
    awarding punitive damages of $25,000 against him.

[11]

For
    the reasons set out below, I would dismiss the appeal. I would grant the
    appellants leave to appeal the trial judges award of costs, but I would
    dismiss their costs appeal.

[12]

I
    would allow the cross-appeal, in part. I would set aside the award of punitive
    damages against Itkine. I would increase the number of shares that ought to
    have been issued for the February 11, 2010 share call from 5,743 to 6,071,
    thereby, reducing the value of the appellants shares in CEL as at December 31,
    2013 from $858,468.31 to $842,971.52.

II.

THE INTERPRETATION OF S. 6.01 OF THE SHA

[13]

The
    parties respective challenges to the trial judges findings about 218s
    shareholdings in CEL following the two cash calls and their value as of
    December 31, 2013 engage two key issues: (i) the interpretation of s. 6.01 of
    the SHA; and (ii) the inclusion of certain amounts by the trial judge in his
    valuation of CELs shares. In this section, I will consider the first issue.

A.

The issue stated

[14]

The
    parties entered into a November 3, 2009 shareholders agreement. Article 3
    dealt with share ownership. Section 3.01 contained a table setting out each
    shareholders contribution loan, which together totaled $1 million. As well,
    the table recorded the percentage ownership of each shareholder, its share
    quantity, and its share capital. In the case of 218, the table showed it had a
    20% ownership interest in CEL, reflected in 2,000 issued shares, with a share
    capital of $20.

[15]

In
    late 2009 and early 2010, CEL required more funds to renovate the buildings it
    had acquired. A search for external, third-party financing proved unsuccessful.

[16]

Article
    6 of the SHA dealt with financing. Section 6.01 provided as follows:

ARTICLE 6  FINANCING

6.01 When funds are required to meet financial obligations of
    the Corporation or continue business operations, shareholders shall have the
    option to obtain external loans or financing, provided that the terms of such
    financing are satisfactory to simple majority of the shareholders.

If such funds cannot be obtained from external loans or
    financing,

(a) Each shareholder shall have the option to advance
    its proportionate share of the funds required and any such advance shall be
    without interest.

(b) If one or more than one of the shareholders do not agree
    or fail to make the advance after a reasonable period of time, given the then
    existing circumstances, shareholders who contributed the necessary funds shall
    have the option to receive new shares. Issuance of such new shares by Corayana
    shall be contingent on the agreement of simple majority of the
    shareholders. The number of the new shares to be received by contributors
    would be based on their contributions and the then current values of the shares
    before and after the contributions.

[17]

At
    a January 11, 2010 shareholders meeting, the majority approved a cash call
    requiring the infusion of $250,000, of which Bimman, through 218, would be
    required to provide $50,000. He refused.

[18]

At
    a February 11, 2010 shareholders meeting, the majority approved a further cash
    call of $1.35 million. Again, Bimman refused to participate.

[19]

As
    a result of Bimmans refusal, the remaining shareholders invoked section
    6.01(b) of the SHA and issued an additional 4,000 and 21,600 shares to those
    shareholders who met the cash calls. The trial judge held CEL issued too many
    additional shares in respect of the cash calls. He reduced the number of shares
    CEL should have issued on each cash call to 2,307 and 5,743 respectively.

[20]

At
    trial, the appellants relied heavily on the argument that Bimmans interest in
    CEL should not be diluted at all because the issuance of shares in response to
    the two cash calls engaged the criminal interest rate provisions in s. 347 of
    the
Criminal
    Code
, R.S.C. 1985, c. C-46 and should be set aside. The trial
    judge rejected that argument. The appellants do not pursue it on appeal.

[21]

Instead,
    they advance an argument that played a secondary role at trial: s. 6.01(b) only
    entitled participating shareholders to an issuance of shares based upon their
pro rata
contribution to the amount of funds the non-participating shareholder had
    refused to contribute, not upon the overall amount of their contributions. The
    appellants contended the words necessary funds in s. 6.01(b) referred only to
    the amount the non-participating shareholder had refused to contribute. The
    trial judge did not address this argument in his trial reasons, implicitly
    rejecting it.

[22]

However,
    following the release of the trial reasons, the appellants brought a motion,
    which the trial judge described in para. 1 of his resulting endorsement (2015
    ONSC 3076):

The plaintiffs bring a motion to amend the Reasons for Judgment
    (the Reasons) that I released on April 16, 2015:
Bimman v. Neiman
,
2015 ONSC 2313
. Putting the issues simply, they ask
    that I formally adjudicate on an interpretation of the words the necessary
    funds found in Article 6.01(b) of the Shareholders Agreement, set out
    verbatim at paragraphs 66 and 137 of the Reasons.

[23]

The
    trial judge concluded it would not be appropriate for him to adjudicate on the
    appellants request. At para. 6 he stated:

However, I make the following observations in this Addendum to
    my Reasons for Judgment:

a. A reading of my Reasons indicates that while I did not
    deal with the argument sought to be revisited in this motion head on, which I
    am not in any event obliged to do in the discharge of my duties as a jurist, I
    implicitly rejected the interpretation asserted again in this motion. I was
    very much alive to the issue when it was argued and as I wrote the judgment.

b. The argument now advanced by the plaintiffs was not rooted
    in any facts to which my attention was directed during the evidence portion of
    the trial, nor during argument. In effect, it was a gloss put on the words of
    the November Shareholders Agreement by plaintiffs counsel. It was, as I
    observed during argument, a 4 a.m. inspiration, which all good counsel have
    in the heat of battle. It was not plaintiffs counsels primary or strongest
    argument.

c. Put otherwise, the argument advanced by plaintiffs
    counsel was not within the reasonable contemplation of the parties at the time
    the Shareholders Agreements were being negotiated. Indeed, while the words
    necessary funds were used in an earlier draft of the August Agreement, when
    Article 6.01(b) was debated by Itkine and Bimman in various email exchanges, its
    use in the earlier iteration of the agreement actually undercuts the
    plaintiffs suggested interpretation in my view.

d. Finally, this proposed interpretation is not referenced
    in the pleadings, which although not those of trial counsel, still must be considered
    in defining the issues for trial and judgment. In that respect, a review of
    paragraph 6 of the Plaintiffs Reply and Defence to Counterclaim is most
    instructive.

[24]

The
    appellants renew their argument about the interpretation of necessary funds in
    s. 6.01(b) of the SHA on this appeal.

B.

Analysis

[25]

The
    SHA was a one-off contract negotiated amongst CELs shareholders. In those
    circumstances, the deferential standard of appellate review applies to the
    trial judges interpretation of s. 6.01 of the SHA:
Sattva Capital Corp. v.
    Creston Molly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633, at paras.
    52-53;
Ledcor
    Construction Ltd. v. Northbridge Indemnity Insurance Co.
,
    2016 SCC 37, 404 D.L.R. (4th) 258, at para. 24.

[26]

I
    see no palpable and overriding error in the trial judges interpretation of s.
    6.01. His interpretation of the phrase necessary funds as meaning the total
    contributions made by the participating shareholders in response to a cash call
    is a reasonable one, in light of the language of the section as a whole and the
    purpose of s. 6.01 within the overall scheme of the SHA  i.e. to generate
    operating funds for CEL when outside financing proved unavailable.

[27]

I
    do not accept the appellants contention that the interpretation results in a
    commercial absurdity. On the contrary, s. 6.01(b) would operate to incent a
    shareholder in a closely-held, thinly capitalized, nascent corporation to
    participate in the continued financing of the companys operations when outside
    financing proved unavailable. The risk of significant ownership dilution by not
    participating in cash calls would encourage further shareholder contributions.

[28]

Finally,
    while the minutes of the January 11 and February 11, 2010 shareholders meetings
    record Bimmans refusal to participate, they do not record any objection by him
    to the issuance of shares calculated using the interpretation of s. 6.01 adopted
    by the trial judge.

[29]

Accordingly,
    I would not give effect to this ground of appeal by the appellants.

III.

THE CALCULATION OF THE NUMBER OF ADDITIONAL SHARES AND THE VALUE
    OF 218S SHARES

[30]

Both
    sides advance grounds of appeal based on errors they submit the trial judge
    made in calculating the proper number of additional shares that should have
    been issued on the cash calls, as well as the value of 218s shares as of
    December 31, 2013. I propose to deal first with the grounds advanced by the appellants,
    followed by those put forward by the respondents.

A.

The appellants grounds of appeal

The trial judge erred in awarding
    shares for the respondents net $1 million contributions

[31]

The
    appellants submit the trial judge erred in awarding the respondents additional
    shares for the net $1 million they contributed to CEL in response to the first
    and second cash calls. They submit his errors lay in interpreting the words
    necessary funds in s. 6.01(b) of the SHA as all the loan money advanced by
    the defendants and in calculating the number of new shares using their value
    at the time of the shareholder contributions, instead of the date of issuance
    of the shares.

[32]

This
    submission simply is a variant of the appellants ground of appeal concerning the
    interpretation of s. 6.01(b), a submission which I have not accepted for the
    reasons set out earlier. For the same reasons, this submission also must fail.

The trial judge should have
    calculated the value of CEL shares as of March 31, 2010, not as of the dates of
    the cash calls

[33]

The
    appellants submit the trial judge erred when he calculated the proper number of
    new shares using values of CEL as at the dates of the cash calls  January 11
    and February 11, 2010. They contend the calculation properly required using the
    value of CEL as at March 31, 2010, the date the additional shares were issued.

[34]

The
    trial judge explained why he rejected March 31, 2010 as the proper valuation
    date at paras. 160-161 of his reasons:

Mr. Ellyn did not lump all the events of the month of March as
    I have, but argued that because the shares in respect of each of the two cash
    calls were not subscribed for and issued until March 31, the dilution was not
    complete until that date. Hence, he argued that Bimmans interest remained at
    20% for valuation purposes as a result of a finding of oppression.


While this argument had some appeal, in my view it would only
    succeed if I found that the cash calls were either not necessary or a ruse at
    the relevant time, and that none of the money had been contributed along the
    way. I am satisfied the evidence belies those conclusions. Therefore, I hold
    that Bimmans interest in CEL as at March 31, 2010, should be reduced to
    11.08%. I now must embark upon a calculation of its value as at December 31,
    2013, which is the date of reckoning the parties are agreed is my starting
    point.

[35]

The
    trial judges finding that the other shareholders made their contributions
    before March 31, 2010 is not in dispute. The trial judges selection of the
    contribution dates as the dates for valuation faithfully tracks the language of
    s. 6.01(b) of the SHA, which provides that the number of new shares would be
    based on both (i) the contributions of the participating shareholders and (ii)
    the then current values of the [CEL] shares before and after the
    contributions. Accordingly, I see no error in his conclusion on this issue.

The evidentiary effect of the
    Minutes of the February 11, 2010 shareholders meeting

[36]

Finally,
    the appellants submit the trial judge erred by failing to give effect to what
    they characterize as an admission by the respondents that the appellants
    shareholding in CEL was not diluted as a result of the January 11, 2010
    shareholders meeting. In support of this submission, they point to the minutes
    of the February 11, 2010 meeting that record Bimmans required contribution was
    $270,000, which would reflect a continuing 20% shareholding by 218.

[37]

The
    respondents argue the entry in the February 11 minutes was nothing more than a
    clerical error. When the rest of the evidence is considered in its entirety, it
    was clear the other shareholders were taking the position 218s shareholding
    had been diluted by reason of its failure to participate in the January 11 cash
    call.

[38]

I
    accept the respondents submission. What the appellants style as an admission
    is nothing more than a recording error. I give no effect to this ground of
    appeal.

B.

The respondents cross-appeal

The "add back debt" issue

[39]

In
    Appendix 1 to his reasons, the trial judge showed how he calculated the number
    of shares CEL should have issued on the first and second cash calls, as well as
    what Bimmans resulting diluted ownership interest should have been.

[40]

His
    calculations for the shares issued on the February 11, 2010 cash call started
    with an en-bloc adjusted book value for CEL of $1.823 million. In using that
    number, the trial judge accepted the en-bloc fair market value of CEL as at
    February 11, 2010 derived by the appellants expert business valuator, Bruce
    Roher, on Schedule 1B to his supplementary report dated November 18, 2014. The
    supplementary report resulted from the trial judges request, part-way through
    Rohers examination-in-chief, that the parties business valuators engage in a
    form of hot-tubbing on the share valuation calculations. Although they could
    not agree on a joint submission to the trial judge, Roher provided a supplementary
    report.

[41]

Rohers
    Schedule 1B showed that in calculating CELs February 11, 2010 en-bloc value he
    included a $250,000 amount for add back debt. The respondents expert, Paul Mandel
    of Collins Barrow, would not have included that number. The trial judge made a general
    finding that he preferred Rohers evidence over that of Mandel.

[42]

There
    is no dispute the $250,000 for add back debt referred to the amount of the
    contributions made by shareholders on the January 11, 2010 cash call.

[43]

The
    respondents advance two reasons why the trial judge erred in accepting Rohers
    inclusion of the $250,000 in his February 11 en-bloc valuation of CEL.

[44]

First,
    they submit the trial judge committed a calculation error by including the
    $250,000 when, in his reasons, he had found the net contributions made on the
    January 11 cash call only totaled $150,000.

[45]

I
    accept this submission. It was an oversight by the trial judge not to have
    adjusted the February 11 en-bloc book value amount on his Appendix 1 to reflect
    that finding. Appendix 1 should have showed the value as $1,723,000.

[46]

Second,
    the respondents submit the trial judge erred in including any amount, even the
    $150,000, as add back debt in calculating CELs February 11, 2010 en-bloc
    value. They contend the error resulted from the trial judges failure to accept
    an admission Roher made during his cross-examination. Roher was asked whether
    his inclusion of $250,000 in add back debt was based on the assumption the
    $250,000 was used to purchase shares and there is not debt. He agreed. Roher
    was then asked if the $250,000 was debt, would the amount come out of his
    calculation. He agreed it would. On re-examination, Roher was asked whether it
    would be appropriate to add back the $250,000 if the shareholders had paid for
    their shares in January. He answered it would.

[47]

I
    am not persuaded the trial judge made any reversible error on this point. In
    his reasons, the trial judge characterized the issuance of shares pursuant to s.
    6.01(b) as a result of loans, or contributions, made by participating
    shareholders as a hybrid debt-equity transaction. As a result of that
    finding, the probative value of the admission by Roher on which the
    respondents rely to establish an error by the trial judge becomes far from
    clear. Roher did not opine on whether the add back debt amount should form
    part of the valuation calculation in the event the transaction was regarded as
    a hybrid debt-equity one.

[48]

The
    respondents rely on no other evidence to support this ground of appeal. Both
    parties advise they do not want this case remitted back to the trial court;
    they want this court to deal finally with all issues. That being the case, this
    court is left in the position that it has no expert evidence before it
    concerning the treatment of the $250,000 in light of the trial judges
    characterization of the transaction as a hybrid debt-equity one. In those
    circumstances, the respondents have not discharged their burden of demonstrating
    the trial judge made a material error.

[49]

I
    therefore would not give effect to the argument that the trial judge erred in
    including any amount as add back debt in calculating CELs February 11, 2010
    en-bloc value. However, I would allow this ground of appeal to the extent that
    trial judges reasons should have used the amount of $1,723,000 for the
    February 11, 2010 CEL en-bloc adjusted book value, instead of $1,823,000.

The valuation of Buildings Nos. 1
    and 2

[50]

In
    calculating CELs en-bloc adjusted book value as of January 11 and February 11,
    2010, the trial judge used values determined by Roher, which estimated the
    market values of CELs real estate properties on both dates. In Schedule 1D to
    his November 18, 2014 supplementary report, Roher valued Building No. 1 at $1.9
    million on both dates and Building No. 2 at $900,000 on January 11 and $1.9
    million on February 11, 2010. By contrast, Mandel valued each building as of
    February 11, 2010, before adjustments, at $1.733 million, based on a December
    24, 2009 valuation by Red River Appraisal.

[51]

The
    respondents submit the trial judge erred in relying on Rohers January and
    February values for Building No. 1, and the February value for Building No. 2, because
    they were the product of using impermissible hindsight. Instead, they argue the
    trial judge should have relied on the values in the December 24, 2009 Red River
    Appraisal.

[52]

Valuation
    is more art, than an exact science; mathematical certainty is not demanded,
    because it is not possible:
Debora v. Debora

(2006),
83 O.R. (3d) 81 (C.A.)
, at
    para. 51. A valuation exercise must look at the situation as of the valuation
    date. Hindsight information generally is not relevant to the valuation exercise,
    except for the purpose of measuring the accuracy of projections or testing the assumptions
    used by valuators:
New Quebec Raglan Mines Limited v. Uffe Blok-Andersen
,
    [1991] O.J. No. 3472 (C.J.), at para. 2;
Hall v. Atto
,
    [2004] O.J. No. 463 (S.C.), at para.23, affd 2005 CarswellOnt 7087 (Div Ct.).

[53]

I
    am not persuaded the trial judge erred in relying on the contested valuation
    numbers for Buildings Nos. 1 and 2 used by Roher in his Schedule 1D. Roher
    explained how he arrived at his $1.9 million valuation for each building in a
    lengthy Footnote No. 1 to Schedule 1D. It is true that the first part of the
    footnote referred to events that occurred after the valuation date:

Fuller Landau based the market value on the subsequent sale
    price of Buildings 1 and 2 of $1,950,000 less estimated construction costs of
    $50,000. As the purchaser and vendor were negotiating from the fall of 2009,
    Fuller Landau assumed that the subsequent purchase price is the most reasonable
    estimate of the market value at each date.

[54]

However,
    Roher went on to address the value Red River arrived at in December 2009. His
    footnote continued:

The Red River Appraisal of December 2009 of Buildings 1 and 2
    used an average of the Income Approach and the Direct Comparison Approach. Only
    one comparable was used in the Direct Comparison Approach (68 Fox Bay) and that
    comparable was discounted by 15% due to size difference between 68 Fox Bay and
    the Buildings 1 and 2. The same comparable (68 Fox Bay) was used in Red Rivers
    2013 appraisal in the Direct Comparison Approach, however, the selling price
    was not discounted as it had been in Red Rivers 2009 Appraisal. Had Red River
    not discounted the comparable in its 2009 appraisal, the 2009 appraised value
    would have been $1,882,000 which approximates the estimated market value used
    by Fuller Landau.

[55]

At
    trial, the respondents did not take issue with the admission of Rohers
    supplementary report. Nor did they cross-examine Roher on his valuation of
    Buildings Nos. 1 and 2.

[56]

When
    read in the light of his critique of the Red River 2009 appraisal, Rohers
    reference in Footnote No. 1 on Schedule 1D to a post-valuation date event takes
    on the character of a testing of the Red River valuation, not a stand-alone
    hindsight valuation. In those circumstances, I conclude it was open to the
    trial judge to consider and accept the en-bloc adjusted book values of CEL
    using the real estate values set out by Roher on Schedule 1D.

[57]

I
    would not give effect to this ground of cross-appeal.

The value of Corayana Services
    Limited (CSL)

[58]

Establishing
    the en-bloc fair market value of CEL as of February 11, 2010 required
    determining the fair value at that date of a related company, CSL, which had
    been incorporated in December 2009. CSL began generating income in late
    February 2010.

[59]

Roher
    estimated the fair market value of CSL as of February 11, 2010 at $150,000 and used
    that value to calculate the en-bloc value of CEL. The trial judge, in turn, accepted
    that value. The respondents submit the trial judge erred in so doing.

[60]

I
    am not persuaded by their submission. Several pieces of evidence were adduced
    before the trial judge on this issue. Mandel, the respondents business
    valuator, estimated CSLs value at the time at $30,000 using a normalized
    income approach based on expected pre-tax earnings. Roher testified CSLs value
    was higher than that. As part of his in-trial supplementary report, he
    estimated CSLs value at $150,000. He also wrote that Mr. Mandel and I
    discussed the value of CSL. We agreed that the value was in the range of
    $100,000 to $200,000 in 2010 and 2013. Finally, in re-examination Roher
    advised the trial judge that one factor he took into account in valuing CSL was
    its recent securing of a contract with Vale.

[61]

The
    trial judge preferred the evidence of Roher to that of Mandel in all respects.
    Given that finding, and in light of the evidence before the trial judge about CSLs
    value as of February 11, 2010, I cannot say the trial judge committed
    reversible error in accepting and using Rohers estimated value of $150,000.
    Accordingly, I would not give effect to this ground of cross-appeal.

C.

Summary

[62]

By
    way of summary, I would dismiss the appeal on the share issuance issues. I
    would allow the cross-appeal only to the extent of holding that Appendix 1 to
    the trial judges reasons should have used the amount of $1,723,000 for the
    February 11, 2010 CEL en-bloc adjusted book value, instead of $1,823,000.

[63]

Let
    me describe how that affects the calculations shown on Appendix 1 to the trial
    judges reasons.

[64]

Using
    the amount of $1,723,000 changes the February 11, 2010 share value to $140 per
    share [$1,723,000/12,307], thereby increasing the number of shares that ought
    to have been issued from 5,743 to 6,071 [$850,000/$140 per share]. Accordingly,
    in para. 1(b) of the Judgment, 6,071 shares should be substituted for the trial
    judges finding of 5,743 shares that ought to have been issued as of February
    11, 2010. And in para. 2(b) of the Judgment, 15,529 shares should be
    substituted for the trial judges finding of 15,857 shares that were invalid
    and thereby cancelled.

[65]

That
    reduces Bimmans ownership at that date from the 11.08% found by the trial
    judge to 10.88% [2,000 shares / (12,307 + 6,071 = 18,378) shares], requiring
    para. 3 of the Judgment to be varied accordingly.

[66]

Using
    the trial judges finding that CELs value at December 31, 2013 was $7,747,900,
    Bimmans 10.88% shareholding was worth $842,971.52. Consequently, I would vary
    para. 4 of the Judgment to reduce the value of the appellants shares in CEL
    from $858,468.31 to $842,971.52.

IV.

DEFERRED MANAGEMENT FEE

[67]

Section
    6.02(c) of the SHA provides for the payment to CELs directors of a deferred
    management fee  flat $500,000.00 for the entire period of the projects
    existence. There is no dispute that the two directors at the relevant times
    were Bimman and Neiman.

[68]

The
    trial judge awarded Bimman $112,068 as his share of the Deferred Management Fee
    (DMF). Bimman contends the trial judge erred by not awarding him 50% of the
    DMF, or $250,000. Bimman submits the trial judges award was arbitrary because
    it was not based on the terms of the SHA or the evidence.

[69]

I
    would not accept this submission. First, the trial judge found, at para. 223,
    that Bimmans final entitlement to a portion of the DMF was very much a matter
    left for future negotiation. The appellants have not demonstrated the trial
    judge committed a palpable and overriding error in so interpreting s. 6.02(c)
    of the SHA.

[70]

Second,
    the trial judge provided a detailed explanation of how he calculated Bimmans
    entitlement to the DMF. He stated, at paras. 220-224:

Conversely, I am not persuaded that Bimmans activities prior
    to October 2009 warrant compensation to the levels he proposes. From my
    understanding of the project, namely a conversion of very modest apartments to
    prime rental property in Thompson, the day-to-day activities associated with
    the renovations were really left to Neiman and the team he assembled to
    complete. I am satisfied that much of the heavy lifting in respect of the
    renovation work and the subsequent marketing and rental of the units, if not as
    entire buildings, was done after Bimman was forced out of the day-to-day
    management of the Property.

Furthermore, while Bimman may have introduced UCN [University College
    of the North] to the Property, and may have been instrumental in retaining
    appraisers to assist in the marketing of the two buildings, the deal that was
    struck was concluded under Neimans watch, with little or no Bimman
    involvement.

I have not lost sight of the fact that Bimman was forced out of
    the management group as a result of exaggerated, if not unfounded, allegations
    of impropriety bordering on embezzlement. I have concluded that while Bimmans
    resignation was perhaps ill-advised, the defendants, with Itkine at the helm,
    made his life positively miserable during this period of time. He had no
    alternative but to resign, if only to secure his entitlement to a healthy
    portion of the DMF, a negotiation which never took place, notwithstanding earlier
    promises from Itkine to the contrary.

Bimman did not, however, have a reasonable expectation to one
    half of the amount reserved for the DMF, or $250,000, after his resignation and
    based on the status of the development to that date. Indeed, it does not appear
    that he ever asserted such a claim, as it is not evidenced in any of the
    meeting minutes either prior to or following the date of his resignation and
    into early 2010. His final entitlement to a portion of the DMF was very much a
    matter left for future negotiation.

That said, I am satisfied that but for the timing of his forced
    resignation from CEL, he would have been permitted to stay and participate in
    the management of the project and undoubtedly would have been entitled to an
    increased share of the DMF, a share greater than that to which the defendants
    suggest hes entitled. In that respect, I find that he is entitled to share in
    the DMF up to the end of March 2010, the moment in time that I have held that
    the oppression took place. This adds an additional five months to the
    calculation. Using the straight mathematical formula that both parties are
    agreed to, this calculation yields a DMF entitlement of $112,068.

[71]

Those
    findings were open to the trial judge to make on the record before him. I see
    no basis for appellate intervention.

V.

COSTS APPEAL

[72]

As
    mentioned, the trial judge awarded the appellants their costs of the action
    fixed at $780,312.50 on a partial indemnity scale.

[73]

The
    appellants submit they should have received a higher award. They contend the
    trial judge erred by (i) not awarding costs on a substantial indemnity scale,
    (ii) not awarding costs for pre-trial motions argued before Newbould J., (iii)
    reducing the amounts of experts fees recoverable as disbursements, and (iv)
    awarding $5,000 in costs to the respondents for a post-trial motion.

[74]

I
    would not accept any of those submissions.

A.

The appropriate scale of costs

[75]

Although
    the appellants acknowledge the choice of the appropriate scale of costs lies
    within the discretion of a trial judge, they argue the trial judge committed
    two errors of principle in refusing to award them substantial indemnity costs.

[76]

First,
    they submit that since the respondents made allegations of fraud against them,
    substantial indemnity costs should follow. Bimman and his corporation, Bimman
    Real Estate Services Inc., had contracted with a local paint store owner, Lucy
    Lambert, to involve some of the CEL work crew in painting projects in Thompson
    (the Lambert Contracts). In October 2009, Bimman was accused of having
    misappropriated CELs funds and taken the Lambert Contracts to the detriment of
    that company, complaints that were repeated by the CEL board in the months that
    followed.

[77]

While
    an unsubstantiated pleading of fraud can expose a party to substantial
    indemnity costs, and while the respondents made such an allegation in respect
    of the Lambert Contracts, the trial judge explained, at para. 8 of his costs
    endorsement (2015 ONSC 4144), why, in the end, that pleading did not attract
    costs on a higher scale:

Lead counsel for the Defendants, from the drop of the puck at
    trial, downplayed the importance of the Lambert Contracts and their impact on
    the decision-making process surrounding the raising of funds necessary to
    finance CEL in the formative days, a process counsel allowed was critical to
    the ultimate success of CEL. This approach, whether undertaken by plan or
    happenstance, meant that
the allegations of fraud formed
    more a part of the Plaintiffs overall mantra than the Defendants defence or
    counterclaim, the latter of which I suggested in the Trial Judgment had all but
    disappeared or was unsupported by any damage evidence.
[Emphasis added]

[78]

Second,
    the appellants submit the trial judge acted inconsistently in awarding punitive
    damages against Neiman and Itkine, but not awarding substantial indemnity costs
    against the respondents. I do not agree. An award of punitive damages does not
    automatically translate into an award of substantial indemnity costs. An award
    of costs acts to provide fair and reasonable indemnity for legal expenses
    incurred when assessed in light of all of the factors enumerated in rule
    57.01(1) of the
Rules of Civil Procedure
, which include not only the
    nature of the allegations asserted in a proceeding, but also how a party
    conducts a proceeding. The trial judges cost endorsement disclosed he took all
    relevant factors into account. At para. 39, the trial judge explained how he
    balanced them:

On balance, I am satisfied, having regard to the matters
    described above, that a payment of costs to the Plaintiffs on a partial
    indemnity basis only is appropriate in all the circumstances. I decline to
    award costs of any aspect of this case on a substantial indemnity basis since I
    am not persuaded that there was clear evidence throughout of reprehensible,
    scandalous or outrageous conduct to warrant an award of elevated costs, even
    though, I dare say, that the allegations of Bimmans alleged misdeeds loomed
    large throughout the stages of the proceedings ramping up to trial. In any
    event, I am of the view that the award of punitive damages sounded a note of
    condemnation to the lead Defendants for their sometimes inappropriate
    behaviour.

[79]

I
    see no error in principle in how the trial judge exercised his discretion in awarding
    costs on a partial indemnity scale.

B.

Costs of the motions before Newbould J.

[80]

Newbould
    J. dismissed competing pre-trial motions brought by the parties in respect of
    property sales proceeds paid into court. Newbould J. left the costs of both
    motions to the trial judge, who concluded, at para. 27 of the costs endorsement,
    neither side came away as a clear winner at days end. As a result, the trial
    judge decided there will be no order as to costs of the motion and
    cross-motion.

[81]

The
    appellants submit the trial judge erred in failing to appreciate that by
    reserving costs to the trial judge, Newbould J. was indicating that the result
    of the trial should influence the disposition of costs of these motions. I
    disagree. Newbould J. left the costs of the motion to the trial judge; he did
    not order costs in the cause of the action. The trial judge explained why no
    costs order should be made in respect of the motions. He made no error in
    principle in so exercising his discretion. I give no effect to this ground of
    appeal.

C.

Recoverable experts' fees

[82]

In
    determining the appellants recoverable disbursements, the trial judge reduced
    claimed business valuator fees by 25% to $169,137, plus HST. He also reduced
    the claimed real estate appraisers fees from about $58,000 to $35,000, plus
    HST. The appellants submit the trial judge erred in so doing.

[83]

I
    see no error. A party is free to pay a retained expert whatever amount of fees
    it sees fit. However, courts do not act as a rubber stamp automatically
    approving claimed experts fees. Part II, Item 26 of Tariff A under the
Rules of Civil Procedure
only permits a party to recover a reasonable amount for experts reports. In
    the present case, the trial judge subjected the appellants claimed
    disbursements for experts reports to the required reasonableness analysis. He
    concluded the claimed amounts were excessive when compared with the fees
    charged for similar work by the respondents experts and after taking into
    account the usefulness of the work for the issues that remained live at
    trial. In sum, he properly discharged his duty to vigilantly review the
    reasonableness of claimed experts expenses. I would give no effect to this ground
    of appeal.

D.

The $5,000 cost award for a motion

[84]

The
    trial judge released his reasons on April 16, 2015. The appellants then brought
    a remediation motion in writing asking the trial judge to adjudicate on their
    necessary funds SHA interpretation argument described above at paras. 21 to 23.
    By reasons released on May 19, 2015, the trial judge dismissed the motion with
    costs. In his July 2, 2015 costs endorsement, the trial judge awarded the
    respondents costs of the remediation motion in the amount of $5,000.

[85]

The
    appellants spent some time at the hearing arguing the trial judge erred in so
    doing because he failed to provide them with an opportunity to make submissions
    on the appropriate amount of costs to be awarded.

[86]

I
    see no merit in this submission. On May 9, 2015, the appellants submitted a
    bill of costs in which they sought partial indemnity fees of $3,257.63 for
    their remediation motion. In light of that ask by the appellants, an ultimate
    award of $5,000 all in to the respondents for the motion was fair and
    reasonable. The trial judge committed no error in awarding that amount.

E.

Summary

[87]

I
    would grant the appellants leave to appeal the trial judges award of costs,
    but I would dismiss their costs appeal in its entirety.

VI.

PUNITIVE DAMAGES

[88]

The
    trial judge found the activities of Neiman and Itkine amounted to a marked
    departure from ordinary standards of decent behavior  and awarded punitive
    damages of $25,000 jointly against them for such appalling behaviour.

[89]

Neiman
    does not appeal that award. Itkine does, submitting it was unfair for the trial
    judge to make such an award when the appellants had not sought punitive damages
    against him in their pleadings.

[90]

It
    is common ground the appellants did not include a claim for punitive damages
    against Itkine in their pleadings and only sought such damages when they made
    their closing submissions at trial.

[91]

Whether
    a defendant has been taken by surprise by a defective pleading must be decided
    in the circumstances of the particular case:
Whiten v. Pilot Insurance Co.
, 2002
    SCC 18, [2002] 1 S.C.R. 595, at para. 88. The question is whether the defendant
    had adequate notice of his possible jeopardy for personal liability and an
    adequate opportunity to respond to the claim:
Alfano v. Piersanti
,
    2012 ONCA 297, 291 O.A.C. 62, at para. 163.

[92]

In
    the circumstances of the present case, such notice was not given until the
    evidence had closed. That was not fair to Itkine. A party should know before a
    trial starts the extent of his or her jeopardy. Itkine did not. Accordingly,
    the trial judge erred in awarding punitive damages against Itkine. I would set
    aside that part of his Judgment.

VII.

DISPOSITION

[93]

For
    the reasons set out above, I would dismiss the appeal, including the appeal of
    costs.

[94]

I
    would allow the cross-appeal in two respects only.

[95]

First,
    I would set aside the award of punitive damages against Itkine in para. 9 of
    the Judgment.

[96]

Second,
    I would vary paras. 1(b), 2(b), 3 and 4 of the Judgment in the manner described
    in paras. 63 to 66 above.

[97]

Para.
    5 of the Judgment specifies the amount the respondents are to pay 218 for its
    shares in CEL, which includes pre-judgment interest. Before us, the parties did
    not make submissions about how to recalculate pre-judgment interest. However,
    the amount in para. 5 of the Judgment needs to be revised. Accordingly, as part
    of their submissions on costs, the parties shall include an agreed-upon
    recalculation of the amount to be substituted in para. 5.

[98]

I
    would encourage the parties to agree on the costs of the appeal. If they
    cannot, any party seeking costs may file brief written submissions of up to 3
    pages in length, together with a Bill of Costs, no later than Thursday, April 14,
    2017. Any party against whom costs are sought may file brief responding
    submissions no later than Monday, April 24, 2017.

Released: March 31, 2017 ("RGJ")

"David Brown J.A."

"I agree. R.G. Juriansz J.A."

"I agree. B.W. Miller J.A."





[1]
The appellants abandoned their argument that the issuance of the shares
    pursuant to the resolutions made at the January 11 and February 11, 2010
    shareholder meetings was invalid for want of proper notice.


