


COURT OF APPEAL FOR ONTARIO

CITATION:
Schembri v. Way, 2012
    ONCA 620

DATE: 20120920

DOCKET: C54258

Feldman and Hoy JJ.A. and Spence J. (
ad hoc
)

BETWEEN

Gordon Schembri, Schembri Financial Limited, Leaf
    Construction Management Inc. and 1784652 Ontario Inc.

Plaintiffs/Appellants

and

Al Way, Jamesway Construction Corporation,
    Kingsley Financial Inc., Triumph Financial Holdings Inc., 1725030 Ontario Inc.,
    Premier Project Consultants Ltd., National Rent-All Inc., Terra-Tec Excavating,
    Oxford & First St. Inc., Simcoe & Eastwood Avenue Inc. and 359 King
    Ontario Inc.

Defendants/Respondents

James M. Wortzman, for the appellants

P.A. Neena Gupta, for the respondents

Gary L. Petker, for Faye Patterson

Ian M. Hull, for the trustees of the Way Family Trust

Heard: February 13, 2012

On appeal from the order of Justice James R.H. Turnbull of
    the Superior Court of Justice, dated June 29, 2011, with reasons reported at
    2011 ONSC 8021 and 2011 ONSC 4098.

Feldman
    J.A.:

[1]

This appeal arises from a pleadings motion. The motion judge allowed a
    number of amendments to the statement of claim but refused to add two parties 
    the Way Family Trust and Faye Patterson - or to add a new remedy for the
    oppression claim. The plaintiffs appeal those refusals.

FACTS

[2]

1784652 Ontario Inc. (Schembrico) and 1725030 Ontario Inc. (Wayco)
    entered into a joint venture agreement for the demolition and redevelopment of
    a property at 345 King St. N. in Waterloo, Ontario in April 2007. They were to
    share the profits equally.

[3]

The plaintiffs allege that the defendants improperly boosted the costs
    of the project by retaining a number of related companies to do work at
    inflated prices, thereby reducing the amount of the shared profit. It is also
    alleged that the defendants diverted Schembricos portion of the profits into
    other related entities. All of these actions, say the plaintiffs, fraudulently
    deprived Schembrico of its profits under the joint venture agreement.

[4]

The anticipated profit from the sale of the redeveloped property was $10
    million from which Schembrico anticipated receiving $5 million. When it
    received only approximately $1.4 million, Schembrico demanded an accounting but
    did not receive it.

[5]

Al Way, Kingsley Financial Inc. (of which Mr. Way is an officer and
    director), Triumph Financial Holdings Inc. (Triumph), Gordon Schembri and
    Schembri Financial Ltd. (of which Mr. Schembri is an officer and director)
    entered into a shareholder agreement in April 2008 regarding the manner in
    which the affairs of Triumph were to be conducted.

[6]

Schembri Financial holds 45 per cent of the shares of Triumph, while
    Kinglsey Financial owns 55 per cent. Triumph, in turn, owns 100 per cent of the
    shares of companies (the Triumph Subsidiaries) that own lands, in London,
    Oshawa and Waterloo (the shareholder lands).

[7]

The plaintiffs allege that Wayco improperly used Schembricos profits
    from the joint venture to finance the redevelopment of the shareholder lands.

[8]

After commencing the action, the plaintiffs brought a motion before
    Roberts J. for the appointment of a receiver and manager of the Triumph
    Subsidiaries that were developing the shareholder lands and for the delivery of
    documentation regarding the joint venture. Affidavits and cross-examinations on
    the affidavits produced a significant amount of evidence for use on that
    motion.

[9]

From both the cross-examinations, as well as from other disclosures in
    the context of the motion, the plaintiffs learned that $6 million of the
    profits from the joint venture had been paid to a Way corporation, Premier
    Project Consultants Ltd. (PPC).

[10]

It
    was also revealed that $855,000 of the $6 million had been directed to other
    Way corporations: 158170 Ontario Ltd., 1604909 Ontario Inc., The Shores Ltd.,
    Jameshill Developments Ltd., The Spruce Street Lofts Inc., and Maple Hill Creek
    Apartments Inc. (the Wayco beneficiaries).

[11]

Roberts
    J. appointed a receiver and manager of the Triumph Subsidiaries and ordered the
    production of all financial documents relating to the joint venture. She did so
    after reviewing an extensive evidentiary record and on the basis of the
    defendants acknowledgement that the plaintiffs had presented a strong
prima
    facie
case against Mr. Way and the Way companies of serious financial and
    accounting irregularities and improprieties. She noted that the defendants had
    not disputed the evidence presented by the plaintiffs: (2010), 76 B.L.R. (4th)
    147, at para. 6.

[12]

Based
    on this undisputed evidence, Roberts J. made a number of significant findings
    of wrongdoing by Mr. Way and the companies he controlled. For instance, she
    found that Mr. Way had shuffled money around to his corporations, that he had
    not complied fully with court-ordered production and he was willing to
    manipulate figures and to ignore his accountants advice.

[13]

Following
    the motion, the plaintiffs sought to add a number of parties that they allege
    improperly received monies from the joint venture, including the Wayco
    beneficiaries, a trust controlled by Mr. Way (the Way Family Trust or
    Trust), as well as Ms. Patterson who, as a director, officer and employee of
    a number of Way companies, is alleged to have participated with Mr. Way in
    shuffling the joint venture money. The plaintiffs also sought to add a claim
    for a redistribution of the shares of Triumph as part of the oppression remedy.

[14]

The
    motion judge granted the request to add the Wayco beneficiaries, but refused to
    add the Way Family Trust, Ms. Patterson, or the new ground of relief under the
    oppression remedy as set in para. 2(k) of the proposed amended statement of
    claim.

ISSUES

[15]

Did
    the motion judge err in law by refusing to add the Way Family Trust or Ms.
    Patterson as parties, or by refusing to allow the statement of claim to be
    amended by adding a claim for the readjustment of the shares of Triumph as an
    oppression remedy?

ANALYSIS

(1)

The proposed claim
    against Faye Patterson

[16]

In
    the proposed amendments that add the claims against Ms. Patterson, there are no
    new paragraphs where specific new allegations are made against her. Instead,
    her name is added to existing paragraphs where she is alleged to have
    participated in certain of the activities of Mr. Way and some of his companies
    either as an employee or as a director and officer. She is the president and a
    director of PPC and the vice president of Jamesway.

[17]

The
    specific causes of action identified by the motion judge that were proposed to
    be added against her are conspiracy, inducing breach of contract and breach of
    fiduciary duty based on the following broad allegations: 1) having joint
    control with Mr. Way of funds that belonged to the joint venture and
    participating in the diversion of those funds to other Way entities and in the
    fraudulent inflation of the costs of the joint venture; 2) together with Mr.
    Way, improperly using Schembricos share of the profits from the joint venture
    on other projects involving the shareholder lands; and 3) conspiracy to injure
    the plaintiffs by depriving them of money that they are due and owing by, for
    example, diverting Schembricos profits to PPC for baseless expenses.

[18]

The
    motion judge found that the proposed amendments did not disclose a reasonable
    cause of action against Ms. Patterson in her personal capacity. He viewed the
    allegations as mere claims against the corporations of which Ms. Patterson was
    a directing mind, as in
ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.
(1995),
    26 O.R. (3d) 481 where Finlayson J.A. stated, at p. 491:

Considering that a corporation is an inanimate piece of legal
    machinery incapable of thought or action, the court can only determine its
    legal liability by assessing the conduct of those who caused the company to act
    in the way that it did. This does not mean, however, that if the actions of the
    directing minds are found wanting, that personal liability will flow through
    the corporation to those who caused it to act as it did. To hold the directors
    of Peoples personally liable, there must be some activity on their part that
    takes them out of the role of directing minds of the corporation. In this case,
    there are no such allegations.

[19]

The
    motion judge also found that the claims against Ms. Patterson were bald
    allegations with no factual basis and that the proposed pleading did not
    specify why she was being sued as an individual separately from the
    corporations. He concluded by saying that, if evidence is disclosed in the
    examinations for discovery and production of documents that would found the
    claims he had denied, then the plaintiffs could renew their motion to add Ms.
    Patterson.

[20]

The
    motion judge then assessed the viability of each of the three causes of action
    proposed against her. Dealing first with the claim against Ms. Patterson for
    conspiracy to injure, the motion judge found that all of the components of that
    cause of action were properly pleaded against her in para. 98 of the proposed
    amended statement of claim. In that paragraph, it is asserted that some of the
    defendants, including Ms. Patterson, acted in concert to deprive the plaintiffs
    of their profits. The motion judge concluded that [i]f such is proven, it
    naturally follows that if the conduct is found to be unlawful, and such
    deprivation is proved, the defendants would have known that injury to the
    plaintiffs would be the natural result.

[21]

Nevertheless,
    although the conspiracy claim was sufficiently pleaded and particularized, the
    motion judge would not allow that claim to be added against Ms. Patterson
    because of the ruling he had already made that there was an insufficient
    factual basis to ground any of the claims against her in her personal capacity.

[22]

The
    second claim was for breach of fiduciary duty. The motion judge found that the
    proposed amended claim did not plead facts that would give rise to a fiduciary
    duty between Ms. Patterson, as an employee of Mr. Way or as a director and
    officer of PPC and Jamesway, and the plaintiffs.

[23]

The
    third claim was for inducing breach of contract, the contract being the joint
    venture. After setting out the elements of the tort, the motion judge concluded
    that the pleading was adequate to sustain the claim against Ms. Patterson for
    inducing breach of contract, and that [w]hile it lacked some particulars, it
    was sufficient to allow her to plead to it if that had been necessary.
    However, because he had found that there was an insufficient factual basis to
    allow Ms. Patterson to be sued in her personal capacity for any cause of
    action, the motion to add the claim against her for inducing breach of contract
    was also dismissed.

[24]

While
    the motion judge and plaintiffs do not specify which sub rule they are relying
    on, in my view,  Rule 5.03(4) of the
Rules of Civil Procedure
, R.R.O.
    1990, Reg. 194, is the most applicable in the circumstances, together with r.
    26.01:

26.01   On motion at any stage of an action the court shall
    grant leave to amend a pleading on such terms as are just, unless prejudice
    would result that could not be compensated for by costs or an adjournment.

5.03(4)  The court may order that any person who ought to have
    been joined as a party or whose presence as a party is necessary to enable the
    court to adjudicate effectively and completely on the issues in the proceeding
    shall be added as a party.

[25]

The
    motion judge directed himself in his introduction to the reasons that [i]n
    accordance with the ruling of the Ontario Court of Appeal  amendments to add
    parties should be presumptively approved, unless there is abuse of the court process
    or non-compensable prejudice.

[26]

There
    is neither an allegation of prejudice nor a limitation period issue here, and
    the action is at an early stage. The plaintiffs could commence a new action
    against the proposed defendants and then seek to join it with the existing
    action. The procedure of adding parties to the existing action circumvents the
    costly and time-consuming process involved in that procedure.

[27]

Because
    this is a motion to amend pleadings, the allegations in the pleading are taken
    to be true and provable. The only issue therefore, is whether the allegations
    as pleaded, plead all of the necessary components of an identifiable cause of
    action.

[28]

In
    my view, having found that the causes of action for conspiracy to injure and
    inducing breach of contract were sufficiently pleaded against Ms. Patterson,
    the motion judge erred by not allowing her to be joined as a defendant in
    respect of those two causes of action.

[29]

The
    motion judge referred to the following statement by Finlayson J.A. in
ScotiaMcLeod
,
    affirmed by this court in
Normart Management Ltd. v. West Hill
    Redevelopment Co. Ltd.
(1998), 37 O.R. (3d) 97, at p. 102:

It is well established that the directing minds of corporations
    cannot be held civilly liable for the actions of the corporations they control
    and direct
unless there is some conduct on the part of those directing
    minds that is either tortious in itself or exhibits a separate identity or
    interest from that of the corporations such as to make the acts or conduct
    complained of those of the directing minds.
[Emphasis added.]

[30]

The
    fact that corporate actors can be separately liable if they have engaged in
    tortious conduct, even in the course of their duty, was also confirmed by this
    court in
ADGA Systems International Ltd. v. Valcom Ltd.
(1999), 43
    O.R. (3d) 101 (C.A.), at p. 112-113.

[31]

At
    para. 98, the motion judge made the following statement:

In the case at bar, the factual foundation for the tort of
    conspiracy, the claim for breach of fiduciary duty and inducing breach of
    contract, as pleaded, is identical to that which underlies the allegations for
    breach of the [joint venture agreement] and the Shareholders Agreements. The
    damages alleged in all cases are the same. The allegations made against Ms.
    Patterson are bald allegations with no factual basis to found a claim against
    her in law.

[32]

With
    respect to the motion judge, in this passage he has not acknowledged that in
    this case there is a clear pleading of fraudulent conduct by Ms. Patterson,
    which is detailed to the same extent as the claims against other defendants.
    This brings the case squarely within the type of conduct where a claim against
    the directing mind is not barred.

[33]

The
    motion judge also erred in suggesting that there must be evidence to sustain
    such a claim. It may be that because there was such an abundance of evidence
    already developed in the record in this matter, the motion judge expected sworn
    or documentary evidence to support the proposed new pleadings. However, that is
    not a requirement on a motion to add a party (subject to other considerations
    such as prejudice or abuse of process). As Moldaver J.A. stated in
Andersen
    Consulting v. Canada

(Attorney General)
(2001), [2002] 150 O.A.C.
    177 at para. 34: [T]he law is clear that unless the facts alleged are based on
    assumptive or speculative conclusions that are incapable of proof, they must be
    accepted as proven and the court should not look beyond the pleadings to
    determine whether the action can proceed.

[34]

I
    would therefore allow the appeal with respect to the addition of Ms. Patterson
    as a defendant on the two issues of conspiracy to injure and inducing breach of
    contract. The plaintiffs are not pursuing the claim for breach of fiduciary
    duty.

(2)

The proposed claim
    against the Way Family Trust

[35]

The
    plaintiffs sought to add the Way Family Trust as a defendant that they allege
    knowingly received from Mr. Way and Way entities money that ought to have gone
    to the plaintiffs. The proposed amendments add the Trust into various existing
    paragraphs of the statement of claim as one of a list of parties that either
    received the plaintiffs funds or participated in the plan to divert those
    funds. However, there are no particulars of any of these allegations.

[36]

The
    motion judge rejected a number of alleged defects with the pleading and would
    have been ready to approve the addition of the Way Family Trust had there been
    any evidence to support the allegations against it.

[37]

He
    rejected the submission that the pleading lacked particularity. He found that
    it was sufficient for a claim for fraud and breach of trust to allege knowing
    receipt of monies that the Trust knew or should have known were impressed with
    a trust for the plaintiffs.

[38]

He
    accepted the plaintiffs explanation that the reason the Trust was not named as
    an original party to the action was that they only discovered the payments out
    of some of the joint venture profit proceeds to Way companies after the
    litigation was commenced.

[39]

He
    also rejected the submission made by counsel for the trustees that the
    plaintiffs only sought to add the Way Family Trust for strategic reasons,
    including to obtain discovery from it and to apply pressure on the other
    defendants to settle. He reasoned that Mr. Way is one of the trustees and would
    be examined in his personal capacity in any event.

[40]

Notwithstanding
    that he rejected those arguments, the motion judge refused the amendment
    because, unlike the Wayco beneficiaries that were added, there was no evidence
    in the record already developed and no evidence referred to by Roberts J. that
    the Way Family Trust had received any of the diverted funds. Also of 
    significance for the motion judge was the fact that the plaintiffs had
    commissioned a report from KPMG but had not produced that report and had not
    suggested, based on that report, that the accountants had found that the Way
    Family Trust had received any of the disputed funds.

[41]

The
    motion judge relied on the decision of C. Campbell J. in
Hilltop Group Ltd.
    v. Katana
[2001] O.J. No. 1564 (S.C.), for the proposition that it is
    appropriate when considering a motion to add parties for the court to consider
    evidence advanced in support of the claim in order to assess its tenability.
    However, the facts in that case make it inapplicable to this situation. In
Hilltop
,
    the plaintiffs by counterclaim sought to name a new defendant by counterclaim
    two weeks before the trial. The basis of the claim was that they had only
    recently learned that the proposed new defendant was a 50 per cent shareholder
    in one of the companies operated by her husband, who was also a defendant, and
    that she may have played a role in his impugned activities.

[42]

The
    rule being relied on was rule 5.04(2), which allows a party to be added or
    deleted at any stage subject to non-compensable prejudice. The focus of the
    judges analysis in that case was the lateness of the request, the effect on
    the upcoming trial and the issue of prejudice, and in that context, the
    tenability of the proposed new claim. For that purpose, because the proposed
    pleading was so bald, the court looked at the transcripts that were available
    to see if there was any suggestion of the involvement of the proposed new party
    and there was not. The court therefore found, among other things, that the
    pleading did not disclose a tenable claim. However, that was true without
    looking for evidence. Nonetheless, the judge was willing to apply any evidence
    he could find to support the claim and fill in the pleading if there was any
    basis for doing so, but there was none.

[43]

In
    my view, Moldaver J.A.s statement in
Andersen
, quoted above, is again
    applicable. Where a party wishes to amend a claim or add a new party within the
    limitation period, the facts pleaded are taken to be true and provable (subject
    to unprovable assumptive or speculative conclusions) and the court is to assess
    the tenability of the claim on that basis.

[44]

The
    trial judge also found that to join the Way Family Trust would unduly
    complicate the action and cause significant prejudice to the Trust in having to
    produce documents and incur accounting and legal expenses. However, this is not
    the type of prejudice envisioned by the rule. Unfortunately, everyone involved
    in litigation must endure the time and expense involved in its procedures. In
    any event, the plaintiffs were not seeking to add a party late in the
    litigation but at a fairly early stage before examinations and production.

[45]

Once
    the motion judge determined that the proposed pleadings adequately disclosed
    and pled the asserted causes of action, the fact that the plaintiffs did not
    produce evidence to support the allegations was not a reason to refuse the
    amendment.

(3)

The claim for reapportionment of the share percentage holdings in Triumph

[46]

The
    plaintiffs sought to amend para. 2(k) of the statement of claim from claiming a
    50/50 interest in Triumph to reversing the shareholdings so that Schembrico
    would hold 55 per cent and Wayco 45 per cent.  The motion judge held that there
    was no factual basis for this claim as pleaded. At the request of the
    defendants, the entire paragraph was struck from the pleading with leave to
    amend.

[47]

The
    plaintiffs rely on s. 248(3) of Ontarios
Business Corporations Act,
R.S.O. 1990, c. B 16 (OBCA), which sets out the available remedies for
    oppression. Section 248(3)(d) includes as a potential remedy an order
    directing an issue or exchange of securities. The defendants submit that the
    case law only allows this type of remedy to be ordered where the circumstances
    call for it and that there is no suggestion that a readjustment of the share
    split in the joint venture corporation was ever contemplated as a remedy for
    any breach.

[48]

They
    say that, at a minimum, the plaintiffs would have to plead that Schembri
    Financial had a reasonable expectation that it might secure a majority position
    in the event of a dispute with Kingsley Financial, that a re-apportionment of
    shares would address the oppression and that there is no less intrusive way to
    achieve redress.

[49]

In
    my view, the pleaded amendment should be allowed under Rule 26. The facts
    pleaded that are alleged to constitute the oppression, if proved, will give the
    court the authority to order the appropriate oppression remedy provided under
    the OBCA. It will be for the trial judge to determine what is appropriate based
    on the evidence and the submissions at the time. There is no merit in
    attempting to fetter the discretion of the trial judge at the pleading stage,
    subject to any particular circumstances not present in this case.

ADDITIONAL ISSUE: COSTS

[50]

In
    their supplementary notice of appeal, the plaintiffs objected to part of the
    costs order made by the trial judge in the cause.  There was no reference to
    this ground of appeal in their factum. Some mention was made of the issue in
    oral argument. I would not grant leave to appeal on this issue, which is a
    matter of discretion for the motion judge.

RESULT

[51]

I
    would allow the appeal, set aside the order of the motion judge and allow the
    motions to amend the pleading as follows: 1) by adding Ms. Patterson in respect
    of the claims for conspiracy and inducing breach of contract; 2) by adding the
    Way Family Trust as pleaded; and 3) by allowing the proposed amendment to para.
    2(k) of the statement of claim.

[52]

Following
    the hearing, the counsel advised that they had come to an agreement regarding
    the costs of the appeal and below. As the plaintiffs have been successful, they
    will have the costs of the appeal fixed at $21,395.42 for fees, $4,728.83 for
    disbursements, plus HST, for which the defendants will be jointly and severally
    liable. They shall have the costs of the motion from the Way Family Trust in
    the amount of $12,000 for fees, $382.32 for disbursements, plus HST, and from Ms. Patterson in the amount of $14,000
    for fees, $382.32 for disbursements, plus HST.

K.
    Feldman J.A.

I
    agree Alexandra Hoy J.A.

I
    agree Spence J. (
ad hoc
)

Released: K.F. September 20, 2012


