2016 QCCQ 1993, 2016 QCCQ 1993

Sarrapuchiello c. Marzoli 2016 QCCQ 1993 COURT OF QUÉBEC CANADA PROVINCE OF QUÉBEC DISTRICT OF MONTRÉAL Civil Division No. 500-22-208578-131 DATE: March 17, 2016 ______________________________________________________________________ PRESIDED BY JUDGE HENRI RICHARD ______________________________________________________________________ ALAIN SARRAPUCHIELLO Plaintiff v. FRANK MARZOLI and MARZCORP OIL & GAS INC.

Defendants ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Alain Sarrapuchiello alleges that Frank Marzoli approached him to invest $50,000 in Marzcorp Oil & Gas Inc. ( Marzcorp ) with a guaranteed principal repayment within six months in addition to a “return of 20%”. In exchange for this investment, Mr Sarrapuchiello received 200,000 common shares of Marzcorp.

He qualified the agreement as an “investment agreement”, which he distinguished from Subscription Agreement P-1 in which he offered to buy the Marzcorp shares. [ 2 ] Since he was not repaid within the promised deadline, Mr Sarrapuchiello is claiming solidarily from Mr Marzoli and Marzcorp $60,000 “under the terms of the investment agreement” and given their “fraudulous [ sic ] and misrepresentative representations”. [ 3 ] At the hearing, Mr Sarrapuchiello amended his action in order to add a subsidiary conclusion to declare Subscription Agreement P-1 null and void since it was contrary to the Securities Act , CQLR, c.

V-1.1. [ 4 ] In defence, Mr Marzoli and Marzcorp denied having concluded any agreement other than Subscription Agreement P-1 in which Mr Sarrapuchiello “irrevocably subscribes for and offers to purchase from” Marzcorp 200,000 common shares at a price of $0.25 per share. [ 5 ] Hence, Mr Marzoli and Marzcorp raised objections to the evidence of any other agreement that would contradict or vary the terms of the Subscription Agreement. [ 6 ] In addition, Mr Marzoli and Marzcorp denied having represented to Mr Sarrapuchiello that the purchase price of the shares would be repaid within six months, increased by a percentage of 20%.

Questions in dispute [ 7 ]

a) Can Alain Sarrapuchiello prove an “investment agreement” or any agreement other than Subscription Agreement P-1 by testimony?

b) Is Subscription Agreement P-1 contrary to the Securities Act ? Context [ 8 ] In autumn 2009, Messr Sarrapuchiello and Marzoli entered into a business relationship that led to a friendship. [ 9 ] Mr Sarrapuchiello testified that Mr Marzoli, a seasoned businessman, took him under his wing, namely to obtain financing for

the start-up of a daycare with his wife. [ 10 ] During the course of their relationship, Mr Marzoli presented Marzcorp, of which he was the sole administrator, to Mr Sarrapuchiello, and which operated in the oil exploration sector in vallée de la Matapédia in the Gaspésie region. [ 11 ] Mr Marzoli explained to Mr Sarrapuchiello that Marzcorp was in the process of a “Reverse Take Over” with Tudor Corporation.

Mr Sarrapuchiello basically understood that Marzcorp wanted to take control of Tudor in order to become a public company, duly listed on the stock exchange. [ 12 ] To find out more, Mr Marzoli put Mr Sarrapuchiello in contact with his spouse, Ms Leanne Dorr, designated as the Senior Vice-President, Shareholder & Investor Relations of Marzcorp, who emailed him, on April 18, 2011, a document presenting Marzcorp that listed, among other things, the upcoming steps in order for the company to be listed on the stock exchange. [ 13 ] Mr Sarrapuchiello appeared enthusiastic at the idea of investing in Marzcorp, so much so, that he spoke about it with certain acquaintances to whom he forwarded the documentation received from Ms Dorr. [ 14 ] In an email dated April 30, 2011, Mr Sarrapuchiello wrote to Ms Dorr and Mr Marzoli on the following terms: Hi Frank.

Hi Leanne. Can you send a copy of the subscription? We are re-considering investing. [ 15 ] When Mr Sarrapuchiello used the term “We”, he was referring to his wife whose family is close to Moroccan royalty. [ 16 ] On May 3, 2011, Ms Dorr emailed Subscription Agreement P-1 to Mr Sarrapuchiello while apologizing for the delay and asking him to fill it out according to the following instructions: 1. Complete and sign the first page 2. Complete and sign

Schedule A, and check the appropriate category in Appendix A to

Schedule A 3. Complete and sign

Schedule C – Power of Attorney 4. Send money to Marzcorp (by cheque or by wire, if by wire, you may want to send their wire instruction). [ 17 ] Mr Sarrapuchiello thanked Ms Dorr and answered: “I will read this through”. [ 18 ] A few hours later, Mr Sarrapuchiello wrote to Ms Dorr: “Leanne, can I call you if I have any questions?? I am quite new at this and there is a lot to read through”.

Ms Dorr answered that he could call her on her cell phone. [ 19 ] Marzcorp has its head office in Ontario and a business office in Montréal. [ 20 ] On May 5, 2011, Mr Sarrapuchiello went to the Marzcorp business office in Montréal and gave Ms Dorr the duly signed Subscription Agreement.

Ms Dorr did not remember if it was already completed or if Mr Sarrapuchiello signed it in front of her. [ 21 ] For the purposes of the present judgment, it is important to refer to and cite relevant excerpts from the “Subscription Agreement for Regular Shares”, filed as Exhibit P-1, in which Mr Sarrapuchiello is designated as the “Subscriber” and Marzcorp as the “Corporation”. [ 22 ] Mr Sarrapuchiello acknowledges and agrees that the obligations of Marzcorp under this agreement were conditional “on the accuracy of the representations and warranties of the Subscriber contained in this Subscription Agreement, ..., including the Accredited Investor Certificate set out as

Schedule ‘A’” (Article 4.2). [ 23 ] The relevant passages of Subscription Agreement P-1 read as follows: 6.1 Representations, Warranties and Covenants of the Subscriber The Subscriber, on its own behalf . . ., hereby represents and warrants to, and covenants with, the Corporation as follows as at the date hereof and as at the Closing Time and acknowledges that the Corporation, and its counsel, are relying on such representations and warranties in connection with the transaction contemplated herein: . . . (

c) The Subscriber, on its own behalf, . . ., represents, warrants and certifies as set out in

Schedule “A” hereto and further certifies that the Subscriber . . ., falls into one or more of the categories of prospectus exempt purchasers listed in

Schedule “A” (as specified by the Subscriber in such Schedule). (

d) The Subscriber has duly and properly completed, executed and delivered to the Corporation within applicable time periods, the certificate and form set forth in

Schedule “A” hereto and the representations, warranties and certifications contained therein are true and correct as at the date hereof and will be true and correct at the Closing Time. . . .

(

l) No person has made to the Subscriber any written or oral representations : (

i) that any person will resale or repurchase any of the Regular Shares; (ii) that any person will refund the Subscription Price; or (iii) as to the future price or value of the Regular Shares. . . . 6.2 Acknowledgements and Agreements of the Subscriber The Subscriber, on its own behalf . . ., acknowledges and agrees as follows: . . . (

e) The Subscriber understands that the Corporation is not currently a reporting issuer or the equivalent in any jurisdiction and there may be an indefinite restriction period on the resale of the Subscribed Shares. . . . (

j) The Subscriber has not received or been provided with a prospectus , offering memorandum, within the meaning of the Securities Laws, or any sales or advertising literature in connection with the Offering and the Subscriber’s decision to subscribe for Regular Shares was not based upon, and the Subscriber has not relied upon, any verbal or written representations as to facts made by or on behalf of the Corporation. The Subscriber’s decision to subscribe for Regular Shares was based solely upon the Term Sheet attached hereto as

Schedule “B” . . . . (

l) The Corporation is relying on an exemption from the requirement to provide the Subscriber with a prospectus under the Securities Laws and, as a consequence of acquiring Regular Shares pursuant to such exemption, certain protections, rights and remedies provided by Securities Laws, including statutory rights of rescission and/or damages, will not be available to the Subscriber . . . . (

p) There are risks associated with the purchase of the Regular Shares. . . . (

s) The Subscriber . . . acknowledges that the Regular Shares are speculative in nature and that there are risks associated with the purchaser of Regular Shares and the Subscriber . . . has such knowledge, sophistication and experience in business and financial matters as to be capable of evaluating the merits and risks in its investment in the Subscribed Shares, fully understands the speculative nature of the Subscribed Shares and is able to bear the economic risk of loss of its entire investment . 6.3 Reliance on Representations, Warranties, Covenants and Acknowledgements The Subscriber acknowledges and agrees that the representations, warranties, covenants and acknowledgements made by the Subscriber in this Subscription Agreement are made with the intention that they may be relied upon by the Corporation in determining the Subscriber’s eligibility . . . to purchase Regular Shares under the Securities Laws.

The Subscriber further agrees that by accepting Subscribed Shares, the Subscriber shall be representing and warranting that such representations, warranties, acknowledgements and covenants are true as at the Closing Time with the same force and effect as if they had been made by the Subscriber at the Closing Time and that they shall survive the purchase by the Subscriber of Regular Shares and shall continue in full force and effect notwithstanding any subsequent disposition by the Subscriber of any of such Regular Shares. . . . 9.6 Entire Agreement This Subscription Agreement, including the Schedules hereto, constitutes the entire agreement between the parties with respect to their transactions contemplated herein and cancels and supersedes any prior understandings, agreements, negotiations and discussions between the parties.

There are no representations, warranties, terms, conditions, undertakings or collateral agreements or understandings, express or implied, between the parties hereto other than those expressly set forth in this Subscription Agreement or in any such agreement, certificate, affidavit, statutory declaration or other document as aforesaid. This Subscription Agreement may not be amended or modified in any respect except by written instrument executed by each of the parties hereto. [Emphasis added.] [ 24 ]

Schedule “A”, entitled “Certificate for accredited investors resident in Canada”, is found after the Subscription Agreement. [ 25 ] In that document, Mr Sarrapuchiello represents, warrants, covenants and certifies to Marzcorp that he is an “accredited investor” by virtue of satisfying one or more of the indicated criteria set out in Appendix “A”. [ 26 ] In Appendix “A”, entitled “To Certificate of Accredited Investors” [ sic ], Mr Sarrapuchiello represents, warrants and certifies to Marzcorp that he is an accredited investor by virtue of being:

(

j) an individual who, either alone or with a spouse, beneficially owns, directly or indirectly, financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000. [ 27 ] On May 6, 2011, i.e. the day after Subscription Agreement P-1 was signed, Mr Sarrapuchiello made an electronic funds transfer of $50,000 in payment of the 200,000 Regular Shares that he irrevocably subscribed for and offered to purchase from Marzcorp. [ 28 ] As a result of this payment, Marzcorp sent him a share certificate dated May 11, 2011.

According to the testimony, Mr Sarrapuchiello met Mr Marzoli on several occasions after the purchase of the Marzcorp shares in order to follow-up on the “Reverse Take Over” of Tudor. [ 29 ] Mr Sarrapuchiello testified that Mr Marzoli represented to him his $50,000 investment would be repaid within six months along with a 20% profit. [ 30 ] Mr Marzoli categorically denied that he made such representations, warranties and covenants to Mr Sarrapuchiello.

On the contrary, Mr Marzoli told him that the value of the Marzcorp shares was directly tied to the Reverse Take Over with Tudor and kept him informed of developments in this regard. [ 31 ] According to Mr Sarrapuchiello, it was upon the suggestion of Ms Dorr that he signed Appendix “A”, in which he acknowledged that he and his wife had financial assets in excess of $1,000,000. For her part, Ms Dorr categorically denied that she suggested anything whatsoever to Mr Sarrapuchiello before filling out the Subscription Agreement and its Schedules and Appendix, suggesting instead that he consult a legal advisor.

This was why she sent him a copy of Subscription Agreement P-1 before it was signed. [ 32 ] In that regard, paragraph (

n) of

article 6.2 of the Subscription Agreement provides that: The Subscriber, . . ., is responsible for obtaining such independent legal and tax advice as it considers appropriate in connection with the execution, delivery and performance of this Subscription Agreement and the transactions contemplated under this Subscription Agreement, including without limitation for the proposes of giving representations, warranties and covenants under this Subscription Agreement. [ 33 ] On November 8, 2013, more than two and a half years after Subscription Agreement P-1 was signed, Mr Sarrapuchiello sent the following email to Mr Marzoli: Hi Frank, I hope this message finds you well.

As you know, in May 2011 you asked for 50k for one of your projects related to your activities. I gave you 50k which was supposed to return to me in 6 months with at least 20 % more. So I should have received at the end of 2011 at least 60K. We are now in November 2013 and 2 years later, i still did not receive my money back. You always told me that this money was not lost. On the other hand, as you know, 800k is waiting for you personally at the notary’s office for a building which you were supposed to modify to receive the daycare I had been working on since we met.

I’m expecting receiving from you by Monday the 50k plus what is owed to me. So Frank, now it’s your turn to at least give me back my 50k to prove to me that I may still consider you as an honest business man. Kind Regards. [ 34 ] Mr Marzoli did not answer this email because he never represented or agreed that the amount invested by Mr Sarrapuchiello to purchase the Marzcorp shares would be repaid within a certain timeframe with a profit. [ 35 ] Mr Sarrapuchiello instituted the proceedings in this case on December 20, 2013.

Analysis First question in dispute [ 36 ] In his motion introductive of suit, Mr Sarrapuchiello referred to an “investment agreement” concluded with Mr Marzoli in which the amount of $50,000 for the purchase of shares in Marzcorp would be repaid within six months with “a guaranteed return of 20%”. [ 37 ] At the hearing, Mr Sarrapuchiello testified that Subscription Agreement P-1 was a “mere formality” that fell under a “Global Agreement” made with

Mr Marzoli with regard to the repayment of his investment with a profit. [ 38 ] Mr Marzoli and Marzcorp raised objections to any evidence aimed at contradicting or varying the terms of Subscription Agreement P-1. The Court took these objections under reserve in order to hear the evidence as a whole from both parties. [ 39 ] Mr Sarrapuchiello referred the Court to

article 2861 of the Civil Code of Québec ( C.C.Q. ): 2861. Where a party has been unable, for a valid reason, to procure written proof of a juridical act, such

an act may be proved by any means. [ 40 ] Thus, given his friendship with Mr Marzoli, Mr Sarrapuchiello contended that he “has been unable, for a valid reason, to procure written proof of a juridical act”. Therefore, according to him, the testimonial evidence of this investment agreement is admissible. [ 41 ] As ruled by the Superior Court in Lefrançois c. Lefebvre , [1]

article 2861 C.C.Q. constitutes an exception to

article 2862 C.C.Q., which provides that “Proof of a juridical act may not be made, between the parties, by testimony where the value in dispute exceeds $1,500”, unless there is a commencement of proof or the juridical act was executed in the ordinary course of business of an enterprise. [ 42 ] With respect for the position of Mr Sarrapuchiello, the Court concludes that articles 2861 and 2862 are not applicable to the present case. This is because these articles encounter the presence of a juridical act, Subscription Agreement P-1, and

article 2863 C.C.Q., which states: 2863. The parties to a juridical act set forth in a writing may not contradict or vary the terms of the writing by testimony unless there is a commencement of proof. [ 43 ] Subscription Agreement P-1 cannot be ignored and binds Mr Sarrapuchiello and Marzcorp. In trying to establish an “investment agreement” with Mr Marzoli, Mr Sarrapuchiello is attempting to contradict or vary the terms of Subscription Agreement P-1, which he cannot do under

article 2863 C.C.Q. [ 44 ] To contradict or vary the terms of Subscription Agreement P-1, Mr Sarrapuchiello must establish a commencement of proof that “ may arise from an admission or writing of the adverse party, his testimony or the production of real evidence that gives an indication that the alleged fact may have occurred” (article 2865 C.C.Q.). [ 45 ] Mr Sarrapuchiello has not discharged his burden of establishing any commencement of proof whatsoever in order to contradict or vary the terms of Subscription Agreement P-1.

Also, the ordinary course of business of Marzcorp is not to sell shares but to operate in the oil exploration sector. [ 46 ] Then, Mr Sarrapuchiello referred the Court to

article 2864 C.C.Q.: 2864. Proof by testimony is admissible to interpret a writing, to complete a clearly incomplete writing or to impugn the validity of the juridical act which the writing sets forth. [ 47 ] But there is no reason to interpret Subscription Agreement P-1, the terms of which are clear and unequivocal, or to complete it since it is not a “clearly incomplete writing”. [ 48 ] In civil law, the burden of proof is on the plaintiff’s shoulders in accordance with the principle provided for in

article 2803 C.C.Q . which states: “A person seeking to assert a right shall prove the facts on which his claim is based”. [ 49 ] The Court must weigh the probabilities pursuant to

article 2804 C.C.Q . which states: “Evidence is sufficient if it renders the existence of a fact more probable than its non-existence”.

In other words, the Court must establish what is more probable and likely. [ 50 ] In addition, if Mr Sarrapuchiello wants to “impugn the validity of the juridical act which the writing sets forth”, he must adduce preponderant evidence that he was the victim of false representations or fraudulent tactics. [ 51 ] After analysis, the Court concludes that Mr Sarrapuchiello has not discharged his burden in this regard. [ 52 ] First, in signing Subscription Agreement P-1, Mr Sarrapuchiello acknowledged that: - no person has made any written or oral representations that any person will resale or repurchase any of the Regular Shares or refund the Subscription Price (article 6.1 (l)); - he has not relied upon any verbal or written representations as to facts made by or on behalf of the Corporation, his decision to subscribe for Regular Shares was based solely upon the Term Sheet attached as

Schedule “B” (article 6.2 (j)); - there are risks associated with the purchase of the Regular Shares (article 6.2 (p)); - the Regular Shares are speculative in nature and that there are risks associated with their purchase and that he is able to bear the economic risk of loss of its entire investment (article 6.2(s)); - the Subscription Agreement constitutes the entire agreement between the parties and there are no representations, warranties, terms, conditions, undertakings or collateral agreements or understandings, express or implied, between the parties hereto other than those expressly set forth in the Subscription Agreement or in any such agreement, certificate, affidavit, statutory declaration or other document as aforesaid (article 9.6).

[ 53 ] Second, although Mr Marzoli can be qualified as an exuberant witness, the Court finds no evidence that calls his credibility or good faith into question. [ 54 ] Hence, the Court concludes that Mr Sarrapuchiello cannot present any evidence whatsoever with a view to contradict or vary the terms of Subscription Agreement P-1 and has not discharged his burden to establish a fraudulent tactic by Mr Marzoli or another representative of Marzcorp when he irrevocably subscribed for and offered to purchase the shares in question.

Second question in dispute [ 55 ] Mr Sarrapuchiello asked the Court to declare Subscription Agreement P-1 null and void given the absence of a prospectus, which is contrary to

section 11 of the Securities Act : 11. Every person intending to make a distribution of securities shall prepare a prospectus that shall be subject to a receipt issued by the Authority. The application for a receipt must be accompanied with the documents prescribed by regulation. Notwithstanding the foregoing, in the case of a distribution made by a dealer acting as firm underwriter, the issuer is responsible for preparing the prospectus. [ 56 ] Mr Sarrapuchiello also relied on

section 148 of the Act, which provides that: 148. No person may act as a dealer, adviser or investment fund manager unless the person is registered as such. [ 57 ] Hence, Mr Sarrapuchiello invoked

section 214 of the Act, which is found under the title “CIVIL ACTIONS”, in order to have Subscription Agreement P-1 declared null and void: 214. Every person who has subscribed for or acquired securities in a distribution of securities effected without the prospectus required under Title II may apply to have the transaction rescinded or the price revised, at his option, without prejudice to his claim for damages.

The plaintiff may claim damages from the issuer or the holder, as the case may be, whose securities were distributed without a prospectus from the promoter of the venture, from their officers or directors, or from the dealer responsible for the distribution. However, if the plaintiff did not receive the prospectus he was entitled to receive, he has no claim in damages except against the dealer or the person prescribed who is required to send the prospectus to him pursuant to

section 29. For the purposes of this section, a reference to a prospectus includes a document, prescribed by regulation, standing in lieu of a prospectus. [ 58 ] Mr Marzoli and Marzcorp opposed these arguments with Regulation 45-106 respecting Prospectus Exemptions , [2] which defines “accredited investor” as follows: (

j) an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000; [ 59 ]

Section 2.3 of the Regulation states the following with regard to “accredited investor”:

(1) The prospectus requirement does not apply to a distribution of a security if the purchaser purchases the security as principal and is an accredited investor. [ 60 ] In Appendix “A” of Subscription Agreement P-1, Mr Sarrapuchiello represents, warrants and certifies to Marzcorp that he is an accredited investor given that he has financial assets, with his wife, in excess of $1,000,000. [ 61 ] As shown by the aforementioned excerpts from Subscription Agreement P-1, Mr Sarrapuchiello acknowledged and agreed that Marzcorp’s obligations were conditional “on the accuracy of the representations and warranties of the Subscriber”, in particular the Accredited Investor Certificate set out as

Schedule “A”. [ 62 ] If Mr Sarrapuchiello signed Appendix “A” in the capacity of an “Accredited Investor” and this was not the case, he can blame no one but himself. Mr Marzoli and Marzcorp are entitled to believe in the truth of everything that Mr Sarrapuchiello acknowledges, agrees, represents, warranties and covenants in Subscription Agreement P-1.

Otherwise, what would be the point of signing a contract! [ 63 ] Consequently, given the prospectus exemption for “Accredited Investors” provided for in the above-mentioned Regulation, Mr Sarrapuchiello cannot demand the nullity of Subscription Agreement P-1. [ 64 ] As for the absence of a permit or authorization to sell the said shares, this does not affect the validity of Subscription Agreement P-1, pursuant to

section 214 of the Securities Act , but instead falls under the penal provisions provided for in the Act. THEREFORE, the Court:

DISMISSES the motion by Alain Sarrapuchiello to institute proceedings against Frank Marzoli and Marzcorp Oil & Gas Inc.; SUSTAINS the objections raised by Frank Marzoli and Marzcorp Oil & Gas Inc. with regard to any evidence that attempts to contradict or vary the terms of Subscription Agreement for Regular Shares P-1; THE WHOLE , with legal costs. __________________________________ Henri Richard J.C.Q. Mtre Dominic Bianco (MERCADANTE DI PACE) For the plaintiff Mtre Stéphane Nobert and Mtre Alexandre Ménard (LEX OPERANDI SERVICES JURIDIQUES INC.) For the defendants Hearing dates: February 17 and 18, 2016