Katana v. Avsenik, 2012 ONSC 1667

SUPERIOR COURT OF JUSTICE B E T W E E N FRANK KATANA JR. AND SUSAN CORK Plaintiffs - and - JOSEPH AVSENIK JR., MELINDA AVSENIK, NATURAL COMFORT LTD., CELEBRITY SHOES

(2005) LIMITED, AND MICHAEL SCAUZILLO Defendants R U L I N G BEFORE THE HONOURABLE JUSTICE M.L. LACK on February 16, 2012, at OSHAWA, Ontario. APPEARANCES : R. Brush Counsel for the Plaintiffs N. Tourgis Counsel for the Defendants THURSDAY, FEBRUARY 16, 2012 CITATION: Katana v. Avsenik 2012 ONSC 1667 R U L I N G LACK, J. (Orally):

Joseph Avsenik Jr., Melinda Avsenik and Celebrity Shoes

(2005) Limited, three of the defendants in this action have brought a motion for an order staying this action against them. This motion is brought in the context of a complicated history. Essentially, the Katana and Avsenik families were involved for many years in the business of producing shoes. Obviously, there was a falling out. It led to a proceeding in Toronto, which I will call the first proceeding, in which Katana Jr. and Avsenik Jr. litigated the issue of what was to become of the assets of a company known as Natural Comfort Ltd. in which they and/or their privies were interested.

That litigation was settled by Minutes of Settlement, Mutual Releases and an Indemnification Agreement between the parties including Katana Jr., and Avsenik Jr. dated July 7, 2005. Those agreements led to a consent order made by Jarvis, J. on July 7, 2005, which resolved that litigation. This is a convenient point to note that those agreements were executed by Mr. Gilmour, Katana Jr.’s lawyer at the time, on behalf of Katana Jr. and others. Thereafter in a Toronto proceeding, file number 07-CL-6865, Katana Jr. sought leave to commence a derivative action in the name of and on behalf of M.A.K.

Shoes Inc. as against the defendants in which he sought to set aside the order of Justice Jarvis in the first proceeding on the basis, among other things, that Avensik Jr. and Natural Comfort had misled the court by relying upon materially false affidavit evidence. He also sought to set aside the Minutes of Settlement, Mutual Releases and Indemnification Agreement in the first proceeding on the grounds of fraudulent misrepresentation. The proposed action also contained related personal claims by Katana Jr. against Avsenik Jr., Melinda Avsenik, Celebrity and others.

Justice Wilton-Siegel heard the motion for leave to commence the derivative action over three days and delivered his ruling on the motion on October 24, 2007. Justice Wilton-Siegel dismissed the motion for leave. Later he ordered Katana Jr. and the other plaintiff, his mother, to pay costs of the motion fixed at $80,000. Katana Jr. then launched an appeal of Justice Wilton-Siegel’s order to the Divisional Court. The appeal was perfected, but was removed from the court hearing list in 2008 and now sits in limbo.

The effect of launching that appeal was to stay the payment of the costs ordered against Katana Jr. and the costs have not in fact been paid. Katana Jr. obviously could not commence the derivative action because he was not granted leave. He did not commence the personal claims set out in the draft statement of claim filed on the leave motion in Toronto. Instead, on July 6, 2007, while the motion for leave to issue the derivative action was still before Justice Wilton-Siegel under adjournment for completion of argument, Katana Jr. started this action in Whitby, now Oshawa.

Essentially, he launched the personal claims here, which were set out in the draft statement of claim under consideration on the leave motion. At the same time he started another action in Whitby, now Oshawa, in which he claimed damages against Mr. Gilmour on the basis that Mr. Gilmour had executed the Minutes of Settlement, Mutual Releases and Indemnification Agreement on behalf of Katana Jr. and consented to the order in the first proceeding, all without Katana Jr.’s authorization. That allegation of Mr.

Gilmour’s lack of authority was never raised before Justice Wilton-Siegel where the allegation made was that those agreements were obtained as a result of fraud and fraudulent misrepresentations perpetrated by Avsenik Jr. and others on Katana Jr. and others. So essentially while Katana Jr. was alleging on the leave application and in the present action that he was induced by fraud to enter into settlement in the first proceeding, he was alleging in the Gilmour action that he had not authorized the settlement at all, positions that would appear to be inconsistent one with the other.

The Gilmour action was dismissed on a without prejudice basis after the parties entered into an agreement extending the limitation period. In the present action, Katana Jr. seeks to set aside the order of Justice Jarvis dated July 7, 2005, in the first proceeding, and the Minutes of Settlement, Mutual Releases and Indemnification Agreement, also associated with the first proceeding, and to recover damages against the three defendants, who have brought this motion, based on allegations of fraud and fraudulent misrepresentation.

These have been referred to by counsel on this motion as the misrepresentation allegations. And that’s what I’m going to call them. In the case of Melissa Avsenik, the allegations against her are restricted to allegedly being in possession of property as a result of the transactions referred to in the Mutual Release, so the success of these proceedings against her are contingent on findings favourable to the plaintiff Katana Jr. on the fraud and fraudulent misrepresentation allegations.

In the present action, Katana Jr. also seeks damages based on an allegation that Avsenik Jr. eroded the goodwill and value of a company known as Natural Comfort and thereby caused damages to Katana Jr. in his capacity as a shareholder of Natural Comfort. These are the second set of allegations in the present

caused damages to Katana Jr. in his capacity as a shareholder of Natural Comfort. These are the second set of allegations in the present action and have been referred to by counsel on this motion as the oppression allegations. So, that is, essentially the background. The moving parties here contend that the misrepresentation allegations in the present action are in pith and substance the same allegations in fact and in law that Katana Jr. made in the prospective derivative action which Justice Wilton-Siegel considered on the motion for leave and decided were bound to fail.

They say that the present action should be stayed in regard to those allegations because they result in a multiplicity of proceedings, are barred by the doctrine of res judicata and are a collateral attack on the findings of Justice Wilton-Siegel on the derivative motion and an abuse of process. Respecting the oppression allegations, they concede that Justice Wilton-Siegel did not adjudicate the oppression allegations. However, by that I mean, the oppression allegations as they’re framed in the present action.

However, they, the moving parties, contend that in the present action, Katana Jr. pleads that he acquired knowledge of the alleged conduct giving rise to a claim for oppression in or around 2002 which was well before entering into the Minutes of Settlement and Mutual Release in July 2005. In the Mutual Release Katana Jr. released all debts and claims related to the oppression or cessation of Natural Comfort. If that Mutual Release stands then it is a complete defence to the oppression allegations in the present action, in their submission.

In the present action, Katana Jr. attacks the validity of the Mutual Release. Justice Wilton-Siegel found that the attack on the Jarvis order and Mutual Release could not succeed. The moving parties say that again, Katana Jr. is really seeking to undermine judicial findings, which have been made, without pursuing the appropriate remedy for doing so, which is an appeal of Justice Wilton-Siegel’s order. They take the position that the present action should be stayed in regard to the oppression allegations as an abuse of process or under

Section 106 of the Courts of Justice Act . In my view neither the doctrine of res judicata or issue estoppel applies. The doctrine of res judicata cannot apply because no action was ever commenced in the derivative proceedings. Cause of action estoppel cannot apply since the derivative actions contemplated a derivative action and the current action alleges personal causes of action. Issue estoppel, however, is narrower.

For it to apply, the issue must be the same as the one decided in the prior proceeding; the decision must have been final and the parties or their privies must have been the same as the parties in the other proceeding. I find that issue estoppel does not apply because Justice Wilton-Siegel was determining whether the test to commence a derivative action had been met. He was not considering the personal rights of Katana Jr. It is obvious right from the beginning of his ruling where he wrote that the applicants including Avsenik also assert personal rights against the defendants.

He noted: “The action regarding these claims will proceed regardless of the outcome of this motion.” That perspective was essentially repeated in his subsequent costs ruling. Moreover, in adjudicating whether the corporate actions could go ahead he did not have a full range of judicial powers at his disposal. He had a specific focus. He noted that he was not trying the action at that stage. He noted that he could not make findings of fact. He noted that he could not draw inferences of credibility on the motion.

Justice Wilton-Siegel’s own words in the ruling circumscribe the applicability of the findings on the derivative motion. For the same reasons the present proceeding cannot be said to be a collateral attack on the order of Justice Wilton-Siegel. The moving party contends that the present action is effectively a re-litigation of the facts on which he based his ruling. However, as Justice Wilton-Siegel himself noted, he did not make findings of fact. Nor can it be said that by allowing this proceeding to go ahead there would be a multiplicity of proceedings. The derivative action was not commenced.

The action against Gilmour has been dismissed. There is now only one action in existence. For these reasons, the motion to stay this proceeding under Rule 21.03, subsection (3), paragraph (

c) is dismissed. However,

Section 106 of the Courts of Justice Act provides that the court may stay a proceeding on such terms as are considered just. The order of Justice Wilton-Siegel is currently under appeal by Katana Jr. If that appeal is successful, the derivative action may proceed. The hearing of the derivative action and the personal action, this action, will involve substantial overlap of issues in the two proceedings and the two cases will share the same factual background. We do not know whether the derivative action will proceed because Katana Jr. has not taken steps to list the appeal for hearing.

It is entirely within his power to do so. It would be unfair to allow the personal action to proceed and risk the unnecessary and costly duplication of judicial and legal resources that will result if it proceeds and can then be followed by the hearing of the derivative action. There is also the risk of different results. If both actions are to proceed, and we won’t know that until the appeal is disposed of, it is likely appropriate that they be consolidated or heard together. For these reasons, I am staying the present action under

Section 106 of the Courts of Justice Act until the Divisional Court adjudicates the appeal already commenced by Katana Jr. from the order of Justice Wilton-Siegel in the Toronto action bearing Court File Number 07-CL-6865 or until the appeal is otherwise disposed of. Such a stay would not result in an injustice to Katana Jr. in pursuing his personal claims because it is within his power to conclude the

appeal. ********** C O U R T A D J O U R N E D