2017 QCCA 1412, 2017 QCCA 1412

2727901 Canada inc. c. Sovell 2017 QCCA 1412 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-026430-165 (500-11-048836-155) DATE: September 20, 2017 CORAM: THE HONOURABLE GENEVIÈVE MARCOTTE, J.A. PATRICK HEALY, J.A. THOMAS M. DAVIS, J.A. (AD HOC) 2727901 CANADA INC. ROBERT CHOUEKE 109652 CANADA INC. MEMPHIS BLUES APPAREL COMPANY LTD. APPELLANTS – Defendants/Cross-Plaintiffs v. GREGORY SOVELL RESPONDENT – Plaintiff/Cross-Defendant and C-IN2 CLOTHING COMPANY INC.

IMPLEADED PARTY – Impleaded party JUDGMENT [ 1 ] THE COURT on appeal from a decision rendered on September 28, 2016, by the Honourable Danielle Turcotte of the Superior Court, district of Montreal, in the context of a shareholder dispute. [ 2 ] For the reasons of Davis, J.A. (ad hoc) , with which Marcotte, J.A., and Healy, J.A., agree, THE COURT : [ 3 ] DISMISSES the appeal, with judicial costs. GENEVIÈVE MARCOTTE, J.A. PATRICK HEALY, J.A. THOMAS M. DAVIS, J.A. (AD HOC) Mtre David Stolow Kugler, Kandestin For Appellants Mtre Jean-Yves Simard Mtre Léa-Eugénie Maalouf Lavery, De Billy For Respondent

Date of hearing: June 13, 2017 REASONS OF DAVIS, J.A. [ 4 ] Appellants appeal from a judgment of the Superior Court, District of Montreal rendered on September 28, 2016 (Justice Turcotte) [1] in the context of a shareholder dispute. [ 5 ] The focal point of the dispute is C-IN2 Clothing Company Inc. (“ C-IN2 ”), a business started by Respondent Gregory Sovell.

Short of capital, he sought and received assistance from Appellant Robert Choueke and certain companies that he or his spouse controlled, Appellants 2727901 Canada Inc. (“ 2727901 ”) , 109652 Canada Ltd. (“ Ruby ”) and Memphis Blues Apparel Company Ltd. (“ Memphis Blues ”). In April 2015, 2727901 invoked the shot gun clause in the shareholders’ agreement between it and Respondent, offering to purchase Respondent’s shares for the sum of $300,000.

There was, however, a hitch. 2727901 claimed that it was owed approximately $2,000,000 by C-IN2, initially characterized as an inter-company loan, but in fact claimed in respect of various management services that 2727901 stated it had provided to C-IN2, either itself or through employees of Ruby and Memphis Blues.

Respondent, believing that the fees were not due (and that he had been oppressed), instituted the proceedings, which culminated in Justice Turcotte’s judgment. [ 6 ] The judgment declares that the Appellant Choueke managed the affairs of C-IN2 in a manner that was prejudicial to the corporation and its shareholders and renders a number of conclusions which are not under appeal. [ 7 ] In fact, the only issues appealed concern the determination of the amounts owed by C-IN2 to the Appellant companies, which amounts flow generally from sections 11 and 15 of the shareholders’ agreement: 11.

ROBERT will assist in sourcing for seasonal and ongoing product design. ROBERT will also fully participate in strategic decisions concerning the brand. Ruby will provide the following services to the Corporation for a fee to be paid monthly - not included as Compensation: 1) Warehouse, Pick and pack and shipping logistics for a fee equal to 5% of sales from each territory where required. 2) Back office services; including bookkeeping; for a fee equal to 2% of all gross sales; 3) Financing (as described in Ruby's Obligations) will be provided for a fee equal to 3% of gross all sales [sic]. 15.

The Corporation shall bear all expenses incurred directly by it, including, without limitation, incorporation costs and fees, landed cost of goods, taxes, duties, sales commissions, royalties, license fees, shipping costs, costs of any employee hired specifically for the Corporation, professional fees, advertising, promotion, trade show expenses, store fixtures, bad debts, and travel expenses. [ 8 ] Prior to the trial presided by Justice Turcotte, a number of Safeguard Orders were issued, including one by Justice Hamilton who ordered a forensic accounting. This was performed by Mr.

Luc Marcil, a C.P.A. and forensic accountant, who described his mandate as follows: « Perform a forensic business and accounting investigation of the affairs of C-In2 Clothing Company Inc. for the purpose of determining the amount of any loan advances made to C-In2 by any of Ruby International, 2727901 Canada inc. or Memphis Blues Apparel Company Ltd since 2010 » . [2] [ 9 ] The contents of this report are particularly relevant since it serves in large part as a basis for the judgment under appeal. 1. The Marcil Report [ 10 ] Mr.

Marcil evaluated the relationship of the parties between November 1, 2010 and April 30, 2015, fifteen days after 2727901’s invoking of the shotgun clause. He noted that 2727901 and the other Appellant companies claimed that, according to their calculations, they had transferred $1,961,079 more to C-IN2 than they had received. [ 11 ] By far the largest portion of this amount were salaries of $1,037,352 paid by Ruby to five employees, who Ruby argued performed significant work for C-IN2.

In fact this amount was 114.62% more than the amounts actually paid to the employees, as Ruby apparently also charged C-IN2 for various government payroll charges. [ 12 ] An amount of $139,302 paid in salaries to these five individuals was not recorded in the loan

schedule prepared by 2727901, as it had been paid to the employees directly by C-IN2. [ 13 ] In his analysis, Mr. Marcil distinguished between back office and front line services, concluding that only two of the employees, Nancy Arruda and Gillian Bessner, performed front line services. For him, the distinction was important, as a management fee for back office services of 2% of gross sales was already provided for in clause 11 of the shareholders’ agreement. [ 14 ] Mr.

Marcil concluded that there appeared to be an excess charge of $394,303, as 2727901 could charge C-IN2 either the salaries of the back office employees or the 2% administration fee, but not both, though it was up to the Court to decide: Should the Court determine that back office services have been overcharged by the managing companies, an adjustment would have to be made to the balance of the intercompany loan as at April 30, 2015. This adjustment would require to subtract from the balance of the

intercompany loan either the salaries charged in respect of these three (3) employees ( $427,910 per Table 8 ) or the management fees charged in relation to back office services ( $394,303 per Table 9 ). [ 15 ] Mr.

Marcil found other charge backs in respect of credit card use, cellular phones and computer services, to be beyond his mandate and they are not in dispute in any event. [ 16 ] He then considered the various management fees set out in clause 11 of the shareholders’ agreement. [ 17 ] Up until October 2014, a flat management fee of 10% was charged to C-IN2, based on its net sales figures, despite clause 11 referring to “sales” in respect of the pick and pack fee and to “gross sales” for the back office and financing fees . During the period under review Mr.

Marcil found that C-IN2 was charged a total amount of $1,648,099 in management fees. He broke down the amount as follows: $662,342 in respect of the pick and pack fee, $591,454 in financing fees and the aforementioned $394,303 in respect of back office services. [ 18 ] Mr. Marcil raised a potential error in respect of the 5% pick and pack fee, essentially in relation to goods shipped directly, where no manipulation by Appellants’ employees was required.

Respondent had provided him with a list of customers for which the managing companies did not provide pick and pack services. [3] The list included customers whose goods were shipped directly by the Thai manufacturer, Siam, and customers whose goods were received from Shipvine, a US company that administered on-line sales for C- IN2. According to Respondent, pick and pack services were not provided by Appellants for goods with a value of $12,847,398. Mr. Marcil determined that, if the Court accepted Respondent’s analysis, then a reduction of $318,956 was required to be made to the amount claimed by Appellants.

This amount was adjusted to $341,216 by Mr.

Marcil following further information provided by the parties. [ 19 ] He also found that the pick and pack fee was potentially overstated by $120,864, as this fee was charged a second time on goods that were returned and then put back into stock. [ 20 ] In addition, he suggested the financing fee be reduced by an amount of $163,487 on sales made through Siam as according to Respondent these sales were prepaid and, therefore, C-IN2 did not require any financing in respect of them. [ 21 ] A further issue relates to the change in the method of the calculation of the management fees that Appellants instituted in October 2014.

In November 2014, following an inquiry from Respondent, the Appellants made certain changes to the practice of charging a flat fee of 10% of the sales figures that appeared on C-IN2's financial statements. The amount charged to C-IN2 for the pick and pack fee was adjusted to exclude sales for which Appellants believed that the service was not provided. However, all three components of the fee set out in

section 11 were adjusted so that the fee was subsequently calculated on gross sales as opposed to net sales. [ 22 ] The change to using gross sales in November 2014 had an impact on the pick and pack fee charged on sales returns that Mr. Marcil initially calculated at $52,559. Following his report he prepared a memorandum to clarify this aspect of the dispute, concluding that the impact of the change caused by the new calculation method was an amount of $42,110. [4] [ 23 ] Moreover, Mr.

Marcil found that financing fees and back-office fees could be adjusted downward by a further amount of $150,075, following the testimony of Mr. Brodkin, the accountant for the Appellant companies in respect of his use of net versus gross sales for accounting purposes.

However, he also noted that “Should the court grant the potential adjustment of $59,859 regarding the management fees paid on sales returns [5] the $150,075 potential adjustment regarding the change in the basis of calculation of the financing and back office fees would have to be reduced by $29,930…”. [6] [ 24 ] As for the actual intercompany loan, based on information provided by Respondent that the actual loan made by Appellants to C-IN2 had been fully repaid in 42 months, Mr. Marcil determined that Appellants had charged $38,100 too much for interest on the loan.

He suggested that, if the Court agreed with Respondent’s position, a further reduction of $38,100 in the amount claimed from C-IN2 was in order. In Exhibit P-34-D, he provided a full calculation, taking into account the monthly capital repayment. 2. THE JUDGEMENT APPEALED FROM [ 25 ] The trial judge relied on Mr. Marcil’s reports and found him to be fully credible. [ 26 ] On the question of salaries charged to C-IN2 over the period considered by Mr.

Marcil, based on the total salary amount of $1,037,351 paid to Appellants’ employees and the amount of $139,302 paid directly to the employees by C-IN2, she concluded that 87% of salaries had been paid by the Appellants and 13% by C-IN2 and used these percentages as a basis for her calculations of the responsibility of Appellants and Respondent. [ 27 ] She agreed with Mr. Marcil that the salaries for the three employees performing back office services should not be imputed to C-IN2, as it was also being charged a fee equivalent to 2% of sales in consideration of these services.

Therefore she deducted $372,282 (87% of the total salary charged back) and further held that in respect of these employees, C-IN2 had paid an amount of $55,629, which was not its responsibility and was, therefore, entitled to a credit for this amount. [ 28 ] The trial judge acknowledged that the other two employees, Ms. Arruda and Ms. Bessner had in fact performed some services for C-IN2, but based on her evaluation of the evidence concluded that only one third of their salaries, she determined that an amount of $203,147, should be imputed to services performed on behalf of C-IN2.

Of that amount, she held that 87% ($176,738) should be credited to Appellants and 13% ($26,409) should be reimbursed to C-IN2. [ 29 ] She agreed with Mr. Marcil that an amount of $341,216 should be deducted from the pick and pack fees claimed by Appellants from C-IN2. The amount took updated sales figures produced at trial into account. [ 30 ] The judge also agreed with the expert’s suggested reduction of $42,110 to the amount owing by C-IN2 in respect of the pick and pack fee, arising from Appellants unilateral change in the calculation method (gross sales rather than net sales).

[ 31 ] A further $125,136 was deducted from the amount claimed by Appellants representing the excess charged for financing fees (3%) and administrative charges (2%) resulting from the change implemented in October 2014. Finally she deducted the amount of $29,930 set out in the adjustment prepared by Mr. Marcil following the testimony of Mr.

Brodkin, [7] given her understanding that packing fees in respect of on-line sales handled by Shipvine should not be charged to C-IN2. [ 32 ] With respect to the financing fees, the trial judge agreed with the expert that the sum of $163,487 should be deducted from the amount owing by C-IN2, accepting that the orders prepared by Siam were prepaid, such that no financing was required and, hence, no fee was in order. [ 33 ] She deducted a further amount of $31,461 charged by Ruby to C-IN2 for software support and a warehouse employee, concluding that the services related to this amount had been rendered exclusively to Ruby. [ 34 ] The trial judge accepted Mr.

Marcil’s re-calculation of the interest charges, deducting the sum of $38,100. [ 35 ] Considering her finding as to the amounts actually due by C-IN2, less the overpayments for salaries, the trial judge concluded: [70] En soustrayant les crédits des éléments composant le prêt, le solde de celui-ci devrait être de 411 072 $.

Par contre, on doit retrancher le trop payé par C - IN2, soit 82 038 $, laissant ainsi une dette r é elle de 329 034 $. [ … ] [ 36 ] In the conclusions of her judgment, this amount is apportioned between C-IN2, Ruby and Memphis Blues. [ 37 ] The trial judge further noted that 2727901 had not advanced any money to C-IN2, the entire amount claimed being the result of journal entries made by 2727901. This led her to the discussion of whether an oppression remedy was in order.

The basis for her conclusion can be found in the following paragraph: [73] En l’espèce, force est de constater qu’en sa qualité de dirigeant de C - IN2, M. Choueke a exercé ses pouvoirs de manière injuste vis-à-vis M. Sovell. M. Choueke a manqué à son devoir d’agir au meilleur intérêt de C - IN2, en privilégiant les intérêts de Ruby, Memphis et les siens. [ 38 ] Her conclusions as to the bad faith of M. Choueke and the Appellants led her to grant relief to Respondent under

section 238 and following of the

Canada Business Corporations Act (R.S.C., 1985, c. C-44). However, as previously mentioned, these orders are not called into question by Appellants. 3. ANALYSIS [ 39 ] Appellant raises numerous issues. All of them involve either issues of fact or, perhaps mixed questions of fact and law. The words of the Supreme Court of Canada in Benhaim v. St-Germain , are therefore applicable: [37] It may be useful to recall the many reasons why appellate courts defer to trial courts’ findings of fact, which were described at length in Housen , at paras. 15-18.

Deference to factual findings limits the number, length and cost of appeals, which in turn promotes the autonomy and integrity of trial proceedings. Moreover, the law presumes that trial judges and appellate judges are equally capable of justly resolving disputes. Allowing appellate courts free rein to overturn trial courts’ factual findings would duplicate judicial proceedings at great expense, without any concomitant guarantee of more just results. Finally, according deference to a trial judge’s findings of fact reinforces the notion that they are in the best position to make those findings.

Trial judges are immersed in the evidence, they hear viva voce testimony, and they are familiar with the case as a whole. Their expertise in weighing large quantities of evidence and making factual findings ought to be respected.

These considerations are particularly important in the present case because it involves a large quantity of complex evidence . [8] [ My underlining ] 3.1 The Salaries Charged to C-IN2 [ 40 ] Appellants argue that the judge committed an overriding and palpable error in her treatment of the salaries charged back to C- IN2 by the Appellant companies. [ 41 ] Appellants refer the Court to what they describe as undisputed evidence that Ms. Arruda and Ms. Bessner performed at least 85% of their work for C-IN2, as reflected in their testimony. [ 42 ] Ms.

Arruda also acknowledged that she received a commission for sales that she performed for Memphis Blues. Her employer was Ruby. [ 43 ] There was no additional evidence before the Court directly in relation to the amount of time spent by Ms. Arruda and Ms. Bessner carrying out work for C-IN2 and Appellants’ position is that the judge should have relied solely on their testimony. [ 44 ] I do not agree. The trial judge’s analysis of this issue was not limited to the two snippets of testimony of Ms. Arruda and Ms.

Bessner on the amount of work that they performed for C-IN2, as the following paragraphs of her judgment demonstrate: [34] En ce qui concerne M mes Arruda et Bessner, le salaire qui leur est attribuable pour la même période est de 609 442 $. La preuve démontre qu’elles sont des employées de RUBY dont les activités ne se limitent pas à l’administration des affaires de C-IN2. Selon le contrôleur, RUBY exerce les mêmes tâches auprès des autres entreprises de M.

Choueke qui sont distributeurs d’autres marques de sous- vêtements. [35] Les lieux physiques ne comprennent aucune cloison séparant les opérations de l’une ou l’autre des compagnies qui exercent des activités similaires. Les employés travaillent sans tenir une quelconque feuille de temps permettant de départager le temps consacré à

telle ou telle entité. [36] Cette structure particulière est créée par M. Choueke, au bénéfice de ses entreprises. [ 45 ] These findings of the trial judge are borne out by the evidence, particularly the testimony of the Appellants’ controller Mr. Todoran. [ 46 ] It would not be appropriate for this Court to limit itself to the evidence of Ms. Arruda and Ms. Bessner, relied on by Appellants, to conclude that the trial judge made an overriding error.

On the contrary, she considered all of the evidence before her to determine the appropriate amount to be charged to C-IN2 in respect of salaries. [ 47 ] One important element of the evidence was the lack of clarity in the relationship between the parties. The following extract of Repondent Sovell’s testimony is illustrative of this: Q- Okay, that’s... okay. And that’s one of the items you’re contesting. So now my question is, can you please explain to the Court the basis for your contestation, as of today, with the report and...what is the basis of your contestation? A- My basis is that...

I was under the impression, when the company was started, that the Ruby offices had various operational components to our process. I had no input on really who was working in the Ruby offices in Montreal; I know that there was a great many people there, I did not hire them, I did not... they did not report to me. I had no... no oversight to any of the process in the offices in Montreal.

I believe that if this was something that should have been charged back to the company, I believe that there should have been a budget, it should have been approved; there should have been a discussion about what these people that were charged back to the company... um, there should have been an approval process for them.

In that, I also believe that that would have given the ability to question if there were more efficient ways to process that component of the business. [ … ] [ 48 ] This lack of clarity leads into another important element of the parties’ relationship that the trial judge considered, one that is really at the heart of their dispute.

It is the shareholders’ agreement itself, particularly clauses 11 and 15. [ 49 ] These two clauses are important as they demonstrate that in relation to the cost of employees, C-IN2’s obligations are limited to bearing the cost of those employees hired specifically for it, as clause 15 refers to “cost of any employee hire specifically for the Corporation”. The evidence before the trial judge certainly allowed her to conclude that the employees whose salaries were claimed by Appellants, including Ms. Arruda and Ms. Bessner, were not hired specifically for C-IN2.

They also had obligations to Ruby and the other Appellant companies. [ 50 ] Finally it is also relevant to consider that Appellants never presented a budget for the salaries of these employees to Respondent; nor was he kept abreast of what C-IN2 was being charged on a yearly basis. [ 51 ] The trial judge did not commit an overriding and palpable error on this question. 3.2 The Administration Fees [ 52 ] Appellants claim that the trial judge made an overriding and palpable error in disallowing a significant amount of the administration fees claimed by 2727901. [ 53 ] Again, I disagree. 3.2.1 The Pick and Pack Fee [ 54 ] Appellants suggest that the judge made on overriding and palpable error in deducting the amount of $341,216 from the amount owed by C-IN2 under this heading.

For Appellants, the un-contradicted evidence was that a significant portion of goods were shipped from Siam to Montreal and then to Shipvine and, therefore, that the pick and pack fee of 5% was owing on those goods. It is true that both Mr. Choueke and Mr. Todoran testified that the amount of goods coming through Montreal was important, but without any specifics as to the amount of goods in question. However, Ms.

Arruda also testified that only 5 % of the international sales would have been picked and packed in Montreal: A- So that is what I am saying. 5%, - my rough estimate is 95% of international sales were picked and packed at the factory, sold directly to the customer. The balance of international orders which is a - which the difference, the 5% [ … ] would have been picked, packed in Montreal and sent to international customers. [ 55 ] Respondent Sovell also testified on the amount of goods that were shipped to clients directly, basing himself on figures obtained from Ms. Arruda.

In addition he prepared a series of tables to support his position that C-IN2 had been overcharged for the pick and pack fee. These were considered by Mr. Marcil, and the reduction of $341,216 made to Appellants’ claim by the trial judge flows directly from his report and the information that he received from Respondent. In addition, the Respondent Sovell testified that there was no need for all of the products to transit through Montreal. [ 56 ] One can conclude that the trial judge preferred the testimony of Respondent Sovell (supported by Ms.

Arruda) on this issue. [ 57 ] The trial judge also considered the drafting of

section 11 of the agreement and the wording that the fee was payable where the manipulation was required. Her conclusion that “les frais de prélèvement et d'emballage (5 %) de même que les frais de financement (3 %) ne sont dus que si RUBY rend de tels services” is certainly reasonable and is supported by the testimony of Ms. Arruda. She stated that she also arranged to have the product pre-packed in Thailand by Siam and shipped directly to the clients.

[ 58 ] The Appellants fait to convince me that the trial judge committed an overriding error in respect of the deduction allowed for the pick and pack fee. 3.2.2 The Financing Fee [ 59 ] Appellants refer the Court to the testimony of Mr. Choueke that the purpose of the 3% fee was to finance the overall operations of C-IN2.

They also invite the Court to consider the financial straits that Respondent and his predecessor business were in prior to the conclusion of the shareholders' agreement as being indicative of the parties intent that the financing fee was payable on all sales. [ 60 ] In deducting the amount of $163,487 from Appellants’ claim, the judge clearly agreed with Mr. Marcil that the financing fee only applied to the sales where Appellants were required to carry the cost of the sale. She also considered the testimony of Respondent: [63] Le Tribunal est d’accord avec la position de M.

Sovell voulant que les termes de la convention soient clairs. Les frais de financement ne peuvent être perçus que si tels services sont rendus : 11. (…) Ruby will provide the following services to the Corporation (…) : 3. Financing (…) will be provided for a fee equal to 3% of all gross sales. [ 61 ] I cannot find this conclusion to be erroneous or unreasonable, given

section 11 of the shareholders’ agreement. It does not refer to obligations that already existed as at the date of the agreement but rather to obligations that will be undertaken by Ruby. “Financing […] will be provided” is not indicative of Ruby financing the overall operations of C-IN2, but rather that when it provides financing it will be entitled to 3%. As such, the sales made through Siam, being prepaid by the clients, did not require financing and the 3% should not be charged to C-IN2 on these sales. [ 62 ] Appellants also refer to

section 12 of the shareholders’ agreement, which reads as follows: 12. The Corporation shall assume the debts owing to Siam in Thailand and JP Morgan to be repaid from ongoing revenues. GREG shall provide written details of the debts. In order to Siam to continue producing, ROBERT has paid to them the sum of $50,000. This amount will be paid back to RUBY from first year operating revenues of the Corporation. [ 63 ] In my view, it does not necessarily support the conclusion that Appellants propose. The debts to Siam and J.P. Morgan were to be assumed by C-IN2, not by Appellants. Moreover these lenders were to be paid from ongoing revenues. [ 64 ] Moreover, the judge’s

interpretation of the contract is owed deference by this Court. In the judgment in Droit de la famille — 153088 , our role was described as follows: [14] Whether a judge correctly interpreted a contract (or a consent agreement homologated by a court) is a question of fact or, at best, a mixed question of fact and law.

As the Court recently reiterated, deference must be accorded to the trial judge’s finding and the judgment should neither be reversed nor modified unless it is vitiated by a palpable and overriding error: [9] L’interprétation de la clause d’exclusivité est une question de fait ou, au mieux, une question mixte de droit et de fait. La Cour doit ici tenir compte du récent arrêt Sattva Capital Corp. c. Creston Moly Corp. , où une formation de sept juges de la Cour suprême du Canada s’est prononcée sur ce point.

De nos jours, a-t-elle souligné, est erronée la proposition selon laquelle tout jugement qui tranche une difficulté d’interprétation dans un contrat est par le fait même un jugement qui tranche une question de droit. Le juge Rothstein, auteur des motifs unanimes de la Cour, écrit notamment à ce sujet : [52] De même, la Cour dans l'arrêt Housen conclut que la retenue à l'égard du juge des faits contribue à réduire le nombre, la durée et le coût des appels tout en favorisant l'autonomie du procès et son intégrité (par. 16-17).

Ces principes militent également en faveur de la déférence à l'endroit des décideurs de première instance en matière d'interprétation contractuelle . Les obligations juridiques issues d'un contrat se limitent, dans la plupart des cas, aux intérêts des parties au litige. Le vaste pouvoir de trancher les questions d'application limitée que notre système judiciaire confère aux tribunaux de première instance appuie la proposition selon laquelle l'interprétation contractuelle est une question mixte de fait et de droit .

La norme d’intervention en appel sur une question d’interprétation comme celle que soulève ce pourvoi est donc celle de l’erreur manifeste (ou évidente) et dominante (ou déterminante) […]. [9] [Reference omitted] [ 65 ] The trial judge did not commit any reversible error. 3.2.3.

The Change from Net Sales to Gross Sales [ 66 ] The last issue raised by Appellants deals with the $125,136 reduction made to management fees by the trial judge related to the change in the calculation method from net sales to gross sales. [ 67 ] Like her decision on the financing fee, her determination on this issue is a mixed question of fact and law. She also considered elements that went beyond the mere change in the calculation method.

She explained this as follows: [56] Selon RUBY , afin de convertir les ventes nettes en ventes brutes, il faut majorer le chiffre des ventes nettes d'un montant équivalent aux ventes subséquemment annulées, vu le retour de Ia marchandise, ou faisant l'objet d'un escompte. Autrement dit, RUBY calcule maintenant ses frais sur une liste potentielle de vente et non sur les ventes réelles.

[ 68 ] This conclusion flows from Mr. Marcil’s report: The controller has represented to us that the sales numbers that appear on C-IN2's financial statements represent the result obtained by subtracting sales discounts and allowances as well as sales returns from the total sales otherwise recorded in the books and records of the company.

We understand that the controller refers to the result of this operation as «net sales». [10] [ 69 ] The trial judge also placed importance on the way that appellants had calculated the management fees owing by C-IN2 prior to Respondent Sovell complaining about them, which was to use the sales reported in C-IN2’s financial statements. [ 70 ] The appellants’ accountant, Mr. Brodkin, was asked to explain how he arrived at the calculation of the management fees owing by C-IN2: Q- “... of gross sales.” What was the definition of “gross sales”? R- In this case, it... we...

I took it as the sales on the financial statements. Q- Okay. R- Or on the worksheet. Q- But you prepared the financial statements. So, just to be sure, was the definition of «gross sales» given to you by Mr. Todoran or Mr. Choueke? R- No. No, they weren’t. I included... when we have sales on the financial statement, it includes everything. It includes the sale itself, it includes discounts, it includes returns, and it’s basically... it’s not even gross sales, it becomes net sales. So we took it... Q- Okay.

R- ... based on that figure, but the figure that I have on the financial statements. […] Q- Was it the same for all of the Ruby companies? R- Well, what do you want to... Q- Was it the same way to calculate sales for all of the entities, with Mr. Choueke? R- It’s generally an accounting altogether. We net all the sales... […] Q- And ten percent (10%) of gross sales, according to your verifications, would be ten percent (10%) of the sales line in the financial statements? R- That’s the way I took it, yes. Q- And since you had... as you mentioned here, «as agreed,» so you had the shareholders agreement...

R- Correct. Q- ... in your file. In your view, this was in accordance with the terms agreed to between the parties? R- The way we had discussed it and the conclusion that I drew, that was the agreement. Q- Thank you. [My underlining] [ 71 ] The trial judge concluded on this point as follows: [58] Cette nouvelle méthode de calcul des frais est mise de l'avant en réaction à Ia demande d'explications de M. Sovell, simplement pour amoindrir le correctif auquel il s'attend. On crée une fausse notion de ventes brutes qui n'existe pas dans Ia réalité de C-IN2.

D'ailleurs, le comptable professionnel de C-IN2 témoigne qu'il n'a jamais fait une telle distinction dans les états financiers. II est évident que c'est face à l'obligation de devoir accorder un crédit à C-IN2 que l'on applique dorénavant cette manière de fonctionner. [My underlining] [Reference omitted] [ 72 ] The testimony of Mr.

Brodkin concerning the long-time accounting practice of Appellants, in my view, supports the position taken by the trial judge that the recalculation of the management fees was based on a notion of gross sales that had not been used by appellants prior to Respondent Sovell’s questioning of the management fees that C-IN2 was been charged. This testimony also allowed her to conclude that previous to this, appellants had accepted that the calculation be done on the reported sales of C-IN2, which were essentially net sales.

In the circumstances, it was reasonable for her to conclude that the calculation method should not have been modified. I cannot find that the judge committed a reversible error. [ 73 ] For these reasons, I would dismiss the appeal with judicial costs.

THOMAS M. DAVIS, J.A. (AD HOC)