2010 QCCQ 3262, 2010 QCCQ 3262

Trakakis c. 9200-8143 Québec inc. 2010 QCCQ 3262 COURT OF QUEBEC CANADA PROVINCE OF QUEBEC DISTRICT OF LAVAL TOWN OF LAVAL Civil Division No: 540-22-013921-092 DATE: April 27, 2010 ______________________________________________________________________ BY THE HONOURABLE JEAN PIERRE ARCHAMBAULT, J.C.Q. ______________________________________________________________________ CONSTANTINE TRAKAKIS Plaintiff v. 9200-8143 QUÉBEC INC. and GEORGE ROMBOTIS and THEODORE ROMBOTIS Defendants ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] The Court is seized of three (3) similar actions against Defendants 9200-8143 Québec Inc. (hereinafter “9200”), Georges Rombotis and Theodore Rombotis, each claiming jointly and severally from them an amount of $ 16 666.66 pursuant to three

(3) Promissory Notes, dated September 10, 2008; [ 2 ] The three (3) actions are: 540-22-013921-092 Constantine Trakakis or 9064-8809 Québec Inc. v. 9200-8143 Québec Inc. & George Rombotis and Theodore Rombotis 540-22-013922-090 John Panorios & 9064-8809 Québec Inc. v. 9200-8143 Québec Inc. & George Rombotis and Theodore Rombotis 540-22-013923-098 John Panorios & 9064-8809 Québec Inc. v. 9200-8143 Québec Inc.& Georges Rombotis and Theodore Rombotis [ 3 ] The parties have agreed that the proof presented in the present case and the judgment to be rendered in said case shall apply to all three (3) files; [ 4 ] Defendants contest the three (3) claims as more fully described in the Modified Oral Pleas produced in each case; [ 5 ] Essentially, Defendants claim that said Promissory Notes were issued without consideration in favour of Plaintiffs;

[ 6 ] Notwithstanding this, Defendants add that should the Court be of the opinion that said Promissory Notes have been issued with consideration in favour of Plaintiffs, said consideration would be the balance of the sale price of $ 50,000.00, owed by Defendant “9200” to Plaintiffs pursuant to the Memorandum of Sale (D-4), dated October 24 2008 and the Memorandum of Agreement of Recognition of Debt (P-6), dated September 11 2008; [ 7 ] Defendants ask that the corporate veil be lifted and that Plaintiffs be held responsible for amounts presently been claimed by the Landlords of the premises in an action before the Superior Court; [ 8 ] This action, bearing number 540-17-003884-102 before the Superior Court, is for an amount of $ 149,268.20 representing arrears of rent due to said Landlords, a majority of which Defendants claim was due and owed by “9064” at the time they bought the restaurant, assets and business from Plaintiffs company; [ 9 ] They claim Plaintiffs are hiding behind the corporate veil of the company 9064-8809 Québec Inc. (hereinafter “9064”) to shield their responsibility from said amounts owed to the Landlords; Questions under litigation [ 10 ] 1.

What is the consideration for which the three

(3) Promissory Notes (P-1 in each file) have been issued? 2. Are Plaintiffs hiding under the corporate veil of “9064” and should the Court lift said corporate veil?

THE FACTS [ 11 ] The facts accepted by the Court as proven by preponderance of proof notwithstanding the contradictory proof presented by both parties can be resumed as follows; CHRONOLOGY OF EVENTS [ 12 ] “9064” is a company who operated a restaurant business in rented premises, located at 3455 St Martin Blvd. in Laval, under the name “Restaurant Jardinos”, until October 24 2008; [ 13 ] As appears from a copy of CIDREQ, produced as Exhibit D-2, John Panorios, John Vourakis and Constantinos Trakakis are the 3 shareholders of “9064” and Mr.

Trakakis is its president; [ 14 ] “9200” is the company who bought the assets of “Restaurant Jardinos” from “9064” on October 24 2008, as more fully appears from the Memorandum of Agreement of Sale entered into by the parties on that date (D-4); [ 15 ] As appears from a copy of the CIDREQ, produced as Exhibit D-1, George Rombotis and Theodore Rombotis are the 2 shareholders and directors of “9200”; [ 16 ] It is admitted that Defendants where interested in buying the assets and business of Restaurant Jardinos from “9064”; [ 17 ] A first Promise to Purchase was presented by Georges Rombotis through a company in his name, 9017-8161 Québec Inc., on May 6 2008. for an amount of $ 450,000. (P-3) to be paid with no balance of sale; [ 18 ] This was followed by a second Promise to Purchase, dated August 12 2008, for an amount of $450,000. but with a balance of sale in the amount of $50,000. and which mentioned (P-4): “13.

Annexe II Re: Balance of sale shall be payable within a year following signing of deed as a lump sum. The amount bearing ($50,000. 00 ) fifty thousand dollars.” [ 19 ] It is admitted that Mr. Rombotis presented a demand for a Small Business Loan in the amount of $ 250,000. to finance the purchase of the business; [ 20 ] It is also admitted that following discussions between the parties, the Bank asked Mr.

Rombotis to deposit a new Offer to Purchase which was drafted by his lawyer, Me Lazaris; [ 21 ] This new offer was for an amount of $ 400,000.; [ 22 ] The preponderant proof is to the effect that the Bank demanded this and that the opening financial statement showed that the company had an amount of $50,000. as working capital in its books as shown by a copy of the opening balance sheet of “9200”, produced as P-10; [ 23 ] It is admitted that notwithstanding the purchase price of $400,000. mentioned in the Offer to Purchase Assets (P-5), the parties had agreed that the real purchase price was $ 450,000. but that there would be a balance of sale of $ 50,000. to be paid in September 2009, approximately one year after the sale; [ 24 ] Defendant’s lawyer, Me Lazaris, then proceeded to draft a Memorandum of Agreement of Recognition of Debt, dated September 11 2008, produced as Exhibit P-6, in order to reflect the parties intentions; [ 25 ] The Court notes that this document is distinct from the Offer to Purchase and was done separately so as not to be shown to

the Bank; [ 26 ] A Promissory Note dated September 10 2008, in the amount of $50,000., payable jointly to John Panorios, John Vourakis and Constantine Trakakis, payable no later than September 30 2009, was annexed to said Memorandum of Recognition of Debt; [ 27 ] Said Promissory Note is signed, jointly and severally, by “9200”, George Rombotis and Theodore Rombotis. The proof heard by the Court is to the effect that said $ 50,000. Promissory note was never paid; [ 28 ] But on the same day, namely September 10 2008, Defendants signed the three

(3) Promissory Notes, produced as Exhibit P- 1, in the three cases presented to the Court, all of which are for an amount of $ 16,666.66; [ 29 ] Plaintiff Panorios states that a clerical error occurred and adds that it was agreed that each of the shareholder of “9064” would receive $ 16,666.66; [ 30 ] In fact, while one of the Promissory Notes was supposed to be made in the name of John Vourakis, two of the notes were made in his name, John Panorios; [ 31 ] Discussions were also undertaken by the parties with the Landlordss, 110441 Canada Inc., the Estate of the late Aristides Chalvatsiotis and George Barakaris, in order that the lease between “9064” and the Landlords be transferred in favour of “9200” (P-7, en liasse); [ 32 ] This resulted in the signing of a Memorandum of Agreement of Transfer of Lease, signed between “9200”, “9064” and the Landlords on October 24 2008 (P-7); [ 33 ] On the same date, “9064” and “9200” proceeded to sign the Memorandum of Agreement of Sale of an Enterprise, by which “9064” sold all of its assets, firm name, goodwill and clientele to “9200”, for an amount of $ 400,000. (D-4); [ 34 ] Plaintiffs based their three claims on said Promissory Notes (P-1) and on the Memorandum of Agreement of Recognition of Debt between “9064” and George Rombotis and Theodore Rombotis and, more particularly, on articles 2 to 6 of said Memorandum (P-6) by which the parties agreed that said amount of $ 50,000. would be paid to John Panorios, John Vourakis and Constantinos Trakakis; [ 35 ] Constituting themselves as Cross-Plaintiffs, Defendants submit that “9200” was served with a Motion to Institute Proceedings by the Landlords in a file bearing number 540-17-003884-102 of the Superior Court; [ 36 ] They indicate that the basis of said action is the non payment of rental composed of operating expenses for the years 2007, 2008 and 2009; [ 37 ] It is admitted that “9064” is also a Defendant in this case, being sued jointly and severally with “9200” by Landlords for the arrears of rent in the amount of $ 149.268.20; [ 38 ] Defendants claim that “9064” is responsible for the majority of this amount due for the years 2007 and 2008, before “9200” bought the business and that the lease was transferred; [ 39 ] Defendants claim that Plaintiffs, in the actual three (3) cases, are the controlling minds behind “9064” and are using said company to shield their personal responsibility and thus hiding behind the corporate veil for such purpose and to avoid having to pay their share of arrears of rent owed to Plaintiffs, thus leaving “9200” to pay for the entire amount.

They fear that “9064” is but an empty shell corporation with no assets and that “9200” will have to pay the Landlords’ claim in full when judgment is rendered by the Superior Court; APPLICABLE RULES OF LAW [ 40 ]

Article 2803 of the C.C.Q. states: "A person wishing to assert a right shall prove the facts on which his claim is based. A person who alleges the nullity, modification or extinction of a right shall prove the facts on which he bases his allegation." [ 41 ] This

article imposes on Plaintiff's shoulders the burden to prove the allegations contained in his claim by preponderance of proof. It also imposes on Defendants’ shoulders the burden to prove the allegations contained in their Plea and Counter claim; [ 42 ]

Article 317 C.C.Q. indicates that a company is a legal person but adds that “ in no case may a legal person set up juridical personality against a person in good faith if it is set up to dissemble fraud, abuse of right or contravention of a rule of public order”; [ 43 ] In fact, a corporation has a juridical personality, which differs from that of its shareholders and directors. It also has a patrimony which is different from that of its shareholders and directors; [ 44 ] But

article 317 C.C.Q. prohibits the shareholders and directors to use said juridical personality in order to hide themselves behind it and to abuse of this right to defraud people doing business with the corporation; [ 45 ] In such a case,

article 317 C.C.Q. allows the Court to lift the “corporate veil” and pronounce a personal condemnation against them; [ 46 ] For such a conclusion to occur, one must prove that said shareholders or directors are the alter ego of the corporation; [ 47 ] Alter Ego means a corporation which is an instrument, a puppet in the hands of said shareholders who act through it;

[ 48 ] Authors Maurice and Paul Martel while making reference to the Supreme Court of Canada’s decision in Buanderie centrale de Montréal c. Montréal [1] define, the alter ego in the following manner [2] : “Par “alter ego”, l’on entend que la compagnie est si intimement liée à son actionnaire qu’elle n’est en réalité que le reflet, le conduit de celui-ci.

Ainsi que l’a récemment expliqué la Cour suprême: “Une corporation peut être considérée comme l’alter ego d’une autre lorsqu’on retrouve entre celles-ci une relation si intime que ce qui, en apparence, relève des affaires de l’une appartient, en réalité aux activités de l’autre.

Un nombre important de facteurs certes peut être identifié pour determiner l’existence d’une telle relation, à mon sens toutefois, l’élément le plus explicite et le plus susceptible d’englober la réalité du concept est le contrôle.” [ 49 ] Since the case of Salomon c Salomon [3] the principle of the distinct personality of the corporation constitutes the basis of corporate law; [ 50 ] Pursuant to this principle, the responsibility of the shareholders is limited to the monies that they have invested in the corporation and they do not encounter any personal responsibility for the debts or acts of the corporation.

It is the principle of the corporate veil; [ 51 ] Articles 309 and 317 C.c.Q. reiterate this principle but also establish certain exceptions: “ 309. Legal persons are distinct from their members. Their acts bind none but themselves, except as provided by law. 317.

In no case may a legal person set up juridical personality against a person in good faith if it is set up to dissemble fraud, abuse of right or contravention of a rule of public order.” [ 52 ] It is important to note that the principle of the corporate veil apply to shareholders and not to directors; [ 53 ] Authors Martel define the notions of fraud and abuse of rights stipulated in

article 317 of the Civil Cole in the following manner [4] : “Le mot “fraude” vise vraisemblablement la fraude au sens du Code criminel , soit le fait par supercherie, mensonge ou autre moyen dolosif de fruster le public ou toute personne, determine ou non, d’un bien ou d’argent, mais comme il est utilisé dans le Code civil du Québec , il ne requiert pas d’accusation aussi extrême ou de condamnation criminelle; il couvre assurément l’”acte accompli de mauvaise foi avec l’intention de porter atteinte aux droits ou aux interêts d’autrui ou d’échapper à l’application d’une loi” ainsi que l’”acte accompli par un débiteur insolvable en vue de frauder ses créanciers” (fraude paulienne.

Il englobe vraisemblablement aussi le dol, c’est-à-dire “le fait de provoquer volontairement une erreur dans l’esprit d’autrui pour le pousser à conclure un contrat ou à le conclure à des conditions différentes .” À elle seule, cette expression codifie les principales exceptions jurisprudentielles pré-1994, soit l’utilisation de la compagnie comme instruction pour des fins frauduleuses ou délictuelles, ou pour se soustraire à des obligations contractuelles ou légales.

Quant aux mots “abus de droit” cette expression a une portée encore incertaine, et ne reflète probablement pas le droit antérieur en matière de “voile corporatif” À la lumière de l’

article 7 du Code civil du Québec , on peut présumer que l’abus de droit vise le fait d’exercer ses droits de manière à causer délibérément ou malicieusement un prejudice à autrui, ou d’une manière excessive et déraisonnable et contraire à la bonne foi. Il existe cependant quelques autorités, avec lesquelles nous sommes en respectueux, mais total désaccord, à l’effet que la simple mauvaise foi peut constituer un “abus de droit” au sens de l’article 317.” (our underlining) [ 54 ] In Mecanitech Sylvestre Inc. c.

Equipments environnementaux M et P Inc . [5] , our college Judge Richard Landry describes the notions of good faith, fraud and abuse of rights in the following manner: “[61] Tel que relevé dans la

section précédente, le voile corporatif n'a pas été créé pour servir de paravent à des individus qui l'utilisent pour s'avantager personnellement au détriment des tiers qui font affaires avec eux de bonne foi, comme c'était le cas de Mécanitech. [64] Mécanitech avait le droit de s'attendre à être traitée de manière honnête et de bonne foi pour les bons services rendus.

Or, elle s'est butée à des agissements déraisonnables et contraires au comportement qui s'impose à l'administrateur compétent et integer. [65] Ces faits et gestes de monsieur Peace constituent une fraude paulienne et un abus de droit de sa part justifiant la levée du voile corporatif. Ils engagent également sa responsabilité extracontractuelle à

titre d'administrateur unique des deux sociétés impliquées. [66] Quant à Équipements Peace, elle n'est que la « marionnette » de monsieur Peace, son « alter ego » , qui a été utilisée pour frustrer certains créanciers. Elle est donc également responsable envers la demanderesse” [ 55 ] These principles have been also stated by the Court of Appeal in Lanoue c.

Brasserie Labatt Ltée [6] “La levée du voile corporation ne s’applique que si l’actionnaire majoritaire et administrateur d’une compagnie a utilisé cette dernière comme écran pour tenter de camoufler le fait qu’il a commis une fraude ou un abus de droit ou qu’il a contrevenu à une règle d’ordre public. Lorsque le contrat est intervenu entre Labatt et Citi Club, Labatt savait pertinemment qu’elle négociait, dans le cours normal des affaires, avec une société et non avec des individus.

On ne peut pretendre que les appellants se sont alors servis de la personnalité juridique d’une personne morale afin de masquer la fraude, l’abus de droit ou une contravention à une règle d’ordre public. L’insolvabilité future de la personne morale n’a pas pour effet de rendre les actionnaires débiteurs personnels d’une dette qu’ils n’avaient pas garantie. D’autre part, Labatt n’a pas établi que les appellants avaient commis une faute entraînant leur responsabilité

extracontractuelle.

ANALYSIS and DECISION [ 56 ] Considering the testimonial and documentary proof presented by both parties; [ 57 ] It is admitted that the price paid by “9200” to buy the assets and business of Restaurant Jardinos from “9064” was $ 450,000. and that this was done through two (2) distinct contracts, namely the Memorandum of Agreement of Sales (D-4), which states that the price is $ 400,000. and the Memorandum of Agreement of Reconignition of Debt (P-6) which states that, notwithstanding the sales contract, the parties agree that the real price of sale is $ 450,000.; [ 58 ] The Court deems it important to reproduce articles 2 to 6 of said Exhibit P-6, which in the Court’s opinion are quite clear and unequivocal: “2.

That notwithstanding the terms of

section 3 of the Agreement of Sale of an Enterprise, the Debtor acknowledges and confirms that the aggregate price to be paid by it for the purchase of the restaurant business is four hundred and fifty thousand dollars ($450,000.00) as opposed to four hundred thousand dollars ($400,000.00) as indicated in that certain offer to purchase executed between them on August 12, 2008 which Offer was submitted to the Debtor’s financial institution. 2. That subject to the stipulations herein set forth, the Debtor herein acknowledges being indebted to the Creditor in the amount of $50,000.00 (the “Indebtedness .”); 3.

That the Indebtedness shall be paid by the Debtor and/or the Guarantors to the nominees of the Creditor, namely John Panorios, John Vourakis and Constantinos Trakakis, according to the terms of the promissory note executed on September 10, 2008, copy of which is annexed hereto; 4. That Debtor shall have the right to prepay the whole or part of the outstanding balance of the Indebtedness any time without notice, penalty or indemnity; 5.

That Debtor undertakes to pay to the Creditor or any nominees of the Creditor as requested by the Creditor the aforesaid Indebtedness of FIFTY THOUSAND DOLLARS ($50,000.00) bearing no interest on or before September 30 th 2009; 6. That Mr. Theodore Rombotis and Mr.

George Rombotis undertake jointly and severally with the Debtor, waiving any benefit of division or discussion to make payment of the Indebtedness to the nominees of the Creditor as directed by same” (our underlining) [ 59 ] In these articles “9064” indicates to “9200” and to Theodore and George Rombotis that said payment of $ 50,000. is to be made to John Panorios, John Vourakis and Constantinos Trakakis by Promissory Note, executed on September 10, 2008. They also mentioned that the payment must be made before September 30, 2009; [ 60 ] The Court is of the opinion that this is the consideration for the three

(3) Promissory Notes that are the basis of the three (3) cases that are before this Court; [ 61 ] It is admitted by George Rombotis that he has not paid them and that he knows that they are still being owed; [ 62 ] He adds that if they are not paid, it is because of the claim by the Landlords in the amount of $ 149,268.20, that is before the Superior Court for arrears of rental for the years 2007, 2008 and 2009, a majority of which is owed by “9064”, namely for the period before “9200” bought the business and before the transfer of the lease to “9200”; [ 63 ] Defendants are asking the Court that compensation be affected between the amounts claimed by Plaintiffs through the 3 Promissory Notes for the balance of the sale price that is owed and the amounts that “9064” owe to the Landlords; [ 64 ] Through their counter claim, Defendants are also asking the Court to lift the corporate veil and to condemn Plaintiffs personally to pay for all amounts that Defendants may be called upon to pay to the Landlords in the Court file, bearing number 540-17- 003884-102 before the Superior Court; [ 65 ] With respect, the Court cannot do this for the following reasons; [ 66 ] First of all, the Court action undertaken jointly and severally by the Landlords against “9200” and “9064” is a complete and different action from the 3 present cases, which the Court is presently being seized; [ 67 ] The Landlords’ action is based on a lease that existed between them and “9064” and which was transferred to “9200” by the Memorandum of Agreement of Transfer of Lease dated October 24 2008. (P-3); [ 68 ] On the other hand, the 3 present cases are based on a balance of sale price of $ 50,000. which the parties have agreed to be paid by 3 Promissory Notes (P-1), payable to the shareholders of “9064”, pursuant to the Memorandum of Agreement of Sale (D-4) and the Memorandum of Agreement of Recognition of Debt (P-6); [ 69 ] Furthermore, both parties have indicated that they have a strong Defence to offer against the Landlords’ claim which has to be proven before the Superior Court; [ 70 ]

Article 1673 C.c.Q. states that compensation is affected by the operation of the law upon the coexistence of debts that are certain, liquid and exigible:

“ 1673. Compensation is effected by operation of law upon the coexistence of debts that are certain, liquid and exigible and the object of both of which is a sum of money or a certain quantity of fungible property identical in kind.

A person may apply for judicial liquidation of a debt in order to set it up for compensation.” [ 71 ] The Landlords’ action and claim has yet to be proven to become certain, liquid and exigible; [ 72 ] Thus, the Court cannot operate compensation between said amounts; [ 73 ] As for the lifting of the corporate veil, the Court is of the opinion that Defendants have not proven that Plaintiffs and/or “9064” have committed a fraud or an abuse of right at the time of the negotiations, nor at the time of the signing of the various documents presented to the Court; [ 74 ] In fact, the proof is that both parties were represented by Attorneys during the entire negotiations and signing of the documents and that said documents were even drafted by Me Lazaris, who is the Attorney for the Defendants; [ 75 ] The Court notes that neither the Memorandum of Agreement of Sale (D-4) nor the Memorandum of Transfer of Lease (P-7) include any mention of a personal warranty of the shareholders of “9064” for the obligations of “9064”; [ 76 ] Furthermore, Defendants’ fear that “9064” will not respect its obligations towards the Landlord in the future.

This is not a fact, this is a fear of something that might happen in the future. The Court cannot base itself on this to lift the corporate veil, as this is an apprehended fear, furthermore the Court is of the opinion that Defendants could have protected themselves against this situation in their contracts and notes that they did not; [ 77 ] As for the payments being made to the shareholders,

article 1557 C.c.Q. provides: “ 1557. Payment shall be made to the creditor or to the person authorized to receive it for him.

Payment made to a third person is valid if the creditor ratifies it; if it is not ratified, the payment is valid only to the extent that it benefits the creditor.” [ 78 ] This is exactly what was done through the Memorandum of Agreement of Recognition of Debt (P-6) whereby “9064” indicated that the payment be made by Promissory Notes to John Panorios, John Vourakis and Constantinos Trakakis; [ 79 ] Consequently, the Court is of the opinion that Plaintiffs have proven the well founded of their claims in the three (3) case before the Court; [ 80 ] The Court is also of the opinion that Defendants have not proven their Counter Claim in the three (3) cases before the Court; FOR THESE REASONS, THE COURT: GRANTS Plaintiffs action ; CONDEMNS Defendants, jointly and severally, to pay Plaintiff, Constantine Trakakis, the amount of $ 16,666.66 with interest at the rate of 15 %, starting on September 30, 2009; THE WHOLE , with costs. __________________________________ JEAN PIERRE ARCHAMBAULT, J.C.Q.

Me Virginie Paquette / ANGELOPOULOS & associates Representing the Plaintiffs Me Jerry Lazaris Representing the Defendants Date of hearing: February 22, 2010