2019 QCCQ 3942, 2019 QCCQ 3942

Zhou c. 9181-5712 Québec inc. 2019 QCCQ 3942 COURT OF QUEBEC CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL CIVIL DIVISION No: 500-22-230404-165 DATE: June 28, 2019 ______________________________________________________________________ BY THE HONOURABLE ELIANA MARENGO, J.C.Q. ______________________________________________________________________ CHONG CHONG ZHOU Plaintiff/cross-defendant v. 9181-5712 QUÉBEC INC.

Defendant and ALLAN SCHACHTER Defendant/cross-plaintiff ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] Plaintiff Chong Chong Zhou (“Zhou”) is seeking recovery of a $26,000.00 deposit, which he paid, on account, to defendant 9181-5712 Québec Inc. (“the Company”), following a bilateral promise to purchase and sell a condo unit (exhibit P-1), which was never built or delivered. [ 2 ] The Company did not file an answer to the lawsuit nor did it appear at trial. [ 3 ] Zhou is also suing defendant Allan Schachter (“Schachter”), in his personal capacity as director of the Company. [ 4 ] Schachter, in turn, is seeking damages in the amount of $10,000.00, from Zhou, for alleged abuse of proceedings.

Facts and Analysis [ 5 ] On October 3, 2011, Zhou and the Company entered into a bilateral promise to purchase and sell a condominium unit to be built in Montreal. Zhou paid the Company the sum of $26,000.00, on account, but never received said unit or recovered said deposit. He now sues both the Company and Schachter, a director and investor in the Company, to recover said amount. The Company [ 6 ] It is clear that the Company did not honour its contractual undertakings under contract P-1, and is liable towards Zhou for the amount claimed (arts. 1458 and 1716 of the Civil Code of Québec ).

Schachter [ 7 ] In par. 22 of his amended originating application, Zhou asks the Court to lift the corporate veil and to hold Schachter personally liable for the Company’s debt. [ 8 ] The basis upon which the Court is being asked to do so is unclear. [ 9 ] Fraud was initially alleged.

However, this allegation was abandoned by Zhou’s counsel in oral argument, who instead relied on the duty of care owed by company directors to shareholders, and argued that Schachter’s negligent oversight of the Company - of which he was only one investor and administrator among several - led to the Company’s demise, which, in turn, led to Zhou’s loss. [ 10 ] The problem for Zhou is that the deposit is owed to him by the Company - not by Schachter. Schachter was a director of the Company, which contracted with Zhou to provide the condominium unit. As

article 309 C.C.Q. indicates that corporations are distinct from their members, and that the members are not bound by the acts of the corporation, the Company’s contract with Zhou has no legal effect on Schachter, and Schachter has no legal contractual relation to Zhou: “309. Legal persons are distinct from their members. Their acts bind none but themselves, except as provided by law.”

[ 11 ] To hold Schachter liable for Zhou’s losses, the Court would have been required to lift the corporate veil, as initially requested by Zhou. To do so, Zhou would have needed to demonstrate that Schachter used the legal protection of the Company to engage in fraud, abuse of right or violation of a rule of public order, as per

article 317 C.C.Q ., which states: “ 317 .

The juridical personality of a legal person may not be invoked against a person in good faith so as to dissemble fraud, abuse of right or contravention of a rule of public order.” [ 12 ] Those are the only reasons for a Court to lift the corporate veil. [1] [ 13 ] If the Company mismanaged its funds and its business, such that it could no longer meet its financial obligations, that is the fault of the Company, not of its directors. [2] [ 14 ] It is a fundamental doctrine of corporate law that corporations are legally distinct from their shareholders and directors, who themselves are not liable for the corporation’s debts.

The only exception occurs when one of the conditions listed in

article 317 C.C.Q. is made out. [ 15 ] None of the conditions listed in

article 317 C.C.Q . was made out in the present matter. There was no proof of attempts by Schachter to divert funds away from the Company, nor to use the Company as a shield behind which to short-change Zhou.

There was no indication that Schachter abused a right he held, nor that he diverted the Company from its normal economic purpose. [3] In fact, the main proof made went to showing that Schachter was barely involved in the Company’s administration; was not involved in the Company’s day-to-day operations; was not involved in making decisions for the Company; never met with plaintiff or any other buyer for that matter; and did not know what the Company did with Zhou’s deposit. [ 16 ] As above stated, in recognition of this lack of proof, Zhou’s lawyer abandoned any allegations of fraud in oral argument. [ 17 ] Instead, the general argument was that Schachter ought to have exercised more prudence and diligence in supervising the affairs of the Company. [ 18 ] Zhou’s counsel invoked art. 322 C.C.Q . which states: “ 322.

A director shall act with prudence and diligence. He shall also act with honesty and loyalty in the interest of the legal person.” [ 19 ] However, as stated in Emballages Alpha (pre-cited): « [52] L'administrateur d'une compagnie n'est personnellement responsable que s'il commet une faute extracontractuelle indépendante des obligations contr actuelles ou légales de celle-ci. L'examen de la jurisprudence appliquant l'

article 322 C.c.Q. concerne davantage les situations où l'administrateur, par ses actes, agit dans le but de nuire à la société ou en contravention de ses statuts ou encore commet des actes frauduleux. » [ 20 ] Zhou’s lawyer also invoked art. 119 of the Business Corporations Act (CQLR c S-31.1 ), which states: “ 119. Subject to this division, the directors are bound by the same obligations as are imposed by the Civil Code on any director of a legal person.

Consequently, in the exercise of their functions, the directors are duty-bound toward the corporation to act with prudence and diligence, honesty and loyalty and in the interest of the corporation.

In their capacity as mandataries of the corporation, the officers are bound, among other things, by the same obligations as are imposed on the directors under the second paragraph.” [ 21 ] This changes nothing, as Zhou did not prove that Schachter committed an extracontractual fault or omission engaging his liability. [4] [ 22 ] Ultimately, Zhou was unable to prove that Schachter engaged his extracontractual liability. [ 23 ] The fact that the Company ultimately failed to meet its financial obligations is, of itself, not sufficient to justify lifting the veil and making Schachter personally responsible for the Company’s debts.

As Lefebvre, J.C.S. pointed out in an oft-cited passage : « 55. À tous les jours des compagnies font faillite et leurs dirigeants repartent en affaires sous des noms souvent similaires à ceux des compagnies faillies.

Ceci n'est pas en soi frauduleux. » [5] [ 24 ] In the end, Zhou’s simplistic argument - “The Company owes me money and Schachter was once a director of the Company, therefore Schachter owes me money” - does not justify lifting the corporate veil; nor did Zhou prove that Schachter posed specific actions that engaged his extracontractual liability. [ 25 ] In conclusion, Zhou did not fulfill his burden of proof (arts. 2803 and 2804 C.C.Q .), as he did not prove that Schachter committed a fault or omission in his regard, and his application must therefore be denied.

Cross-Application [ 26 ] In his cross-application, Schachter alleges the following: « 23. Le demandeur-reconventionnel est poursuivi injustement par le défendeur- reconventionnel vu que le demandeur-reconventionnel

n’a jamais reçu à

titre personnel quelque montant que ce soit du défendeur-reconventionnel; 24. Le défendeur-reconventionnel a institué des procédures abusives contre le demandeur-reconventionnel sachant pertinemment que le demandeur reconventionnel n’a retiré aucun bénéfice des sommes que le défendeur reconventionnel aurait pu avancer; 25. Le demandeur-reconventionnel est donc bien fondé en faits et en droit de réclamer du défendeur-reconventionnel la somme de $10,000.00 pour les honoraires extrajudiciaires qu’il doit encourir suite aux procédures abusives du défendeur-reconventionnel; […] » [ 27 ]

Article 51 of the Code of Civil Procedure states: “ 51. The courts may, at any time, on an application and even on their own initiative, declare that a judicial application or a pleading is abusive. Regardless of intent, the abuse of procedure may consist in a judicial application or pleading that is clearly unfounded, frivolous or intended to delay or in conduct that is vexatious or quarrelsome.

It may also consist in a use of procedure that is excessive or unreasonable or that causes prejudice to another person, or attempts to defeat the ends of justice, particularly if it operates to restrict another person’s freedom of expression in public debate.” [ 28 ] In Syndicat des copropriétaires du 90, rue du Minervois c.

Habitations Bouladier inc. [6] , the Court writes : « [32] Dans Pyrioux c. 9251-7796 Québec inc. [ Pyrioux ], le juge Dufresne, qui s’exprimait au nom de la Cour, a par ailleurs noté qu’on doit retrouver un élément blâmable : [26] […] Avant de conclure qu’un acte de procédure ou une demande en justice est abusif, on doit y déceler la présence d’un élément blâmable. Enfin, il peut y avoir abus d’ester en justice sans que l’auteur de l’abus soit de mauvaise foi. [33] Dans Trudel c.

Laurin , la cour d’appel a traité comme suit du test de la « témérité » à appliquer pour déterminer s’il y a abus du droit d’ester en justice : [20] La notion d’abus du droit d’ester en justice est désormais bien circonscrite. En 2007, dans l’arrêt Royal Lepage , le juge Dalphond précisait que cette notion ne se limite pas aux cas de mauvaise foi et qu’elle comprend également ceux où une

partie fait preuve de «témérité», c’est-à-dire qu’elle prend l’initiative d’une procédure «alors qu’une personne raisonnable et prudente, placée dans les circonstances connues de [cette partie] conclurait à l’inexistence d'un fondement pour cette procédure» . Plus récemment, en 2011, la Cour d’appel concluait que la connotation particulière des termes employés au deuxième alinéa de l’article 54.1 de l’ancien Code de procédure civile implique aussi une conduite blâmable et, par conséquent, un élément de faute [11] . Ainsi, le constat d’un comportement fautif peut être ce qui permet de conclure qu’un acte de procédure est manifestement mal fondé au sens de cet

article 54.1. a.C.p.c. Mais la témérité suffit. […] [Emphase ajoutée] [34] Discutant du concept de témérité, le juge Dalphond qui s’exprimait au nom de la Cour d’appel dans Royal Lepage commercial inc . c. 109650 Canada Ltd a énoncé que le critère de la personne raisonnable et prudente placée dans les mêmes circonstances est un critère objectif.

Il a aussi rappelé que la fragilité d’un recours ne su ffit pas pour le déclarer abusif . [35] La Cour d’appel a aussi souligné à plus d’une reprise la prudence dont doit faire preuve le tribunal avant de rejeter une deman de en justice à un stade précoce et indiqué, notamment dans Pyrioux , que la demande en rejet n’a pas pour objet de court-circuiter une demande en justice recevable : [21] La Cour a eu l’occasion de tracer à maintes reprises les contours du pouvoir des tribunaux de sanctionner les abus de procédure. Il semble bien qu’il faille y revenir.

Cette fois, pour préciser que l’article 54.1 a.C.p.c. n’est pas un raccourci pour court-circuiter le processus judiciaire. L’objectif visé par cette disposition n’est pas de mettre fin prématurément à une demande en justice, par ailleurs recevable.

La tentation est particulièrement grande en ces temps où les délais pour qu’une affaire soit entendue au fond sont parfois très longs, mais il faut résister à celle-ci, à moins qu’il ne soit patent, sans qu’une preuve élaborée soit administrée, que la demande en justice ou l’acte de procédure est abusif ou paraît l’être . [36] La Cour d’appel a aussi rappelé à plus d’une reprise que le doute doit jouer en faveur du demandeur . » [ 29 ] In the present instance, the Court does not find that Zhou acted in a reckless manner in suing both the Company and Schachter, as he could not have known, beforehand, what Schachter’s effective implication in the Company was. [ 30 ] In other words, from an objective standpoint, the Court believes that a reasonable person, placed in the same circumstances, would have sued both the Company and Schachter, although the recourse against Schachter was ultimately found to be ill-founded.

WHEREFORE THE COURT HEREBY: GRANTS plaintiff's claim against 9181-5712 Québec Inc.; CONDEMNS 9181-5712 Québec Inc. to pay plaintiff the sum of $26,000.00, plus interest at the legal annual rate of 5% and the additional indemnity provided for in

section 1619 of the Civil Code of Québec , from December 12, 2017, plus legal costs; DISMISSES plaintiff’s application against Allan Schachter; and DISMISSES Allan Schachter’s cross-application; EACH PARTY paying its own costs.

__________________________________ ELIANA MARENGO, J.C.Q. Me Leila Azizi L.A. AVOCAT INC. Lawyers for plaintiff Me Danielle Oiknine OIKNINE & ASSOCIÉS Lawyers for defendant Allan Schachter 9181-5712 Québec inc. Absent and unrepresented Dates of hearings: May 30 and October 3, 2018, and February 22, 2019