) ) FACTORS WESTERN LTD. Plaintiff – v. –, 2013 ONSC 4393

CITATION : Western v. Stach et al, 2013 ONSC 4393 COURT FILE NO.: 23670/06 DATE: 2013-06-26 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) FACTORS WESTERN LTD. Plaintiff – and – JOHN STACH (also known as JOHN VON STACH and JOHN S. STACH), GRACE STACH (also known as GRAZIELLA STACH), JOSEY BOUGIE (also known as JOSIE BOUGIE and JOSEPPIENA BOUGHIE), DAVID J. ROBINSON, KEITH DAVIS, TONY SANTELLI, PAT GREEN, POWERHOUSE RACING PRODUCTS LIMITED, JVS POWERSPORTS INC., JVS HOLDINGS INC., JVS POWER PRODUCTS INC., JVS POWERSPORTS USA INC., VON STACH MARKETING GROUP INC., VON STACH USA INC., WOODLAND SPRINGS INC., KEVIN C.

McLEOD carrying on business as WASTE TECH, and HEATFLEXX, INC. Defendant(s) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Steven. G. Shoemaker, Counsel for the Plaintiff Paul E. Trenker, Counsel for the Defendants ) ) ) HEARD: June 13, 2013 reasons on motion WHALEN, j. [ 1 ] This action has a long and interesting history going back to 2006 when the plaintiff alleged loss of more than $2,600,000 at the hands of the defendants. A factor’s business is the purchase of commercial accounts receivable.

This plaintiff purchased invoices from the defendants in respect of imported goods then sold by them in Canada and the U.S. The plaintiff alleged that the purchased invoices were fraudulent and it launched this action. The defendant, John Stach, was the alleged directing mind of the subject importing sales operations, and his business activities allegedly involved all of the other defendants, who were members of his family, friends or

corporations in which he and the other individual defendants had an interest or role. [ 2 ] In the early stages of the action, the plaintiff obtained Norwich Pharmacal , Anton Pillar and Mareva injunction orders. I was the presiding judge when most of these orders were granted, and therefore have some familiarity with the background. Subsequently, the parties reached an interim settlement in which the defendants agreed to pay $500,000.

While all or substantial amounts were ultimately paid under this arrangement, it seems it was not without breaches, delays, breakdowns, numerous changes of counsel by the defendants and other difficulties, which heightened the plaintiff’s already great distrust of the defendants. Breach of this interim settlement was simply remedied by a continuation of the action. [ 3 ] The action also involved considerable procedural contest that culminated in the plaintiff moving to strike the defendants’ pleadings.

This caused the parties to enter into serious negotiations for final resolution, which ultimately resulted in minutes of settlement dated September 13, 2011. The defendants executed these minutes under the guidance of independent legal counsel. There is no question that the plaintiff was patient, accommodating but persistent in its effort to achieve final resolution. The alternative was likely very long, complicated and expensive litigation.

In pursuing negotiated settlement, the plaintiff pressed every advantage it had to bring the defendants to the table. [ 4 ] The September 2011 minutes of settlement required the defendants to pay the plaintiff $250,000 in Canadian funds by the following instalments: $115,000 by September 15, 2011; $20,000 by November 12, 2011; $20,000 by March 12, 2012, and; the balance of $95,000 by August 15, 2012.

The agreement contained the specific stipulation that failure to make any of the payments on time would constitute a breach, upon which “the plaintiff shall be entitled to Judgment in the amount of $250,000 against the Stach defendants”. The minutes were silent on the crediting of any payments that may have been made at the time of a breach. As part of the arrangement, consent to judgment, an approved form of judgment and mutual releases were executed, all to be held in escrow. In the event of a breach, the plaintiff could proceed to enforce the judgment or continue the litigation, at its option.

If all payments were made on time, the releases would be delivered and the action dismissed. [ 5 ] At the time of execution of the minutes, the plaintiff had registered a certificate of pending litigation against real property (130 Hood Street) registered in the name of John Stach’s mother, Grace Stach. That property was purported to have value well beyond the $250,000 that had been agreed. The certificate was to remain in place until the full amount agreed had been paid.

The defendants also agreed not to permit further judgments to be taken out against them or their companies. [ 6 ] The September 2011 minutes of settlement contained the following provisions: 3. In the event that the Stach Defendants are unable for any reason to pay the required amounts under these Minutes of Settlement by June 15, 2012, Grace Stach agrees that she shall apply to a lender for a mortgage registered in her name as against the property located at 130 Hood Street in the City of Sault Ste.

Marie (“130 Hood”) in an amount equal to the remaining outstanding amount still owing under these Minutes of Settlement. Grace Stach agrees that she shall promptly provide any and all information reasonably required for the lender to process the application for the mortgage in order that funds sufficient to satisfy all the remaining outstanding amounts owing under these Minutes of Settlement be paid before August 15, 2012. 4.

To facilitate the registration of the mortgage described in Paragraph 3, the Certificate of Pending Litigation (“CPL”) registered by the Plaintiff on May 26, 2006 as instrument number AL1442 as against 130 Hood shall be lifted for the sole purpose of registering a mortgage against the real property located at 130 Hood and proceeds from said mortgage registration shall be advanced to the plaintiff in an amount equal to the remaining outstanding amount owing under these Minutes of Settlement.

Upon lifting the CPL to facilitate the registration of the mortgage described in Paragraph 3, Grace Stach hereby agrees and covenants not to sell, convey, transfer or further encumber the real property located at 130 Hood in any fashion until such time as the remaining outstanding amounts still owing to the Plaintiff are satisfied by the Stach Defendants. [ 7 ] The first three payments were made on time, although one was about $556 short because of currency conversion.

The plaintiff did not complain or draw this to the defendants’ attention. [ 8 ] On August 6, 2012, the defendant John Stach advised plaintiff’s counsel that a mortgage had been arranged for 130 Hood Street in order to obtain the funds to make the final $95,000 payment by August 15, 2012. Mr. Stach requested the lifting of the certificate of pending litigation for that purpose, as provided in paragraph 4 of the minutes quoted above. At this point, Mr. Stach was dealing directly with plaintiff’s counsel and did not have his own lawyer. Further emails followed back and forth between Mr.

Stach and plaintiff’s counsel (Motion Record Tab 2B; Responding Motion Record, Tab 32 to 37), wherein Mr. Stach clearly represented that a mortgage had been approved and that one or both of two named local lawyers were involved in the preparation of documents.

He asked plaintiff’s counsel to communicate directly with these lawyers in order to facilitate the mortgage and temporary lifting of the certificate of pending litigation. [ 9 ] Plaintiff’s counsel initially took the position that the request was late and that the plaintiff did not have to cooperate because such a request should have been made before June 15, 2012. However, plaintiff’s counsel soon indicated that his client would cooperate as long as full payment was made by August 15, 2012. Plaintiff’s counsel also stated by email that he had attempted to reach both of the lawyers suggested by Mr.

Stach, but had been unsuccessful. [ 10 ] When the final installment of $95,000 had not been received by the end of the day on August 15, 2012, the plaintiff issued the consent judgment for $250,000 and filed a writ against the Hood Street property. On August 16, 2012, Mr. Stach again emailed that he had a mortgage letter of commitment in his possession. He explained that the bank had not sent instructions to its counsel until 4 p.m. on August 15, 2012 and he hoped that the necessary steps could be taken that day. [ 11 ] Plaintiff’s counsel responded that he had not heard from any lawyer about a mortgage.

As payment had not been received by

the end of business on August 15, 2012, the judgment had been taken out and a writ of execution filed. The parties attemptednegotiations for a week or two after, but without success. [12] The plaintiff did not challenge that the defendants had obtained a mortgage commitment. It now asserts its right to paymentof the full $250,000 stated in the judgment and without offsetting the sums already paid pursuant to the minutes of settlement. [13] In response, the defendants brought this motion for relief against penalty and forfeiture under S. 98 of The Courts of JusticeAct, R.S.O. 1990, Chap.

C43, which provides: A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just. [14] The defendants have provided their counsel with $95,000, which is being held in his trust account for payment to the plaintiffif the court grants the relief sought.

The defendants also acknowledge that they must pay interest on that sum from August 15, 2012until payment is actually made. [15] In support of the claim for relief under The Courts of Justice Act, the defendants also asserted that the requirement forpayment of $250,000 without crediting of the amounts already paid was a criminal interest rate contrary to S. 324 of the Criminal Codeof Canada. [16] The plaintiff argued that the stipulation underlying the payment of $250,000 upon breach was fair given the history of thelitigation, the many delays, the complexity, the attempts to settle (including earlier breached agreements), and the defendants’ relatedtrack record, lack of reliability and untrustworthiness, all in the context of allegations of fraud.

It pointed out that the defendants weresophisticated commercial parties and that they had been represented both when the interim and final minutes of settlement had beenentered into. They knew the history of the action and the plaintiff’s concerns. They entered the minutes legally informed and with openeyes.

The $250,000 breach term was a reasonable inducement to encourage the defendants in respecting the minutes of settlement in atimely fashion. [17] Plaintiff’s counsel acknowledged that he had probably been wrong in taking the position that failure to invoke paragraph 3 ofthe minutes prior to June 15, 2012 relieved his client of the obligation to cooperate in placing a mortgage for the specific purpose offunding the final installment.

However, he also pointed out that in later email communications he indicated that the plaintiff would beprepared to cooperate if provided with the proper documentation assuring that the mortgage was in fact committed and proper safeguardswere in place. He also indicated he had attempted to telephone the lawyers identified by Mr.

Stach, but with limited success; and hefurther reported to the defendants on August 16, 2012 that he had never heard from a lawyer in respect of the proposed mortgage orreceived documents in that regard. [18] The plaintiff also submitted that in seeking equitable relief the defendants did not come to the court with clean hands. Documents produced indicated that a company by the name of VS Products Inc. had purchased a mobile home for $245,000 U.S. onAugust 19, 2012, only four days after the due date for payment of the final $95,000 installment. Those documents included emailsapparently sent by Mr.

Stach and with the company’s name also appearing. The defendants did not deny the acquisition. [19] In 869163 Ontario Ltd. v Torrey Springs II Associates Ltd.

(2005) O.A.C 159, Sharpe J.A. provided a very helpful analysisand discussion of remedies for penalties and forfeiture. A penalty is a stipulated payment of money “in terrorem” by an offending party,whereas forfeiture is the loss of a right, property, or money (often held as security), or of part payment, by reason of some specifiedconduct. Forfeitures may have penal consequences if the right or property forfeited by the defaulting party bears no relation to the losssuffered by the innocent party: See Dunlop Pneumatic Tyre Co. v. New Garage & Motor Co., [1915] A.C. 79 (U.K.H.L).

While thecommon law prizes the right of parties to contract freely, as a public policy exception it will not require a party to pay a true penalty. Onthe other hand, and quite distinctively, equity will only grant relief where forfeitures having penal consequence are inequitable andunconscionable. [20] The common law assessment of whether a stipulated remedy clause was a penalty or not would be made from the perspectiveof the formation of the contract, not its breach.

The question was whether the remedial sum stipulated at the time of the contract wasextravagant and unconscionable in comparison to the greatest loss that could conceivably be proved to have followed from the breach. Once a common law penalty was found, the court had no discretion but to strike the penalty clause down. [21] By contrast, equity focused on the enforceability of forfeitures at the time of breach rather than at the formation of theagreement. Here, the question was whether it was unconscionable for the innocent party to retain the right, property, or moneyforfeited.

A forfeiture was penal if the sum forfeited was out of all proportion to the damage incurred and it was unconscionable for theinnocent party to retain the right, property or money forfeited. As Sharpe J.A. pointed out, equity will not refuse to enforce all penalremedy clauses. Equity would enforce such a clause if the resulting forfeiture was not unconscionable, even though the remedy bore norelation to the actual damages suffered.

Although the distinction of common law versus equity was to some extent a look at two sides ofthe same coin, Sharpe J.A. found good authority to the effect that where a court is faced with a choice, it should avoid classifyingcontractual clauses as penalties in favour of framing the matter in terms of forfeiture. (paras 31 to 34). [22] In assessing the situation before me, I also found the following cases helpful in their statement and application of theprinciples at play: Roynat Inc. v.

Transport Training Centres of Canada Inc. 2010 ONSC 4894; Action Auto Leasing & Gallery Inc. v.Boulding, 2011 ONSC, 7253, and; Iyer v. Pleasant Developments Inc. (2006), (ON SCDC), 210 O.A.C. 90 (Div.Ct.). Of course, the onus is on the party seeking relief under S. 98 of The Courts of Justice Act to demonstrate that the remedy soughtmeets the tests just stated. [23] I appreciate the plaintiff’s predicament in this case and the difficult process it has faced. Clearly it does not trust thedefendants, and it may well be justified in taking this view.

For tactical reasons, based on experience with these defendants, the plaintiffmay have been justified in building every incentive it could into an agreement to settle, including agreed penalties for breach. The court

understands the plaintiff’s situation, although it cannot be part of such tactics, which are a concern. [ 24 ] Also, at the performance end of the settlement agreement, the plaintiff was clearly wrong in its

interpretation of paragraphs 3 and 4 of the minutes. No matter how paragraph 3 is read, there was no requirement that the defendants notify the plaintiff before June 15, 2012 of its intention to raise the remaining payment by placing a mortgage on 130 Hood Street. That provision only came into play if the final payment had not been made by June 15 . Indeed, a plain-meaning

interpretation of paragraph 3 would suggest that if the payment had not been made by June 15, the defendant Grace Stach was required to seek mortgage funding. This could only be done if the plaintiff cooperated in lifting the certificate of pending litigation as paragraph 4 provided. By inference then, the plaintiff was at least required to cooperate with Grace Stach’s obtaining a mortgage, if not press for it.

This did not mean that the plaintiff was not entitled to the usual conveyancing process and safeguards. [ 25 ] By taking the position it did, I am concerned that the plaintiff signaled a discouragement of the contemplated mortgage funding, especially as the defendants were self-represented at the time. This was an odd signal, if the real purpose of the agreed breach remedy was to encourage full payment of the $250,000 agreed.

While it was not the plaintiff’s responsibility to prepare mortgage documents or press other counsel to move the financing forward, neither did the plaintiff seem terribly enthusiastic in seeing that it was done. Telephone calls by themselves are not very business-like. Having already received $155,000 of the agreed settlement amount, breach and the issuing of the remedial judgment for $250,000 put the plaintiff in the position of being able to collect $405,000 instead of the originally agreed settlement amount. In other words, there was a very real advantage to the plaintiff if breach occurred.

There is no evidence that this was the plaintiff’s real objective, but these are questions that worry a court when it is asked to enforce a breach remedy of the kind found in these minutes of settlement. [ 26 ] I have considered the plaintiff’s submission that the defendants did not come before the court with clean hands because of the mobile home purchased only four days after the August 15, 2012 deadline. Although it may be so, there is no clear evidence to prove the point.

The mobile home had nothing to do with the minutes of settlement, and a corporation that was not a defendant in these proceedings purchased it. There was no clear evidence of VS Products Inc.’s ownership or direction. The company’s name appeared on emails sent by Mr. Stach, but his role and status with the corporation were not established in the materials presented to the court. Nor was there evidence of how the purchase had been made. Did the corporation or someone else raise the purchase funds? Did the company acquire ownership through the assumption of outstanding debt on the vehicle?

I will not speculate, and again, there was no evidence to assist me in answering these questions. [ 27 ] I am inclined to agree with defendants’ counsel that the history of the matter and the peripheral issues arising in August 2012 have little or no bearing on the question before the court. A determination must be found in the terms of the agreement itself and the immediate surrounding facts of performance or breach. In this case, the parties reached final settlement on the basis of the defendants paying $250,000 according to the

schedule stipulated. The defendants paid $155,000 on time, but failed to pay the remainder by August 15, 2012. The defendants deposed that they had a commitment from a bank for funding the remaining amount by sometime between August 6 and 16, 2012, and the plaintiff did not challenge this assertion. It is clear, that once August 15 had come and gone, the plaintiff was not prepared to accept late payment of the $95,000. It asserted its right to receive a full and further $250,000. [ 28 ] I agree with defence counsel that at the end of business on August 15, 2012, the plaintiff’s loss was $95,000.

Thereafter, its loss would increase on a reasonable interest accrual basis, plus any costs of collecting on the loss. [ 29 ] The real source of the problem is that the breach remedy in the minutes of settlement did not credit the defendants for the $155,000 they had already paid.

If the dispute was to be fairly settled for $250,000 and breach resulted in judgment of a full $250,000, then in effect the defendants were forfeiting $155,000 while the plaintiff was receiving a potential $155,000 windfall. [ 30 ] Is this an extravagant recovery out of all proportion with the actual loss of $95,000, assuming that settlement had been agreed at $250,000 of which $155,000 had been paid? I have no difficulty concluding that it was. [ 31 ] Nor was the stipulated breach remedy related in any way to the actual loss the plaintiff would sustain if breach occurred.

Although the plaintiff referred to the remedy provision as a reasonable incentive or inducement to comply, in fact it was a penalty. I have no difficulty concluding that the plan and possibility that the plaintiff might ultimately obtain $405,000 for what it was prepared to settle for $250,000 and had already received $155,000 was unconscionable.

I therefore conclude that the defendants have met the burden for relief under S. 98 of The Courts of Justice Ac t, and they are therefore entitled to relief from forfeiture. [ 32 ] I make no observation in respect of the criminal rate of interest argument advanced by the defendants.

It is interesting, but unnecessary for disposition. [ 33 ] Accordingly, the judgment granted against the defendants on October 13, 2011 shall be rescinded and a new judgment shall issue in favour of the plaintiff and against the defendants in the amount of $95,000 plus interest at the rate of 4% per annum from August 15, 2012 until payment.

I have arrived at this rate of interest because I believe it more reasonably approximates prevailing commercial interest rates than the usual court rate. [ 34 ] In granting this relief the court assumes and expects that the defendants’ counsel will immediately pay to the plaintiff the $95,000 that he indicated was being held in his trust account for that purpose. [ 35 ] I have heard the parties’ submissions on costs.

However, I am not prepared to make a ruling until I have received defence counsel’s sworn report on the payment of the monies held by him in trust and his clients’ actions in respect of the payment of interest. This report should be filed with the court by no later than August 15, 2013, at which time a ruling on costs will be made in any event.

Whalen, J. Released: 2013-06-26 CITATION : Western v. Stach et al, 2013 ONSC 4393 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: FACTORS WESTERN LTD. - and - JOHN STACH (also known as JOHN VON STACH and JOHN S. STACH), GRACE STACH (also known as GRAZIELLA STACH), JOSEY BOUGIE (also known as JOSIE BOUGIE and JOSEPPIENA BOUGHIE), DAVID J. ROBINSON, KEITH DAVIS, TONY SANTELLI, PAT GREEN, POWERHOUSE RACING PRODUCTS LIMITED, JVS POWERSPORTS INC., JVS HOLDINGS INC., JVS POWER PRODUCTS INC., JVS POWERSPORTS USA INC., VON STACH MARKETING GROUP INC., VON STACH USA INC., WOODLAND SPRINGS INC., KEVIN C.

McLEOD carrying on business as WASTE TECH, and HEATFLEXX, INC. reasons on motion Whalen, J. Released: 2013-06-26