2013 ONSC 5857, 2013 ONSC 5857

CITATION : 829194 ONTARIO INC v. GARIBOTTI ET AL, 2013 ONSC 5857 COURT FILE NO.: 13-40010 DATE: 2013-09-18 SUPERIOR COURT OF JUSTICE - ONTARIO RE: 829194 ONTARIO INC. and PAUL BRAVO, Plaintiffs AND: PAUL GARIBOTTI, SANDRA GARIBOTTI and BRAVO CEMENT CONTRACTING (TORONTO) INC. et al, Defendants BEFORE: The Honourable Justice David A. Broad COUNSEL: M. Abradjian and R. Kis, for the Plaintiffs B. Jaeger and C.

Ferrari, for the Defendants HEARD: September 12 and 13, 2013 ENDORSEMENT The Parties [ 1 ] The Plaintiff 829194 Ontario Inc. (“829”) owns 25% of the common shares of the Defendant Bravo Cement Contracting (Toronto) Inc. (“Bravo Toronto” or the “Corporation”). The Plaintiff Warren Bravo (“Warren”) is the director and a shareholder of 829 and is one of two directors of Bravo Toronto. [ 2 ] The Defendant Paul Garibotti (“Paul G.”) is a 50% shareholder of, and the other director of Bravo Toronto.

Since 2008 Paul G. has been the de facto directing mind of the Corporation. [ 3 ] The remaining 25% of the shares of Bravo Toronto is owned by the Defendant by Counterclaim Paria Enterprises Inc., the principal of which is the Defendant by Counterclaim Paul Bravo (“Paul B.”) [ 4 ] The Defendant Sandra Garibotti (“Sandra”) is the spouse of Paul G.

It appears from the Statement of Defence that the Defendants 744817 Ontario Limited and 1809222 Ontario Inc. are landlords of premises occupied by Bravo Toronto and the Defendants Gari Holdings Inc. and Botti Holdings Inc. are corporations in which Paul G. has an interest. [ 5 ] Bravo Toronto is one of a group of companies in the cement business utilizing the Bravo name in four centres in Ontario, Hamilton, London, Windsor and Toronto (the “Bravo Companies”). They all have different shareholders although there is some connection between certain of them.

It does not appear, based upon the information available, that the four corporations are affiliates for the purposes of the BCA or associated for tax purposes.

The Nature of the Action and Counterclaim [ 6 ] The Plaintiffs have brought action by Statement of Claim seeking various relief including, without limitation, damages for breach of contract, trust, representations, warranties, covenants and fiduciary duties, damages for oppressive conduct, misappropriation of funds, breach of duty and conversion, a tracing of funds and an accounting of funds paid by Bravo Toronto to the Defendants, an interim and permanent injunction restraining the Defendants from unilaterally making any material decisions with respect to Bravo Toronto and taking other enumerated steps in in relation to it, and for an order that Bravo Toronto be wound up. [ 7 ] For the purposes of the present motion for interim relief brought by the Plaintiffs, the pertinent claim is that the Defendants’ conduct has been oppressive to the Plaintiffs.

The Plaintiffs rely upon “any statutory remedy available to the Plaintiffs pursuant to the Ontario Business Corporations Act, R.S.O. 1990, c. B. 16.” (the “ BCA”) Although not specifically stated, this presumably includes the “oppression remedy” set forth in s. 248 of the BCA . [ 8 ] The Defendants have defended the action and Bravo Toronto counterclaimed against the Plaintiffs and other named Defendants to the Counterclaim for various relief.

The pertinent claim in reference to the motion brought by Bravo Toronto is the claim that the Plaintiffs comply with the dispute resolution provision of the Shareholders Agreement among the shareholders of Bravo Toronto. Nature of the Motions [ 9 ] The Plaintiffs brought a Motion for an interim injunction with respect to the affairs and management of Bravo Toronto and for disclosure of financial information relating to it.

The Motion was originally brought before Justice Ramsay on April 18, 2013 at which time it was adjourned on certain terms including that the Defendants be restrained from dissipating assets, that the approval of Warren be required for any payments by the Corporation, that the Plaintiffs have the right to oversee the operations of the Corporation and for disclosure of information and documents in reference to the Corporation. The issuance of a Certificate of Pending Litigation (the “CPL”) was authorized by Justice Ramsay in respect of the residence of Warren and Sandra.

The original Order made by Justice Ramsay is hereinafter referred to as the “April Interim Order”. On May 23, 2013 Justice Ramsay varied the terms of the adjournment in the April Interim Order to stipulate that the Plaintiffs’ representatives, on their attendances at the Corporation’s premises, be restricted to seeking

information and they shall not attempt to manage the affairs of the Corporation (the “May Variation Order”). [ 10 ] The Plaintiffs seek to maintain the relief in the April Interim Order and to extend it to include a provision that Warren be appointed to co-manage the operations of Bravo Toronto, along with Paul G.

They also seek full access to Bravo Toronto’s premises, records, files and customer data, as well as continuation of the CPL. [ 11 ] Bravo Toronto has brought a motion for an order requiring its shareholders to enter into negotiations and, if necessary, to engage in mandatory mediation, including an order that, if a mediated agreement is not reached, the mediator would be empowered to make a binding determination of the disputes between the parties by choosing between the parties’ final best offers.

In the alternative, in the event that mandatory mediation and arbitration is not ordered, the Defendants seek discharge of the CPL, an order that the action and counterclaim proceed to trial on an expedited basis and that, in the interim, a Monitor be appointed to approve payments by Bravo Toronto exceeding $500.00. Plaintiffs’ Oppression Claim [ 12 ] In support of their claim of oppression, the Plaintiffs rely upon four categories of improper conduct by Paul G. in his management of the affairs of Bravo Toronto, as follows: (

a) utilizing or diverting funds and resources of Bravo Toronto to purposes other than legitimate purposes of the Corporation, including payment of personal expenses of Paul G. and Sandra and their family and of various employees of the corporation, permitting Bravo Toronto to pay for and supply resources and materials for the construction or renovation of the personal residence of Paul G. and Sandra, and causing Bravo Toronto to make unauthorized and unsupported payments to Paul G. and his holding company Gari Holdings Inc; (

b) diverting corporate opportunities of Bravo Toronto to a corporation Dynamic Coatings Inc. (“Dynamic”), owned or controlled by a personal friend of Paul G., by directing work to Dynamic which Bravo Toronto was equipped and able to perform, and providing Dynamic with the use of equipment and services of Bravo Toronto without compensation; (

c) failing to honour various tax and union debts, for which Warren, as director of the Corporation, may incur personal liability; and (

d) putting less steel fibre (used to reinforce concrete) into concrete mixes than that specified by engineers on various jobs and improperly re-labelling steel fibre packing containers without authorization of the suppliers, thereby exposing Bravo Toronto to risk of liability. [ 13 ] In light of the desirability of disposing of the motions on a timely basis, I do not propose to carry out a full recitation of the competing evidence, comprising affidavits of various persons with extensive exhibits, transcripts of lengthy cross-examinations of various affiants and voluminous briefs of documents responding to undertakings given on the cross-examinations.

It is sufficient to note that Paul G. has acknowledged, to use the words of the Defendants’ Factum, putting various personal expenses “through the company,” including expenses related to renovations to his home (which is evidently registered in Sandra’s name). On cross-examination he could not, or would not, provide or undertake to provide a detailed accounting of the funds, labour or resources of Bravo Toronto that were diverted to his personal use or that of his spouse and family, including supplies, services and labour provided by Bravo Toronto to the renovations to the residence owned by Sandra.

In answer to an undertaking Paul G. valued the labour and resources of Bravo Toronto that went into the residence at approximately $220,000.00, whereas the accountant retained by the Plaintiffs to review the records, following the April Interim Order, estimated the figure to be closer to $525,000.00. [ 14 ] Paul G. seeks to justify the diversion of corporate resources to his personal use and that of his family, on three bases, first, that it was a historically accepted practice for the various owners of the four Bravo Companies to utilize the resources of the companies to pay personal expenses, second, that it formed part of the compensation they each received as the person responsible for managing the individual company, and third, up until 2008, Warren was provided with internal financial documents which disclosed the payments, and from 2008 to 2011 Warren’s brother Mark Bravo (“Mark”), the President of 829, continued to receive financial documentation as did his cousin Paul B (as the principal of the remaining shareholder Peria) and none of them questioned the payments. [ 15 ] The fact that the principals of the other Bravo Companies engaged in similar conduct does not, in my view, excuse or justify an improper diversion of corporate funds to Paul G. and his family of the nature and magnitude disclosed by the evidence.

With the exception of one payment of $65,000.00 to a corporation providing materials or labour for the renovation to the Garibotti residence which was entered onto the books of the Corporation as a “shareholder loan” to Gari Holdings after the Canada Revenue Agency questioned it, none of the transactions were documented as bonuses or loans, and none of them were authorized by the Board of Directors of the Corporation, comprised of Paul G. and Warren. [ 16 ] The Shareholders Agreement provides that the care and management of the corporation is vested in the board of directors and there was no evidence of a resolution of the Board approving payments in excess of his salary for Paul G.’s personal benefit.

Accordingly, it cannot be argued that the diversion of corporate resources for the personal benefit of Paul G. formed part of his compensation for managing the day-to-day operations of the Corporation. [ 17 ] Similarly, I am not satisfied that provision of internal financial records to Mark and Paul B. in the circumstances operates as some sort of estoppel preventing 829 and Warren from complaining about the diversion of corporate resources to Paul G. and his family.

The evidence indicated that there was a deliberate decision made by Paul G. in 2008, in apparent consultation with others involved in the Bravo Companies, to withhold the disclosure of financial information from Warren. This decision appears to have been made in direct contravention of s. 144 of the BCA which sets forth the nature of the records of the Corporation to which Warren is entitled, as a director, to have access for examination. Remedies

[18] It was acknowledged by counsel for the Defendants in argument that the Court need not make a finding of oppression before itcan make an interim order under s. 248(3) of the BCA. (see Deluce v.Air Canada (1992) (ON SC), 12 O.R. (3d) 131(Ont. Ct. Gen Div.) at para 75). Accordingly, I do not need to make a definitive finding that the affairs of the corporation have beenconducted in a manner which is oppressive or unfairly prejudicial or that unfairly disregards the interests of the Plaintiffs in order togrant interim relief.

However, if that were necessary, I would find that the requirement has been satisfied in respect of the diversion ofcorporate funds and resources to the personal use of Paul G. and his family. In diverting corporate funds for his personal use, withoutauthorization of the Board and of the other shareholders as required by the Shareholders’ Agreement, the interests of the othershareholders, including the Plaintiff 829, were unfairly disregarded.

For the reasons that follow, it is not necessary for me to makefindings of oppression, prejudice or unfair disregard of shareholder interests with respect to the dealings of the and Paul G. with Dynamicor with respect to the alleged “steel fibre splitting” in order to support the granting of interim relief. [19] The Plaintiffs submit that the test for the issuance of an injunction, namely, a serious issue to be tried, irreparable harm to thePlaintiffs, and the balance of convenience favouring the plaintiffs, has been satisfied. [20] It is noted that the relief which the Plaintiffs seek, namely that Warren be appointed to co-manage the affairs of theCorporation and that the Defendants produce all financial information with respect to the Corporation, represent measures to which theyare already entitled pursuant to the BCA and the Shareholders Agreement.

As indicated above, the Shareholders Agreement specificallyprovides that Bravo Toronto is to be managed by the board of directors.

Although the provision provides for a board to be comprised offour directors, the parties have indicated that, notwithstanding that, the board is currently comprised of Paul G. and Warren. [21] S. 253(1) of the BCA provides that where a corporation or a director (among other specified persons) does not comply withthe BCA, the regulations, articles, bylaws, or a unanimous shareholders agreement, a complainant or a creditor of the Corporation mayapply to the court for an order directing the corporation or any person to comply with, or restraining the corporation or any person fromacting in breach of, any provisions thereof, and upon such application the court may so order and make any further order it thinks fit.There is no requirement that the three-pronged test for an interim injunction be satisfied in order for a compliance order to be made unders. 253(1) of the BCA. [22] It is noted that the making of a compliance order under s. 253(1) is permissive and not mandatory.

Under s. 248(3) of the BCAthe court may likewise make any interim order it thinks fit, including, without limitation, orders in the nature of those listed atparagraphs 248(3)(

a) to (n). In the present circumstances, a “fit” order will be one which is directed towards maintaining, to the extentpossible, the viability of the Corporation and its operations pending resolution of the issues in the proceeding, for the benefit of theshareholders and the other stakeholders in the Corporation and which will protect the reasonable interests and expectations of all of theshareholders.

Accordingly, an interim order of this nature may deviate from or override the strict requirements of a shareholdersagreement in order to achieve these objectives. [23] There is nothing in the evidence to indicate that Paul G. and Warren are currently capable of working together cooperativelyand effectively on a day-to-day basis to run the ongoing business operations of the Corporation. Notwithstanding the ShareholdersAgreement, over the years responsibility for management of the business has devolved upon Paul G.

There is no recent history of Paul G.and Warren working together in managing the affairs of the Corporation and the Plaintiffs have not presented a plan for how a co-management arrangement would work in practice. Paul G. has been managing the personnel of the corporation and is familiar with itssuppliers and sub-contractors. In order to maintain the viability of the business on interim basis, it would be disruptive to introduceWarren into the day-to-day business operations.

The risk associated with this is exemplified by the events immediately following theApril Interim Order which necessitated the making of the May Variation Order. [24] However, there is no basis for limiting Warren's role as a director of the Corporation in respect of the overall care andmanagement of the Corporation, including participating in decision-making on matters beyond those strictly related to day-to-dayoperational issues. [25] Day-to-day operational management should therefore remain with Paul G. pending further order of the Court.

This willcomprise quoting on and contracting for jobs, contracting with subcontractors and suppliers, managing staff, including hiring and firingnon-management personnel (being non-supervisory personnel whose primary responsibilities comprise performance of work on jobsites), maintenance of equipment, day-to-day accounting including management of receivables and payables, utilization of the existingcredit facilities of the Corporation for the usual operations of the business, and managing payroll and government remittances, as well asother routine decision-making having to do with the ordinary course of business of the Corporation. [26] All care and management of the affairs of Bravo Toronto, beyond day-to-day operational management, as outlined above,shall, pending further order of the Court, remain vested in the Board of Directors of the Corporation, comprised of Paul G. and Warren.This will include, without limitation, making resolutions for authorization of new loans or increases in existing credit facilities, capitalexpenditures, including for acquisition of land, equipment and vehicles, in amounts exceeding $5,000, entering into or renewing leasesfor premises or equipment, authorization of any contracts with, or the provision of services, materials, supplies, benefits or payments(other than reimbursement of legitimate routine expenses having to do with day to day operations of the business) to officers,shareholders, employees or any persons not at arms-length with them, embarking on new business ventures or business directions,authorization of bonuses, distributions, or payments to management or other employees in excess of existing salary or remuneration,hiring or firing of management staff, and declaration of dividends. [27] It is appropriate for the protection and comfort of the Plaintiffs that a monitor be appointed to examine the financial recordsand affairs of the Corporation on a regular basis and to report to the shareholders and to the Court.

Although the Defendants only proposethat a monitor be appointed as an alternative should their request for mandatory mediation and arbitration not succeed, they are satisfiedthat any such monitor be charged with approving payments by the Corporation exceeding $500. Mediation and Arbitration [28] The Defendants point to and rely upon the dispute resolution provision at para. 9.03 of the Shareholders Agreement in support

of their submission that there be mandatory mediation and, failing resolution on mediation, binding arbitration of the disputes betweenthe parties. [29] The pertinent parts of para. 9.03 are as follows: Dispute Resolution. This

section will apply to the determination of any dispute on a matter arising out of any provision of this agreement.The parties will endeavor to resolve the dispute by negotiation between themselves or by their solicitors.

If negotiations between theparties, without their solicitors, do not resolve the dispute, the parties shall continue negotiations with the assistance of a mediator… Ifthe dispute is not resolved in the mediation, the parties may upon unanimous consent of the parties refer the issue to arbitration before asingle arbitrator to be agreed upon by the parties… If the dispute is not resolved in the mediation or by arbitration, any party may seek toresolve the dispute in a proceeding in the Ontario Superior Court of Justice. [30] It is observed that the dispute resolution provision contemplates four distinct steps in a dispute resolution process.

The first,namely negotiation, is stated to be mandatory and have two possible modes, one by the parties negotiating directly, and the other by theparties negotiating through their solicitors. The second step, namely negotiation with the assistance of a mediator, although stated to bemandatory, on a plain reading appears to only apply where the parties were unsuccessful in reaching a resolution by direct negotiation,without solicitors. The third step, namely arbitration before a single arbitrator, is stated to be optional, requiring the unanimous consentof the parties.

The fourth step in the dispute resolution process was stated to be a proceeding in the Superior Court of Justice.

The parties,by the agreement, specifically reserved to themselves the right to apply or bring action in the court should the dispute not be resolved bymediation or by optional arbitration. [31] It is also noted that the dispute resolution provision is stated as applying to the determination of a dispute on a matter arisingout of any provision of the agreement. [32] Pursuant to s. 1 of the Arbitration Act, 1991, S.O. 1991, c. 17 an “arbitration agreement” is defined to mean “an agreement bywhich two or more persons agree to submit to arbitration a dispute that has arisen or may arise between them.” In my view, the partiesdid not, by para. 9.03 of the Shareholders Agreement, make an "arbitration agreement," as defined, but rather only identified thepossibility of arbitration should the parties unanimously agree to refer a dispute to arbitration.

Moreover, the parties, by the provision,specifically preserved to themselves the right to bring court action for resolution of a dispute should they not agree to refer it toarbitration. [33] As noted above, para. 9.03 only requires that a dispute be referred to mediation where the parties have not utilized theirsolicitors in negotiation. Here the parties have been, and continue to be, represented by solicitors and a court proceeding has alreadycommenced.

The parties appear to have intended, by the dispute resolution provision, that mediation be an alternative to legalrepresentation as a prelude to the commencement of litigation.

Moreover, the dispute in this action is not on a matter arising out of aprovision of the agreement, but rather concerns the question of whether the business or affairs of the Corporation have been conducted ina manner that is oppressive, unfairly prejudicial to, which unfairly disregards the interests of the Plaintiffs under s. 248 of the BCA. [34] In light of the foregoing, it would not be appropriate to order that the disputes between the parties, as described in thepleadings, be referred to mandatory mediation or arbitration.

Discharge of Certificate of Pending Litigation [35] The Defendants seek the discharge of the CPL pursuant to s. 103(6) of the Courts of Justice Act R.S.O. 1990, c. 43 on threegrounds, namely: (

a) that the plaintiffs do not have a reasonable claim to an interest in the lands, but rather the constructive trust claim is that of theCorporation; (

b) that the plaintiffs claim damages as an alternative to the interest in the land; and (

c) the Corporation will suffer prejudice by limiting the ability of Paul G. and Sandra to grant additional security against the land for anincrease in the Corporation's line of credit with its banker. [36] While ordinarily the party at whose instance a CPL is issued will have a direct claim to an interest in the subject land, theCourt of Appeal in the case of Chilian v. Augdome Corp. (1991) (ON CA), 2 O.R. (3d) 696 (CA) held that entitlementto a certificate of pending litigation does not necessarily require that the interest in land in question be claimed directly by the plaintifffor itself.

Here the Plaintiffs seek to establish and protect the Corporation's interest in the land, by virtue of the expenditures made by itto enhance its value, by advancing a claim, as against the registered owner, that the Corporation has a constructive trust interest in theland.

This is not a case of the shareholder simply attempting to protect the value of his or her shares in the corporation by registering aCPL against real property owned by the corporation. [37] Morden, A.C.J.O. in Chilian, at para. 56 and 57 held that what is required for registration of a CPL is that "an interest in land[be] in question in the proceeding” and that the claim to the interest in land asserted in the proceeding be that of the plaintiff or applicantin the sense that it has commenced and maintained the proceeding in which the claim is made.

Justice Morden made this ruling whileacknowledging the apparent inconsistency with what are now subsections 103(4) and (6), which appear to suggest that the claim assertedmust be one belonging directly to the party at whose instance the certificate was issued. [38] I have not been referred to any case overruling Chilian and it remains binding authority. Accordingly, the fact that theconstructive trust claim against the land may belong to the Corporation and not to the plaintiffs personally does not provide sufficientground, by itself, for discharging the CPL.

In any event, even if I were required by authority to discharge the CPL on this ground, Iwould stay the discharge order for sufficient time to permit the Plaintiffs to apply for leave to bring a derivative action under the BCA

and to apply for a CPL in the context of the derivative action. [ 39 ] With respect to the question of the Plaintiffs’ alternative claim for damages, it is noted that the Court's power under s. 103(6) (a)(

i) of the Courts of Justice Act to discharge a CPL is discretionary. The Plaintiffs’ claim for damages is not an alternative to the claim for interest in land. The Plaintiffs’ damages claim is personal whereas the claim to an interest in the land is on behalf of the Corporation.

I decline, in the exercise of my discretion, to discharge the CPL on this ground. [ 40 ] On the question of prejudice I note that there is nothing in the evidence to suggest that the Corporation's banker has requested additional security against the property in question or that an increase in the Corporation’s line of credit has been applied for. I am not satisfied that there has been prejudice demonstrated to support a discharge of the CPL on this ground. Disposition [ 41 ] For the reasons set forth above is ordered as follows: 1.

The care and management of the affairs of Bravo Cement Contracting (Toronto) Inc. (the “Corporation”), beyond day-to-day operational management, as outlined below, shall, pending further order of the Court, remain vested in the Board of Directors of the Corporation, comprised of Paul Garibotti and Warren Bravo, including, without limitation, making resolutions for authorization of new loans or increases in existing credit facilities, capital expenditures, including for acquisition of land, equipment and vehicles having a value exceeding $5,000, the entering into or renewal of leases for premises or equipment, contracts with, or the provision of services, materials, supplies, benefits or payments (other than reimbursement of legitimate routine expenses having to do with day-to-day operations of the business) to officers, shareholders, employees or any persons not at arms-length with them, embarking on new business ventures or business directions, authorization of bonuses, distributions, or payments to management or other employees in excess of existing salary or remuneration, hiring or firing of management staff, and declaration of dividends. 2.

Day to day operational management of the affairs of the Corporation shall remain with Paul Garibotti, pending further order of the Court, which shall comprise managing employees of the Corporation, quoting on and contracting for jobs, contracting with subcontractors and suppliers, managing and supervising staff including hiring and firing non-management personnel (being non- supervisory personnel whose primary responsibilities comprise performance of work on job sites), maintenance of equipment, day-to- day accounting, including management of receivables and payables, utilization of the existing credit facilities of the Corporation for the usual operations of the business, and managing payroll and government remittances, as well as other routine decision-making having to do with the ordinary course of business of the Corporation. 3.

Mr. Uwe Manski of BDO Canada Inc. shall be appointed as a Monitor to examine the financial records and affairs of the Corporation on a monthly basis and to report to the shareholders and to the Court, and to approve payments by the Corporation exceeding $500.00. 4. The Monitor shall report his findings to the shareholders of the Corporation by the end of each month for the immediately preceding month and shall submit a report to the Court every six months, with the first of such reports to be submitted by March 31, 2014. 5.

The fees and expenses of the Monitor shall be paid by the Corporation and any reasonable advance towards such costs required by the Monitor shall be made by the Corporation from time to time to be held in trust by the Monitor and applied to the accounts of the Monitor to be rendered on a periodic basis. 6. The Plaintiff Warren Bravo shall be entitled, on an ongoing basis, to access to the records referred to in

section 144 of the BCA , for the purpose of examination, during normal business hours of the Corporation and shall be entitled to have a chartered accountant carry out an audit of such books and records and to be provided with such information and explanation by the Defendant Paul Garibotti as would permit completion of such an audit. 7. The motion of the Defendants for referral of the disputes between the parties to mediation and binding arbitration is dismissed. 8.

The motion of the Defendants for discharge of the Certificate of Pending Litigation issued pursuant to the Order of Justice Ramsay dated April 18, 2013 is dismissed. 9. The parties shall prepare a discovery plan in accordance with Rule 29.1 of the Rules of Civil Procedure . In the event that the parties have not agreed upon a discovery plan within 30 days hereof, either party may move for an order settling the terms of a discovery plan.

Costs [ 42 ] If the parties are unable to agree on costs, they may file written submissions of no more than five pages, double-spaced, in addition to any pertinent offers and draft bills of costs, within 30 days. Such written submissions are to be forwarded to me at my chambers at 85 Frederick Street 7 th Floor, Kitchener, Ontario N2H 0A7. If no submissions are received within 30 days, the parties will be deemed to have settled the issue of costs as between themselves. D. A. Broad J.

Date: September 18, 2013