2017 ONSC 7177, 2017 ONSC 7177

CITATION : Richard Sherk et al. v. Mark Sherk et al., 2017 ONSC 7177 COURT FILE NO.: 16-59770 DATE: November 30, 2017 SUPERIOR COURT OF JUSTICE - ONTARIO RE: Richard Sherk and 2128445 Ontario Inc. A N D: Mark Sherk, Bent Nail Holdings (St. Catharines) Inc., Verge Insurance Brokers Limited, 1729628 Ontario Inc. and Marick Bros. Investments Inc. BEFORE: Arrell, J. (in writing on consent) COUNSEL: David Thompson & Matthew G. Moloci, for the applicants Stephen F. Gleave & Ian R. Dick, for the respondents The Honourable Mr. Justice H.S.

Arrell E N D O R S E M E N T INTRODUCTION: [ 1 ] The defendant Richard Sherk brings this motion seeking an interim payment out of court of funds currently being held to the credit of this action pursuant to the order of Turnbull, J. dated November 30, 2015. The amount requested is $392,712.50. The matter was to go to trial at the long trial sittings in October 2016. At the request of counsel, and on the consent of all parties, the trial was adjourned with a new date yet to be fixed. [ 2 ] In October 2016 a similar motion was brought. I released my decision on that motion on November 28, 2016 ( Verge v.

Sherk 2016 ONSC 7253 ) whereby I ordered a payment out of court in favour of Richard in the amount of $632,448.29. Such payment was subsequently made by Mark who then appealed my order. The Divisional Court dismissed the appeal on November 8, 2017 ( 2128445 Ontario Inc. v. Sherk, 2017 ONSC 5996 ). FACTS: [ 3 ] The applicant, Richard Sherk, through his co-applicant, 212, was a 50% shareholder in the responding corporation, Verge. The respondent Mark Sherk is the brother of Richard Sherk and was the other 50% shareholder in Verge through his holding company, Bent Nail Holdings (St. Catharines) Inc. (“Bent Nail”).

In 1990, Richard and Mark purchased 100% of the shares of Verge with each owning 50%. Each brother was a director of the corporation and Mark assumed the position of president, while Richard was the secretary/treasurer.

[ 4 ] The respective rights of Richard and Mark regarding ownership of Verge were set out in a shareholders’ agreement entered into in October 1990. The shareholders’ agreement, as it relates to the purchase of a retiring party’s shares and their valuation, was subsequently revised by a memorandum of understanding (“MOU”), signed by Richard and Mark on October 2, 2002. [ 5 ] Richard retired from Verge on April 3, 2012.

Richard and Mark agreed that for the purposes of valuing Richard’s shares, the valuation date would be April 30, 2011, which was the last full fiscal year preceding Richard’s retirement (the valuation date). In accordance with the MOU, Richard and Mark each retained professional business valuators to establish the fair market value of Richard’s shares in Verge as of the valuation date. [ 6 ] The evidence would indicate that shortly after Richard retired issues arose between him and his brother which have resulted in this extremely lengthy and costly litigation.

Two aspects of that litigation are relevant to this motion. The first aspect of the litigation was seeking a determination of the value of Richard’s shares. That has now been settled subsequent to Turnbull, J.’s decision of November 30, 2015. The parties agree the valuation of the shares are $7,854,250.00.

The second aspect of the litigation of relevance to this motion is that of any damages suffered by Mark as a result of alleged actions by Richard after his retirement. [ 7 ] Turnbull, J. ruled in his endorsement dated November 30, 2015 as follows at para. 29: In my view, Richard is clearly entitled to be paid something for his shares as three and one-half years have passed since he left the company. An advance payment is within the jurisdiction of the court under s. 248 of OBCA.

Undoubtedly, it was Richard’s expectation that upon retirement from Verge, he would be able to live comfortably upon receiving his one half of the determined value of his shares in a timely manner.

Mark, had he been the one to retire, would have expected the same. [ 8 ] The learned judge further stated at para. 31 the following: In the context of a share purchase, the courts have generally ordered that an advance payment be made in certain circumstances where the court has found there has been oppressive conduct contrary to the applicable corporation’s legislation or where the party seeking the advance payment has established a strong prima facie case of oppression. Mr.

Gleave has agreed that an advance payment is appropriate in this case and therefore I need not consider at length the authorities provided to me with respect to the finding of oppression. [ 9 ] Turnbull, J. concluded as follows at paras. 33-37: In my view based on the reports before the court, the approximate value of Richard’s shares at valuation day is $7,500,000.00.

It is ordered that a commercial closing shall take place within 90 days, whereby Mark shall purchase Richard’s shares for the price of $7,500,000.00 without prejudice to the right of either party to claim a higher or lower amount for those shares at the hearing of the application or the trial of the damages action. Those actions are to be tried in October 2016, one after the other, or together in the discretion of the trial judge. It is ordered that pursuant to the MOU, 50% of the $7,500,000.00 ($3,750,000.00) shall be made payable to Richard and 212 on closing of the share transaction.

At the time of closing, a further sum of $1,125,000, (representing 10% of $3,750,000.00, i.e. $375,000 per year for the fiscal years ending April 30, 2013, April 30, 2014 and April 30, 2015) together with interest at the prime rate shall be paid to Richard and 212 representing the 10% annual payments to which he was entitled under the MOU.

After the aforesaid payments have been made to Richard and 212, the remaining sum attributed by this court to the purchase price of the shares shall be paid into court to the credit of this action number 54017/12 and remain in court until further order of the court. [ 10 ] The above was completed pursuant to the above order and funds of approximately $2,625,000.00 were paid into court and have accumulated interest since that date.

At the same time as this occurred, Richard resigned as a Director as per Turnbull, J.’s order. [ 11 ] Turnbull, J. described these funds as a form of security or “cushion” for the potential claims alleged by Mark. [ 12 ] It is significant that Turnbull, J. ruled that his estimate of the value of these shares was without prejudice to either party arguing at trial as to a different valuation.

He also obviously intended that either party could revisit the issue at any time by stating: “… until further order of the court.” He was also expecting that the ultimate resolution of this litigation would be completed at the fixed trial date of October 2016 being less than a year after his order. [ 13 ] Subsequent to Turnbull, J.’s ruling the parties agreed on the valuation cited above. It is also significant that he pointed out that either party could enforce any judgment at trial in the ordinary way should the valuation be higher or lower than he estimated.

[ 14 ] Turnbull, J. stated at para. 42 the following with which I agree: I am satisfied that this order does not in any way constitute an effort by the court to rewrite the parties’ contract: J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., 2008 ONCA 183 , 234 OAC 59 , at paras. 60-62 and 64-66 . ANALYSIS: [ 15 ] The parties have agreed to a different valuation which is higher than Turnbull, J. used. I conclude that his formula for distribution was fair and reasonable to the parties.

It is reasonable and fair that Richard receives those funds now which are owing and due under the Turnbull, J. formula. There is no evidence before me that Richard would be unable to pay any judgment awarded in this matter, especially now that he has already received a substantial amount pursuant to the order of Turnbull, J. and my earlier order. No logical argument has been put to me that should deprive Richard of the funds that belong to him pursuant to the Turnbull, J. formula.

Should there be a judgment against him in the future it can be enforced in the ordinary way if what remains in court is insufficient, as correctly pointed out by Turnbull, J. [ 16 ] The Divisional Court recognized this approach as fair and reasonable in its decision on this issue at para.31: The Turnbull order was an interim order made at Richard`s request in the oppression application. It was intended to remedy the fact that Richard had received nothing for his shares since retiring in 2012 (reasons, para. 29).

It was also intended to address the fact that Mark required control of Verge in order to facilitate the purchase of Richard`s shares (reasons, para. 32). By virtue of the Turnbull order, Richard was deprived of any control of Verge. The order clearly contemplated that Richard should receive annual payments towards the purchase price for his shares each year pending the trial, including 2016.

As I will explain when I address the next issue, the terms of the SPA show that parties understood and acknowledged this. (emphasis added) [ 17 ] The Divisional Court, at para. 30, 32, and 34 clearly sets out the purpose and intention of the Turnbull order: [30] It must be remembered that the Turnbull funds were paid into court because of a motion brought by Richard within the oppression application, and not by Mark. There was no motion by Mark for security of any kind. Mark never sought to create substantive rights in the Turnbull funds.

Notwithstanding the comments of Turnbull R.S.J. and Arrell J. to the effect that the Turnbull funds stand as some form of security for Mark in the event that Richard was found in the future to have damaged the company, the Turnbull order did not create a right to the Turnbull funds as security for those or any other damages, as suggested by Mark, in the absence of some formal request on Mark’s part. [32] The Turnbull order gave Mark no right to the Turnbull funds that was altered in any way by the Arrell order.

The payment to Richard of a portion of the Turnbull funds is not like the loss of Greymac’s rights under the mortgage in Mountainview Mall. The Turnbull order gave Mark no substantive rights beyond those he has at law and no procedural rights beyond those he has under the Rules of Civil Procedure. Those rights are unaffected by the Arrell order. Mark is still entitled to recover the full amount of damages and pre-judgment interest, if any, owing by Richard in the damages action. What he is not entitled to, and never was, is execution ahead of judgment.

In short, the Turnbull order was not akin to the mortgage in Mountainview Mall. [34] Mark contends that, by virtue of the SPA, the Turnbull funds were all to be held in escrow. He submits that the Arrell order deprived him of the right to those funds. That is not correct. The SPA did not create any greater right on Mark’s part to the Turnbull funds than did the Turnbull order. More importantly, the SPA implicitly acknowledged Richard’s entitlement to an annual payment for 2016.

CONCLUSION : [ 18 ] I am satisfied that the reasoning set out in my decision in the initial motion which was released November 28, 2016 for an interim payment of funds to Richard out of the funds in court pursuant to the Turnbull, J. order, is still valid on this identical Motion for a further payment to encompass the 10% that was due and payable April 30, 2017. [ 19 ] I am comforted in my decision based on the ruling of the Divisional Court regarding the initial motion for a payment out of the funds in court. [ 20 ] It is ordered that there will be a payment out of court in the amount of $392,712.50 payable to Richard Sherk and 2128445 Ontario Inc. within 15 days of the release of this endorsement.

Such funds will be a credit for any amount still owing by Mark Sherk et al on the agreed upon valuation of the shares at the completion of this litigation. [ 21 ] If the parties are unable to agree upon costs, the applicant may file written submissions of no more than 3 pages double-spaced, in addition to any relevant offers and draft bill of costs. The applicant shall file submissions by December 19, 2017 and the respondent may reply with a similar length by January 16, 2018. ___________________________ Arrell, J.

Released: November 30, 2017 CITATION : Richard Sherk et al. v. Mark Sherk et al., 2017 ONSC 7177 COURT FILE NO.: 16-59770 DATE: November 30, 2017 ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: Richard Sherk and 2128445 Ontario Inc. - and – Mark Sherk, Bent Nail Holdings (St. Catharines) Inc., Verge Insurance Brokers Limited, 1729628 Ontario Inc. and Marick Bros. Investments Inc. ENDORSEMENT HSA