Lumley v. Rodney’s Oyster House Corp.

Stafford Lumley v. Rodney’s Oyster House Corp et al.

Ontario Superior Court of Justice [Commercial List]

Farley J.

Heard: October 27, 1999
Judgment: October 27, 1999
Docket: 99-CL-3499

Counsel: Larry Keown, for Applicant/Counter-Respondent.

Kevin E. Kemp, for Respondent/Counter-Applicants.

Subject: Corporate and Commercial

Corporations — Winding-up — Under provincial Acts — By order of court — Under relief from oppression remedy.

Corporations — Shareholders — Shareholders’ remedies — Relief from oppression — Orders for relief — General.

Statutes considered:

Business Corporations Act, R.S.O. 1990, c. B.16

s. 207 — considered

APPLICATION for disengagement of company; COUNTERAPPLICATION for wind-up order under Ontario Busi-ness Corporations Act.

Farley J.:

Endorsement

1 This application and counter-application are disposed of in the following way and this endorsement stands for both.

2 Both sides concede what is painfully obvious; realizing that there has been a complete breakdown in trust and therefore the ongoing relationship in the Toronto company (and as a corollary the Vancouver company) is impossi-ble to continue. They acknowledge that there must be a disengagement. I agree, not only from the concession and acknowledgment, but also from the record before me. Both sides have engaged in practices which are inappropriate and, if the one side were with clean hands, would not be tolerated as engaged in by the offending parties. The diffi-culty here is that both sides are rather gray — neither is all black nor all white — and it would be an imposing and rather meaningless task to attempt to sort out who was originally at fault since there appears to have been either a high degree of tolerance/condonation or alternatively, an unbelievable degree of naiveté. However the counter appli-cation requests as an alternative relief that the Toronto company be wound up pursuant to s. 207 OBCA. In my view the fact situation here and the disintegration of the relationship of the parties would support a windup. However while it appears to me that there are just and equitable grounds made out for such a windup, is that draconian rem-edy the one to be applied here? Section 207 allows for the more tailored and less drastic remedy to be fashioned as one would give if there had been oppression found.

3 The parties have recognized that disengagement is the appropriate and desirable remedy. The question is what are the terms of disengagement?

4 I think it helpful to recognize that Lumley has moved to Vancouver and is managing the Vancouver company. However for some reason, he is not being paid by Vancouver but rather by Toronto. Similarly there are certain ex-penses he has incurred which have been charged to Toronto but are more appropriately Vancouver related expenses. While physically located in Vancouver, apparently Lumley has provided some “long distance” management of To-ronto both remotely and in his trips to Toronto. Part of that management of course was very deleterious to the long term and valid interests of the Toronto company and its shareholders since it involved the hiding of substantial amounts of money from Monday and Tuesday Galley receipts which were sequestered in a T-D Bank account for which he was the sole signing officer (and from which material Vancouver benefits were obtained) — and on which income tax was not forthcoming since this income was not reported. This exposed all directors and put them in an unenviable position. This wrongdoing is all the more reprehensible given that Lumley is an accountant by profes-sion. Thus it would not appear to me that on balance there should be any allocation of his salary and other compen-sation to the Toronto company whilst he was stationed in Vancouver.

I also note that there is not a coincidence of shareholdings between Toronto and Vancouver. Celestine and McMurray are minority shareholders in Toronto and have no interest in Vancouver. They must be accommodated for this in the revised Toronto company when Lumley’s interest is acquired. As well of course half Shell in which Clark has a 46% interest and Lumley a 54% one has only half the Vancouver shares. Given that Lumley has moved to Vancouver and is running that operation and the cross applicants are in Toronto working at the Toronto company, it would seem to make better practical sense to have the disengagement proceed by having Lumley acquire Clark’s interest in half Shell so that he will have half Shell’s shares in the Vancouver company and that Clark, Celestine and McMurray pro-rata (or as they agree between themselves) acquire Lumley’s (and half Shell’s) shares in the Toronto company.

These acquisitions are to be at fair market value as determined by a valuator (and if required, confirmed by the court) after adjustment for the back charges and advances to the Vancouver company. The valuator is to be a person reasonably qualified in the field of valuing “individual” restaurant companies although that need not be a specialty in the sense of it being the valuator’s major or even significant field of work. The two sides are to agree on the valuator by November 5, 1999; failing agreement each side is to select one partner in an accounting firm which has more than 25 chartered accountants and each accountant so selected is to agree on a common valuator by November 12, 1999; failing agreement the court will select a valuator from a list of three qualified valuators nominated by each side. The valuation is to be of fair market value, valued as of October 31, 1999, with adjustments as aforesaid, and without premium or discount for minority or majority interest. The valuation is to be completed forthright and a closing is to take place by December 31, 1999 (or January 1, 2000 if recommended by valuator).

The fair market valuation of the Vancouver interest and the Toronto interests may be netted against each other. If there is a difference (as is expected and normal), then the difference is to be secured by personal guarantees and a charge on the purchaser’s assets (subject only to pre-existing charges “in the ordinary course of business”) and paid out together with interest at the TD Bank prime rate plus 2% per annum in 60 equal principal installments over the next 5 years from closing on an end of month installment basis plus applicable interest.

The two sides will agree not to compete in the other’s market (i.e. the counter applicants will not operate in the greater Vancouver municipality in any shellfish restaurant directly or indirectly and Lumley will not have any shell-fish restaurant interest directly or indirectly in the City of Toronto).

I understand that the name “Rodney’s Oyster House” or any variation thereof is owned by the Toronto company. There is to be a cost free license of this granted to the Vancouver company for use only in the greater Vancouver municipality and subject to reasonable license terms.

The charge against the assets of the purchaser to secure the payment of the balance of the purchase price is subject to postponement in favour of a standard type of commercial loan from a Canadian chartered bank or its equivalent for any loan offered in “the ordinary course of business”.

Prior to closing the Toronto (and Vancouver) company is to be run “in the ordinary course of business”. Lumley is to have no management or supervisory/director role in the Toronto company directly or indirectly; Similarly Clark is to have no similar role in the Vancouver company directly or indirectly. Bank and cheque authorizations are to be changed immediately.

The Meikle shares of the Toronto company having been paid for by the Toronto company are to be turned over to the Toronto company.

The August 20, 1999 transactions in the Toronto company are to be treated as null and void for this exercise. It is unclear but troublesome as to the involvement of Mr. Borgers.

I understand that Lumley has or is in the course of disclosing the unreported earnings that were hidden in the TD Bank Account. Any penalty for this activity should be paid by Lumley and he is to indemnify the others for any penalty they may be subjected to.

If there are any mechanical matters overlooked or which require clarification, if they cannot be worked out among counsel on an objectively reasonable business basis, then I will give my decision thereon (this will be facilitated by receiving a single comparison sheet between the two sides as to their respective positions on any points).

Success being divided and both sides having to bear the burden of inappropriate activity, each side is to bear its own costs.

P.S. After reading this endorsement to counsel I have asked the two sides to advise me of any point they feel is un-covered in this disposition so that I may add it on as an addendum here.

Order accordingly.