Case Name:
Piccolo v. Piccolo (c.o.b. Sam's Auto Body Shop)
RE: Sam Piccolo, Applicant, and
Anthony Piccolo, carrying on business as Sam's Auto Body Shop,
Respondent
[2010] O.J. No. 4800
2010 ONSC 5677
Court File No. CV-85-SM000150
Ontario Superior Court of Justice
Master L.A. Pope
Heard: May 7, 2010.
Judgment: October 15, 2010.
(42 paras.)
Corporations, partnerships and associations law -- Corporations -- Oppression remedy -- Powers of the court -- Provide an accounting -- Trial of an issue -- Limitation on payments to shareholders -- Reference proceeding to determine brothers' entitlement to interest on shareholder loans -- Sam's proprietorship transferred assets to new partnership -- Anthony subsequently took over business and registered it as sole proprietorship without Sam's knowledge -- Sam brought reference after becoming aware of exclusion -- There was no entitlement to interest on shareholder loans, as there was no evidence of agreement -- Financing documentation and tax returns supported conclusion no interest accrued -- No equitable basis to award Sam interest, as shareholder loan resulted from transfer of depreciating assets into business rather than cash injection.
Reference proceeding to determine entitlement to interest on shareholder loans owed from 1967 onwards by Sam's Auto Body Shop as between Sam and Anthony. The parties were brothers involved in the auto body repair business. In 1963, Sam hired Anthony to work at a business, Golden Streak, which he operated as a sole proprietorship. In 1963, the brothers purchased property and started up a partnership operating under the same name. Financing was arranged in both brothers' names. In 1967, a company was formed in the name of Sam's Auto Body Shop to carry on business at the newly-purchased property. Financial statements indicated that one share was held in trust for Sam and Anthony. An accountant testified that a review of financial statements revealed that the net capital value and goodwill of Golden Streak were transferred into Sam's Body Shop by way of a loan payable to Sam in the amount of $47,525. As of 1968, the shareholder loan accounts stood at $45,161 for Sam and $3,300 for Anthony. In each year following incorporation, no interest was ever paid to shareholders and no interest expense was ever charged to the company or claimed as an expense on tax returns. The brothers ceased operating the business in 1970 and the garage was rented out to a third party tenant. Sam remained involved with the company. In 1971, Anthony returned to work for the tenant, taking over the business in 1972. Anthony subsequently incorporated a sole proprietorship and continued to use the Sam's Auto Body Shop business name. Sam did not become aware of his exclusion from the business until 1982. Anthony took control of the premises in 1985. Sam brought a reference for an accounting by each of the shareholders to the company. Sam sought interest on his shareholder loan payable from 1967 onward. Anthony submitted that the financing obtained in 1968 was secured by Sam's shareholder loan and included a term that no interest would be paid on that loan. Anthony contended that the documentation was indicative of a longstanding agreement between the brothers that no interest was payable on the shareholder loans.
HELD: No interest was payable on the shareholder loans. There was no evidence of an agreement entitling the brothers to interest on their shareholder loans. To the contrary, the financing documentation indicated an agreement that no interest would be paid. The historical financial statements bore out Anthony's contention that interest did not accrue on the shareholder accounts and was never charged to the company. Sam did not establish an equitable basis for entitlement to interest. Sam's shareholder account was based on the parties' determination of the value of Golden Streak rather than an injection of cash into the business. It was reasonable to infer that those assets depreciated in value over time, and thus it was inaccurate to argue that the company had benefited from the use of Sam's money since 1967. It would be unjust to award interest on a loan that was formed by primarily depreciating assets rather than a cash injection. In addition, until a final accounting was completed, it was not possible to determine monies owed to one or both parties.
Statutes, Regulations and Rules Cited:
Courts of Justice Act, R.S.O. 1990, c. C.43, s. 128(1)
Ontario Business Corporations Act, R.S.O. 1990, c. B.16, s. 247
Counsel:
Raymond G. Colautti, for the Applicant.
Claudio Martini, for the Respondent.
INTERIM REPORT ON REFERENCE
1 MASTER L.A. POPE:-- This matter came before me as a Reference proceeding pursuant to an Order made on August 23, 2002, wherein Quinn J. granted leave to the applicant to, among other relief, amend his original Notice of Application issued some 17 years earlier in 1985 with a reference on the issue of entitlement to interest on the shareholders' loans.
2 The Applicant filed a Notice of Hearing For Directions dated March 11, 2008, which sets out that by Order of the court, a reference was directed for the following purposes:
(a) determining the entitlement of interest on the shareholders loans, and the amount of interest owing from 1967 onwards by Sam's Auto Body Shop Limited to the shareholders and their shareholder loan accounts;
(b) obtaining directions of the Court as to the completion of the reference directed by the Order of Justice Staniszewski made on February 27, 1985;
(c) obtaining directions of the Court by Order of Justice Quinn on August 23, 2002, as to the completion of the winding-up of Sam's Auto Body Shop as directed by the Order of Justice McDermid dated June 28, 1990, and the Order of Justice Zalev dated May 3, 1994 as amended by the Order of Justice Brockenshire dated September 15, 1994;
(d) obtaining directions to finish an up-to-date accounting to take into consideration what has happened since the last Reference Report, being then Master Quinn's Supplementary Report dated January 13, 1995 including:
i) all rents collected and all expenses paid on behalf of the corporation; and
ii) all rents owing, if any, to the corporation, Sam's Auto Body Limited, by other businesses operated by Anthony Piccolo himself or other persons or entities that operated on the property without a lease.
3 As a preliminary matter, the court heard submissions on an issue that arose as a result of the following discrepancy in the language of the provision in the said Order of August 23, 2002 and the Amended Notice of Application. Paragraph 2 of that order provides that ". . . the Amended Notice of Application will also include a reference on the issue of entitlement to interest on the shareholders' loans." (emphasis) However, the relief sought in paragraph (d) of the Amended Notice of Application, attached as Schedule "A" to the said Order, seeks that a "reference be held to determine the amount of interest owing by the Corporation to the shareholders, on the shareholder loan accounts." (emphasis)
4 After submissions, the parties agreed that the issue to be determined on this hearing is entitlement to interest on the shareholder loans and the hearing continued on only this issue.
Facts
5 Sam and Anthony Piccolo are brothers. Sam Piccolo was involved with the auto body repair business from 1953 until 1960. In 1960 Sam Piccolo, in partnership with Vito Cipparone, started a business known as The Golden Streak Body Shop. Sam Piccolo bought out the interest of Vito Cipparone and operated the business as a sole proprietorship from 1960 until 1963. Anthony Piccolo was also involved in the auto body repair business and in 1963 was working for Downtown Motor Sales. Sam hired Anthony to work at the Golden Streak Body Ship in 1963. In 1963 Sam and Anthony decided to purchase property on Erie Street in the City of Windsor and to start up an auto body repair shop at that location. Several parcels of property were purchased on Erie Street, and they were taken in the name of Anthony Piccolo and Sam Piccolo carrying on business and partnership under the firm name and style of Golden Streak Body Shop. There were also mortgages that were given back for the purchase of the property and for renovations to the property in the name of Sam Piccolo and Anthony Piccolo. (Report of Master Quinn dated May 5, 1986, pp. 1-2)
6 In 1967 a company was formed by the name of Sam's Body Shop Limited. It was intended that this company carry on the auto repair business on the Erie Street premises. The minute books of the company do not contain any minutes nor were there any shares tendered to indicate the ownership of the company. The financial statements prepared by the accountant for the company indicate that the one share held in trust by Anthony Mariotti was to be held in trust for Sam Piccolo and Anthony Piccolo. Joseph Berk, the accountant for Golden Streak Custom Shop and Sam's Body Shop Limited, gave evidence at the reference hearing before Master Quinn on May 5, 1986. He pointed out that upon a review of the balance sheet for Golden Streak Custom Shop and the opening balance sheet for Sam's Body Shop Limited, the goodwill of Golden Streak Custom Shop in 1967 was $16,358.40, and the value of the assets of Golden Streak were approximately $31,169.05. He further explained that the net capital value of Golden Streak and the goodwill were transferred into Sam's Body Shop Limited by way of a loan payable to Sam Piccolo in the amount of $47,524.45. The said financial documents also bore out a loan payable to Anthony Piccolo in the amount of $3,300, which represented the amount of funds contributed to the corporation by him. (Report of Master Quinn dated May 5, 1986, pp.2-3)
7 Master Quinn found the shareholder loan accounts stood at $45,161.88 for Sam and $3,300 for Anthony as at December 31, 1968. (Report dated January 26, 1998)
8 In each year from incorporation in 1967, the corporation prepared Financial Statements. No interest was ever paid to the shareholders on the shareholder's loan accounts and no interest expense was ever charged to the corporation.
9 In each year since incorporation, the corporation filed tax returns. No expense for interest charged to the corporation on shareholder's loan accounts was ever claimed as a corporate expense on tax returns from 1967 to date.
10 In July of 1970, the brothers ceased operating the body shop business. The garage premises were rented out to a third party tenant. In 1971, Anthony returned to work as an employee of the tenant. Sam never resumed any involvement in the body shop business, but did remain involved in the corporation's affairs.
11 In 1972, Anthony released the tenant and took over the garage premises and carried on a body shop under the name of "Sam's Auto Body Shop." Anthony registered that trade name as a sole proprietorship and subsequently incorporated it as 469204 Ontario Limited. No lease was entered into with Anthony's company. Sam was not aware of this being done to his exclusion until 1982. Anthony refused to enter into a lease once Sam discovered this fact.
12 Anthony and/or his company have occupied the garage premises until very recently. The showroom portion of the property was rented to third party tenants from time to time. Anthony and his company took control of the premises (garage and showroom) and have occupied and operated it exclusively since 1985 until very recently. Sam was excluded from the business of the corporation after this date.
13 In January 1985, Sam Piccolo commenced an application for a declaration under the provision of section 247 of the Ontario Business Corporations Act. That Application requested a reference and an accounting with respect to specifically described matters. Essentially, the Application has to do with determining the ownership of shares in the corporation and, beyond that, an accounting by each of the shareholders to the corporation. There is no request in that Application for a reference or for an accounting in regard to the historical shareholder loan accounts. There is no issue raised on the face of this Application pertaining to the matter of the shareholder loan accounts and which, over the intervening 17 years from 1968, had been recorded in the company's financial statements in the same amounts year after year and without interest.
14 The order that directed the Reference is dated February 27, 1985. There is no reference in that order to the matter of the historical shareholder loan accounts. The Reference directed by the order is to conduct an accounting in regard to those same matters referred to in the Application itself.
15 Over the course of some 13 years from 1985 to 1998, a reference proceeding ensued before Master Quinn.
16 On May 5, 1986 the Master released his first report in which he concluded that Anthony Piccolo and Sam Piccolo were each entitled to 50 percent of the shares of the corporation.
17 At a subsequent reference proceeding that dealt with the other aspects of the Reference, essentially having to do with an accounting by each of the shareholders to the corporation, the Master found that Sam held the sum of $17,973.00 and Anthony the sum of $48,423.30, both in trust for the company. (Report dated December 14, 1993)
18 By Report dated January 26, 1998, the Master fixed the shareholder loans accounts as at December 31, 1968, as follows:
Sam Piccolo $45,161.88
Anthony Piccolo $3,300.00
19 In the same Report, the Master ruled that interest was owed on said shareholder loans.
20 The report of the Master went before Justice Abbey on March 1, 1999 for confirmation.
21 Justice Abbey refused to confirm Master Quinn's findings with respect to entitlement to interest on the shareholder loans. He found that the Master lacked proper jurisdiction to make the finding. Justice Abbey found there had been no evidence presented concerning the issue of interest on the shareholder loan accounts recorded in the company's records from 1967. He noted further that there was no evidence introduced concerning, for example, the understanding of the two shareholders with respect to interest payable on the shareholder loan accounts, nor any evidence with a view to establishing either an agreement in regard to the matter of interest or an equitable basis for requiring interest to be paid. He concluded that the subject of interest on the shareholder loan accounts was simply not addressed during the course of the ongoing reference. (Reasons For Judgment, Abbey J., March 1, 1999, at pp. 3-4)
22 On August 23, 2002, Sam Piccolo was granted leave to amend the Notice of Application dated January 25, 1985 to claim interest on the outstanding shareholder loans along with a reference to determine the issue of entitlement to interest.
23 After several rulings later, by October 2006, the only significant asset of Sam's Body Shop Limited remaining was the property located at 460-468 Erie Street East, Windsor, Ontario. At that time, the property had been listed for sale for $575,750 however no offers were received and the listing agreement ultimately expired. To date the property has not been sold.
Applicant's Evidence and Position
24 The applicant filed the affidavit of Susan Piccolo who is the wife of Sam Piccolo, sworn March 10, 2008. Her evidence is essentially a repetition of the historical facts of the case and of the litigation to date. The evidence includes an accounting report prepared by Ed Miles, C.A., which calculates the amount due to Sam Piccolo including compound interest on his shareholder loan account of $490,211.48 as at October 21, 2002.
25 The applicant submits that he is entitled to interest on his shareholder loan as the company and Anthony Piccolo have had the use of his money since 1967 and it would be fair and equitable for the parties to receive interest on their loans from that date forward.
26 The applicant relies on the case of Naneff v. Con-Crete Holdings Ltd., [1993] O.J. No. 1756, aff'd [1994] O.J. No. 1811 (Div.Ct.), for the proposition that a shareholder loan is repayable with interest where that shareholder no longer remains active in the company and after the shareholder was excluded from participation in the daily operations and decision-making of the company. The main issue in Naneff was whether the plaintiff's large shareholder loan was repayable on demand or whether it should remain in the companies for as long as he remained a shareholder. This case involved a very successful family group of companies and substantial shareholder loans that appear to have grown from the retention of profits in the company. Due to dissention in the family, the plaintiff was removed as an officer and he was dismissed from his position as an employee. As a result, the plaintiff sought repayment of the balance of his shareholder loan accounts held by two of the companies of over $900,000. The court held that although the loans were not repayable on demand, they were available to be drawn upon on demand and without limit. Further, it was held that although they were not subject to any "specified terms of repayment," that provision in itself contemplates some form of "repayment." Ultimately the court ordered that the shareholder's loans were repayable to the plaintiff within a reasonable period of time after he first made known his desire for repayment, namely two years was considered a reasonable period to allow the companies for repayment. While entitlement to interest on the loans was not in issue in the Naneff case, the court awarded the plaintiff interest for 15 months at the pre-judgment rate under the Courts of Justice Act from the date of formal demand for payment. It is unknown if there was evidence before the court in that case of historical interest being paid on the shareholder accounts.
27 The applicant further submits that should the court fail to find that interest should be awarded from 1967 onward, interest should be awarded at least from the date on which repayment of the shareholder loan was claimed by delivery of the original Notice of Application. (Notice of Application issued January 25, 1985.) The Notice of Application contains a claim for interest under the Courts of Justice Act.
28 The applicant argues that he is entitled to pre-judgment interest under the Courts of Justice Act ("Act") from 1967 onward based on the provision of section 128(1). That section provides that a person may be entitled to interest calculated from the date the cause of action arose to the date of the order. (emphasis) The respondent argues that this is a specious argument based on the expiry of the limitation period when the order was granted in 2002 to amend the application to add a claim for interest.
29 Lastly, the applicant submits that while he did not seek an amendment to his original application to add a claim for entitlement to interest on the shareholder loans until 2002, it is not a bar to an award of interest prior to that date.
Respondent's Evidence and Position
30 The respondent filed the affidavit of Anthony Piccolo sworn April 20, 2010. Exhibit "G" to his Affidavit is a Commitment Letter dated July 12, 1968 from the Industrial Development Bank addressed to Sam's Body Shop Limited authorizing a loan to the company for $40,000 secured by an assignment of the shareholder loan owing to Sam Piccolo, which included a term that no interest would be paid on the loan. The terms of repayment commenced November 23, 1968 with monthly instalments thereafter for approximately eight years, until December 1976. Anthony Piccolo submits that this letter confirms what was always agreed and understood as between the brothers that no interest was payable on the shareholder loans.
31 The respondent also filed the affidavit of Anthony Piccolo sworn August 31, 1998, which was filed in support of his motion to oppose confirmation of the report of the Master on January 26, 1998 where the Master made findings of the balances in the shareholder loan accounts and calculated interest thereon. His evidence is that there was no agreement between himself and Sam for interest to accrue on the shareholders' loan accounts, nor were any payments ever made from 1967 onward and the company was never charged with interest on those accounts. In support of that position, Anthony Piccolo relies on a report he obtained from Ernst & Young, chartered accountants, dated April 15, 1991. (Exhibit "B" to Affidavit of Anthony Piccolo) They were retained to perform a review procedure of corporate financial documents with respect to the matter of the shareholder loan dispute. On page 4 of the report, having reviewed the financial statements as issued for the fiscal years up to June 30, 1984, the accountants noted that the statements had been approved by Sam Piccolo with no request for interest to be charged on each of the approval dates, therefore, it was their opinion that it would be inappropriate to request retroactive interest and further that interest on the shareholder loan was inappropriate. Ernst & Young's engagement included a review of the financial statements, presumably from date of incorporation in 1967 to and including June 30, 1988.
Issue: Are the shareholders entitled to interest on the shareholder loans?
32 The first issue is whether there existed an agreement, express or otherwise, relative to entitlement to interest on the shareholder loan accounts.
33 Clearly, there is no evidence of an agreement in writing entitling the shareholders to interest on their shareholder loans. To the contrary, at least from December 1968 to December 1976, based on the Commitment Letter to the Industrial Development Bank, an agreement was in place that no interest would be paid on the shareholder loans and, in fact, the historical financial statements bear out that interest did not accrue on the shareholder accounts, nor was interest ever charged to the company. After the loan was paid in full, presumably in December 1976, based on the review of the financial documents by Ernst & Young, no request had been made for interest and no interest had been paid on the shareholder loans to the end of the business year in 1988. Further, it was their opinion that it would be inappropriate to request retroactive interest where no agreement existed. Moreover, it is Anthony Piccolo's evidence that there was no agreement between himself and Sam for interest to accrue on the shareholders' loan accounts.
34 The decision in Naneff, in my view, is not helpful as that case involved a different issue than in the case herein. The issue in Naneff was whether the plaintiff's shareholder loans ought to be paid to him or remain invested in the companies. Although the court ordered that the shareholder was entitled to be paid the balance in his shareholder loan account, with pre-judgment interest payable for 15 months from the date of demand, as stated above, it is unknown whether there was evidence before the court as to whether historical interest had been paid on the shareholder accounts. Here, Sam Piccolo has not made a claim for payment of his shareholder loan account. He sought remedies in the form of declarations and accountings of the finances of the company based on allegations of oppression, as well as a winding up of the company, both pursuant to the Ontario Business Corporations Act. This case continues to be at an interim stage where the issues involved in the winding up have not been adjudicated and no final orders have been made.
35 For the reasons above, I find that no agreement, written or otherwise, existed between the parties that entitle the shareholders to interest on the shareholder loans from the date of incorporation onward.
36 The next issue is whether the applicant has established an equitable basis for entitlement to interest.
37 Given the evidence that no interest was ever paid on the shareholder loans, it is difficult to conceive how it would now be equitable that interest be awarded, for the following reasons. Firstly, the basis for the applicant's shareholder loan account was not as a result of an injection of cash into the business. As outlined above, the basis for Sam Piccolo's shareholder loan account arose from an agreement between the parties as to the determination of the value of the goodwill of Golden Streak Custom Shop in 1967 of $16,358.40, and the value of the assets of Golden Streak of $31,169.05 for a total using the net capital value of Golden Streak of $47,524.45. It is reasonable to infer that those assets were depreciating in value and have likely been of no value to the company for a long time, if in fact they are still in existence. Therefore, to argue that the company has had the use of Sam Piccolo's money since 1967 is inaccurate to say the least. At best, the company had the use of the depreciating assets for a limited period of time. Furthermore, I find that it would be unjust to award interest on a loan that was formed not by a cash injection in the company but by primarily depreciating assets.
38 Secondly, the only asset that remains in the company is the Erie Street property, which was listed for sale in 2006 for $575,750 but was not sold. In order to finalize the winding up of the company, the parties require an accounting to take into consideration what has happened since the last Reference Report dated January 13, 1995, including all rents collected and expenses paid on behalf of the company, and all rents owing, if any, to the company given that Anthony Piccolo continues to operate the business without a lease. Therefore, it is a reasonable inference that the balances in the shareholders' loan accounts will likely be affected depending on rulings made in the final accounting. The account balances as determined by Master Quinn were relatively small as at December 31, 1968, namely:
Sam Piccolo $45,161.88
Anthony Piccolo $3,300.00
39 Sam's account is subject to a debit of $17,973 based on the Master's ruling on October 25, 1994 that Sam holds this amount in trust for the company. Therefore, after deducting the monies held in trust from the balance in his shareholder loan account, Sam would be entitled to approximately $27,000 from the company. The Master also ruled that Anthony held in trust for the company the sum of $48,423.30. Therefore, if the balance in his shareholder loan account were deducted from the monies he holds in trust, he would owe the company approximately $45,000. One might ask, if it is equitable that Sam be entitled to interest on the balance in his shareholder loan account, then is it equally equitable that Tony be required to pay interest on the monies he holds in trust? The point is that a final accounting has not been completed which will inevitably affect monies owing to one or both of the parties.
40 Considering all of the above, it is my view that the applicant has not established an equitable basis for entitlement to interest on the shareholder loan accounts.
41 Regarding the applicant's argument that he is entitled to interest on the balance of his shareholder loan account pursuant to the Courts of Justice Act, and notwithstanding the respondent's limitation argument, I am not convinced that Sam is a "person who is entitled to an order for the payment of money" in the above circumstances (Section 128(1) of the Courts of Justice Act). In his said Report, the Master made a finding as to the balance in the respective shareholder loan accounts. The Master did not, and could not at that time, make an order that the balance in Sam's shareholder loan account was due and owing to him, given the further steps outstanding in the winding up of the company including any further adjustments that might affect monies owing to one or both of the parties. Thus, it cannot be stated that Sam is entitled to an order for the payment of money as required by section 128(1).
42 For the above reasons, the applicant has not discharged his burden to satisfy the court that he is entitled to interest on the balance of his shareholder loan account.
MASTER L.A. POPE
cp/e/qlafr/qljzg/qlpxm/qlana