Executive Summary: Key Legal and Evidentiary Issues

• The plaintiff sought to enforce a $50,000 promissory note after the defendant corporation defaulted twice, raising contract enforcement questions.

• Claims were made against individual directors and a related company, seeking to pierce the corporate veil and impose personal liability.

• The court assessed whether causes of action like unjust enrichment, bad faith, fraudulent misrepresentation, and breach of personal guarantees were properly pleaded.

• Most of the claims were struck for lacking sufficient material facts or being untenable at law, especially those relying on oral or implied guarantees.

• Allegations of improper diversion of funds and fraudulent misrepresentation were permitted to be re-pleaded with specific facts.

• The plaintiff was granted leave to amend certain claims but denied leave for others, and the defendants were awarded costs.

Factual background and procedural history

Adam Jeremy Clark loaned $50,000 to Yntegrity Sales & Marketing Inc. (YSM) via a promissory note in February 2023. After YSM defaulted, the parties entered into a release agreement in July 2024 amending the original loan terms. YSM defaulted again, prompting Clark to sue not only YSM, but also its founder Hyung Cho, managing partner Renee Chang, and another company, Mind Over Marketing Inc. (MOMI), for repayment and damages. Clark alleged that the individual defendants and MOMI improperly diverted funds, misrepresented YSM’s financial condition, and made personal guarantees.

The individual defendants and MOMI brought a motion under Rule 21.01(1)(b) of Ontario’s Rules of Civil Procedure to strike the Statement of Claim on the basis that it disclosed no reasonable cause of action. They asserted they were not parties to the promissory note and that the allegations against them were bald, unsupported, or legally untenable.

Court’s analysis and findings

The court examined each of the plaintiff’s claims to determine whether any could plausibly succeed. It emphasized that for the purposes of a Rule 21.01(1)(b) motion, all well-pleaded facts must be assumed true, but that conclusions unsupported by material facts or facts incapable of proof could not sustain a cause of action.

The unjust enrichment claim was struck because it lacked detail on any actual transfer of value to the defendants. The bad faith claim was held to be not legally viable since the moving parties were not parties to the relevant contracts, and “bad faith” is not a standalone tort.

The court found that the claim for damages based on “opportunity costs” could stand, as it was not pleaded as a cause of action but a measure of damages. Likewise, the claim for punitive damages was not struck, as its viability could not be assessed on a pleadings motion.

Claims against MOMI

The only remaining allegation against MOMI was that it served as an alter ego for Chang and was used to divert YSM’s assets. However, the court found that the Statement of Claim did not plead facts showing how MOMI’s payment of YSM’s debt indicated a diversion or commingling of assets. The claim was struck but leave to amend was granted.

Claims against Cho and Chang

The Statement of Claim failed to properly plead a basis to pierce the corporate veil. It did not allege that YSM was a sham corporation or that either individual acted outside their corporate duties. Claims that their actions were tortious or fraudulent were inadequately particularized. The court found that the pleadings did not meet the high standard for personal liability and struck the corporate veil allegations, but allowed limited leave to amend if YSM was to be alleged as a sham.

Fraudulent misrepresentation claims were also struck. The pleadings lacked the essential elements: who made the representations, when, what was said, and with what intent. Documents incorporated by reference did not cure these deficiencies.

Allegations of improper diversion of funds similarly failed. The court found the pleadings vague, unsupported, and contradictory to the claim—since MOMI’s payment to Clark suggested separate corporate identities rather than diversion. Leave to amend was granted.

The claim that Cho and Chang made personal guarantees was struck without leave to amend. No written guarantees were pleaded, and oral or implied guarantees are unenforceable under the Statute of Frauds. The court found that the referenced text messages did not contain any personal guarantees and rejected the notion that acting in a corporate capacity could give rise to personal liability.

Outcome

The court struck the claims of bad faith and breach of personal guarantees without leave to amend. It also struck the corporate veil claim but allowed leave to amend solely on the basis that YSM may be a sham corporation. Claims of unjust enrichment, fraudulent misrepresentation, and improper diversion were struck with leave to amend. The claims for opportunity cost and punitive damages were not struck.

The plaintiff was given 30 days to amend the Statement of Claim. Costs of $10,000 were awarded to the defendants on a partial indemnity basis.