Executive Summary: Key Legal and Evidentiary Issues

• Dispute arose from a failed sale of the “Mrs. Falafel” business and the seller’s failure to return the full $55,000 purchase deposit after mutual rescission.
• The trial and appeal turned on whether rent and property damage could be set off against the unpaid $25,000 portion of the deposit, including the validity and authenticity of a disputed residential lease.
• Evidence about the connection between 1895366 Ontario Inc. and HRO Future Company Limited supported piercing the corporate veil and treating the two corporations as a single entity for liability on the deposit.
• The trial judge’s credibility findings, including rejecting the alleged residential lease and preferring the respondent’s evidence on occupancy and damage, were central and afforded deference on appeal.
• On appeal, the Divisional Court applied the Palmer/Barendregt test and refused to admit fresh corporate and tax records that could have been led at trial to prove separateness of the companies.
• The appellate court found no legal error in the test for piercing the corporate veil and no palpable and overriding error in the factual findings, leading to dismissal of both the motion and the appeal with substantial costs against the appellants.

Background and failed business sale

The dispute stems from the attempted purchase of a small restaurant business known as “Mrs. Falafel,” operating at 191 Baldwin Street in downtown Toronto. The business was owned by 1895366 Ontario Limited, a numbered company, while the building itself was owned by HRO Future Company Limited. Both corporations were controlled in practice by Hiyam Samara, who signed documents on behalf of the entities. On June 20, 2016, the respondent, Leila Fawaz, agreed to purchase the Mrs. Falafel business for $275,000, paying a $55,000 deposit with the balance due on closing a year later, on June 20, 2017. The parties later decided not to proceed with the sale. By a full and final release dated July 19, 2016, they mutually rescinded the agreement, and it was agreed that the $55,000 deposit would be repaid to Ms. Fawaz. In that release, Ms. Fawaz released Ms. Samara and HRO from liability related to the aborted purchase. To effect the return of the deposit, Ms. Fawaz received four post-dated cheques drawn on the business account of Mrs. Falafel. The first two cheques cleared, but the last two, totalling $25,000, were returned for insufficient funds. That $25,000 shortfall became the core of the litigation.

Subsequent dealings and competing claims

After the mutual rescission, the two women continued discussions about possible joint business ventures, though these never led to any binding agreements. Instead, Ms. Samara repurposed the Baldwin Street premises and ultimately used the space to open a cannabis dispensary. Meanwhile, the deposit issue remained unresolved. Ms. Fawaz commenced a Small Claims Court action seeking $25,000, representing the unpaid portion of the deposit, plus pre-judgment interest. She sued the numbered company, Ms. Samara personally, and HRO as defendants. On the defence side, events became complicated. Mrs. Falafel was dissolved as a corporate entity in May 2018. Nevertheless, five months after dissolution, a Defendants’ Claim (counterclaim) was issued jointly in the names of Mrs. Falafel and Ms. Samara. They alleged that the $25,000 should be retained as a set-off for alleged renovation costs, property damage, and unpaid rent said to be owing from Ms. Fawaz in connection with the premises.

The disputed residential lease and alleged rent

Thirty days before trial, Ms. Samara produced a written residential lease dated June 1, 2016. It purported to show that HRO, through Ms. Samara, leased a residential unit to Ms. Fawaz at the Baldwin Street property. The lease bore signatures for HRO and for the respondent but had no witnesses, and the unit described was plainly not ready for occupancy at that date because renovations were still underway. Ms. Fawaz unequivocally denied ever signing the lease or having seen it before the litigation; she also had a home in Oakville where she lived with her husband and three children. The appellants argued that rent fell due under this lease, and that unpaid rent, together with alleged damage to the building, justified keeping the remaining $25,000 of the deposit. The residential lease document thus became a key evidentiary issue: it was central to whether rent could properly be set off against the deposit and whether the respondent had any tenancy-based obligations at all.

Trial judge’s findings on credibility and liability

The Small Claims Court trial judge, Deputy Judge Howe, rejected the appellants’ position on rent and repairs. The judge found it highly implausible that Ms. Fawaz, who owned and lived in a family home in Oakville, would have moved into a small unit in Kensington Market with her husband and three children. On the evidence, the unit was not ready for occupation as of the lease date, and the respondent denied signing the lease. The judge accepted the respondent’s version of events and held that no rent was owing. The trial judge also rejected the allegation that Ms. Fawaz caused damage to the building, finding on a balance of probabilities that she had not damaged the premises. In consequence, there was no factual basis for the alleged set-off. On the central monetary issue, the trial judge accepted that Ms. Fawaz was still owed $25,000, as the unpaid balance of the deposit. The question then became which defendants were liable: the numbered company, HRO, and/or Ms. Samara personally.

Piercing the corporate veil and treatment of the entities

The trial judge was confronted with a complex corporate structure and inconsistent use of corporate names. The original purchase agreement for Mrs. Falafel was between the respondent and the numbered company. The subsequent release was in favour of Ms. Samara and HRO. The deposit cheques were drawn on Mrs. Falafel’s account. The alleged rent was said to be owed to the numbered company, but the residential lease produced was signed by HRO. At the same time, Ms. Samara was the directing and signing mind behind both corporations and executed the relevant documents on their behalf. Faced with these facts, the trial judge concluded that this was an appropriate case to pierce the corporate veil and to treat the companies as one entity for the purpose of liability on the unpaid deposit. Relying on the Transamerica line of authority and more recent guidance (including Alessandro v. Briggs), the court held that when a corporation is completely dominated and controlled and is being used for fraudulent, improper, or wrongful purposes, or where those in control of the corporation expressly direct a wrongful act, the separate legal personality of the corporation may be disregarded. The trial judge found that, in their dealings with Ms. Fawaz, the numbered company and HRO were effectively operating as one and were used interchangeably to justify retaining the deposit. However, the claim against Ms. Samara personally was dismissed; the court found she had signed documents in her capacity as a corporate officer, not in her personal capacity. The final Small Claims Court order required 1895366 Ontario Inc. and HRO to pay the respondent $25,000 plus pre-judgment interest.

Motion for fresh evidence on appeal

On appeal to the Divisional Court, the appellants sought to introduce fresh evidence aimed at showing that the numbered company and HRO were in fact separate, legitimate entities, with their own corporate documentation, tax accounts, and business records. They argued that the trial judge should not have pierced the corporate veil and that they could not have anticipated, at trial, that the judge would treat the companies as a single entity. The Divisional Court applied the well-established four-part test for fresh evidence from Palmer v. The Queen, as reaffirmed by the Supreme Court of Canada in Barendregt v. Grebliunas. That test considers: whether the evidence could have been obtained with due diligence for the trial; whether it is relevant to a decisive issue; whether it is credible; and whether, if believed, it would likely have affected the result. The court held that all of the documents the appellants now wished to put forward were available, or could have been available, at first instance with reasonable diligence. An appeal is not an opportunity to patch evidentiary gaps identified in the trial reasons. The Divisional Court also noted that some documents had already been before the trial judge and that additional corporate proofs of separateness would not change the outcome: there was no dispute that, on paper, the companies were distinct; what mattered was how they were actually used in their dealings with the respondent. The motion to admit fresh evidence was therefore dismissed.

Standard of review and no legal error on corporate veil

The Divisional Court reiterated the appellate standards from Housen v. Nikolaisen: errors of law are reviewed for correctness, while findings of fact and mixed fact and law are reviewed for palpable and overriding error, absent an extricable legal error. The appellants argued that the trial judge applied the wrong test for piercing the corporate veil by relying on Transamerica and not making a specific finding of fraud. The court rejected this. It referred to more recent Ontario Court of Appeal authority, including Veeragathy v. Ambalavanar and FNF Enterprises Inc. v. Wag and Train Inc., which clarify that fraud is not the only ground for veil-piercing; unjust enrichment, breach of trust, or misuse/misappropriation of funds may also justify disregarding corporate separateness. In light of this jurisprudence, the Divisional Court concluded that the trial judge had properly stated and applied the legal test, recognizing that the corporate veil can be pierced where a corporation is used for improper purposes or where those in control direct wrongful acts. No extricable error of law was found.

No palpable and overriding error on factual findings

On the factual side, the appellants contended that the trial judge erred in finding that the numbered company and HRO acted interchangeably and wrongfully withheld the deposit. They argued that Mrs. Falafel and HRO were arm’s-length entities: one a restaurant/catering business, the other a landlord. They also claimed they lacked notice that veil-piercing would be at issue. The Divisional Court held that there was ample evidence on which the trial judge could reasonably conclude that the entities were effectively treated as one in their dealings with the respondent. Ms. Samara was the director and signing officer of both corporations; after the dissolution of Mrs. Falafel, a joint claim was still issued in its name and in Ms. Samara’s personal capacity, seeking rent and damages for property actually owned by HRO; and the withheld deposit from Mrs. Falafel was justified by alleged rent and damage associated with HRO’s property. In addition, while the initial purchase agreement was with the numbered company, the release extended to HRO, and the cheques were signed and amended by Ms. Samara. The appellate court emphasized that it is for the trial judge to weigh credibility and decide which witnesses to believe. It was open to the trial judge to prefer the respondent’s evidence, to accept that the release was intended to cover HRO despite claims of “mistake,” and to treat the interconnected conduct as sufficient to justify veil-piercing. As to notice, the court pointed out that counsel for the appellants had expressly argued at the outset of trial that there were “absolutely no grounds to pierce the corporate veil,” confirming that veil-piercing was indeed a live issue throughout the proceedings. No palpable and overriding factual error was shown.

Treatment of the residential lease and rent claim

The appellants also attacked the trial judge’s treatment of the residential lease. They argued that the respondent bore the burden of proving the lease was forged, that there was no handwriting analysis, and that the judge failed to explain adequately why the lease was not enforced. The Divisional Court upheld the trial judge’s approach. It held that the trial judge was entitled, on the record, to find that there was no binding residential lease, having preferred the respondent’s account that she had never signed the document and would not plausibly have moved her family into the small Kensington unit. At the same time, the Divisional Court noted that there was nothing inconsistent in the trial judge’s view that, even if the lease was invalid for various reasons, it still showed that, on its face, Ms. Samara was purporting to act on behalf of HRO when she signed it. The lease could be both legally ineffective and still evidentiary of how the corporate actors presented themselves and their relationships. This reinforced, rather than undermined, the conclusion that the entities were used interchangeably. The ground of appeal based on the lease and rent claim was accordingly dismissed.

Final disposition and monetary consequences

Having found no error in the legal test for piercing the corporate veil, no misdirection on the law of fresh evidence, and no palpable and overriding error in the trial judge’s factual and credibility findings, the Divisional Court dismissed the appeal in its entirety. The motion for fresh evidence was also dismissed. On costs, the court accepted that the respondent, as the successful party at both the motion and appeal stages, was entitled to recover her costs. It fixed costs of $3,000 for responding to the motion for fresh evidence and $15,000 for the appeal itself, both on a partial indemnity basis, and ordered that the appellants were jointly and severally liable for these amounts. Taken together with the underlying Small Claims Court judgment, the overall result is that the respondent, Leila Fawaz, remains entitled to the principal sum of $25,000 (being the unpaid balance of her deposit) plus pre-judgment interest in an amount not specified in the appellate reasons, and an additional $18,000 in appeal-related costs, for a clearly quantified total of $43,000 in principal and costs (exclusive of interest), all ordered in her favour.