For a number of years, the business partnership between Rachel Conduit and Bruce Dawson was an apparent success. Handlebar, a cyclist-friendly bar on the southern edge of the increasingly gentrified Kensington Market neighbourhood in downtown Toronto, is the kind of hipster establishment that, as one online reviewer put it, you could enjoy yourself at even if you can't stand hipsters.
Handlebar was the second licensed establishment they had run together and more than three years into its operation, Ms. Conduit was not concerned about its financial success. "If I just work harder, things will be better," is her business philosophy, she said. Overseeing the finances was the responsibility of Mr. Dawson, whom she considered not only to be her best friend, but someone with a successful business past.
These views changed a year ago, when the Canada Revenue Agency contacted Ms. Conduit to say that the bar was behind in its filings and owed $17,000 in HST payments. It was the beginning of a nearly 12-month-long legal odyssey and despite a reprieve last week from an Ontario Superior Court judge, she is still potentially liable for more than $70,000 in personal debt owed by Mr. Dawson and that is not connected to Handlebar. It became the quintessential cautionary tale for friends who go into business together, without knowing about their legal obligations if something goes wrong.
"It has been very frustrating," Ms. Conduit said. (Her legal last name is Reynolds, but she is widely known by her middle name, Conduit). "It was also hard to explain to anyone. They would say, 'That cannot be true.' But it can happen," she said.
After being informed about the tax debt, Ms. Conduit retained lawyer Tannis Waugh, who sent a letter to Mr. Dawson stating that the partnership had been dissolved. It was a "hostile takeover" Mr. Dawson said in a subsequent court proceeding. In an interview with The Globe and Mail last week, he stated that he believes he is owed money for his ownership share of the bar.
This was by no means the end of the legal story for Ms. Conduit. She was unaware that RBC had obtained a $62,000 judgment in 2013 against Mr. Dawson, for debts from a previous business.
When it was not repaid, the bank issued a Notice of Garnishment against Handlebar. The Ontario Rules of Civil Procedure permit any entity that is owed a debt to seek a legal order against the partnership as a whole if it is not complying with a garnishment request.
Court records show that Handlebar did not respond to the notice. Ms. Conduit explained that she did not know about any of this because the finances were the responsibility of Mr. Dawson.
Last March, the bank went to court again, this time seeking more than $70,000 from Handlebar, to satisfy the debt of Mr. Dawson.
The bank's lawyer, Mr. Dawson and Superior Court Justice Robert Reid were the only people in attendance. Mr. Dawson said he had already paid down $30,000 of his RBC debt, but interest charges were hampering his efforts, according to a court transcript.
"So, you're taking no position on behalf of Handlebar," the judge asked. Mr. Dawson agreed.
At the request of the bank, an order was issued by Justice Reid against Handlebar for just over $70,000. RBC later sought to make Ms. Conduit personally liable for this amount.
By this stage, lawyer Gosia Bawolska was also retained by Ms. Conduit and her financial plight was the talk of social media among the Kensington community.
Partnership agreements for small business are fraught with risk, Ms. Bawolska said. "Any partnership, unless they have a rock-solid agreement, exposes each partner to debts they may not even know exist," she said.
Ms. Conduit and her husband changed the ownership structure of the bar and have incorporated Handlebar. According to Ms. Waugh, the cost of doing so is relatively inexpensive and is the best protection in terms of personal liability for small businesses.
Ms. Bawolska was successful in convincing Superior Court Justice Robert Nightingale to revisit the issue, in part after showing that Ms. Conduit was never notified of the court proceeding last March.
Given that it is not clear how much Mr. Dawson was actually entitled to draw from Handlebar, the amount that should have been garnisheed might be "substantially less" than RBC was awarded, Justice Nightingale said in his Jan. 23 ruling.
If legal costs of nearly $2,000 are paid to RBC and $10,000 is put into a fund within 60 days to pay possible money owed, the original award will be set aside, the judge ruled. "I am not celebrating yet. But I am happy," Ms. Conduit said.
A spokesperson for RBC, A.J. Goodman, wouldn't provide a comment on the specific case, but stated that the bank advises its clients entering any form of business arrangement to be aware of all the assets and liabilities their partners are bringing into the venture.
For his part, Mr. Dawson believes he has been unfairly vilified. "I have been tried by mob on social media. Rachel is a very popular person and everybody wants a bad guy," said Mr. Dawson, who currently operates the Maison Close 1888 gastropub in Kensington Market. He stressed that he is trying to pay down his personal debt. "I am not hiding. Why didn't they ever come to me?" Mr. Dawson asked.
In response, Ms. Bawolska said that Mr. Dawson had numerous opportunities to inform Ms. Conduit what was happening before the court order against the partnership. "I find his comments out of touch with the reality of his actions to date," the lawyer said.