Kary Investment Corporation v. Tremblay, 2003 ABQB 315 Date: 2003 0328 Action No. 0201-10349 IN THE COURT OF QUEEN'S BENCH OF ALBERTA JUDICIAL DISTRICT OF CALGARY BETWEEN: KARY INVESTMENT CORPORATION Plaintiff (Respondent) - and - MARCEL TREMBLAY Defendant (Appellant) (Applicant) _______________________________________________________ REASONS FOR JUDGMENT of JUSTICE PETER MARTIN _______________________________________________________ APPEARANCES: Andrew R. Robertson Macleod Dixon LLP for the Plaintiff (Respondent) C.D. O’Brien, Q.C. and W.E. Brett Code

Bennett Jones LLP for the Defendant (Appellant) (Applicant) INTRODUCTION [ 1 ] This matter comes before me as an appeal of a

summary judgment granted by a Master in favour of the Plaintiff. [ 2 ] The relationship between the parties and the circumstances which gave rise to this lawsuit need not be fully described in the disposition of this matter. The following narrative will suffice for that purpose. I have outlined the circumstances in general rather than precise terms, but I do not believe the lack of specificity will be significant to this application.

SUMMARY OF RELEVANT FACTS [ 3 ] In the early fall of 2001, the defendant, Marcel Tremblay (“Tremblay”), was the sole shareholder of a privately held Alberta company known as Overlord Acquisitions Inc. (“Overlord”). At that time, Overlord entered into an agreement with the plaintiff, Kary Investment Corporation (“KIC”), which resulted in that company acquiring 500,000 shares of Overlord for $1.00 per share. Rex Kary (“Kary”) was the President of KIC, a privately held company. As part of the overall arrangement, Kary began to work for Overlord in an executive capacity.

At that time, Tremblay held 3,750,000 Class “A” Common Shares of Overlord’s stock, while KIC held 500,000 shares of the same stock. [ 4 ] The arrangement between Overlord, KIC, and Tremblay was reduced to a comprehensive Unanimous Shareholder Agreement (“USA”), dated October 31, 2001. The USA sought to address and regulate various matters, including the possibility that either of the two shareholders of Overlord may wish to sell their shares to the other. As at October 31, 2001, there were only two shareholders, but the Agreement also contemplated the possibility of others becoming shareholders in the future.

With regard to KIC wishing to sell all or some of its shares, the USA provided that KIC could exercise a “put” according to the following provisions: 9.01 Any Shareholder other than Tremblay desirous of selling any or all of his or its Shares may give notice in writing (the “Transfer Notice”) to all other Shareholders stating that such Shareholder desires and offers to sell to the other Shareholders, the Shares specified in such Notice at the value fixed under

Article V above (referred to in this

Article IX as the “Purchase Price”) as of the last day of the month immediately preceding the month in which the Transfer Notice is given. 9.02 Upon the giving of such Transfer Notice, the other Shareholders shall, at such time not later than thirty (30) days after the giving of the Transfer Notice as the other Shareholders may decide, purchase and pay for the Shares covered by the Transfer Notice at the Purchase Price. 9.03 Unless otherwise agreed as between themselves, the other Shareholders shall be entitled to purchase and pay for the offered Shares in the same proportions respectively as their respective shareholdings in the Corporation.

Tremblay shall acquire any shares not acquired by the other shareholders of the Corporation. [ 5 ] By January of 2002, there were five other parties (the “New Shareholders”) who had each subscribed for 45,000 shares of Overlord. Their subscription prompted all shareholders, new and old, to enter into a Waiver and Novation Agreement dated January 18, 2002. By that agreement the New Shareholders assumed all rights and responsibilities of the USA. [ 6 ] Unhappy differences arose between Kary and Tremblay and came to a head in early 2002. The inability to resolve those differences prompted KIC to exercise its “Put”.

On April 30, 2002, Kary, on behalf of KIC, served written notice on Tremblay advising of his intention to divest all of KIC shares in Overlord in this manner. This notice was also addressed to all of the New Shareholders, but

served only on Tremblay. That discrepancy was intentional; Kary was told by Overlord’s corporate solicitor and secretary that Tremblay and KIC were the only registered shareholders at that time. Kary governed himself accordingly and served the only other registered shareholder – Tremblay. [ 7 ] Tremblay initially responded to the “put” by denying that he had received the Transfer Notice until after April 30, 2002, although it was later established that it had been received by his office on that date. He then refused to accept the “put” by alleging that the USA was invalid. [ 8 ] Mr.

Kary had been acting without counsel until he began this lawsuit. To do that he retained Mr. Robertson, who brought a motion before a Master of this Court for a

summary judgment. [ 9 ] Tremblay was cross-examined on his affidavit sworn in response to the

summary judgment application. During that examination he was hostile and openly contemptuous.

For example, he refused to answer clearly admissible questions, alleging they violated his human rights, and insisted instead on reading his paper; he swore at the plaintiff and his counsel and otherwise denigrated opposing counsel and the questions he was asking. [ 10 ] Finally, Kary testified under oath that Tremblay had advised him that he, Tremblay, would drag the court process out for more than seven years and that the legal fight and delay would invigorate him. [ 11 ] Such offensive conduct, so clearly contemptuous of the court, its officers and its process, occurs only rarely.

When it does, it is usually explained by the fact that the offending party is extremely frustrated because he has a strong case and is being subjected to vexatious proceedings, or is uneducated, or is unstable. From my vantage point, Tremblay’s misconduct cannot be explained by the first two. On the limited information before me, his cause may be more fairly described as desperate and technical rather than right or righteous. Also, he is not uneducated. On the contrary, the evidence discloses that he has an MBA and has been a very successful businessman.

That leaves the third possibility, which may or may not apply. In any event, such outrageous conduct cannot serve to disqualify Tremblay from exercising his legal rights in the manner he has now chosen. He remains entitled to the law. It may be served to him cold, without empathy or equity, but he remains entitled to its benefit. Accordingly, for the remainder of these reasons, I will not be influenced by his misconduct. It is, however, a relevant factor in the exercise of my discretion as to costs. [ 12 ] Mr.

Trembley’s stated plan to invigorate himself for seven years while he stretched out these proceedings could not be realized. Less than seven months after the proceedings were commenced, Master Waller heard an application for

summary judgment and granted it. Following valuation of the shares according to the formula provided for that purpose in the USA, it was calculated that Tremblay was obliged to purchase the shares “put” to him by KIC for approximately $1.4 million. [ 13 ] The Master’s ruling was accompanied by comprehensive Reasons for Judgment. About one month later, the parties appeared before him again to settle the terms of the Order and to advise him of the value of the shares KIC “put” to Tremblay. At that hearing, Tremblay appeared with new counsel, Mr. Brett Code. Mr.

Code, with his usual thoroughness and courtesy, raised two matters which had not been pressed by his predecessor or considered by the Master. The first was the observation that Overlord had not been named as a party to the litigation. That failure was said to be fatal as Overlord was an affected party. Secondly, it was noted that the New Shareholders had not been served with a copy of KIC’s Transfer Notice of April 30, 2002, as they were apparently entitled to be. That failure, argued Mr. Code, provided a meritorious defence to the action, which could not be properly considered or dismissed by the granting of a

summary judgment. As the Master was not then functus, Mr. Code asked him to reconsider his decision in light of these arguments and to dismiss the application. [ 14 ] The Learned Master addressed those issues, but was unmoved by them. With regard to the first argument, he ruled that Overlord was effectively controlled by Tremblay and; “...if the Corporation refused to transfer the Shares, Mr.

Tremblay would ultimately be identified with that decision.” [ 15 ] With regard to the failure to serve the New Shareholders with the April 30, 2002 Transfer Notice, the Master found that their status at the time the Notice was served was “too amorphous” to require the service of the Transfer Notice on them as beneficial shareholders. He also found that there was a certain element of “conditionality” with respect to the Waiver and Novation Agreement and accordingly dismissed that argument as well.

[ 16 ] It is that decision, to grant

summary judgment in this case, which is the subject of this appeal. The appellant also asks that I direct a stay of the action until other parties, who he argues should have been added to the action, are in fact added. POSITION OF THE PARTIES [ 17 ] In this appeal, the appellant argues that: 1. Although the Learned Master correctly stated the legal test for the granting of

summary judgment, he erred in applying that test to the circumstances of this case; 2. The proceedings should be stayed pending the addition of parties who were signatories to the amended USA, and whose legal rights were affected by the “put” and the granting of

summary judgment; 3. That the “put” notice was invalid in that it did not strictly comply with the terms of the USA and the Waiver and Novation Agreement; 4. The New Shareholders, who at the time “put” was exercised, were at least equitable shareholders, were entitled to notice and to themselves exercise their right to purchase KIC’s “put” shares; 5.

There is at least a triable issue regarding the value of the “put” shares and at least to that extent, the appeal should be allowed and that issue be remitted to be decided at trial. [ 18 ] The position of the respondent is that all truly affected parties were named in the action and the Transfer Notice was not required to be served on the prospective shareholders because, among other things, there was considerable confusion about their status at the relevant time, and because the corporate counsel and secretary of Overlord had advised KIC that only Tremblay and KIC were registered shareholders. [ 19 ] With regard to the allegation that the New Shareholders should have been added as parties to the proceedings, the respondent argues that although all of them are aware of these proceedings, none of them have asked to be added.

It should be noted that situation changed only hours before this application was heard by me, when counsel appearing, apparently on behalf of the New Shareholders and Overlord, advised the respondent’s counsel that her clients wished to be added to the proceedings as their legal rights were being affected. [ 20 ] With regard to the valuation argument, the respondent asserts that the shares were valued in accordance with the formula provided in the USA, which was substantially confirmed by the corporate secretary and legal officer, who, using that same formula, came to the same result.

Therefore, argues the Respondent, there is no merit to this assertion. ANALYSIS [ 21 ] The purpose of Rule 159 is to bring unmeritorious litigation to a just but

summary conclusion. To be just, the applicant must establish, beyond a reasonable doubt, that there is no real dispute in law or fact. The standard must be set that high because a successful application for

summary judgment will deprive the other party of the right to have matters determined following a full trial of all of the issues. Thus, a

summary judgment may only be granted where it is demonstrated that the outcome is virtually certain and that there are no issues which could realistically affect that outcome if the case went to trial. The point was simply stated by McGillivray C.J., in Western Airlines Ltd. v. D.E.E.L. Enterprises and Gauthier et al (1977), 1977 ALTASCAD 7 (CanLII) , 2 A.R. 166 (C.D.) : I do not think that what, in effect, amounts to a striking out of the appellant’s Statement of Defence can be permitted on a

summary

application unless the question at issue is beyond doubt. (p. 169) [ 22 ] The Chief Justice’s use of the phrase “beyond doubt” has been somewhat refined, and is now taken to mean “beyond a reasonable doubt”: see for example, Progressive Construction Ltd. v. Newton , [1982] 2 W.W.R. 741 (B.C.S.C.) and Canada (Attorney General) v. Stahl , (1999), 30 C.P.C. (4 th ) 42 (Q.B.) . [ 23 ] I turn then to determine whether any of the arguments raised by the appellant might jeopardize what the Master thought would be the inevitable outcome of this litigation.

Whether other parties were required to be added to the action. [ 24 ] The appellant argues, and I accept, that as a general rule all affected parties and all parties to a contract, must be before the court to enable a fair adjudication of the issues in question. That principle was reiterated in the recent decision of Alberta (Treasury Branches) v. Ghermezian (2000), 2000 ABCA 228 (CanLII) , 84 Alta. L.R. (3d) 229 (C.A.) , were the court explained that the purpose for this rule was to ensure that: (

i) no injustice is done to any party to an action, or other interested parties; (ii) the parties are not prejudiced by not having all proper parties before the court; (iii) all interested parties must be bound by the decision so there is no risk of subsequent proceedings by persons not before the court and thus avoid the need for multiple suits; and (iv) the court will be able to effectively adjudicate all issues in question. [ 25 ] That “general” rule and the reasons supporting it, are beyond dispute.

However, on the peculiar facts of this case, I would not interfere with Master Waller’s finding that the addition of Overlord may have been unnecessary, and in any event the failure to add it as a party would not be fatal to the application. I take the same view of the submission that the

summary judgment is fatally flawed because the New Shareholders were not named as parties. In other words, I think that the circumstances of this case may qualify as an exception to the general rule. Failure to Serve the New Shareholders with the Transfer Notice [ 26 ] I turn next to address the only argument which concerns me and that is the failure of KIC to serve the New Shareholders with a copy of the Transfer Notice which signalled its intention to exercise the “put”. I fully appreciate the argument advanced by Mr.

Robertson that the status of the New Shareholders was uncertain at the time the “put” was exercised by KIC, and hence notice to them was unnecessary. The uncertainty arose because a number of New Shareholders had asked that their shares be issued in the names of their businesses, or other surrogates. I accept that that uncertainty had not been resolved by the date the “put” was exercised, April 30, 2002.

I am also aware that as a precaution, Kary, on behalf of KIC, addressed the Transfer Notice to all shareholders, but served only Tremblay because he was advised that there were at the time only two registered shareholders of Overlord – Tremblay and KIC. [ 27 ] I further appreciate the respondent’s argument that the ambiguity of the status of the New Shareholders at the critical time could be used by Tremblay to trap KIC, so that whoever KIC served with the Transfer Notice on April 30 th , Tremblay would argue that that service was incorrect and therefore invalid.

For example, if the New Shareholders were served, Tremblay could argue that they were not entitled to service and therefore service was invalid. Similarly, if service was affected on the New Shareholders who had actually signed the Waiver and Novation Agreement, Tremblay could argue that service was again defective because those who would later become the registered shareholders of those shares had not been served, and so on.

[ 28 ] I approach this issue by noting that as of January 18, 2002, there were five New Shareholders who had signed the Waiver and Novation Agreement and in that way assumed the rights and responsibilities of the USA. I understand that within two months of that date, and in any event well before April 30, 2002, each had paid for their shares and those funds had gone into, and been used by, the treasury of Overlord. It is true that the share certificates remained to be issued and there was some question regarding three of the New Shareholders as to the name in which their shares were to be issued.

It follows that there would ultimately have been a discrepancy between the names of the subscribers of the Waiver and Novation Agreement and the names of the persons or entities who eventually received the shares for which those New Shareholders had subscribed. [ 29 ] That potential discrepancy does not, however, alter the fact that as at April 30, 2002, there were five new paid-up shareholders to whom the provisions of the USA applied.

In the context of this case, it is at least arguable that these New Shareholders were entitled to exercise a right of first refusal over a limited number of the shares being “put” by KIC; and to decide with other shareholders whether any one of them should be entitled to more than their proportionate share, and if so, to acquire more. Only then would Tremblay be obliged to acquire the remainder of KIC shares. [ 30 ] Can it be reasonably argued that these New Shareholders should have been served with the Transfer Notice and that failure to do so may render the Transfer Notice invalid? I think it can.

It is true that the New Shareholders were not registered as such at the time the Transfer Notice was served. But that omission did not mean that they were not then shareholders. They had paid for their shares and were signatories to the Waiver and Novation agreement. In that way they had assumed the same rights and responsibilities of the other shareholders as governed by the USA. Neither the Waiver and Novation agreement, nor the USA, had any provision restricting the shareholders to be served the Transfer Notice pursuant to

Article 9 of the USA to registered shareholders. Accordingly, I conclude that the New Shareholders were shareholders entitled to be served with the Transfer Notice: see Gordon v. Gaby (1966), 1966 CanLII 514 (SCC) , 57 D.L.R. (2d) 1 (S.C.C.) . [ 31 ] The USA sets out certain conditions to effect service of the Transfer Notice. The law demands a strict compliance with such terms to invoke the aid of the court in enforcing the contract. See Pierce v. Empey , 1939 CanLII 1 (SCC) , [1939] 4 D.L.R. 672 (S.C.C.) . An application of that rule is found in Baughman v.

Rampart Resources Ltd. (1995), 1995 CanLII 2910 (BC CA) , 124 D.L.R. (4th) 252 (B.C.C.A.) , where the court found that the plaintiff, not having complied with the stated requirements, had not effectively exercised her option and consequently the defendant’s offer had never been accepted and there was no contract. The court concluded that the wrongful repudiation by the option grantor had the effect simply of leaving the option open. [ 32 ] As noted, in this case the New Shareholders were not served with the Transfer Notice.

One approach that I have considered is whether it would be possible and appropriate on this appeal to “save” the

summary judgment by carving out those shares which may have been influenced by the New Shareholders. By my calculation that would amount to about 5% of KIC’s 500,000 shares. If this was done, the shareholders could still agree among themselves that one of them would be able to acquire a disproportionate share. I assume that Tremblay, who is desperately trying to repudiate and defeat the provision of the USA which forced him to acquire KIC shares, would only be too happy to now sell as many as any New Shareholder wanted, for the price he was forced to pay for them. In other words, the intention of

Article 9.03 of the USA could still be given effect. It could only be given effect, however, with the benefit of the hindsight that pursuant to the valuation formula of the USA, the valued price of the KIC shares on April 30, 2002 far exceeded their actual value on that date; and further that there was no provision for a discount of those KIC shares still being held in escrow. In short, I cannot imagine that any new shareholder would want to acquire any shares “put” by KIC on April 30, 2002, as such an acquisition on those terms would make no economic sense.

If I am wrong in that assumption, it is clear that Tremblay would now be pleased to sell as many of the shares as the New Shareholders wanted to buy. [ 33 ] Presumably, at this stage Tremblay would argue that he was entitled to ignore the “put” served on him on April 30, 2002, because it had not also been served, as required, on the New Shareholders. In other words, he could maintain that it would be wrong to reflect now on what might have been, as I have just done; that the exercise of the “put” complied with the USA or it did not.

If it did not, he was entitled to ignore it, as he did. [ 34 ] Without passing on the viability of these submissions, I cannot dismiss them as hopeless, or without an ability to influence the outcome of the case. [ 35 ] Furthermore, if KIC was required to serve the New Shareholders and became aware of that obligation only after Tremblay contested validity of the service he received on April 30, it could not have issued a corrected Transfer Notice until May 1 st , at the earliest.

In that event the USA provided that those shares would then be valued according to their trading value for the last 10 days of April, rather than March as was done here. Assuming that the New Shareholders were entitled to notice, the valuation of the shares

following receipt of what Tremblay would argue was a valid Transfer Notice may have been considerably different. [ 36 ] I appreciate that Tremblay’s initial defence was to attack the validity of the USA and consequently it would be awkward for him to embrace it now. He did plead in the alternative in his Statement of Defence, however, that the failure to serve the New Shareholders invalidated the exercise of the “put”. CONCLUSION [ 37 ] In determining this appeal, it is unnecessary for me to pass on the ultimate viability of the “service” argument or to say that it will impact the result of this action.

It is sufficient if it is possible that it may succeed and thus alter the outcome of the trial. I am unable to say that this argument lacks that potential. Accordingly, the appeal must be allowed. I am also asked to enter a stay pending the addition of others who Tremblay argues should be added to this action. I decline to do so. Counsel may add any party he thinks necessary and I will leave that decision to him. However, the matter need not be stayed for that purpose. [ 38 ] I remain concerned about Mr. Tremblay’s stated intention to drag this matter out for the next seven years.

I think that in order to ensure the litigation proceeds expeditiously, a case manager is required. It is not necessary to burden another member of the court with the task of reviewing the file in order to begin case managing it. I have already done that, so I will ask the Associate Chief Justice that I be appointed the case manager. [ 39 ] Rule 159(4) states that a court considering an application for

summary judgment may order that the action proceed (or not proceed) on terms including the giving of security, and pursuant to established time lines. Not knowing the outcome of this application, counsel could not have raised these matters with me previously. I will say simply that without deciding the issues, I am concerned about the defiant and disrespectful attitude displayed by Tremblay during his cross-examination and I would like counsel to address both the giving of security and the requirement to establish a time line to get the matter onto trial.

Counsel may make an appointment with my secretary when they are ready to address those matters. [ 40 ] I would invite counsel to address the matter of costs now, if they are ready to do so. HEARD on the 25th day of March, 2003. DATED at Calgary, Alberta this 28th day of March, 2003. __________________________ J.C.Q.B.A.