Crofton v. H.M.E. Evans & Company Limited, 2011 ABQB 158

Court of Queen ’ s Bench of Alberta Citation: Crofton v. H.M.E. Evans & Company Limited, 2011 ABQB 158 Date: 20110311 Docket: 0403 01817 Registry: Edmonton Between: Cameron Crofton Plaintiff - and - H.M.E. Evans & Company Limited Defendant _______________________________________________________ Memorandum of Judgment of the Honourable Madam Justice D.C. Read _______________________________________________________

Summary: [ 1 ] An issue of potential or actual conflict arose when an accounting firm, named liquidator of a corporation was also retained as trustee in bankruptcy of two other corporations. The liquidation court order required the accounting firm to seek information from the principal of the two bankrupt corporations respecting transactions between the corporation in liquidation, the principal, and the two bankrupt corporations. Facts: [ 2 ] On June 11, 2010, by court order, Price Waterhouse Coopers (“PWC”) was named liquidator of H.M.E. Evans & Company Limited (“Evans Ltd.”) pursuant to

Part 17 of the Business Corporations Act, R.S.A 2000 c. B-9. [ 3 ] Evidence before the court at the time the liquidation order was made (“Liquidation Order Hearing”) established the following:

a. Evans Ltd. is a family owned corporation. All of the shareholders are descendants of Mr. H.M.E. Evans. b. Jay Peers, one of the shareholders either directly or through a corporation or corporations controlled by him (“Peers Entities”) had managed the affairs of Evans Ltd. for a number of years. c. Some of the shareholders were represented at the Liquidation Order Hearing. Others were not. The existence of other unknown shareholders could not be ruled out. d.

The represented shareholders expressed concerns at the Liquidation Order Hearing, inter alia , about lack of information generally about the affairs of Evans Ltd. under the management of Jay Peers and about various historical transactions made between the Peers Entities and Evans Ltd. From the evidence tendered at the Liquidation Order Hearing, it was clear that some shareholders had been requesting information for some time from the Peers Entities and the information had not been provided. e.

Paragraph 9 of the liquidation required that Jay Peers provide PWC as liquidator and the shareholders of Evans Ltd. with all the information requested in two letters, dated August 25, 2008 and December 9, 2008. Copies of these letters are attached as

Schedule A to this judgment. f. Jay Peers was living on certain lands located in the City of Edmonton and owned by Evans Ltd., known as the Sylvancroft Lands. It was a term of the liquidation order that PWC as liquidator would place the Sylvancroft Lands on the market with a view to selling the lands at fair market value. Any sale was to be approved by all of the shareholders and the Court. g.

One of the Peers Entities, Federal Mortgage Corporation (“FMC”) claimed to be an assignee of certain security from HSBC Canada, including a mortgage registered against title to the Sylvancroft Lands. [ 4 ] At the Liquidation Order Hearing, I assumed case management of the litigation. [ 5 ] A further case management hearing was held on December 10, 2010, at which time a second order was made expanding the terms of the previous liquidation order. Terms of this expanded order included the following: 16.

The Liquidator shall investigate such transactions between the Company and Jay Peers or any person or corporation related to Jay Peers that the Liquidator considers appropriate. 17.

The furtherance of the investigation to be conducted by the Liquidator, the Corporation, all of its current and former directors, officers, employees, agents, accountants, legal counsel and shareholders and all other persons acting on its instructions or behalf and all other individuals, firms, corporations, governmental bodies or agencies, or other entities having notice of this Order shall forthwith advise the Liquidator of the existence of any books, documents, securities, contracts, orders, corporate and accounting records, and any other papers, records and information of any kind related to the business or affairs of the Company, and any computer programs, computer tapes, computer disks, or other data storage media containing any such information (the foregoing, collectively, the “Records”) in that Person’s possession or control, and shall provide to the Liquidator or permit the Liquidator to make, retain and take away copies thereof and grant to the Liquidator unfettered access to and use of accounting, computer, software and physical facilities relating thereto, provided however that nothing in this paragraph 17 or in paragraph 18 of this Order shall require the delivery of Records, or the granting of access to Records, which may not be disclosed or provided to the Liquidator due to the privilege attaching to solicitor-client communication or documents prepared in contemplation of litigation or due to statutory provisions prohibiting such disclosure. 18.

If any Records are stored or otherwise contained on a computer or other electronic system of information storage, whether by independent service provider or otherwise, all Persons in possession or control of such Records shall forthwith give unfettered access to the Liquidator for the purpose of allowing the Liquidator to recover and fully copy all of the information contained therein whether by

way of printing the information onto paper or making copies of computer disks or such other manner of retrieving and copying the information as the Liquidator in its discretion deems expedient, and shall not alter, erase or destroy any Records without the prior written consent of the Liquidator.

Further, for the purposes of this paragraph, all Persons shall provide the Liquidator with all such assistance in gaining immediate access to the information in the Records as the Liquidator may in its discretion require including providing the Liquidator with instructions on the use of any computer or other system and providing the Liquidator with any and all access codes, account names and account numbers that may be required to gain access to the information. [ 6 ] At the December 10, 2010 hearing, PWC confirmed they had also accepted a retainer as trustees in bankruptcy of FMC and of Peers Foster Kristiansen Inc. (“Peers Foster Inc.”).

Both corporations are Peers Entities in that they were controlled by Jay Peers or his nominees. In addition, Peers Foster Inc. represents itself as owning 50.94% of the shares of the capital stock of Evans Ltd. [ 7 ] By the time of this second hearing it was evident that Peers Foster Inc. had made a claim against Evans Ltd. asserting an unsecured debt for what was described as ‘an inter-company loan stemming from historical business dealings of the firm.’ [ 8 ] A third case management meeting and hearing was held on March 7, 2011.

At this hearing, two of the shareholders, Virginia Hilliard and Simon Peers, (“Hilliard/S. Peers”) who represented themselves as holding a total of 39.5% of the shares of the capital stock in Evans Ltd., divided equally between them, requested that PWC be removed as liquidator of Evans Ltd., alleging that PWC had an irreconcilable conflict of interest in acting as liquidator of Evans Ltd. and as trustee in bankruptcy of Peers Foster Inc. and FMC. Issue: [ 9 ] Should PWC be removed as liquidator of Evans Ltd. for conflict of interest? Analysis: a. Positions of the Parties: [ 10 ] Hilliard/S.

Peers’ principal concern was that PWC’s duty to request information from the Peers Entities and specifically to obtain information about and evaluate the claims made by the Peers Entities against Evans Ltd., particularly in respect to the mortgage claimed by FMC and the unsecured claim made by Peers Foster Inc., was incompatible with their role as trustee in bankruptcy of FMC and Peers Foster Inc. Essentially, it was argued that PWC was required to act as a forensic accountant in order to fulfill their duties in this regard. In fulfilling this role, they had a duty to all of the shareholders of Evans Ltd.

In Hilliard/S. Peers’ view, this role is incompatible with PWC’s role as trustee in bankruptcy for FMC and Peers Foster Inc., wherein their role as trustee, their duty was to maximize the value of the assets of these entities for the benefit of their creditors. Hilliard/S. Peers argued that FMC is a fiduciary in both their roles and that one of the primary duties of a fiduciary is to avoid the appearance of possible conflict. Since the appearance of potential conflict was clear, Hilliard/S. Peers argued that PWC should be removed as liquidator. [ 11 ] PWC argued that there was no actual conflict of interest.

Further they said that because they were a court appointed liquidator and a court appointed trustee in bankruptcy, their duty was as a fiduciary to the interests of all concerned parties, and not individually to any of Evans Ltd., FMC or Peers Foster Inc. Their duty was also to the court. Their obligation was to act with an even hand, and with full candour.

They argued that their position disabled them from advocating for any of the parties but instead required them to take information they obtained and disclose all material facts affecting the parties, to the parties and to the court so that the court can make a decision respecting competing claims.

As a consequence, they said that their role as forensic accountant in the litigation could never result in a an actual conflict. [ 12 ] On behalf of another group of shareholders of Evans Ltd., it was argued that the application should simply be adjourned to permit PWC to do the necessary investigations respecting the Peers Entities on the basis that it is only once this information is obtained that it would be clear whether PWC has an actual or potential conflict in carrying out their various roles.

[13] Other Evans Ltd. shareholders took no position on the issue. Some did not attend. [14] Counsel for PWC argue that cost is an important consideration in liquidation proceedings. They point out that expense anddelay will result from the appointment of an alternate liquidator. Counsel for Hilliard/S.

Peers acknowledge that replacement of theliquidator will entail some cost but argue that if PWC is permitted to continue in its dual roles, then the expense of replacement in thefuture when, as is likely, the interests of the shareholders of Evans Ltd. and the interests of the creditors of FMC and Peers Foster Inc. areplainly at odds, the costs of replacing PWC as liquidator then will be greater than they are now. b. Purpose of a Liquidation Order: [15] In Coopérants, Mutual Life Insurance Society (Liquidator of) v.

Dubois, (SCC), 1996 1 S.C.R 900, theSupreme Court of Canada discussed the role of a liquidator under the Winding -Up Act , R.S.C., 1985, c. W-11, quoting with approvalbeginning at paragraph 36 from Re J.

McCarthy & Sons Co. of Prescott Ltd. (1916), (ON CA), 38 O.L.R. 3, at p. 9,where the Ontario Court of Appeal described the purpose of a liquidation under the then Act as follows: The purpose of the Act is to wind up, finally, the affairs of the company as inexpensively and speedily as possible, in the interests of thecreditors, and all others concerned in it, primarily; and, for the common good, all are equally deprived of some of their ordinary rights,including a right of action, and all that may follow upon that right, such as mode of trial, right of appeal, etc., and all are confined to theremedies which the Act provides or permits.

At paragraph 37, the Supreme Court went on: 37 The purpose of the statute is to arrange for the closing down of the company's business in an orderly and expeditious manner whileminimizing, as far as possible, the losses and harm suffered by both the creditors and other interested parties and by distributing theassets in accordance with the Act.

The mechanism provided consists in requiring the court's leave for proceedings by the creditors [citeomitted] and giving responsibility for the company's affairs to a court-appointed liquidator, who acts as an officer of the court, under itscontrol and in accordance with its directives [cite omitted]. The court and the liquidator must respect and give effect to the creditors'rights as much as possible, taking their nature into account and not disregarding the other interests involved. As Galipeault C.J.Q. statedin Maranda-Desaulniers v.

Peckham, [1953] B.R. 163, at p. 172, the court has a discretionary power in this regard: [Translation] In making decisions, a liquidator acting under the Winding-up Act is subject only to the orders of the court (R.S.C., c. 213,s. 35), since the duty of an inspector appointed by court order for the winding-up is merely to assist and advise the liquidator in thewinding-up of the company's business (s. 41). In selling the property of a company that is being wound up, the liquidator is subject to the court's control (s. 35), and nothing in the Actitself limits the court's discretion in exercising such control.

The liquidator must of course take into account the creditors' interests andwishes, but he is not bound by what the creditors want. It is up to him to determine what actions are most likely to protect the creditors'interests. [16] The role of a liquidator pursuant to a liquidation order is therefore similar in many respects to the role of a receiver or, indeed,a trustee in bankruptcy. c. Obligations of a Court Appointed Liquidator: [17] As with a trustee in bankruptcy or a receiver, a liquidator is an officer of the court and is expected and presumed to act assuch. [18]

Section 222 of the Business Corporations Act, sets out generally the duties of a liquidator of a corporation. None of theselegislative provisions deals with the liquidator’s obligations where conflict is alleged.

[19] Canada Trustco Mortgage Co. v. York-Trillium Development Group Ltd. (1992), 12 C.B.R. (3d) 220 (Ont. C.J. - Gen. Div.)sets out the obligations of a court-appointed receiver, at 221: a. it is a fiduciary as to all interests of concerned parties and as such it is to act as an appointee of the Court in good faith;with candour; disclosing all relevant material facts affecting the parties; avoiding any real or objectively perceived conflicts of interest;and b. it has a general duty to exercise it obligations with prudence, diligence, due care and skill. [20] Both PWC and Hilliard/C.

Peers agreed through their counsel that this test was also the appropriate test for removal of a courtappointed liquidator. I concur. d. Obligations of an investigator: [21] However, the task of an investigator appointed by the court is somewhat different from that of a liquidator carrying out hisrole as a liquidator. An investigator operates under court order and is bound by the terms of that order and to the court to fulfill the termsof the order and to report to the court.

The investigator is also responsible to report to and to advise the liquidator as the representative ofthe corporation whose affairs he is asked to investigate and to report to and advise the shareholders of that corporation. The investigatorhas no obligation to the creditors of the corporation, either to report to them or to provide advice.

Indeed, the investigator has theobligation to advise the corporation and its shareholders of the merits of advancing or resisting a proprietary claim, respecting thecreditors or debtors of the corporation, and this advice may be at odds with the interests of a creditor. [22] This distinction is made clear in Re bankruptcy of Confederation Treasury Services Limited, [1995] O.J. No. 399337; C.B.R. (3d) 237 (Ont. Court of Justice, General Division) relied upon by PWC.

In Confederation Treasury the court refused anapplication by some creditors to remove a trustee in bankruptcy who had previously been involved as forensic investigator for anothercreditor. However, in making its decision, the court emphasized that the creditors requesting the removal of the trustee were in adifferent position from the shareholders of Evans Ltd.

The court said this at para 28: Thus given that Richter is the preference of the petitioning creditor (and of the ALC Committee which appears to represent apparentlyunchallenged major creditors); it has the advantage of being quite familiar with and knowledgeable of the situation from its priorinvolvement as forensic investigator; the proprietary claims have been acknowledged as complex and difficult to describe; thoseadvancing proprietary claims have had the advantage of advice from their own forensic investigators; it does not appear on the materialbefore me that Richter has any ongoing relationship with any creditor and particularly not with any creditor or claimant which may havean adverse position to the estate... e.

Test for Removal for Conflict of Interest and Factors to be Considered: [23] In YBM Magnex International Inc. (Re) [2000] A.J. No 1118, at para 36, Paperny, J. (as she then was) set out the test forremoval of a receiver for conflict of interest. She noted that the onus to remove a receiver is heavier than the onus to oppose theappointment in the first place. She quoted with approval from Tannis Trading Inc. v. Camco Food Services Ltd. (Trustee of) (1988), (ON SC), 67 C.B.R. (N.S.) 1 (Ont.

S.C. - Bankruptcy), in which the court removed a trustee because there was boththe potential for and the appearance of conflict in the circumstances, noting the caution expressed in that decision at paragraph 6: In the complex context of insolvency, it is perhaps trite to say that each case will depend on its own facts. It is not, in my view, possibleor necessary to attempt to define where the line should be drawn. No hard and fast rule can be laid down. It is a matter of degree. A firmthat it the auditor of one or more of the creditors will not ordinarily be precluded from acting as a trustee.

[ 24 ] At paragraph 39, she provided a helpful

summary of the factors typically considered by courts in determining whether to exercise their discretion to remove a receiver for conflict of interest: a. the gravity of the conflict or potential conflict; b. the receiver's qualifications, and the experience and familiarity already gained by the receiver; c. the prejudice to the estate in removing the receiver, in particular, the knowledge which would be lost and the time and costs which would be incurred in substituting a new receiver and bringing that person up to speed; d. the receiver's conduct, in particular, whether the receiver: (

i) has disclosed the conflict or potential conflict from the outset; (ii) has established measures to reduce the dangers of conflicts or potential conflicts; and (iii) has in any way acted improperly; e. delay by the applicant in alleging conflict and bringing the motion for removal; f. tactical reasons for bringing the motion for removal; and g. the wishes of various stakeholders. [ 25 ] I agree with her comments and with the factors she enumerated as setting out the test for removal of a receiver and I conclude that a similar test is appropriate where the consideration is, as here, the removal of a court appointed liquidator. f.

Application of the Test and Factors: [ 26 ] After balancing the above listed factors, I have concluded that PWC should not be replaced as liquidator of Evans Ltd. They have already begun and should continue their work to ensure that all of the shareholders of Evans Ltd. are identified. They should also continue to work to liquidate the assets of Evans Ltd.

There is no conflict alleged in respect to their work in these capacities and delay and cost to the estate would be incurred were I to order their removal. [ 27 ] However, I have concluded that PWC’s role as outlined in paragraph 9 of the liquidation order and in paragraphs 16-18 of the second order requires them to act as forensic investigators in carrying out the terms of these orders and not just as liquidator. They therefore, have a dual role and it is their role as forensic investigator that places them in a potential conflict.

Their duty as a forensic investigator to investigate, report and advise, is to the court, to the liquidator, and to the shareholders. They have no duty to the creditors of Evans Ltd. As a consequence, their role as forensic investigator is incompatible with their role as trustee of FMC and Peers Foster Inc. Objectively, there is a perception of conflict and the potential for actual conflict. g.

Conclusion: [ 28 ] It seems at least possible that there will be litigation to determine whether the Peers Entities’ claims against Evans Ltd. are or are not legitimate. [ 29 ] Depending on the results of the forensic audit, Evans Ltd. may potentially be a creditor, a debtor, or both of FMC and Peers Foster Inc. They must and will look to the forensic investigator to advise them respecting the merits and the value of any claims they have either as a creditor or a debtor to the bankrupt corporations.

The recommendations they give may be adverse in interest to the other creditors of FMC or Peers Foster Inc., or both of them. [ 30 ] If Evans Ltd. considers it appropriate to deliver a proof of claim, in respect to FMC or Peers Foster Inc., PWC, acting in their role as trustee of these entities, will be obliged to examine it and to determine whether to allow the proof of claim and, if so, whether to accept the value assessed by the forensic investigator.

If PWC were to continue to act as forensic investigator to evaluate Evans Ltd.’s claims against FMC and Peers Foster Inc., I cannot see how the shareholders of Evans Ltd. could be satisfied they can rely upon PWC’s evaluation of and advice respecting the validity of these claims, given their competing obligations to the other creditors. This is the clear distinction in this case from that of Re bankruptcy of Confederation Treasury Services Limited . In Confederation Treasury Farley, J. pointed out that each of creditors had the advantage of advice from their own forensic investigators, upon which they could rely.

[ 31 ] Unlike the situation in Confederation Treasury , Evans Ltd. would not have the advantage of advice from its own forensic investigator if PWC was permitted to continue to act in that role.

If PWC were to offer advice specifically to Evans Ltd., PWC’s obligation to be even handed among the creditors of Evans Ltd., PWC and Peers Foster Inc. could not be maintained. [ 32 ] I direct therefore that the parties choose a forensic investigator from an accounting firm separate from PWC as forensic investigator in respect to the questions raised in paragraph 9 of the liquidation order and paragraphs 16 to 18 of the second order. Mr.

Gerald Smith of the firm of Deloitte Touche was suggested by PWC’s counsel, and has already indicated to that counsel that he has no conflicts in acting in this role and would act. Provided that counsel for Hilliard/S. Peers agree and provided there is no objection from other shareholders, which objection must be raised forthwith on release of these reasons if it is to be made, I direct that Mr.

Smith be retained as forensic investigator with the duty to report to the shareholders of Evans Ltd. and to the Court and the duty to advise the shareholders of Evans Ltd. respecting the potential claims by and against the Peers Entities. [ 33 ] Costs may be spoken to, if necessary, at the next case management meeting. Heard on the 7 th day of March, 2011. Dated at the City of Edmonton, Alberta this 10 th day of March, 2011. D.C. Read J.C.Q.B.A. Appearances: Brian W. Summers for Cameron Crofton James K. McFadyen, Q.C. for Simon Peers and Virginia Hilliard Kentigern A.

Rowan for Price Waterhouse Coopers, Liquidator of H.M.E. Evans & Company Michael J. McCabe, Q.C. for Price Waterhouse Coopers, trustee in bankruptcy of Federal Mortgage Corporation Ltd.

SCHEDULE A December 9, 2008 JAMES K. MCFADYEN DIRECT DIAL: (780) 423-8550 EMAIL: jmcfadyen@parlee.com OUR FILE #: 64290-1/JKM via email Attention: Donald R. Cranston, Q.C. Bennett Jones LLP Barristers & Solicitors 1000, 10035 - 105 Street Edmonton, AB T5J 3T2 Dear Sir: Re: H.M.E. Evans & Company Ltd Mr. Garber advised me that it was agreed at the meeting held November 11 that we should provide, in writing, our clients’ request for information regarding the affairs of H.M.E. Evans & Company Ltd. (“HME”). The following information and documentation has been requested: 1.

Documentation filed at Corporate Registry in May, 2002 indicates that HME was a shareholder of Peers Foster Christianson Inc. (“PFK”). We require particulars of HME shareholdings in PFK and particulars of how and when HME disposed of its interest in PFK. 2. Particulars of all dealings between HME and PFK, or any other Corporation in which Jay Peers or his sons have or had a legal or beneficial interest, including, without limiting the generality of the foregoing, any transfer of assets, monies, or loans; 3.

Particulars of the sale of commercial lands in Nisku (Plan 8121752; Lot 2) from HME to PFK on or about June 26, 2003; including documentation that the purchase price represented fair market value and was, in fact, paid by PFK to HME, and, an accounting with respect to the sale of those lands on or about July 23, 2008. 4. An accounting with respect to the sale proceeds from the sale of the Frasrock Building 5. An accounting of all proceeds realized from the realization of mortgages beneficially owned by HME, as mortgagee, and particulars of any remaining mortgages or other loans made by or on behalf of HME.

6. An accounting with respect to the loans receivable from Superfund, Vertigo Technologies Inc. and Federal Mortgage Corporation Limited as described in the 2001 HME Financial - 2 - Statements. Also, particulars of the advances to subsidiary and investment in subsidiary referred to in the 2007 Financial Statements. 7. Particulars of the management fees referred to in the in 2007 Financial Statements 8. Particulars of Notes Payable referred to in the 2007 Financial Statements 9.

Particulars of the income generated by Jay Peers for the benefit of the shareholders of HME as referenced in your email of November 3, 2008 10. The information requested in our letter to HME dated August 25, 2008, a copy of which is attached. The foregoing is not an exhaustive listing of the questions our clients have or may have relating to the business of HME and related matters. However, full disclosure of the information requested herein will be of assistance in our clients reviewing the business of HME Evans & Company Ltd. Yours very truly, PARLEE McLAWS LLP JAMES K.

MCFADYEN JKM/sl encls. cc John Henderson, Q. C. Fraser Milner Casgrain via email Don Bishop. Q.C. Bishop & McKenzie via email August 25, 2008 JAMES K. McFADYEN, Q.C. DIRECT DIAL: (780) 423-8550

EMAIL: jmcfadyen@parlee.com OUR FILE #: 67409-1 JKM H.M.E. Evans & Company Limited 11207 - 103 Avenue Edmonton, AB T5K 2V9 Attention: Rob Peers Dear Sir: Re: Simon Peers and Virginia Hilliard We are the solicitors for Simon Peers and Virginia Hilliard. As you are aware, Jay Peers, personal representative of the Estate of C.L. Melsom, assigned and transferred onto our clients, Class “A” Common Shares in H.M.E. Evans & Company Limited. A copy of the transfers are attached. We understand that an Annual General Meeting of the Shareholders of H.M.E.

Evans & Company Limited has been scheduled for September 4 and 5, 2008. In accordance with Sections 21 and 23 of The Business Corporations Act (Alberta) , we require copies of the following corporate records:

a) Minutes of all Directors’ meetings held since May 6, 1 999 and copies of all Resolutions of the Directors since May, 1999;

b) Minutes of all Shareholder meetings held since May, 1999, including the Minutes of the last Annual General Meeting of the Shareholders;

c) Copies of all financial statements prepared by the Corporation’s accountant since the last Annual General Meeting of the Shareholders;

d) The reports of the auditors since the last Annual General Meeting of the Shareholders;

e) Particulars of all acts, contracts, by-laws, resolutions, proceedings, decisions and payments made, done and taken by the Directors and Officers of the Corporation since the last Annual General Meeting of the Shareholders. -2-

We will pay your reasonable costs in providing copies of these records. Thank you. Yours truly, PARLEE McLAWS LLP per: J. K. McFADYEN JKM/sl cc: Don Cranston, Q.C. Bennett Jones John Henderson, Q.C. Fraser Milner Casgrain