HSBC Bank Canada v., 2011 ABQB 748

Court of Queen ’ s Bench of Alberta Citation: HSBC Bank Canada v. 1100336 Alberta Ltd. (Incredible Electronics Wholesale), 2011 ABQB 748 Date: 20111202 Docket: 0403 19158 Registry: Edmonton Between: HSBC Bank Canada Plaintiff - and - 1100336 Alberta Ltd. carrying on business as Incredible Electronics Wholesale; Electronics Wholesale (Edmonton) Ltd., Incredible Electronics Inc., Ariza Technology Inc., HBC Business Credit Inc., David Fuss, Cameron Kendrick and Rhonda Thuna Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice E.A.

Marshall _______________________________________________________ I. Introduction.............................................................................................................. Page: 2 II. The Parties............................................................................................................. Page: 3 III. Issues...................................................................................................................... Page: 3

IV. The Facts................................................................................................................ Page: 4 A. Chronology of Events................................................................................. Page: 4 B. Credibility.................................................................................................... Page: 6 C. The Bank Loan........................................................................................... Page: 7 D. Payments from the TD Account................................................................ Page: 8 E.

The Relationship Between 828, EWE and 1100.................................... Page: 8 F. Mr. Kendrick’s Fraud............................................................................... Page: 10 G. The Relationship of Ariza and HBC to 828........................................... Page: 11 V. The Law................................................................................................................ Page: 11 A. An Agreement or Common Design....................................................... Page: 12 1. Mr. Kendrick and Mr. Fuss..........................................................

Page: 12 2. Ms. Thuna..................................................................................... Page: 13 B. Unlawful Conduct..................................................................................... Page: 14 1. Director’s Duties.......................................................................... Page: 15 2. Direct Duties to HSBC................................................................ Page: 16 3. Fiduciary Relationship of Directors to Their Corporations...... Page: 17 4. Unlawful Activity - Conclusion..................................................... Page: 18 C.

Was the Unlawful Conduct Directed towards the Bank?..................... Page: 18 D. Should the Defendants have Known that Injury to the Bank was Likely to Result? Page: 19 E. Did the Conduct Cause Injury to the Bank?.......................................... Page: 19 F. Conclusion - Unlawful Act Conspiracy................................................... Page: 19 VI. The Defences....................................................................................................... Page: 20 A. Contributory Negligence......................................................................... Page: 20 B.

The Change to the Course of Conduct by the Bank............................. Page: 20 C. Counterclaim of Ariza and HBC............................................................. Page: 21 VI. Damages.............................................................................................................. Page: 24 VII. Judgment.............................................................................................................. Page: 25 VIII. Costs..................................................................................................................... Page: 25

I. Introduction [ 1 ] The Plaintiff, HSBC Bank Canada (“the Bank” or “HSBC”), alleges a conspiracy by the Defendants David Fuss, Cameron Kendrick and Rhonda Thuna, and the Defendant companies controlled by these parties, to prevent the Bank realizing a debt owing by a corporation, 828326 Alberta Ltd. (“828”). The Bank alleges the damages it sustained exceeded $1,750,000.00. [ 2 ] The Defendants Ariza Technology Inc. (“Ariza”) and HBC Business Credit Inc. (“HBC”) counterclaim against the Bank for negligent misrepresentation.

Ariza and HBC allege they sustained $600,000.00 in damages as a result of the Bank’s negligent misrepresentation. Ariza and HBC did not pursue their counterclaims for trespass and interference with economic relations at trial. II. The Parties [ 3 ] The Bank began providing financing to 828 in 2001. Initially, Mr.

Kendrick was the only director and shareholder. 828 operated under the name of Electronics Wholesale and was a wholesale and retail distributor of satellite systems and other electronic products. [ 4 ] The Defendants Ariza Technology Inc. (“Ariza”), HBC Business Credit Inc. (“HBC”) and Incredible Electronics Inc. (“Incredible”) were Ontario corporations controlled by Mr. Fuss. Incredible and Ariza were suppliers of 828. In February 2003, HBC became a 50 percent shareholder of 828. [ 5 ] Mr. Fuss is a businessman residing in Toronto.

He was a director of the Defendant 1100336 Alberta Ltd. (“1100”), Ariza, HBC and Incredible. Ms. Thuna is the wife of Mr. Fuss. She was a director of Ariza and HBC, and she was also a director of 828 from February 2003. [ 6 ] The Defendant Electronics Wholesale (Edmonton) Ltd. (“EWE”) was created in July 2003. The signing officers for its bank account created early February 2004 at the Toronto Dominion Canada Trust Bank (“TD”) were one of Mr. Kendrick and 828’s controller, Chelsey Kernaghan, and one of Mr. Fuss and Ms. Thuna. Ms. Thuna was a director of EWE. [ 7 ] 1100 was incorporated on April 1, 2004 and Mr.

Fuss and Benjamin Kendrick (the father of Cameron Kendrick) were the officers and directors. Benjamin Kendrick was not named as a defendant; he was the nominee of Cameron, his son. [ 8 ] Cameron Kendrick represented himself at the trial and chose not to testify. He alleged some facts in his written argument after the trial that I must ignore. The facts were not proven by evidence under oath or otherwise. His father is not a party to this legal action. III. Issues [ 9 ] This case raises the following issues: 1.

Do the Defendants’ actions from February 4, 2004 onwards amount to a conspiracy against the Bank to deprive the Bank from recovering the debt owing by 828? 2. If the Bank establishes a conspiracy, can the Defendants defend on the basis that:

a. the Bank was contributorily negligent, or b. the Bank established a course of conduct with 828 and failed to give reasonable notice of its intention to return cheques NSF? 3. If the Bank establishes a conspiracy, what is the appropriate award and apportionment of damages? 4. Is the Bank liable to HBC and Ariza in their counterclaim for negligent misrepresentation? IV. The Facts [ 10 ] Most of the relevant facts are not seriously in dispute. The major disagreements are the inferences to be drawn from the facts and their legal application. I conclude the facts are as follows: A.

Chronology of Events [ 11 ] In 2001, Mr. Kendrick advised the Bank that the business of 828 was expanding and he needed to establish an operating line of credit to finance inventory purchase. Allan Selley was the Bank’s account manager for 828 and arranged for the operating line of credit. As security for its debt, 828 executed a General Security Agreement (“GSA”) April 26, 2001. It granted the Bank a charge on all the personal property of 828, including its goodwill, revenues, income contract agreements, book debts, accounts receivable and all other property and things of value.

The Security Agreement also states that any money collected or received as proceeds or in respect of accounts, contractual rights or rights to payment were subject to a trust in favour of the Bank. [ 12 ] The authorized maximum for the line of credit increased over time. The line of credit was $350,000.00 in December 2001. In April 2002 an increase in the credit limit to $500,000.00 was approved. Mr. Kendrick provided the Bank with statements of profit and loss, balance sheets, unaudited financial statements, statements of accounts receivable and accounts payable for 828 as well as inventory lists.

A further increase occurred in June 2002 to $620,000.00, followed by a temporary maximum of $650,000.00 in December 2002. [ 13 ] In February 2003, HBC became a 50% shareholder in 828. Mr. Fuss testified that a major reason he chose to have HBC invest in 828 was his telephone conversation with Mr. Selley, which probably took place in January 2003. Mr. Selley denied that any such conversation ever took place. He claimed to have never spoken to Mr. Fuss until a meeting in Edmonton in June 2003. I conclude Mr. Fuss did speak to Mr.

Selley in January 2003, although the conversation did not exceed five minutes in length. I come to that conclusion because the details related by Mr. Fuss were not entirely favourable to his position and because after he became a shareholder, he was provided with a special software program from the Bank, Hexagon, which permitted him to view all cheques issued on the account and to generally have access to the 828 account. I am satisfied access to that tool would be unlikely without his communication with Mr. Selley. [ 14 ] I accept Mr. Fuss’ evidence that Mr.

Selley told him that 828 was over trading and in need of capital, but that he felt Mr. Kendrick was a good businessman and a hard worker. He said Mr. Kendrick had invested $500,000.00 in 828. Mr. Selley received regular financial reporting from 828. Mr. Fuss was told that 828 was sometimes at the top of its line of credit. Mr. Fuss was also pleased to learn that no guarantee from him would be required by his company HBC becoming a shareholder and his wife, Ms. Thuna, a director. Later in this decision I will have more to say about this conversation between Mr. Fuss and Mr.

Selley and its significance. [ 15 ] After Mr. Fuss became involved in 828, Mr. Kendrick remained at all times the representative who dealt with the Bank.

During 2003, 828 often exceeded the operating loan limit with the Bank. On January 12, 2004, the Bank granted a temporary increase in the operating loan limit to $800,000.00 until January 31, 2004. On January 29, 2004, 828 owed $862,000.00 on its operating line. From January 1 to 29, 2004, 828 had been over its lending limit all but two days, January 12 and 13. [ 16 ] I am satisfied that Mr. Selley frequently threatened Mr. Kendrick to dishonour cheques of 828 in January 2004 and earlier. It seems clear that Mr. Kendrick did not believe Mr. Selley would carry out his threats.

But on January 29, 2004, cheques of 828 which had come in on January 28 were returned NSF. Later that day, the Bank served a written notice on 828 that further cheques would be dishonoured. Mr. Kendrick had been assuring Mr. Selley that Mr. Fuss was going to put additional money into the company and when Mr. Selley had contacted Mr. Fuss, Mr. Selley was first told Mr. Fuss would get back to him. Subsequent telephone calls to Mr. Fuss were not returned. Mr. Kendrick had initially stated that Mr. Fuss would be putting in $100,000.00 and then indicated $70,000.00. On January 30, 2004, Mr.

Fuss deposited $35,000.00 to the Bank in Toronto, so Mr. Selley cleared the cheques for that day. A second deposit from Mr. Fuss never occurred. [ 17 ] From February 4, 2004 all 828 cheques were dishonoured and the Edmonton office of the Bank decided to transfer conduct of the 828 account to the Special Credit Group of the Bank in Vancouver. [ 18 ] At the beginning of February 2004, Mr. Fuss and Mr. Kendrick decided to continue the business of 828 by opening an account with TD in Edmonton.

On February 4, 2004, the account was opened and from that point on all receivables coming to 828 were deposited in this TD account. The account was not directly linked to 828 but instead opened in the name of a separate corporation, EWE. [ 19 ] Todd Hayward, the manager of the Special Credit Group of the Bank, met with Mr. Kendrick in February 2004 in Edmonton and was told that Mr. Kendrick and Mr. Fuss had opened an account with TD and that all proceeds generated from the collection of 828’s receivables and from the sale of inventory were being deposited to the TD account. Mr.

Hayward was not however told the business was operating under EWE and that the account belonged to that corporation. [ 20 ] Mr. Fuss and Mr. Kendrick subsequently incorporated 1100386 Alberta Ltd. on April 1, 2004. 1100 took over the operation of the 828 business, including its stock, receivables, and employees. [ 21 ] On March 8, 2004, the Bank made demand for payment. On March 28 and 29, 2004, Price Waterhouse Coopers (“PWC”) was retained by the Bank. Despite the change of banking to the TD account, $135,000.00 was paid to the Bank by electronic deposits.

The amount of principal remaining owing is $690,747.58. [ 22 ] In June 2004, PWC became the privately appointed receiver and manager of the business and undertakings of 828. On July 6, 2004, the Bank petitioned 828 into bankruptcy. PWC’s recovery from 828 was negligible; the receiver found the remaining stock was only receiver cases without the valuable electronic hardware. 828’s records were not recovered as its computers’ hard-drives had been wiped clean. [ 23 ] The last inventory listing that the Bank received from 828 at any time prior to 2004 was the November 2003 inventory listing.

The Bank does not have records showing which specific items of inventory were sold between November 2003 and the end of February 2004. [ 24 ] 1100 ceased operation in 2005. B. Credibility [ 25 ] I have no serious concerns as to the reliability of the Plaintiff’s witnesses other than certain issues with Mr. Selley’s testimony, which I will discuss further. I accept PWC’s conclusion that when it took control of 828 it encountered a company that had been effectively deprived of its valuable assets, staff, and records.

[ 26 ] Mr. Fuss and Ms. Thuna present themselves as innocent third-parties caught up in Mr. Kendrick’s web. They say they did not know of the extent of 828’s difficulties and the illegal conduct by Mr. Kendrick as his businesses failed. [ 27 ] I conclude that Mr. Fuss is not honest when he says he did not know Mr. Kendrick intended to shield the surviving 828 assets by illegal means. Mr. Fuss says he always thought EWE and 1100 would repay 828’s debts. I do not believe that is correct, rather Mr. Fuss was a full participant in the effort to move 828’s business and assets to a new corporate shelter.

I accept that Mr. Fuss may have not known the details of how that plan was executed, but nevertheless he was aware of Mr. Kendrick’s overall intentions, and cooperated to that end. [ 28 ] Similarly, I question Ms. Thuna’s claim that she participated in the various transactions in name only, and only followed Mr. Fuss’ instructions. Ms. Thuna testified that she agreed to take the various director and officer positions at her husband’s request. She says she never inquired of her duties as a director of 828 nor any obligations she had to 828 as a result.

She did not understand a director’s obligation to a corporation of that nature. [ 29 ] While I do believe that Mr. Fuss was the person who generally directed Ms. Thuna, I do not think she was as uninvolved as she says. I note her participation in Mr. Fuss’ various enterprises, and that Mr. Fuss has experienced corporate bankruptcy. C. The Bank Loan [ 30 ] The Bank loan was a demand operating loan or operating line of credit in the nature of an overdraft. If the operating line went above its authorized limit and if cheques were not covered within the period for return, Mr.

Selley submitted a credit excess report to the person whose limit it was within. [ 31 ] The records at trial clearly indicate that from June 2001 until the end of January 2004, 828 operated above its authorized line of credit about 40 percent of the time. [ 32 ] There was a factual issue which arose respecting Mr. Selley’s evidence. He stated when speaking of the overdrafts in December 2003 and January 2004, that before permitting any excess above the approved loan level, he first obtained the consent of the branch manager, R.L. Strain. Mr.

Selley stated that there was always a brief memo to that effect although such documents were never produced by the Bank. [ 33 ] Counsel for Mr. Fuss challenged the veracity of such evidence by referring to the discovery of Mr. Selley. In the discovery, Mr. Selley admitted authorizing increases without authority of any other member of the Bank in July and August 2002. I do not find such evidence to be in conflict because the periods in question were about 18 months apart and Mr. Selley may have possessed that authority on the earlier dates. [ 34 ] There was also an issue about whether Mr.

Selley had been given favourable treatment by 828 in receiving a free barbeque and satellite equipment. It was also alleged that Mr. Selley had a subscription to Direct TV, a ‘gray market’ product from the U.S., and that this subscription was paid through Mr. Kendrick’s VISA account. [ 35 ] Mr. Selley denied receiving such benefits; he stated that Mr. Kendrick did not pay for his Direct TV service and that he had not received gifts of the barbeque and satellite equipment. I do not accept the evidence of Mr. Selley on this issue because I accept the evidence of Ms.

Kernaghan who testified of the benefit to him received from all three items. I found Ms. Kernaghan to be an honest, impartial witness. She was closely involved in the business of 828 and had a good recall of events. [ 36 ] Nothing turns on provision of these gifts, other than these actions indicate improper conduct of both Mr. Kendrick and Mr. Selley. D. Payments from the TD Account

[ 37 ] There was a further issue respecting payments made from the EWE TD account to Ariza and Incredible Electronics. These payments occurred after the 828 HSBC account had been frozen. [ 38 ] Mr. Fuss admitted he heard about the Bank’s demand for payment about 10 days after it occurred on March 8, 2004. From March 17 until March 30, 2004, eleven cheques of $5,000.00 each were paid to Ariza, and during April until May 7, 2004, twenty-one further $5,000.00 cheques were issued. Four cheques of $10,700.00 each were also paid during April for a total of $202,350.82. [ 39 ] It was the sworn testimony of Mr.

Fuss that all the EWE payments were for new stock delivered to the 828 business in Edmonton. He stated that due to the substantial amount of money owing to his companies that he was not prepared to make any further sales to the business without assurance of payment. His evidence is challenged, however, by the fact that when the cheques were issued, the cheque stubs for each of them showed the cheques were for payment of invoices issued by Ariza, Incredible or another associated company of Mr. Fuss dating from 2003. I find Mr.

Fuss’ evidence difficult to accept in this respect because he claims that the business simply placed a reference to a particular invoice because of an impossible accounting requirement. However, in the age of emails and faxes, it would have been simple for the business to simply refer to the new invoice being issued by the supplier for new product. [ 40 ] I do not accept Ms. Kernaghan’s evidence that all payments were made for new product. She was not privy to the writing of all cheques under the new banking arrangement. She was relying on what Mr. Kendrick told her.

I conclude the payments to Ariza and Incredible Electronics were not made for new inventory only. 828, EWE and 1100 gave priority to payment to Ariza and Incredible Electronics over HSBC. E. The Relationship Between 828, EWE and 1100 [ 41 ] Reconstruction of the exact interrelationship between 828 and its ‘successors’, EWE and 1100, is difficult because in many ways these businesses were not operationally distinct. Further, I conclude from the evidence at trial that at least some of the records of the corporations’ activities and property are incomplete, inaccurate or purposively misrepresent the truth.

Other records have disappeared or been destroyed. [ 42 ] At one point 828 transferred its employees, business, stock, and receivables to 1100. At trial, and many years later it is difficult, if not impossible, to reconstruct just how that process occurred, and there is no certainty that any documentation of that transfer relates in any way to what actually occurred.

As observed above, the Defendants’ documentary evidence is very suspicious, at best. [ 43 ] Nevertheless I am satisfied that I can conclude on a balance of probability that 828’s property and operations were transferred to EWE and 1100, and that transfer was not for fair market value. I believe the best conclusion is that the funds in EWE’s TD account actually belonged to 828. In this sense, EWE’s role was merely as a convenient ‘front’ while Mr. Fuss and Mr. Kendrick set up 1100.

EWE’s business was, in fact, 828’s. [ 44 ] At a later point 1100 received the remaining valuable 828 property, employees, and business activities. Nevertheless, the same underlying business and commercial activity occurred in each corporation. To be explicit, I do not have a way to separate the EWE and 1100 businesses.

They both are successors of 828 and carried on 828’s business. [ 45 ] The transfer of assets and personnel to 1100 could be characterized as either: 1. a legitimate attempt to continue a business after 828’s credit was frozen, or 2. an attempt to strip 828 of its assets and leave it to sink with its debt.

[46] Mr. Fuss argues that EWE operated the business in trust for 828, and that this successor corporation would have paid 828’sdebts as the business continued. If true, that would favour the first alternative. Since I cannot effectively separate EWE from 1100, Iconclude that Mr. Fuss’s argument that EWE acted as a trustee for 828 also extends to 1100. [47] I observe it is not impossible the Defendants’ scheme to use 1100 to continue the business and repay 828’s debts was agenuine and legal attempt to salvage 828.

However, I do not believe that is the case, as I note: 1. 828 and 1100 never made any further payments of 828’s debts, 2. Mr. Kendrick (and potentially other persons) deleted 828’s financial and business records, 3. Mr. Kendrick overvalued and overstated 828 assets, and 4. there was no legitimate business reason to incorporate 1100. [48] Mr. Fuss faces a real difficulty to explain his claim that the attempt to salvage 828 was genuine. The cornerstone of anyattempt to save 828 is that 828’s debt be brought under control. Mr. Fuss acknowledges he had access to 828’s line of credit records.

Hereceived telephone calls from bank staff complaining about 828’s liabilities. He knew that 828 was in trouble, that was obvious simplyfrom the difficulty Mr. Fuss had in recovering amounts owed to his companies. If Mr. Fuss knew there was significant economic activityin post-freeze 828 and then 1100, he should have checked to see if 828’s debts were being paid, and if not, then why. Mr. Fuss was onthe board of directors for 1100, a corporation that had a fiduciary duty to 828 to keep that company solvent.

Yet he says he had little tono idea what was going on or did not investigate, which is inconsistent with the fact his companies were supplying products to 828 andtightly involved with 828’s operations. [49] Ms. Thuna was also a director of a troubled corporation (828), and one would expect that even a relatively uninformedlayperson would want to investigate why: 1. none of 828’s post-credit freeze income was applied to the 828 debt to the Bank, and 2.

EWE and 1100 had significant income, which allegedly was in trust for 828, and yet none of that income reached 828 andaddressed its outstanding obligations. [50] I find it very unlikely that any person who hears a company for which they are a director would react casually to the newsthat corporation was bouncing cheques and had a debt approaching a million dollars. Yet Ms. Thuna testified she followed Mr.

Fuss’sorders and did not really understand what was going on. [51] My conclusion on a balance of probabilities is that the transfer of property from 828 to 1100, and the use of the EWE bankaccount represent an intentional and deliberate process designed to sequester 828’s assets in 1100, and leave 828 with the liability toHSBC. To put it another way, the plan was that HSBC have a right to advance its claim on an empty, worthless corporation. [52] Given that conclusion, 1100 had no legitimate business purpose. That corporation was created solely for the purpose ofdefeating a creditor claim.

While the Defendants used a recognized legal arrangement, their conduct is no more equitable than thedefendant in Mercedes-Benz Financial v. Kovacevic, [2009] O.J. No. 783, (Ont. Sup. Ct. J.), who purported to splithimself via contract into a “flesh and blood living man”, and a “juristic person\strawman\legal entity”, with property belonging to theformer and debts to the latter. F. Mr. Kendrick’s Fraud

[53] I accept the evidence at trial that HSBC and PWC found that 828’s accounting, transaction, and stock information wasmisleading or incorrect. Further, I find on a balance of probabilities that 828’s electronic records were intentionally destroyed. [54] I believe Mr. Kendrick is directly responsible for these acts. He was the person ‘on site’ and in control of the records at therelevant times. He certainly had a motivation to first make it appear 828 was a viable business and then cover up his deception. Together,this misconduct is properly characterized as fraud. [55] I am uncertain to what degree Mr.

Fuss and Ms. Thuna knew of the details of Mr. Kendrick’s fraudulent activities. They denythey knew what had happened. While I am suspicious that their testimony is false, I do not have the evidence to prove that on a balanceof probabilities. That said, I am confident Mr. Fuss and Ms. Thuna were aware of, endorsed, and played their parts in the transfer of828’s business to 1100. G. The Relationship of Ariza and HBC to 828 [56] I conclude that corporate Defendants Ariza Technology and HBC Business Credit are only linked to 828, EWE and 1100 bycontract. In parallel to Agribrands Purina Canada Inc. v.

Kasamekas, [2011] ONCA 460, the involvement of these corporations is notsufficient to attract liability as a part of a cival conspiracy. I will not generally examine the relationships of these parties further in thisdecision. V. The Law [57] The Bank advances its claim on the tort of civil conspiracy of the second category, unlawful conduct conspiracy. Followingthe law set out by the Supreme Court in Canada Cement Lafarge v. B.C. Lightweight Aggregate, (SCC), [1983] 1S.C.R. 452, 145 D.L.R. (3d) 385, the Ontario Court of Appeal recently restated the relevant legal test in Agribrands Purina Canada Inc.v.

Kasamekas, [2011] ONCA 460. The Court said at para. 26: [26] For the appellants to be liable for the tort of unlawful conduct conspiracy, the following elements must therefore be present:

a) they act in combination, that is, in concert, by agreement or with a common design;

b) their conduct is unlawful;

c) their conduct is directed towards the respondents;

d) the appellants should know that, in the circumstances, injury to the respondents is likely to result; and

e) their conduct causes injury to the respondents. See also Saxton v. Credit Union Deposit Guarantee Cor., 2006 ABCA 175 at para. 21, 384 A.R. 309. [58] I will review each of these criteria individually, though in certain instances my findings of fact and credibility will applyacross several steps of the test.

A. An Agreement or Common Design [ 59 ] In unlawful conduct conspiracy the “agreement” or “common design” does not need to amount to a formal contract. However, the parties must actually enter into an agreement, as opposed to merely being in agreement. In other words, a common intention independently arrived at by several persons is insufficient to establish the existence of an agreement or combination in conspiracy. Communication and coordination is required.

Furthermore, in order to be a party to conspiracy, one must know the facts of the alleged agreement or common design and have intended to be a party to the common design: Maguire v Calgary , 1983 ABCA 121 at para 12 , 146 D.L.R. (3d) 350. Knowledge of or acquiescence to the impugned course of conduct is not, in itself, sufficient to render one a party to the conspiracy. 1. Mr. Kendrick and Mr. Fuss [ 60 ] I have concluded that Mr. Kendrick and Mr. Fuss actively conspired to defeat the Bank’s ability to recover 828 assets and funds, and that 1100’s trustee role was always a sham. It is clear that Mr.

Kendrick and Mr. Fuss came to an agreement after the Bank returned 828’s cheques to operate the business through an account at the TD. They became signing officers along with Ms. Thuna and Ms. Kernaghan. The incoming cheques to 828 were diverted to this account and all sales of inventory were also diverted. They used the name of a different corporation, Electronic Wholesale (Edmonton) because it was very similar to the Electronics Wholesale trade name 828 had used. By that action, funds which could be used by the Bank were placed out of reach. In addition, Mr. Kendrick and Mr.

Fuss incorporated a further company, 1100, on April 1, 2004 to use the same goodwill business to continue sale of the inventory and collect receivables of 828 albeit at a different location in Edmonton. [ 61 ] The TD account had over $1.2 million deposited to it over the period February to June 2004. During that period, Mr. Kendrick and Mr. Fuss, particularly Mr. Kendrick, ostensibly made some effort to negotiate an arrangement to retire the 828 debt by monthly payments, but no agreement was concluded. While Mr.

Kendrick told the Bank through Todd Hayward of the existence of the TD account, he was not forthcoming with Mr. Hayward’s and PWC’s request for documentation respecting inventory and accounts receivable. I conclude that EWE never was an entity which formally conducted 828’s business, its role was little more than as a front under which 828’s business was continued. [ 62 ] In June, when PWC entered the 828 business premises as receiver there were no accounting records, such as invoices. All accounting information on the computer hard-drives had been erased. I am satisfied Mr. Kendrick was responsible for this.

He refused to provide the password to PWC. Such documentation that was produced by Mr. Kendrick was inaccurate. The statement of values of inventory were very inflated. However, I cannot impute that Mr. Kendrick’s conduct in this respect was part of any agreement with Mr. Fuss. [ 63 ] The Bank alleges that Mr. Fuss and Ms. Thuna along with Mr. Kendrick knew the accounts receivable of 828 were trust funds under the terms of the GSA. Accordingly, it is submitted that the diversion of funds from February 2004 amounted to fraud. While Mr.

Fuss, through HBC, had become a 50% shareholder of 828 early in 2003 and had electronic access to the bank account, can knowledge of the terms of the GSA be imputed to Mr. Fuss? Mr. Fuss was a very experienced businessman who had previous experience with insolvencies. While there is no proof he ever saw the terms of the GSA, it seems significant that when HBC became a shareholder and loaned funds to 828, it received a GSA which included a somewhat similar clause to the Bank’s making all accounts receivables trust funds although after notice and default. This certainly leads to a strong suspicion that Mr.

Fuss was aware accounts receivables of 828 were trust funds of the Bank. [ 64 ] To make a finding of fraud necessitates clear evidence of knowledge on the part of Mr. Fuss. I readily conclude that Mr. Kendrick’s knowledge and action amounts to fraud; there was substantial evidence of dishonesty on his part toward the Bank, but I cannot find Mr. Fuss or Ms. Thuna were aware of the trust and engaged in fraud. [ 65 ] That said, my analysis in relation to unlawful conduct indicates the question of fraudulent misconduct is in a sense irrelevant. I am confident that Mr.

Fuss assisted in the formation of 1100 and its receipt of the 828 business and assets. During that process Mr. Fuss knew that 1100 did not receive those assets for fair market value. Mr. Fuss admitted as much; he said 1100 held 828’s assets in trust.

[66] I find the agreement between Mr. Fuss and Mr. Kendrick was: 1. to prevent the Bank access and recovery of 828’s account receivables, and that was achieved by depositing incoming in the EWETD account, and later in 1100, 2. continuing the business under the EWE ‘flag of convenience’, and 3. transferring 828’s business and assets to 1100, with no apparent intention that 1100 repay any of 828’s outstanding debts. That in effect also meant that Mr. Fuss and Mr. Kendrick agreed to repay some of the debt to Ariza in preference to making payments tothe Bank. 2. Ms. Thuna [67] Ms.

Thuna testified that she had no knowledge of the scheme. Ms. Thuna was a director of 828 from early in 2003. She wasalso a director of Ariza and EWE, and a bank signing officer for 1100. She testified that she agreed to take the various positions at herhusband’s request. [68] At trial Ms. Thuna testified her role was negligible and passive; she never inquired of her duties as a director of 828, nor anyobligations she had to 828 as a result. She did not understand a director’s obligation to a corporation of that nature.

I did not find Ms.Thuna a credible witness, and conclude that she attempted to minimize her knowledge and participation in the plan to strip 828 of itsassets and defeat the Bank’s claims. [69] Since Ms. Thuna was a director of 828 and became a signing officer and director of EWE she was quite aware that thebusiness of 828 had been taken over by EWE. She was also a signing officer of 1100 and I can properly infer she knew it had now takenover the business that EWE had assumed. I accept the Bank’s contention that if she did not know harm to the Bank would occur, she waswilfully blind.

However, I do not think she was wilfully blind because I am able to conclude, on a balance of probabilities, that Ms.Thuna was quite well aware that 828 was in trouble, and that its business was at first operating as EWE and then transferred to 1100. [70] There are judgments where a court has concluded a director held that position “in name only”, and ought not be liable as adecision maker. For example, in Fitzgerald v.

Minister of National Revenue, (TCC), [1991] 2 C.T.C. 2595, 92D.T.C. 1019 (T.C.C), Mogan T.C.C.J. concluded that: ... when the passive or inactive director has become a director in the context of a family business operated by a corporation which isdominated by an uncompromising patriarch, the domestic responsibility for maintaining harmony within the family becomes interwovenwith the legal responsibility to third parties and, in these circumstances, I think that it is not reasonable to impose the same standard ofcare, diligence and skill on the passive 'family director' as on the person who is truly free to become a director and does so outside afamily context.

See also Khan v. Canada, [1999] G.S.T.C. 7, 7 G.T.C. 3068 (T.C.C.). [71] That is not the situation here. I do not believe Ms. Thuna’s claims that she had essentially no knowledge of the relevantcorporate operations and developments. Neither do I see her as an entirely passive assistant of her husband. I have no doubt Mr. Fuss wasthe principle decision-maker of the couple, but that does not mean Ms. Thuna did not acquiesce to someone else’s decision, rather shewillingly carried out Mr. Fuss’s instructions, and knew their effect. B. Unlawful Conduct

[ 72 ] The Agribrands Purina Canada Inc. v. Kasamekas case shows the unlawful conduct that is a basis for civil conspiracy must be actionable. It must be wrong in law (para. 33). [ 73 ] If the alleged misconduct is a breach of 828’s contract with the HSBC, then the illegal conduct is by 828 , which is not a defendant in this action. The Defendants are either involved corporations or the directing minds of those corporations. For corporations such EWE and 1100 it is useful to simply look past the corporations to the persons who controlled the activities of those corporations.

For example, 1100 would be a party to conspiracy if its directing minds, Mr. Fuss and the Kendricks, ordered it to engage in unlawful conduct. [ 74 ] There is no dispute that the individual Defendants were directors of one or more of 828, EWE, and 1100.

The Plaintiff alleges that: 1. 828 was trustee for HSBC’s debt, 2. the individual Defendants were fiduciaries of HSBC, 3. funds were available in EWE’s TD account and 1100 to pay at least part of 828’s debt to HSBC, 4. assets such as stock were in the possession of 828, EWE, and/or 1100 that could have been liquidated to pay at least part of 828’s debt to HSBC, and 5 the transfer of assets to 1100 and the use of the EWE TD bank account were intended to defeat HSBC’s recovery of its debt. [ 75 ] The Defendants argue a more innocent explanation for the use of the EWE TD account and the transfer of 828 assets and business to 1100.

Mr. Kendrick and Mr. Fuss say they took those steps in an attempt to salvage a business that they considered to still be viable. Ms. Thuna basically says she knew only the broadest generalities of what was going on. The Defendants’ central theme is that they, in good faith, took steps to continue 828’s business so that 828 could ultimately repay its debts. They say 1100 operated as a trustee for 828. [ 76 ] I reject this characterization of the formation of 1100 and transfer of business and assets to that corporation.

I find as fact that the intention of the relevant directing minds was to defeat HSBC’s claim and then sink 828 with its debt. That is unlawful conduct. In addition, I am satisfied that even if Mr. Kendrick, Mr. Fuss, and Ms. Thuna had intended that 1100 operate as a trustee for 828 then their conduct was still unlawful. 1. Director’s Duties [ 77 ] The Business Corporations Act , R.S.A. 2000, c. B-9 sets the responsibilities for the directing minds of a corporation.

Directors and officers of 828, EWE, and 1100 could potentially be personally held responsible for 828’s breach if a directing mind breached his or her: 1. Business Corporations Act , s. 122(1)(

a) fiduciary duty to their corporation, or 2. Business Corporations Act , s. 122(1)(

b) obligation to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”

[ 78 ] The Defendants in their closing arguments stressed this is “not a directors’ liability case”. I do not agree. The Plaintiff argued that Mr. Kendrick, Mr. Fuss, and Ms. Thuna owed a duty to HSBC. Their status as directors is not in dispute. Legislation dictates any director has Business Corporations Act , s. 122(1) obligations. The analysis that follows will illustrate how these Defendants’ roles with the various corporations are associated with a resulting obligation to the Plaintiff. 2. Direct Duties to HSBC [ 79 ] One way that directors and officers can act unlawfully is by a breach of their Business Corporations Act , s. 122(1)(

b) duty to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” The Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise , 2004 SCC 68 , [2004] 3 S.C.R. 461 makes explicit that the

Canada Business Corporation Act homologue for that duty can extend to creditors: at para. 57. However, the court warns that this duty is comparatively relaxed: 67 Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(

b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded.

Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made. [ 80 ] The Supreme Court of Canada at paras. 43-47 observes that when a business is stressed, such as was the case for 828 in January 2004, then the issue of balancing interests becomes very difficult, and generally that the courts should be cautious in concluding that a director has been negligent when the director does not prioritize a particular individual’s interests over another. [ 81 ] If, as I have concluded, Mr.

Kendrick engaged in fraud then that is, itself, unlawful conduct, but fraudulent conduct directed at a creditor (HSBC) would also clearly breach a director’s s. 122(1)(

b) duty of care to that creditor. [ 82 ] However, I do not think that is so easily established for Mr. Fuss and Ms. Thuna. 828 had lost its line of credit. It can be said that it is not negligent for the directing minds of 828 to conclude that HSBC was wrong, and that 828 remained viable.

If so, then it was a potentially reasonable solution to address the credit freeze with the decision to: 1. obtain a new line of credit, in this case the EWE account, 2. continue the business, 3. set up 1100, 4. ‘assign’ the business, employees, and property of 828 to 1100, and 5. conduct the former 828 business through 1100. [ 83 ] That proposition is supported by the significant amount of post-credit freeze business ($1.2 million in deposits) that arguably

indicates the possibility that 828 was viable. If so, then the decision to set up and use 1100 is not necessarily a breach of s. 122(1)(b), if one accepts that there was a genuine intent to use the 1100 business to repay debts owed by 828. [ 84 ] Given the Supreme Court of Canada’s caution against a hindsight analysis of an effort such as this ‘continued business’ scheme, and the s. 122(1)(

b) relaxed standard of care, I do not see how it is obvious that Mr. Fuss and Ms. Thuna breached their duty to HSBC when they took

part in this scheme. Mr. Fuss and Ms. Thuna argued that they trusted Mr. Kendrick was taking care of things. If so, then their alleged acquiescence or agreement with Kendrick’s approach to 828 and 1100 likely did not represent a conspiracy. Those steps were a potentially reasonable business decision. [ 85 ] Instead, I have concluded that the use of the EWE TD bank account and formation of 1100 was a conscious and deliberate attempt to defeat collection of the HSBC debt trust interest. However, that trust relationship was between 828 and HSBC , not personally between HSBC and Ms. Thuna (a 828 director) or Mr.

Fuss (a 1100 director). The priority associated with a trust is not directly relevant to those two persons. I therefore do not conclude that the actions of Ms. Thuna were unlawful as a breach of duty to a corporate debtor, HSBC. Similarly, Mr. Fuss did not owe a duty of care to a third-party separate debtor corporation. Both these parties can argue that they, as caretakers of troubled businesses, had many interests to consider and balance. 3. Fiduciary Relationship of Directors to Their Corporations [ 86 ] That however leaves the Business Corporations Act , s. 122(1)(

a) fiduciary duty of the directors to their corporations. Here the fiduciary status for a director has a basis in legislation and is well characterized: Peoples Department Stores Inc. (Trustee of) v. Wise , at para. 32 : The first duty has been referred to in this case as the “fiduciary duty”. It is better described as the “duty of loyalty”. We will use the expression “statutory fiduciary duty” for purposes of clarity when referring to the duty under the CBCA.

This duty requires directors and officers to act honestly and in good faith with a view to the best interests of the corporation. ... [ 87 ] The standards for a fiduciary for a directing mind are therefore very high. The director’s own interests are secondary to those of his or her corporation. [ 88 ] Mr. Kendrick did not meet that standard when he engaged in fraud; that clearly was not in 828’s interest. It cannot be in the best interests of a corporation for its director to mis-state its worth and assets, or systematically destroy that corporation’s financial and business records. [ 89 ] Similarly, Mr.

Fuss and Ms. Thuna also did not meet that standard, but for different reasons. I have concluded that the use of the EWE TD account and the transfer of the 828 business and assets to 1100 was a deliberate scheme to defeat collection of the Bank’s debt interest. [ 90 ] 828 had by contract agreed to act as trustee for its debt to HSBC. A trustee is a well established category of fiduciary relationship: Alberta v. Elder Advocates of Alberta Society , 2011 SCC 24 , [2011] 2 S.C.R. 261 , at para. 27 . It is therefore in 828’s best interest that it meet its obligations and repay its debt to HSBC. Ms.

Thuna had a directorial duty to take steps to meet that obligation. If there was no intent to have 1100 pay 828’s then transfer of the 828 business to 1100 was not merely against 828’s interest, that transfer sabotaged any possibility that 828 would ever meet its fiduciary obligation to HSBC. It is also noteworthy that 828 had a Unanimous Shareholders Agreement executed by Mr. Kendrick and HBC. It included a provision that neither would compete with the business of 828. Mr. Fuss signed the Agreement and was a directing mind of HBC.

His action in incorporating 1100 directly breached his covenant in the Agreement. [ 91 ] Similarly Mr. Fuss had a directorial duty, but to 1100. I conclude Mr. Fuss would have breached that obligation if he authorized 1100 take the property and business of 828 where that transfer had no legitimate business purpose and was, in effect, knowing appropriation of another’s trust property. A recipient of trust property not acquired for fair market value has an extremely dubious right in either equity or law to that trust property.

[ 92 ] I conclude, on a balance of probabilities, that Mr. Fuss and Ms. Thuna were part of a plan that was clearly in a breach of their respective fiduciary duties to 1100 and 828. They adopted a strategy that doomed 828 to bankruptcy. At the very minimum there was the alternative to shut down 828 and liquidate its stock and receivables, which at least would partially address 828’s debts. [ 93 ] Arguably, Mr. Fuss and Ms. Thuna had absolutely no knowledge that Mr. Kendrick had adopted that plan. That is not supported by the evidence, and even so, as fiduciaries of 828 and 1100 Ms. Thuna and Mr.

Fuss had, at a minimum, an obligation to inquire and investigate if Mr. Kendrick’s activities were an attempt to ‘scuttle’ 828 but salvage its assets. A claim of ignorance admits that these directors never even investigated that rather obvious possibility and thereby breached their directorial duties. 4. Unlawful Activity - Conclusion [ 94 ] In

summary, I have no difficulty coming to the conclusion that Mr. Kendrick breached his obligations to HSBC, 828, and 1100. Not only did he engage in fraud, but he also had his

part in efforts to defeat HSBC’s legitimate interest. For Mr. Fuss and Ms. Thuna, their unlawful conduct flows from to their failure to discharge their obligations to 828, and the creation of 1100. C. Was the Unlawful Conduct Directed towards the Bank? [ 95 ] This requirement is met by my conclusion that the incorporation of 1100 and transfer of the 828 business and assets to 1100 satisfies this criterion. Mr. Fuss maintained in his testimony that the reason the change to the TD account and different corporate vehicle was made was to save 828.

It was their hope that by keeping the business alive, it could generate enough funds to repay the Bank. Mr. Fuss admits he was also anxious to regain the payment of the debt of over $1.2 million owing to his companies. However, he intended that EWE and then 1100 act as a trustee to operate the business of 828. [ 96 ] Notwithstanding the protestations of Mr. Fuss, it is evident that his actions and those of Mr. Kendrick were directed towards the Bank. Maintaining the business was probably intended but a very significant purpose was to prevent the Bank realizing on its security.

The total absence of any repayment of the 828 is key to prove that conclusion, particularly in light of payments to Mr. Fuss’s own businesses, and the substantial cash flow through the EWE bank account. [ 97 ] I therefore believe this element for unlawful act conspiracy is satisfied. D. Should the Defendants have Known that Injury to the Bank was Likely to Result? [ 98 ] There can be little dispute here. Through the operation of EWE and 1100, Mr. Kendrick, Mr. Fuss, and Ms. Thuna would have well known that the Bank would sustain very substantial loss.

The only assets of 828 were a little equipment, such as computers, accounts receivable, stock in trade and goodwill. All of these were effectively appropriated by the new undertakings. Very little was realized by the subsequent bankruptcy proceedings against 828. [ 99 ] Put simply, not only were these results likely and foreseeable, they were a necessary consequence of the conspirators’ objective. E. Did the Conduct Cause Injury to the Bank? [ 100 ] As I have stated, the Bank suffered substantial injuries from the actions of Mr. Kendrick, Mr. Fuss, and Ms. Thuna.

I do not dispute the receiver’s report not HSBC’s quantification of the amount it was owed and subsequently recovered. [ 101 ] I shall consider further the extent of the damages, below.

F. Conclusion - Unlawful Act Conspiracy [102] I conclude that the Plaintiff has proven beyond a balance of probabilities all the elements of a civil conspiracy: 1. the common scheme was to divert 828’s business activities to EWE and then 1100, regardless of whether that plan was notintended to or did not functionally benefit 828; 2. Mr. Kendrick, Mr. Fuss, and Ms.

Thuna engaged in unlawful conduct, as previously reviewed; 3. the unlawful conduct was directed to 828 but also HSBC as the scheme would defeat HSBC’s attempt to recover its loan - a‘husk’ of 828 should not be allowed to shield these directing minds from their misconduct as the consequences to HSBC were obvious; 4. injury to HSBC was likely to result if 828’s assets were stripped and 828 never received funds from 1100; and 5. the scheme meant HSBC could not recover its loaned funds; what assets remained of 828 were held in a separate corporation. VI. The Defences A. Contributory Negligence [103] Mr. Fuss and Ms.

Thuna allege that the Bank departed from a reasonable standard of care in extending credit to 828 wellbeyond its borrowing limit. They also point to the failure of the Bank to obtain additional security when increasing lending limits andalso allege that the Bank acquiesced in the transfer of 828’s business transactions to the EWE TD account. [104] The Bank states first that a contributory negligence defence is not available in the case of fraud and secondly, the Defendantscannot rely on their own misconduct to reduce their liability. [105] It appears to me that the latter argument applies.

I am reminded of Justice Southin’s comment in Doman v.

British Columbia(Superintendent of Brokers) (1996), (BC CA), 85 B.C.A.C. 210, 31 B.C.L.R. (3d) 357 (B.C.C.A.) on the characterof parties who complained about slow proceedings where the delay had been caused by the unsuccessful attacks launched by those verysame parties: ... [this] constitutes an abuse of process calls to my mind the delightful Yiddish word "chutzpah" which is sometimes explained as a manwho has been convicted of murdering his parents seeking mercy on the ground that he is an orphan. [106] In this instance the particular example of chutzpah is analogous to a thief in a purse snatching crime denying liability, as thepurse should not have been exhibited so prominently and the purse owner should have pursued the thief with greater diligence.

B. The Change to the Course of Conduct by the Bank

[107] Mr. Fuss and Ms. Thuna also allege the sudden bouncing of 828 cheques by the Bank was a material change in the course ofconduct of the banking relationship. They claim, probably correctly, that if the Bank had not bounced cheques there would have been nochange of accounts to the TD. The law is clear that a debtor must be given reasonable notice of a creditor’s intention to change the termsof the banking relationship: Thermo King Corp. v. Provincial Bank of Canfada et. al., (ON CA), [1982] 34 O.R.(2d) 369, 130 D.L.R. (3d) 256 (Ont. C.A.). [108] As I stated earlier, I am satisfied Mr.

Selley gave oral notice on more than one occasion to Mr. Kendrick that cheques wouldbe bounced if the loan was not reduced. Such threats were confirmed by Ms. Kernaghan. Nevertheless, the short answer to this defenceis that Mr. Fuss and Ms. Thuna have no status to complain of any change in the course of conduct. That right is given to 828 only and itis not a party to this action. A shareholder cannot advance such a position since it contravenes a long standing rule from the case of Fossv. Harbottle (1843), 67 E.R. 189, see also Bank of Montreal v. Jarjoura, 2010 ABQB 103 at para. 44. C.

Counterclaim of Ariza and HBC [109] Initially, both Ariza and HBC counterclaimed against the Bank for negligent misrepresentation. Ariza alleged the Bank’srepresentations induced it to extend further trade to 828; HBC alleged the Bank’s representations induced it to extend a shareholder’sloan to 828. However by the conclusion of the trial, Ariza abandoned its counterclaim.

HBC’s claim for damages in respect of itsshareholder loan to 828 remains the only counterclaim to be considered. [110] HBC’s counterclaim arises out of the January 2003 telephone conversation between HBC’s corporate representative, Mr.Fuss, and Mr. Selley, the Bank’s account manager for 828. HBC alleges it relied on the representations made by Mr. Selley in decidingto invest in 828 in February 2003. At the time of the conversation, 828 owed Mr. Fuss’ companies approximately $600,000.00 in tradedebt. Subsequent to Mr. Fuss’ conversation with Mr.

Selley, in February 2003, this $600,000.00 debt was assigned to HBC andconverted to a shareholder’s loan in return for HBC’s obtaining a 50 percent shareholder's interest in 828. [111] Mr. Selley denied ever speaking to Mr. Fuss by phone during that period. Mr. Fuss testified he had no notes of the call’scontents but says the conversation lasted about five minutes. Mr. Fuss reports that: 1. Mr. Selley said Mr. Kendrick was “over trading”, 2. 828 was in need of capital, 3. Mr. Selley felt Mr. Kendrick was a good businessman and a hard worker, 4. 828 sometimes reached the top of its line of credit, and 5. Mr.

Selley and the HSBC received regular financial reporting from 828. [112] Mr. Fuss was pleased to learn his personal guarantee would not be required, which he felt was unusual. Mr. Fuss testified attrial that he felt the Bank was a “cowboy lender” in that it was lending more money than Mr. Kendrick has invested. That loan waslarger than what he would expect an Ontario bank would advance. Mr. Fuss testified that the information gained from Mr.

Selley was themajor reason he made the choice to convert his companies’ accounts receivable to a shareholder’s loan of HBC. [113] HBC now claims that during that telephone call Mr. Selley made misrepresentations to Mr. Fuss that Mr. Selley knew wereincorrect and also withheld material information about the financial condition of 828. HBC claims this omission is also actionable asmisrepresentation. HBC claims that Mr. Fuss should have been told that 828 was frequently over its lending limit and was substantiallyover that amount at the time of the conversation.

[114] The Bank submits that HBC is unable to point to any false statements made by Mr. Selley, and that in any case it is unclearwhat information Mr. Fuss asked Mr. Selley to provide, given the lack of documentary evidence of the conversation. Moreover, theBank argues that it is improbable that a businessman with Mr. Fuss’ background would have made a major investment decision in such acavalier manner. The Bank argues that Mr.

Fuss was aware of the risk of investing in a company like 828 given that at least three othersimilar businesses in which he was involved in had gone bankrupt. [115] Furthermore, the Bank argues that HBC has not proven it suffered any damages as it gave no evidence as to the amount bywhich the trade debt was increased after the conversation. The Bank submits that there is no evidence HBC suffered an adverse changein position in reliance on the telephone call, because the trade debt was converted to a shareholder’s loan, and HBC expected to be repaidin either case. [116] Finally, the Bank argues that Mr.

Fuss’ companies continued to increase the trade debt extended to 828 in the face ofconsistent overdrafts subsequent to HBC becoming a shareholder in 828 and Mr. Fuss gaining online access to 828’s bank accountthrough the Hexagon program. The Bank suggests this is evidence that 828’s overdrafts did not deter the Defendants from extendingcredit to 828. [117] The Hedley Byrne principle regarding liability for negligent misrepresentations is invoked. The five general requirements fornegligent misrepresentation were first set out in Hedley Byrne & Co. Ltd. v.

Heller and Partners Ltd., [1964] A.C. 465 (H.L.), as citedby the Supreme Court of Canada in Queen v.

Cognos Inc., (SCC), [1993] 1 S.C.R. 87 at 110, 99 D.L.R. (4th) 626: 1. there must be a duty of care based on a “special relationship” between the representor and the representee; 2. the representation in question must be untrue, inaccurate, or misleading; 3. the representor must have acted negligently in making said misrepresentation; 4. the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and 5. the reliance must have been detrimental to the representee in the sense that damages resulted. [118] To be successful in its claim for negligent misrepresentation against the Bank, HBC must prove all five requirements of thetort on a balance of probabilities.

If any element is left unsatisfied, HBC’s counterclaim cannot succeed. [119] I am satisfied that the Bank owed a duty of care to HBC in respect of the telephone conversation. The duty of care of the Bankin the circumstances was to be truthful, honest and use reasonable care in making accurate representations: Queen v. Cognos Inc., supra. [120] That said, none of the positive representations made by Mr. Selley were untrue, inaccurate, or misleading. While HBC allegesthat Mr.

Selley omission of information respecting 828 consistent overdrafts is actionable as a negligent misrepresentation, it is not clearon the evidence what information Mr. Fuss sought from the Bank. HBC has not proved that the Bank failed to use reasonable care in thecircumstances of this case. [121] Mr. Fuss relies on his memory of a brief conversation made over eight years prior. He appears to have been influencedsubstantially by the confidence the Bank showed in Mr. Kendrick and the fact he would not be required to provide a personal guarantee.Neither of these representations was untrue, inaccurate or misleading.

[ 122 ] I do not believe the information regarding the exact standing of the Bank loan would have been a significant influence on his decision, despite Mr. Fuss’ current testimony to that effect. Mr. Fuss is a very experienced businessman who had made investments previously which have failed. Moreover, after HBC’s investment in 828, Mr. Fuss soon knew the full picture of 828’s liability to the Bank. He had access to 828’s bank account online through the Hexagon system and received phone calls from Mr.

Selley asking him to “reign Kendrick in.” Yet, his companies continued to trade with 828. [ 123 ] In any event, I do not need to decide whether or not Mr. Fuss, as HBC’s corporate representative, reasonably relied on the alleged misrepresentation in deciding to invest in 828, because HBC also has not satisfied the final requirement of this tort. [ 124 ] HBC and Mr. Fuss did not provide evidence of making an adverse change of position financially due to the telephone call. The companies controlled by Mr.

Fuss had about $600,000.00 in accounts receivable from 828, and after HBC became a 50 percent shareholder, HBC held a shareholder’s loan to 828 for the same amount. There is no evidence of loss resulting from this conversion of debt to equity. Additionally, while it is claimed increased credit was advanced to 828 after the phone call, no evidence of this was adduced at trial. HBC has therefore failed to prove the value, if any, of damages it suffered from the alleged negligent misrepresentation of the Bank. [ 125 ] The counterclaim is dismissed. VI.

Damages [ 126 ] The Bank relies on the fact that the 828 documentation provided to the Bank showed inventory and accounts receivables of between $1.5 million and $2 million. In addition, over $1.2 million passed through the TD account in little over four months. It appears the Bank has established prima facie proof that there were sufficient assets available to pay the Bank’s trust claim in full in early February 2004. [ 127 ] While some criticism can be made of the Bank’s delay in appointing a receiver and placing 828 in bankruptcy, it is evident that during the interim period Mr.

Kendrick was actively discussing a solution with the Bank to resolve the situation.

In light of my conclusion on the objectives of the conspirators I believe I can characterize those negotiations as a smokescreen, rather than a substantial effort to repay 828’s outstanding debt. [ 128 ] Even after the Bank formally demanded payment of its loan on March 8, 2004, on March 16 th counsel for 828 wrote the Bank requesting certain limits on the appointment of PWC to conduct an independent review of the financial and accounting status of 828. 828 also provided year end financial statements from August 31, 2003 in March 2004. Consistent with Mr.

Kendrick’s pattern of misconduct these reports provided a highly optimistic and inaccurate view of the company’s position. [ 129 ] I agree with the Plaintiff that the significant economic activity in 828 and 1100 after the credit freeze indicates there were funds available to pay of HSBC’s debts. If the Defendants wish to argue that no amounts could ever have been paid then the Defendants would need to provide documentation to prove that point. In Brown v.

Silvera , 2011 ABCA 109 , 65 E.T.R. (3d) 169 the majority of the court confirmed that the trial judge was correct to reconstruct the damages owed to a successful plaintiff on the basis of the admittedly incomplete financial records that were available to the court. [ 130 ] The unsuccessful defendant argued he had more records he could have produced that would have indicated a small sum was owed (paras. 93-94, 97-100), but the Court of Appeal concluded that the defendant could not dispute damage calculations where he had withheld what he claims was relevant (and allegedly determinative) evidence: The trial judge was entitled to determine the value of the corporate property based on that evidence, especially since Brown refused to provide relevant evidence for a more exact accounting of his gains .

The trial judge did not err in relying on the redemption value of the preferred shares. [Emphasis added.] [ 131 ] The Defendants face a similar obstacle and I therefore conclude the Plaintiff is entitled to $690,747.58 and interest per the Judgment Interest Act , RSA 2000, c J-1. The security documents impose liability for the costs of PWC, insurance costs and legal fees. The total claimed with unpaid interest, insurance premiums, costs paid to PWC and legal fees is $1,761,901.14.

VII. Judgment [ 132 ] There will be judgment for the Plaintiff against Mr. Kendrick, Mr. Fuss and Ms. Thuna for this amount. [ 133 ] The Defendants, 1100, EWE, Mr. Kendrick, Mr. Fuss, and Ms. Thuna are collectively liable on a joint and several basis. My understanding is that the two corporate Defendants have no assets so the liability falls to the three individual Defendants. VIII. Costs [ 134 ] Counsel will provide written submissions by email or fax respecting costs to my assistant within ten days of the date of these reasons. Heard on the 12 th day of September, 2011 to the 22 nd day of September, 2011.

Dated at the City of Edmonton, Alberta this 1st day of December, 2011. E.A. Marshall J.C.Q.B.A. Appearances: Gordon R. McKenzie, Nigel J. Forster, Patty Ko, Bishop & McKenzie LLP for the Plaintiff Milton A. Davis, Kelli Preston, Davis Moldaver LLP for the Defendants David Fuss, Rhonda Thuma, Incredible Electronics Inc., Ariza Technology Inc. and HBC Business Credit Inc. Cameron Kendrick on his own behalf