HSBC Bank Canada v. Lourenco, 2012 ABQB 380

Court of Queen ’ s Bench of Alberta Citation: HSBC Bank Canada v. Lourenco, 2012 ABQB 380 Date: 20120608 Docket: 0303 09090 Registry: Edmonton

Between: HSBC Bank Canada Plaintiff - and - Jose J. Lourenco, Onita Blankenfeldt, Administrator of the Estate of Hannu Juhani Salokangas, Also Known As Hannu Salokangas Defendants - and - Allan Smith Plaintiff by Counterclaim - and - HSBC Bank Canada and Barry Taitinger Defendants by Counterclaim - and - Barry Taitinger Third Party

Corrected judgment: A corrigendum was issued on October 22, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. Corrected judgment: A corrigendum was issued on October 3, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. Corrected judgment: A corrigendum was issued on June 28, 2012; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice J.H.

Goss _______________________________________________________ Introduction [ 1 ] The plaintiff, HSBC Bank Canada (HSBC), was a secured creditor of Triple J by way of a General Security Agreement (GSA) dated July 6, 2001. HSBC sues directors of Triple J Armature Inc. (Triple

J) for knowingly assisting in breach of trust by Triple J. [ 2 ] HSBC alleges that Triple J committed a breach of trust by depositing its receivables to a CIBC account. HSBC also alleges that one of the directors, Jose J. Lourenco (Lourenco), falsely represented to HSBC that he was the owner of a Guaranteed Investment Certificate (GIC) issued by TD Canada Trust and pledged as security. The GIC belonged to Lourenco ’ s father. Background Facts [ 3 ] The defendants Lourenco and Hannu Juhani Salokangas (Salokangas) were directors of Triple J, together with Allan Smith (Smith) and Victor Carvalho (Carvalho).

Lourenco, Salokangas, Carvalho and a fourth individual by the name of Park were shareholders of the LTI Group of Companies which in turn was the sole shareholder of Triple J. Sometime after the fall of 2001, Carvalho ceased to have involvement with Triple J. Salokangas passed away on June 27, 2009 and the Administrator of his estate, Onita Blankenfeldt, is now named in the litigation. [ 4 ] Smith was the director for Triple J with day to day involvement with HSBC from 2001 until May 2002. Lourenco and Salokangas took little or no active involvement in management until after May 2, 2002.

In the summer of 2002, a shareholders dispute developed between Lourenco and Salokangas on the one side and Smith on the other.

[ 5 ] Triple J had a revolving operating line of credit with different limits at different times by way of Current Account Overdraft Agreements (CAOA) with HSBC. The CAOA provided that the borrower was not to permit the loan to exceed the loan limit or any margin requirement imposed, and that HSBC may refuse to honor any cheque in excess of that limit. The limit on the Triple J operating line of credit moved from $100,000 initially, fully secured by the pledge of a GIC in that amount by Triple J, to $200,000 in November 2001.

This increase was subject to margining requirements, with the pledge of an additional GIC in the amount of $40,000. HSBC also made four loans to Triple J pursuant to the Small Business Loan Administration Act , each of which was funded into the line of credit account. [ 6 ] In May of 2002, HSBC authorized temporary additional credit - the first of a number of “ bulges ” - whereby the bank agreed to temporarily honor cheques above the operating line of credit limit to a specified amount. The last bulge was authorized to February 16, 2003.

In agreeing to accommodate the bulges, HSBC requested additional security of the directors, in the form of GICs from Lourenco and Salokangas and a Memorandum of Agreement Charging Lands from Smith. The security was provided by the directors, however the GIC pledged by Lourenco was in fact owned by his father (also named Jose Lourenco), a fact of which HSBC was not aware and which Lourenco did not point out.

Lourenco gave evidence that he held a Power of Attorney from his father giving him the authority to pledge his father ’ s assets. [ 7 ] As further bulges were authorized, requests were made by HSBC of Lourenco and Salokangas for further security in the form of personal guarantees and further injections of cash. There is a disagreement between the parties as to whether the personal guarantees were agreed to, but they were never provided.

Lourenco confirmed in his evidence that the directors had cash available, in the vicinity of $100,000 or more, but would not inject the money into Triple J until the shareholders dispute with Smith was resolved. The shareholder dispute was never resolved and the money was never injected. [ 8 ] On January 29, 2003, HSBC dishonored a cheque written by Triple J. At the time, Triple J ’ s line of credit was at $241,230.08.

On February 4, 2003 HSBC sent a letter to Triple J advising that it would allow draws on the line of credit up to $250,000 until February 16, 2003 but warned that any cheque which would take the account over that limit would not be honored. HSBC further demanded that Triple J bring the account within the authorized $200,000 limit by no later than February 17, 2003, failing which it might seek legal action and enforce its security. On February 6, 2003, HSBC dishonored two Triple J cheques which would have taken the line of credit over $250,000.

On February 10, 2003 the line of credit was at $253,200 and a further cheque was dishonored on February 11, 2003. [ 9 ] Triple J opened an account at CIBC on February 11, 2003. There were four signing officers, including Lourenco and Salokangas, the only two signing officers who were directors of Triple J. From that day onward, all accounts receivable of Triple J were deposited in the CIBC account and no further deposits or payments were made into the HSBC account. [ 10 ] On February 27, 2003, HSBC demanded payment of its loans.

At that time Triple J was indebted to HSBC in the total amount of $461,558.15, including the Small Business loans. Notwithstanding the demand, no payment to or deposit with HSBC was made by Triple J. It continued to deposit accounts receivable into the CIBC account and to pay its suppliers, other trade creditors and payroll from the CIBC account. [ 11 ] On May 2, 2003, HSBC (through its legal counsel) requested funds upon maturity from TD Canada Trust regarding the GIC pledged by Lourenco.

TD Canada Trust did not pay out the GIC pledged by Lourenco. [ 12 ] On May 21, 2003, HSBC appointed Browning Crocker Inc (BCI) as its agent to collect accounts receivable and to seize security of Triple J. Issues [ 13 ] The issues for determination in this trial are: 1) Has HSBC established deceit by Laurenco as to the ownership of the GIC pledged by Lourenco with HSBC?

2) Did Triple J breach the trust created by the GSA to the prejudice of HSBC by depositing its accounts receivables into the CIBCbank account? If so, did Lourenco and Salokangas knowingly participate or assist in that breach? 3) Did HSBC suffer any damages? 1) Has HSBC established deceit by Laurenco as to the ownership of the GIC pledged by Lourenco with HSBC? Law [14] The tort of deceit, sometimes called fraud or fraudulent misrepresentation, is based on a false representation made by oneperson to another, knowingly, whereby damage is caused to the other in reliance on that false representation: LN Klar, Tort Law, 4th ed(Carswell: Ontario, 2008) at 668. The elements of the tort are: (

a) a false representation of fact; (

b) knowledge of its falsity; (

c) an intentto deceive; (

d) which materially induced the plaintiff to act; (

e) resulting in damage: Kelemen v El-Homeira, 1999 ABCA 315 at para 7,leave denied [2000] SCCA No 40, Village on the Park (Re), 2009 ABQB 497 at para 54. [15] A false statement can be either verbal or written and can include conduct such as an incomplete disclosure (a half truth) oractive concealment: Village on the Park at para 58.

The false representation must be made by the defendant with knowledge of itsfalsity, which includes reckless disregard of the truth or falsity of the representations or wilful blindness: 235049 Alberta Ltd v 1102440Alberta Ltd, 2011 ABQB 720 at para 80, Village on the Park at paras 84 and 85.

As stated in Opron Construction Co v Alberta (1994), (AB KB), 151 AR 241, [1994] AJ No 224 at para 661: ...the law requires the plaintiff to establish that the defendant's employees or agents permitted the misstatements and non-disclosures tobe made either knowingly, without entertaining any belief in their truth, or recklessly, without caring whether they were true or false... [16] The false representation must be made for the purpose of deceiving the plaintiff or with the intention or expectation that theplaintiff act upon or rely upon the representation.

The motive of a representor is irrelevant, there need be no additional intention to cheator injure the representee: Village on the Park at para 90; Opron Construction Co at paras 652 and 653. Finally, the plaintiff must havematerially relied upon the false representation to its detriment.

A defendant cannot defend the action on the grounds that the plaintiff wasunwise in acting upon the representation, or had the opportunity, which was not taken up, of verifying the information: Klar at 677. [17] The civil standard of proof applies in cases of deceit or fraud, but there must be clear and convincing evidence: Kelemen atpara 29. Facts [18] On May 10, 2002, at the request of Triple J, HSBC increased the Line of Credit limit from $200,000 to $250,000 until May31, 2002. As part of that transaction, Lourenco and Salokangas had each agreed to provide additional security of $20,000.

In mid-May2002 Lourenco delivered to HSBC a GIC Certificate dated May 9, 2002 issued by TD Canada Trust, together with a document entitledHypothecation of Negotiable Securities Owned by Third Party (Hypothecation) dated May 9, 2002 .On November 29, 2002 a documententitled Security Over Cash Credit Balances and Deposit Instruments By Third Party (Security) was also executed by Lourenco. [19] The GIC Certificate issued by TD Canada Trust and delivered by Lourenco to HSBC in mid-May was owned by Lourenco’sfather, Jose Jorge Lourenco.

The address noted was that of Lourenco. [20] Lourenco signed a Director’s Resolution dated June 21, 2000, which he clarified in his evidence should be dated June 21,

2001. He is referred to in it as “ Jose Julio Lourenco ” . That Resolution was provided to HSBC. However, Lourenco indicated that he usually signed documents as simply Jose Lourenco. [ 21 ] Lourenco confirmed that the agreement with HSBC was that Lourenco himself would provide the $20,000 security, not his father. He confirmed that he did not tell anyone at HSBC that the GIC was his father ’ s or was in his father ’ s name, nor that he had authority under a Power of Attorney to pledge his father ’ s GIC.

The Power of Attorney he held authorized business or dealings involving the TD Bank, it did not reference business or dealings with HSBC. Lourenco stated that he did not say anything about his father ’ s ownership of the GIC as no one asked and it did not cross his mind. It also did not occur to Lourenco that HSBC would want confirmation on their records of his authority to pledge his father ’ s GIC.

Indeed, the first notice HSCB had of the Power of Attorney was in September 2004 when it was provided in response to an undertaking. [ 22 ] Lourenco testified that he did not read the May 9, 2002 Hypothecation before he signed it as he did not really care what the document said, other than he knew it was a pledge of the $20,000 GIC. On November 29, 2002, Lourenco signed the Security document to replace the Hypothecation. The Security document provides in Clause 3(

b) that “ [t]he deposits are legally and beneficially owned by the undersigned .... ” Lourenco confirmed that he discussed the document with the lawyer who witnessed his signature, but that he did not tell that lawyer that the GIC was his father ’ s, nor that he had the authority to pledge it by a Power of Attorney.

Lourenco gave evidence that he understood he was signing as guarantor of the $20,000 GIC pledged to HSBC. [ 23 ] The account manager for HSBC gave evidence that the provision of the additional security by the directors of Triple J led the bank to continue to work with Triple J and to recommend that the bulges be extended.

He also confirmed that, based on his review of the documents, he was not aware that Lourenco was not the owner of the GIC pledged, as he would otherwise have obtained other documentation to enforce the pledge of the father ’ s GIC. [ 24 ] Lourenco gave evidence that he received two calls from TD Canada Trust in May 2003 seeking authorization to release the GIC to HSBC. Lourenco confirmed with TD Canada Trust that he had the authority to execute the GIC by way of the Power of Attorney.

On both occasions he refused to provide the authorization and instructed TD Canada Trust not to make payment in response to the demand. Positions of the Parties [ 25 ] It is argued by counsel for the plaintiff that this case is about probity and fair dealings. Lourenco represented to HSBC that he was the owner of the GIC pledged, both in writing and by his conduct, knowing that representation to be false.

He intended HSBC to rely on the representation as the GIC was pledged in response to a request by HSBC for additional security to enable the Triple J line of credit to be temporarily increased as requested by Triple J. HSBC relied on the documents as they are referred to in HSBC credit review documents and correspondence regarding the security held.

HSBC suffered a loss as a result as it ultimately had $20,000 less enforceable security than was represented. [ 26 ] It is further argued by the plaintiff that Lourenco was not an honest or credible witness at trial because he would not answer questions in a straightforward manner, either by not specifically answering the question asked or by answering the questions in a roundabout manner.

Further, he was caught up in his answer on one or more occasion, and testified as having actual knowledge of things that he later confirmed that he did not. [ 27 ] It is argued by counsel for Lourenco that the plaintiff ’ s claim cannot succeed as the pledge was valid and Lourenco has never taken the position that the pledge is anything but enforceable. Lourenco had the authority to pledge his father ’ s GIC by way of the Power of Attorney.

Furthermore, the May 9, 2002 Hypothecation does not refer to any security and the November 29, 2002 Security document does not contain a warranty of ownership for the type of “ instrument ” that was pledged. The November 29, 2002 Security document provides in Clause 3 that “ deposits are legally and beneficially owned by the undersigned ” , and not “ Deposits ” , a term defined earlier in the document and relating to the instrument pledged. It is therefore argued that the representation and warranty as to legal and beneficial ownership in Clause 3 does not relate to the GIC.

Furthermore, the letter enclosing this Security document for execution refers to the “ holder ” of the GIC, not the “ owner ” . [ 28 ] It is also argued that HSCB did not rely on purported ownership of the GIC in any material way as it was pledged after the

line of credit had already exceeded its authorized limit, it was small in the overall picture, it was haphazardly documented, it was initially required to support only a temporary increase in the line of credit, and recovery of the GIC was not pursued by HSBC once it had possession of the Power of Attorney. [ 29 ] The defendants argue that the replacement “ pledge agreement ” , executed November 29, 2002, almost seven months after the initial “ pledge agreement ” relating to the GIC, was taken well after HSBC was contemplating action to recover the loans.

Analysis [ 30 ] The GIC bore the same first and last name as Lourenco and Lourenco ’ s home address. The distinction between the two names by inclusion of his father ’ s middle name is easily missed. The middle names of Julio and Jorge are very similar. Lourenco usually signed documents as Jose Lourenco. [ 31 ] Lourenco did not say anything to HSBC on delivering the GIC (or at anytime later) or to the lawyer witnessing his signature on the Security document on November 29, 2002. That document references the GIC deposit instrument by number and amount and provides in Clause 3(

b) that “ [t]he deposits are legally and beneficially owned by the undersigned ... ” [ 32 ] In my view, this representation and warranty refers to the GIC. I reject the argument that the GIC is not included because the word “ deposits ” in Clause 3(

b) is not capitalized. The use of this as a defined term in the document precludes the argument that the GIC is not a “ deposit ” in the sense of monies which may be deposited to accounts. As a result of the striking out of Clause 1(

b) and (c), the only “ deposit ” to which Clause 3(

b) could possibly refer is the interest in the GIC, referred to in Clause 1(

a) and expressly referred to as “ Deposit ” . [ 33 ] To construe the document otherwise would be to render Clause 3(

b) meaningless in the circumstances. Clause 3(

b) was not struck out, and therefore it must be interpreted as having commercial sense and reflecting an intention of the parties. It does not make sense to interpret it as reflecting an intention to represent and warrant items which are not the subject of the Security document. [ 34 ] Even had Clauses 1(

b) and (

c) not been struck out, in my view it would not make commercial sense for Clause 3(

b) to be interpreted as constituting a representation that the items listed in Clauses 1(

b) and (

c) are legally and beneficially owned by Laurenco free of all other security interests, etc., but not the item listed in Clause 1(a). I am satisfied that the parties intended that Laurenco represent and warrant that the GIC was legally and beneficially owned by him as “ the undersigned ” . The lawyer certified that she satisfied herself by examination of Lourenco that he was aware of the contents of the Security document and understood it. [ 35 ] Clearly, the representation of ownership therein was false.

If not intentional, at a minimum it involved reckless disregard of the truth or falsity of the representations or wilful blindness as to the misrepresentation of facts created in all of the circumstances. I find in fact that HSBC has established actual knowledge of the false representation. [ 36 ] Lourenco argues that the Power of Attorney authorizes him to pledge his father ’ s GIC. That Power of Attorney relates to dealings with TD Bank.

Not only did he fail to advise HSBC or the lawyer attending upon execution of the Security document of this circumstance, he subsequently directed TD not to pay out the GIC funds on maturity to HSBC. Therefore, the TD Power of Attorney appears to have worked to Laurenco ’ s advantage and to HSBC ’ s detriment in the circumstances. [ 37 ] I am also satisfied on the evidence before me that Lourenco made the false representation with the intention or expectation that HSBC would act or rely upon the representation.

The defendants argue that the replacement “ pledge agreement ” was executed well after HSBC was contemplating action to recover the loans. However, the GIC ostensibly formed part of the personal pledges offered up by directors of Triple J. The additional security was required for the bulge financing and the GIC, Hypothecation and Security documents were provided for that purpose. HSBC might have had concerns in 2002, but it was not until February 2003 that those concerns became significant enough to call in the loans.

[38] I find that the false representation materially induced HSBC to act detrimentally. There was at least partial reliance on theGIC as a basis for the bulge allowed by HSBC as well as the ongoing extensions of the bulge financing, as this security, together withthe other security HSBC held, was consistently referenced in the Internal Credit Application reviews and as part of the overall creditpicture HSBC considered in its ongoing dealings with Triple J.

I am satisfied that the provision of additional security was a condition ofallowing the bulge, that the security was required and the false representation of ownership of the GIC was materially relied upon byHSBC, as the account manager testified that he would have obtained other documentation for the enforce ability of the pledge ofLourenco’s father’s GIC if he had known that Lourenco was not the owner. [39] I make the above findings based largely on Lourenco’s own evidence. 2) Did Triple J breach the trust conditions of the GSA to the prejudice of HSBC by depositing its accounts receivables intothe CIBC bank account?

If so, did Lourenco and Salokangas knowingly participate or assist in that breach? Law [40] In a claim against directors for breach of trust, the plaintiff must first prove that a trust relationship existed and that a breachhas occurred. The plaintiff must then establish that the directors of the corporation should be held personally liable as constructivetrustees. A company’s directors will only be personally liable as constructive trustees where the requisite knowledge on their

part isproved: Air Canada v M & L Travel Ltd, (SCC), [1993] 3 SCR 787 at 867. As Iacobucci J. stated in Air Canada at811: ...the only basis upon which the directors could be held personally liable as constructive trustees is under the "knowing assistance" headof liability...persons who "assist with knowledge in a dishonest and fraudulent design on the part of the trustees" will be liable for thebreach of trust as constructive trustees...

This basis of liability raises two main issues: the nature of the breach of trust and the degree ofknowledge required of the stranger. ...The knowledge requirement for this type of liability is actual knowledge; recklessness or wilful blindness will also suffice...to be heldliable the stranger must have had "both actual knowledge of the trust's existence and actual knowledge that what is being done isimproperly in breach of that trust -- though, of course, in both cases a person wilfully shutting his eyes to the obvious is in no differentposition than if he had kept them open.” Whether the trust is created by statute or by contract may have an impact on the question of thestranger's knowledge of the trust.

If the trust was imposed by statute, then he or she will be deemed to have known of it. If the trust wascontractually created, then whether the stranger knew of the trust will depend on his or her familiarity or involvement with the contract. [41] The breach of trust by the trustee, the corporation, must also be shown to have been fraudulent and dishonest. The intention ofthe corporate entity is ascertained through the voices of its officers and agents: Gordon v Winnipeg Canoe Club (1999), (MB CA), 134 Man R (2d) 213, [1999] MJ No 165 at para 54 (CA).

Iacobucci J. explained in Air Canada at 825: It must be remembered that it is the nature of the breach of trust that is under consideration at this point in the analysis, rather than theintent or knowledge of the stranger to the trust. That is, the issue here is whether the breach of trust was fraudulent and dishonest, notwhether the appellant's actions should be so characterized.. the stranger will be liable if he or she knowingly assisted the trustee in afraudulent and dishonest breach of trust.

Therefore, it is the corporation's actions which must be examined.... [42] Iacobucci J. at 826 adopted the definition of fraud as being "...the taking of a risk to the prejudice of another's rights, whichrisk is known to be one which there is no right to take..." thereby making the breach of trust by the company dishonest and fraudulentfrom an equitable standpoint.

The personal liability of the stranger (director) is justified because equity considers his conduct to beunconscionable: PM Perell, “Intermeddlers or Strangers to the Breach of Trust or Fiduciary Duty” (1998) 21 Advocates’ Q 94 at p 106. [43] In R v Zlatic, (SCC), [1993] 2 SCR 29 at 44, McLachlin J. for the majority acknowledged that dishonesty isdifficult to define. She held that it connotes an underhanded design which has the effect, or which engenders the risk, of depriving others

of what is theirs; it is the wrongful use of something in which another person has an interest, in such a way as to put the other's interest atrisk. [44] Fraser C.J.A. for the majority in Condominium Corp No 0321365 v 970365 Alberta Ltd, 2012 ABCA 26, 519 AR 322 at para94 noted that the dishonest and fraudulent intent of the trustee does not refer to fraud in the criminal sense. As for the stranger whoassists the trustee, it is not necessary that he acted in bad faith or dishonestly; it suffices if the conduct is morally reprehensible.

In casesof knowing assistance, liability is imposed where the defendant has participated in a fraud, implying actual knowledge of the fraud beingperpetrated by the trustee: Gold v Rosenberg, (SCC), [1997] 3 SCR 767 at para 33.

Taking a knowingly wrongful riskresulting in prejudice to the beneficiary is sufficient to ground personal liability of a director in such circumstances: Air Canada at 826.It is not required that the stranger to the trust receive a benefit in order to find or infer knowledge, although receipt of a benefit mayground an inference of knowledge: Air Canada at 812. [45] As set out above, wilful blindness will suffice.

Wilful blindness occurs where a person has become aware of the need forsome inquiry but declines to do so because he does not wish to know the truth: R v Sansregret, (SCC), [1985] 1 SCR570 at 584. [46] In R v Olan, (SCC), [1978] 2 SCR 1175 at 6, the Supreme Court held that a plaintiff must also establishdishonest deprivation or imperiling of the economic interest of the person deceived. However, this element is satisfied on proof ofdetriment, prejudice, or risk of prejudice to the victim’s economic interests. There need not have been actual economic loss resulting fromthe fraud.

Dickson J. cited with approval R v Allsop (1976), 64 Cr App R 29 at 31, 32: ...If the deceit which is employed imperils the economic interest of the person deceived, this is sufficient to constitute fraud even thoughin the event no actual loss is suffered and notwithstanding that the deceiver did not desire to bring about an actual loss. .... "Economic loss" may be ephemeral and not lasting, or potential and not actual; but even a threat of financial prejudice while it exists itmay be measured in terms of money ...

Interests which are imperilled are less valuable in terms of money than those same interests when they are secure and protected. Where aperson intends by deceit to induce a course of conduct in another which puts that other's economic interests in jeopardy he is guilty offraud even though he does not intend or desire that actual loss should ultimately be suffered by that other in this context.

Facts [47] The GSA provides in part: 1.2 As general and continuing security for the Obligations (as defined in clause 2.1 hereof), the Debtor: 1.2.1 hereby grants to the Bank, by way of mortgage, charge, assignment and transfer, a security interest in all presently owned andhereinafter acquired personal property of the Debtor of whatsoever nature and kind and wheresoever situate and all proceeds thereof andtherefrom, renewals thereof, Accessions thereto and substitutions therefor, (all of which are herein collectively called the “PersonalProperty Collateral”), including, without limiting the generality of the foregoing, all the presently owned or held and hereinafter acquiredright, title and interest of the Debtor in and to all Goods (including all accessories, attachments, additions and Accessions thereto),Chattel Paper, Documents of Title (whether negotiable or not), Instruments, Intangibles, Licences, Money, Securities and all: (c) ...book accounts and book debts and generally all Accounts, debts, dues, claims, choses in action and demands of every natureand kind howsoever arising or secured including letters of credit, letters of guarantee and advices of credit, which are now due, owing oraccruing or growing due to or owned by or which may hereafter become due, owing or accruing or growing due to or owned by theDebtor (all of which are herein collectively called the “Debts”);... ...

3.1 The Debtor represents and warrants that, and, so long as this General Security Agreement remains in effect, shall be, continuously represent and warrant that: 3.1.4 ...each Debt, Chattel Paper and Instrument included in Collateral is enforceable in accordance with its terms against the party obligated to pay the same (the “ Account Debtor ” ), and the amount represented by the Debtor to the Bank from time to time as owing by each Account Debtor or by all Account Debtors will be the correct amount actually and unconditionally owing by such Account Debtor or Account Debtors, except for normal cash discounts where applicable, and no Account Debtor will have any defense, set off, claim or counterclaim against the Debtor which can be asserted against the Bank, whether in any proceeding to enforce the Collateral or otherwise;... ... 4.1 The Debtor covenants and agrees that at all times while this General Security Agreement remains in effect the debtor will: ... 4.1.2 not, without the prior written consent of the Bank: (

a) create or permit to exist any Encumbrance against any of the Personal Property Collateral which ranks or could in any event rank in priority to or pari passu with the security constituted by this General Security Agreement, save for: (

i) those Encumbrances shown in the Encumbrance Schedule; and (ii) Encumbrances approved in writing by the Bank prior to creation or assumption; or (

b) grant, sell, exchange, transfer, assign, lease or otherwise dispose of the Collateral; provided always, that, until default, the Debtor may, in the ordinary course of the Debtor ’ s business, sell or lease Inventory and subject to clause 5.2 hereof, use monies available to the Debtor. ... 4.1.6 carry on and conduct the business of the Debtor in a proper and efficient manner and so as to protect and preserve the Collateral ... 4.1.7 forthwith pay: (

a) all obligations to its employees and all obligations to others which relate to its employees when due... (

b) all taxes, assessments, rates, duties, levies, government fees, claims and dues lawfully levied, assessed or imposed upon it or the Collateral when due... (

c) all Encumbrances which rank or could in any event rank in priority to or pari passu with the security constituted by this General Security Agreement, other than the Encumbrances, if any, shown in the Encumbrance

Schedule hereto and those approve in writing by the Bank;... 5.2 The Debtor acknowledges that any payments on or other proceeds of the Collateral received by the Debtor from Account Debtors,

whether before or after notification of the security constituted by this General Security Agreement to Account Debtors and whether before or after default under this General Security Agreement, shall be received and held by the Debtor in trust for the Bank and shall be turned over to the Bank forthwith upon request. [ 48 ] Lourenco stated in his evidence that he executed the GSA on July 6, 2001 without asking many questions, and learned only after he had signed that the document provided that Triple J held its accounts receivable in trust for HSBC.

During the period from mid 2001 until May 2002 Lourenco was not very involved in the day to day operation of Triple J. As Lourenco put it, he did not look at the financial information of Triple J, including the internally generated financial statements, because he had a partner whom he trusted with the same equity looking after the company. However, in May 2002 Lourenco became more directly involved and remained so in 2003. [ 49 ] In January 2003, Lourenco spoke with Mr. Lee of the Special Credit Department of HSBC where the Triple J account had been transferred.

The need for an infusion of money into the Triple J line of credit to bring it down to $200,000 or less was discussed. On February 4, 2003, HSBC sent a letter to Lourenco and Salokangas expressing displeasure with the status of the Operating Loan account continuing over the authorized limit of $200,000. HSBC confirmed that it would agree to allow excess on the account up to $250,000 until February 16, 2003 and that any cheques or debits in excess of $250,000 would be returned “ non-sufficient funds ” without further notice.

HSBC demanded that Triple J bring the account within the authorized $200,000 limit by no later than February 17, 2003, failing which it might seek legal action and enforce its security. [ 50 ] Two days later (February 6, 2003), HSBC dishonored two Triple J cheques as they would have taken the Line of Credit over $250,000. On February 10, 2003, the line of credit exceeded the limit by $3,200.

On February 11, 2003 HSBC refused to honor another cheque. [ 51 ] On the same day, February 11, 2003, Lourenco and Salokangas met with Barth, their financial manager, to discuss the options for Triple J as it had payroll to meet. Barth had a number of cheques payable to Triple J for deposit, totaling approximately $10,650. Lourenco gave evidence that he understood that Triple J was indebted to HSBC in excess of $200,000 and that Triple J ’ s receivables were charged in favor of HSBC.

It was decided on the direction of the directors Lourenco and Salokangas that a chequing account would be opened at another bank, CIBC, which was done by Barth on February 11, 2003. Lourenco, his wife, Salokangas and Barth all had signing authority on the CIBC account. All accounts receivable of Triple J were directed by Lourenco and Salokangas to be deposited at CIBC, and payments for payroll and to various suppliers were made out of the new CIBC account from deposits. At all times a positive balance was maintained at CIBC.

Lourenco confirmed that he, Salokangas and Barth decided which of Triple J ’ s creditors would be paid out of the accounts receivable deposited at CIBC. No further deposits were made to the HSBC line of credit account and no payments were made to HSBC toward interest or the outstanding indebtness. HSBC was not informed that Triple J had opened the CIBC account. [ 52 ] Lourenco gave evidence that the directors felt this step was necessary in order to continue operating the business in light of HSBC refusing to honor Triple J cheques.

He was aware that if accounts receivable were deposited into the HSBC Triple J account, HSBC would just apply them in reduction of the loan. Lourenco ’ s evidence was that he had a lot invested in Triple J and if he was not able to continue to operate the company his investment was gone. Infusing available cash into Triple J to bring the line of credit within its operating limits was not considered as an option by the directors.

Lourenco gave evidence that he considered HSBC to be harassing Triple J by demanding that the line of credit be brought below $200,000, that the directors provide additional security, and that the directors develop a plan for the payment of Canada Revenue Agency (CRA) priority payments. [ 53 ] On February 27, 2003, HSBC demanded payment of a total of $461,558.18, representing all amounts outstanding from Triple J. [ 54 ] Triple J continued to operate in this manner, utilizing the CIBC account for deposits of accounts receivable and payment of accounts payable, for approximately three months until May 21, 2003, when HSBC appointed an agent, BCI.

Lourenco was aware that HSBC had demanded payment of its loans prior to the appointment of the agent. Notwithstanding the demand, Triple J continued to operate in the same manner by collecting accounts receivable in the CIBC account and paying payables out of that same account. In that period no payments were deposited or made to HSBC on the outstanding line of credit. Positions of the Parties

[55] The plaintiff argues that Clause 5.2 of the GSA clearly created a trust, the trustee being Triple J and the beneficiary, HSBC.The subject matter of the trust consisted of funds received from Account Debtors. The trust obligation was discharged when the accountsreceivable were deposited in the HSBC line of credit account, thereby turning the funds over to HSBC and paying down the line ofcredit. Any expenditures by Triple J out of the line of credit, for example for business expenses, involved monies further borrowed fromHSBC where there was a negative line of credit balance.

On February 4, 2003, HSBC demanded that Triple J bring the account withinthe authorized $200,000 limit by no later than February 17, 2003. In so doing, HSBC made it clear that it wanted its loans paid down. OnFebruary 27, 2003 HSBC demanded payment in full. [56] The plaintiff submits that by virtue of the

definitions in clauses 3.1.4 and 1.2.1(c), the trust extends not only to accountsreceivable collected by Triple J but also to any positive balance in the CIBC bank account. Where there is a positive balance in the CIBCbank account, the relationship between CIBC and Triple J is that of debtor (CIBC) and creditor (Triple J): Thermo King Corp vProvincial Bank of Canada (1982), (ON CA), 34 OR (2d) 369 (CA).

The funds deposited to the credit of Triple Jwere impressed with the trust set out in Clause 5.2 of the GSA, as CIBC was an Account Debtor of Triple J. [57] The plaintiff argues that the actions of Triple J in depositing the accounts receivable in the CIBC account so they were notavailable to HSBC to pay down Triple J’s indebtedness was a fraudulent breach of its trust obligations to HSBC, depriving HSBC of itsinterest in the receivables.

In doing so, Triple J was knowingly assisted, and in fact directed, by its directors Lourenco and Salokangas.Lourenco and Salokangas decided to open the CIBC account for the express purpose of sheltering accounts receivable from HSBC andprotecting their personal investment. They intended to deprive HSBC of the benefit of the trust created by Clause 5.2 of the GSA. [58] The defendants argue that opening the Triple J CIBC account did not constitute a breach of trust.

Nothing in the GSA or anyother agreement between HSBC and Triple J required Triple J to deposit all of its receivables into an HSBC account, or prohibited TripleJ from opening and operating a secondary account at another bank. Clauses 4.1.6 and 4.1.7 obliged Triple J to carry on its business in aproper and efficient manner so as to protect the collateral and to pay all obligations when due.

Therefore, Triple J had the authority to usethe receivables in the ordinary course of its business without any input or interference from HSBC until the receivables were called in.The opening and maintenance of the CIBC account did not jeopardize HSBC’s secured interest in the company as HSBC continued tohold a valid GSA over the company’s accounts receivable that could be exercised at any time after default. When HSBC called its loanson February 27, 2003, HSBC did not expressly call in the receivables.

Once BCI was appointed as agent for HSBC in May of 2003, all ofthe funds in the CIBC account were seized and turned over to HSBC. Unlike the Air Canada case, there was no additional risk that thefunds could be attached by a third party as a result of the receivables having been deposited into the CIBC account as opposed to the lineof credit at HSBC. [59] The defendants argue that even if Triple J is found to have breached the trust created by the GSA, the evidence is clear thatTriple J opened the CIBC account to continue operating.

The February 4, 2003 letter clearly indicated that HSBC would not honorcheques issued to meet Triple J’s upcoming obligations, such as payroll. There was no fraudulent or dishonest intent to prevent HSBCfrom being able to realize upon the security it held over the company’s accounts receivable as all of the receivables were deposited withCIBC to meet the obligations of Triple J and for no other purpose.

Analysis [60] I am satisfied that Clause 5.2 of the GSA creates a trust whereby Triple J acknowledged that any payments on or otherproceeds of the Collateral received by Triple J from Account Debtors, whether before or after default under the GSA, were received andheld by Triple J in trust for HSBC. The trust existed “whether before or after default”. The trust obligation was discharged on eachoccasion when the monies from Account Debtors were deposited in the HSBC line of credit account, thereby reducing Triple J’sindebtness to the bank.

Furthermore, pursuant to Clause 1.2.1(c), HSBC held a security interest in any Accounts held by Triple J,including the account at CIBC. [61] Was there a breach of trust by Triple J in opening the CIBC account and then depositing all of its accounts receivable in thataccount? Clearly, the act of opening another account does not expressly breach the terms of the GSA. [62] However, Clause 5.2 provides that receivables would be held by Triple J in trust for HSBC and turned over forthwith uponrequest.

At the time the CIBC account was opened, Triple J was in receipt of the February 4, 2003 letter in which HSBC demanded thatTriple J bring the account within the authorized $200,000 limit by no later than February 17, 2003. The only way that this would beeffected, practically speaking, would be through deposit of receivables, or injection of personal funds by the directors. This demand wasexpressly stated to be a prelude to enforcement of HSBC’s security if Triple J did not comply.

[ 63 ] The HSBC line of credit balance was at $253,200 on February 10, 2003, cheques on that account were bouncing, and Triple J opened the account at CIBC the following day, on February 11, 2003. I find that the February 4, 2003 letter constituted a request to turn over receivables under Clause 5.2 by or before February 17, 2003 to the extent that the line of credit balance exceeded $200,000, being around $53,200 at the time the CIBC account was opened. As at February 17, 2003, the date upon which HSBC ’ s demand became effective, Triple J was using its receivables for a purpose not authorized by the trust.

The opening of the CIBC account allowed Triple J to avoid the payment down of the HSBC debt, which would have automatically occurred had the receivables continued to be deposited to the HSBC account. [ 64 ] On February 27, 2003, HSBC demanded payment in full. That constituted a second request under Clause 5.2 to turn over receivables to cover the entire indebtedness.

I find that the deposit of receivables in the CIBC account and payment out for purposes other than payment down of the entire HSBC debt past that date constituted a breach of trust. [ 65 ] Next, I must consider whether the directors of Triple J, Lourenco and Salokangas should be held personally liable as constructive trustees as persons who “ assist with knowledge in a dishonest and fraudulent design ” on the part of Triple J. [ 66 ] In this regard I must first look at the nature of the breach by Triple J. Was it fraudulent and dishonest?

The nature of Triple J ’ s designs can be ascertained through the voices of its directors. Lourenco gave evidence that on February 11, 2003 he and Salokangas instructed Barth to open an account for Triple J at CIBC and to deposit the accounts receivable in hand that day and from that day forward into the CIBC account to enable Triple J to continue to operate.

Triple J could no longer operate out of the HSBC account as HSBC refused to honor cheques in excess of Triple J ’ s approved borrowing limits, which had been exceeded. [ 67 ] The act of depositing the accounts receivable into another bank account kept those monies out of the hands or control of HSBC. The GSA is clear that these accounts receivable were to be received and held by Triple J in trust for the HSBC. This act by Triple J prejudiced the rights and economic interest of HSBC, and was

an act which Triple J had no right to take. The design was calculated to deprive HSBC of what its benefit under the GSA. The action of Triple J was fraudulent and dishonest. [ 68 ] The next issue is the degree of knowledge of the directors of Triple J, Lourenco and Salokangas. Lourenco, who executed the GSA, gave evidence confirming his knowledge of the terms of the GSA establishing that Triple J held its accounts receivable in trust for HSBC. Evidence before me also confirmed that Salokangas understood that the bank had a claim against the receivables.

Lourenco described Salokangas as his “ right hand man ” with respect to Triple J. Lourenco he indicated that Salokangas was involved in almost every meeting that he described attending. As directors of a small closely held corporation, involved to the extent described by Lourenco, both had a responsibility to be knowledgeable and informed about the legal commitments of Triple J.

I am satisfied that Lourenco and Salokangas were aware of the terms of the GSA establishing that Triple J held its accounts receivable in trust for HSBC. [ 69 ] Lourenco acknowledged in his evidence that he was aware of the existence of the trust. According to Lourenco ’ s evidence, Salokangas attended at and was involved in a majority of the discussions and decisions taken by the directors regarding Triple J.

The decision by Lourenco and Salokangas to open the CIBC account was for the express purpose of ensuring accounts receivable of Triple J were used for ongoing operations and were not available to HSBC to pay down the amounts owing to it, thereby protecting their personal investment.

Clearly, Salokangas knew HSBC was being wrongfully deprived of its access to and interest in the accounts receivable or was reckless or willfully blind as to the obligations of Triple J to HSBC. [ 70 ] Finally, I must determine if the directors Lourenco and Salokangas knowingly assisted Triple J in the fraudulent and dishonest breach of trust. Again, the knowledge requirement is actual knowledge that what is being done is improperly in breach of the trust established by the GSA. In this regard, recklessness or wilful blindness will also suffice.

On February 11, 2003 both Lourenco and Salokangas directed Barth to open an account for Triple J at CIBC and to deposit all of Triple J ’ s accounts receivable into that account from that day forward. Barth was further directed by Lourenco and Salokangas to make payments for payroll and to specific suppliers out of the new CIBC account from those deposits. No payments were directed to be made on the HSBC indebtness. This is clear and convincing evidence that both directors knowingly assisted and directed Triple J in the fraudulent and dishonest breach of trust.

Lourenco made a point in his evidence of saying that no payments went to him or Salokangas from that CIBC account, only toward the operating expenses of Triple J. However, that is irrelevant to the finding of knowing assistance. The receipt of a benefit by the stranger to the trust is neither a sufficient nor a necessary condition for an inference of knowledge. This was the taking of a knowingly wrongful risk resulting in prejudice to HSBC and is sufficient to ground personal liability on the part of the directors.

3) Did HSBC suffer any damages? Law [ 71 ] As explained by Perell at 113: ...the doctrinal basis for recovery under the doctrine of knowing assistance does not depend on the defendant being enriched. Rather the rationale is fault-based and equity intervenes to protect the plaintiff ’ s proprietary interest where the defendant actually knew that he was accessory to reprehensible conduct by the trustee...the defendant ’ s liability is measured by the plaintiff ’ s injury consequent to the trustee ’ s misconduct. The plaintiff ’ s injury may exceed the defendant ’ s benefit.

Facts [ 72 ] From February 11, 2003 all accounts receivable of Triple J were deposited in the CIBC account. Deposits in that account from February 11 to May 30, 2003 amounted to $274,186.18. [ 73 ] HSBC records show that as at February 27, 2003, when HSBC demanded payment of its loans, Triple J was indebted in the total amount of $461,558.15. That amount is not disputed.

The accounts receivable were no longer being deposited to the HSBC account after February 11, 2003 but HSBC took no steps at that point in time with respect to the receivables. [ 74 ] BCI was appointed to conduct a review of the business operations and assets of Triple J in order to provide HSBC with an assessment of the security it held. Subsequently, in May of 2003, BCI was appointed as agent for HSBC under Clauses 5.1 and 5.2 of the GSA to collect outstanding book debts and accounts receivable.

BCI attended at the premises of Triple J on May 21, 2003 to take possession of Triple J ’ s books and records relating to its accounts receivable. As well, it attended at CIBC to serve a copy of the agency appointment and request that all Triple J accounts be frozen and balances forwarded to BCI.

CIBC froze the account, but refused to release funds unless it was indemnified regarding any CRA, WCB or Employment Standards claims for remittances. [ 75 ] BCI reported to HSBC that there was approximately $141,000 outstanding accounts receivable as at May 21, 2003, including work that had been completed but not invoiced and net of unposted cash receipts. Upon being notified, a number of debtors expressed concern over the lack of warranty on work done by Triple J, given that Triple J closed its doors 10 days after BCI took possession of the accounts receivable and froze the bank account.

Debtors also raised setoffs against amounts due from Triple J. [ 76 ] In its letter of October 6, 2004, BCI indicated it had recovered the funds held by the CIBC in the amount of $19,006. Accounts receivable recovered to that date amounted to $121,707. Approximately half of the remaining balance was comprised of set-off claims, write-off of old invoices BCI was unable to locate, and settlements made in the course of collection activities.

The remainder represented relatively small accounts where BCI was unable to obtain sufficient information to effect collection. [ 77 ] Receipts before interest totaled $184,563.13. The priority claims were $43,563.13. Thus HSBC was entitled to approximately $140,572.74 in May 2003 before any costs of collection were deducted.

After payment of fees and disbursements of the agent a net payment was made to HSBC of $82,640.64. [ 78 ] HSBC records as at April 16, 2012 show Triple J as being indebted to HSBC in the amount of $364,035.19, comprised of $17,495.31 outstanding under the operating line of credit, and $346,539.88, for the four small business loans. Positions of the Parties

[ 79 ] The plaintiff claims against Lourenco and Salokangas damages of $255,180.40, being the difference between total deposits in the CIBC account from February 11 to May 30, 2003 ($274,186.18) and the amount recovered by HSBC through its agent Browning and Crocker ($19,005.78).

The plaintiff argues that the defendants have not established that any expenditures out of the CIBC account were made for the benefit of the trust, as opposed to the benefit of Triple J. [ 80 ] With respect to the GIC, the plaintiff argues that HSBC has suffered a loss of $20,000 as this security was not available to HSBC to collect when the security was called. [ 81 ] The defendants argue that the plaintiff can recover only damages resulting from Triple J opening the CIBC account, paying all of its receivables into that account and paying Triple J ’ s ongoing operating expenses from those receivables.

This would have to take into account the fact that receivables were generated by Triple J through its business activities to the time of appointment of the agent on May 21, 2003. [ 82 ] The defendants submit that BCI collected $140,713.11 in receivables and cash from the CIBC account - approximately $100,000 more that the $41,000 that HSBC valued the eligible accounts receivable of Triple J in January of 2003, after deducting priority payables and margining, thereby showing a net benefit to HSBC as a result of Triple J continuing operations to May 2003.

The defendants also argue that HSBC delayed in taking steps to call in Triple J ’ s accounts receivable and is guilty of laches. [ 83 ] The defendants argue that despite the fact that HSBC became aware of the Power of Attorney, it has not bothered to seek recovery of the GIC. [ 84 ] Although initially the subject of dispute, the defendant Lourenco ultimately confirmed in his evidence that he is not taking issue with the obligation of Triple J to pay the Small Business Loans.

Analysis [ 85 ] Damages against Lourenco for deceit in relation to the GIC amount to $20,000, being the value of security lost to HSBC as a result of the deceit. The evidence established that the GIC belonged to Lourenco ’ s father. There is no evidence before me that Lourenco was authorized by his father to deal with the GIC in relation to HSBC, as opposed to TD. Therefore, I reject the argument that HSBC is not entitled to damages because it has not sought recovery of the GIC. I also reject the defendants ’ argument that HSBC has not bothered to seek recovery of the GIC.

It has been established that HSBC requested the GIC funds on May 2, 2003, and that TD Canada Trust declined to pay out the same on Lourenco ’ s own instructions. [ 86 ] Any loss incurred by HSBC due to the opening of the CIBC account is much less clear. [ 87 ] I reject the argument that damages are payable in the total amount deposited to the CIBC account from the time it was opened until it was frozen, less the amount recovered from the account. The evidence is sparse as to the accounts receivable which could realistically be recovered at various relevant points in time.

Triple J continued to carry on business until ten days following freezing of the account. The defendants argued that BCI collected approximately $100,000 more in accounts receivable and the balance of the CIBC account than the $41,000 which was HSBC ’ s own valuation of Triple J ’ s eligible accounts receivable as at January 14, 2003 (as noted on the Application for Adjustments of that date). Even if one looks at total receivables of $131,000 on January 14, 2003 ($90,000 of which was classified as “ Ineligible for Margin ” ), accounts receivable still appear to have been higher as at May 2003.

Therefore, the evidence before the Court establishes that the accounts receivable available to HSBC probably increased from January 2003 until May 2003. [ 88 ] There is no compelling evidence that HSBC would have forced Triple J to close its doors earlier than May 2003 in the event that Triple J had not opened the CIBC account. Even if Triple J had continued to deposit receivables into the HSBC account until May 2003, HSBC would still have faced the cost of collecting outstanding accounts receivable.

The CRA and other beneficiaries of statutory trusts would still have had priority for amounts owing. [ 89 ] In my view, the loss incurred by HSBC due to the deposit of receivables into the CIBC account is restricted to costs specifically associated with finding, freezing and collecting the balance in the CIBC account. There is no specific evidence in this regard.

[90] SM Waddams in The Law of Damages, looseleaf (Toronto: Canada Law Book, 2008) states at para 13.30: ... [I]f the plaintiff establishes that a loss has probably been suffered, the difficulty of determining the amount of it can never excuse thewrongdoer from paying damages. If the amount is difficult to estimate, the tribunal must simply do its best on the material available,though of course if the plaintiff has not adduced evidence that might have been expected to be adduced if the claim were sound, theomission will tell against the plaintiff. [91] Here, the plaintiff has adduced evidence regarding its costs.

The difficulty is in determining that portion of the agent’s feesand disbursements which resulted from the opening of the CIBC account. In BCI’s final statement, the total fees and disbursements areshown as amounting to $37,290. The net amount of $19,005.78 recovered from the CIBC bank account amounts to approximately 10%of the total receipts collected by BCI of $186,050.27 including interest.

Calculating damages on this basis, I would find that HSBCincurred a loss of $3,729 as a result of the receivables having been deposited into the CIBC account. [92] I find that HSBC’s additional costs would have been incurred whether BCI had taken action in February 2003 or in May2003. HSBC cannot be faulted for giving Triple J reasonable time before taking steps that would jeopardize the viability of Triple J’sbusiness: Barclay Construction Corp v Bank of Montreal (1989), (BC CA), 65 DLR (4th) 213 (BCCA). I find thatthe delay by HSBC in taking action under the GSA does not disentitle it to these damages. 4.

Pre-Judgment Interest [93] Pre-judgment interest under s.4(2) of the Judgment Interest Act, RSA 2000, c J-1 shall be paid from the date the cause ofaction arose to the date of judgment. 5. Costs [94] The parties may speak to costs within 90 days of this application. Heard on the16th - 20th and 26th day of April, 2012. Dated at the City of Edmonton, Alberta this 8th day of June, 2012 J.H. Goss J.C.Q.B.A. Appearances:

Appearances: Gordon R. McKenzie Carmen L. Plante for the Plaintiff Richard Drewry Darin McKinley for the Defendants _______________________________________________________ Corrigendum of the Reasons for Judgment of The Honourable Madam Justice J.H. Goss _______________________________________________________ The hearing date has been changed from 26 th day of April, 2012 to the 16 th - 20 th and 26 th day of April, 2012. Co-counsel has been added to appearances. _______________________________________________________ Corrigendum of the Reasons for Judgment of The Honourable Madam Justice J.H.

Goss _______________________________________________________ The signature date has been corrected from June 28, 2012 to June 8, 2012. _______________________________________________________ Corrigendum of the Reasons for Judgment of The Honourable Madam Justice J.H. Goss

_______________________________________________________ Hearing date has been corrected from May 28, 2012 to April 26, 2012.