Murphy v. Cahill, 2012 ABQB 446

Court of Queen ’ s Bench of Alberta Citation: Murphy v. Cahill, 2012 ABQB 446 Date: 20120709 Docket: 1203 04666 Registry: Edmonton Between: Gerald Murphy and Gerald Murphy In His Capacity As Trustee of the Gerald Murphy ’ s Children ’ s Parallel Life Interest Settlement Trust Applicants - and - Margaret Cahill, Christopher Cahill, 1248429 Alberta Ltd., 554168 Alberta Ltd., 1247738 Alberta Ltd., and Canadian Consolidated Salvage Ltd.

Respondents Editorial Notice: On behalf of the Government of Alberta personal data identifiers have been removed from this unofficial electronic version of the judgment. _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Donald Lee _______________________________________________________ Procedural History

[ 1 ] This is an Application by the Applicants Gerald Murphy and Gerald Murphy in his capacity as Trustee of the Gerald Murphy's Children's Parallel Life Interest Settlement Trust (the "Trust") for appointment of a Receiver-Manager on an interim basis of 1248429 Alberta Ltd., 554168 Alberta Ltd., 1247738 Alberta Ltd. and Canadian Consolidated Salvage Ltd. (collectively the "CCS Group") pursuant to the Business Corporations Act , R.S.A. 2000, c. B-9, ss. 93-100 and 242 (the "BCA") and the Judicature Act , R.S.A. 2000, c. J-2, s. 13 and the appointment of an Inspector pursuant to

Part 18 of the BCA . [ 2 ] This Application is brought in the context of an Originating Application in Oppression (the "Oppression Application") pursuant to ss. 242 and 244 of the BCA filed by the Applicants. [ 3 ] The parties to this litigation are also parties to separate actions respecting the investment made by the Trust in the CCS Group.

Two debt actions involving the CCS Group were commenced by the Trust's former Counsel in August 2010, alleging a failure of the CCS Group to repay a debt owed to the Trust and a failure to provide audited financial statements. [ 4 ] An Application for appointment of a Receiver was filed by the Trust's former Counsel in October 2010 as relates to the claims discussed above (the "October 2010 Application").

The October 2010 Application was never heard on its merits, as Counsel ultimately entered into an agreement to permit Deloitte & Touche LLP ("Deloitte"), who had been retained by the Trust, to inspect the books and records of the CCS Group and agreeing that the CCS Group's directors, employees and advisors would provide cooperation to Deloitte (the "Deloitte Access Agreement"). [ 5 ] The Oppression Application and an initial Application for appointment of a Receiver-Manager on an interim basis (the "First Receivership Application") were filed and served on March 23, 2012. [ 6 ] The First Receivership Application was brought before me on March 30, 2012.

At that time, I granted the Respondents, Margaret and Christopher Cahill, an adjournment in the First Receivership Application in order for them to question Gerald Murphy on his Affidavits sworn in these proceedings. [ 7 ] On April 10, 2012, the parties appeared before me seeking further direction in respect of the scope and timing of the Questioning of Mr. Murphy. On April 11, 2012, I granted a Consent Order in morning chambers setting timelines for the completion of various steps leading to the hearing of the ultimate Oppression Application.

The Oppression Application is presently scheduled to be heard in Special Chambers on September 20 and 21, 2012. [ 8 ] Gerald Murphy was Questioned on his Affidavits on May 24 and 25, 2012 (the "Questioning"). [ 9 ] The Applicants now bring the present application renewing the request for appointment of a Receiver-Manager of the CCS Group and, in addition, requesting the appointment of an Inspector of the CCS Group.

Analysis [ 10 ] CCS is engaged primarily in the business of buying and selling scrap metal for recycling, and is a wholly owned subsidiary of CCS Holdco. 554's business is to hold the lands on which CCS conducts it's scrap metal business. 554 is a wholly owned subsidiary of 544 Holdco. Murphy, and the Respondent Margaret Cahill are the sole directors of the CCS Group.

Murphy, Margaret Cahill, and the Respondent Christopher Cahill are shown in the Share Registry as the sole shareholders of CCS Holdco. and 554 Holdco. as follows: - [ 11 ] CCS is the owner of property located in the County of Strathcona, and in Downtown Edmonton. 554 is the owner of property located in Downtown Edmonton, and on the NE outskirts of the City of Edmonton.

[ 12 ] Murphy and the two Respondents ostensibly entered into a Unanimous Shareholders Agreement for CCS Holdco and 554 Holdco which provide that: - (

a) There shall only be two directors of each of CCS Holdco and 554 Holdco; (

b) No person shall have a casting vote in the event of an equality of votes at a meeting of the Board of Directors; and, (

c) Any shareholder, officer or director shall have full and unrestricted access to the corporate and business records of the corporation and any of its subsidiaries at all times, and each party shall comply with requests from others in a timely fashion as to records and items in the possession of any such person. [ 13 ] According to correspondence and the corporate solicitors for the CCS Group, there has been an "inability to obtain director and shareholder concurrence" with respect to passing of Directors Resolutions and the necessary paperwork to support Annual Returns.

It is submitted by the Applicant Murphy that Boards of Directors of the CCS Group are legally and practically deadlocked to the ongoing dispute between Murphy and Margaret Cahill, and as a result the Board of Directors is incapable of making any decisions regarding the governance of the CCS Group. [ 14 ] Murphy has sworn what he terms as an "Oppression Affidavit" in which he describes how he recently learned the property taxes were in arrears for the Strathcona lands, East Downtown lands, Downtown lands, and the Celanese lands.

Additionally he deposes that Tax Notices had been issued by the City of Edmonton with respect to portions of the Downtown lands and the Celanese lands, pursuant to which those properties would be auctioned or revert to the City if the arrears were not paid. 554 and CCS were also incurring late payment penalties as a result of the failure to pay property taxes.

However Murphy now acknowledges that subsequent to demands by counsel for Murphy for the payment of those tax arrears, that they have been provided with proof of recent payment of those tax arrears. [ 15 ] In the Receivership Application, Margaret Cahill and CCS are joint debtors to a Security Agreement registered by Mercedes-Benz Financial as against a 2008 Mercedes-Benz B200 vehicle. Murphy deposes that he did not authorize, nor did he allow Margaret Cahill to have personal use of the vehicle.

On or about July 13, 2008 the Mercedes was involved in an accident with a pedestrian outside the South Edmonton Common Cineplex Odeon. The pedestrian has claimed damages in the amount of approximately $160,000 for personal injuries suffered in the alleged hit and run. [ 16 ] Murphy has also deposed to a number of Garage Keepers' Liens that have been registered against CCS, as well as a number of Statements of Claim filed against companies part of the CCS Group as follows: (

a) On or about April 15, 2010 CCS entered into a 6-month lease (the "Lease") for a SCS Model CM 1200 guillotine shear (the "Shear") with Ecovery LLC (the "Lessor"), which was later extended for a further 6-month term. The Lessor alleged that the CCS defaulted under the Lease for failing to make payments and failing to return the Shear at the expiry of the Lease term, among other things, and was indebted to the Lessor for $120,000.00 in arrears and $2,100.00 in liquidated damages. The Court of Queen's Bench of Alberta issued a Replevin Order on December 21, 2011 against CCS with respect to the Shear. (

b) On or about January 12, 2011, Eco-Industrial Business Park Inc. ("Eco-Industrial") filed an Amended Amended Statement of Claim claiming damages in excess of $200,000.00 against CCS and 554, operating as Clearway Recycling, and Chris Cahill Jr. (the "CCS Defendants") for failing to make payment for scrap metal removed from lands owned by Eco-Industrial pursuant to an agreement between Eco-Industrial and the CCS Defendants (the "Agreement"), and for approximately $60,000.00 for environmental damage to the lands (the "Eco-Industrial Action").

CCS filed a Statement of Defence and Counterclaim claiming damages against Eco-Industrial in the approximate amount of $650,000.00 for failure to pay for services rendered under the Agreement. (

c) On January 31, 2012 Finning (Canada), a division of Finning International Inc. ("Finning") obtained a default judgment for $14,914.61 against CCS for failure to pay invoices for service owing to Finning (the "Finning Judgment"). (

d) Garage Keepers' Liens have been registered by Diamond International Trucks Ltd. against CCS as follows:

a. $4,418.93 for repairs effected on an International 7600, serial no. [...788]; b. $9,266.25 for repairs effected on an International 5600, serial no. [...049]; and, c. $6,037.48 for repairs effected on an International 5600, serial no. [...318]. (

e) On or about February 24, 2011, Sunview Pacific Limited ("Sunview") filed an Amended Amended Statement of Claim against several defendants, including CCS, carrying on business under the trade name Clearway Recycling, and Christopher Emmett Cahill.

Sunview alleged, among other things, the theft of specialized industrial equipment and sought damages in the amount of $7,500,000.00 (the "Sunview Action"). [ 17 ] Murphy has not been given notice of, nor has he participated in any director's meetings; he has not received audited financial statements for the CCS Group since at least 2008, and he has not agreed to waive the appointment of an auditor for any of the CCS Group. [ 18 ] Murphy submits that a Receiver Manager should be appointed for CCS Group on an interim basis as it is presently in a "state of suspension" due to the ongoing dispute and deadlock between the directors. [ 19 ] Chris Cahill alleges that the deadlock in the Board of Directors is completely false as the reality is that Murphy has rebuffed all efforts on his part to communicate with him, including efforts to resolve all outstanding issues by refusing to talk, refusing to meet, and refusing efforts to communicate. [ 20 ] Chris Cahill in his Affidavit describes a lengthy meeting that took place between counsel on August 11, 2011 to discuss the resolution of all outstanding issues, and he deposes that a process was agreed upon between counsel which involved the sale of some of the lands presently held which would have resulted in Murphy recuperating a substantial portion, if not all, of his investment in this business.

According to Chris Cahill all efforts of his counsel following the settlement meeting to communicate with Murphy's former counsel were rebuffed, and there were no further communications between counsel with respect to the Agreement that had been reached. [ 21 ] Margaret Cahill in Affidavit evidence deposes that the company has been in sound financial standing at all material times, and that Murphy has received financial statements on a regular basis, albeit not audited.

She deposes that she has invested over $250,000 of her own money into the business which she treats as a shareholder loan, and that her son Chris Cahill who runs the salvage business/scrap yard has invested the sum of $253,000 of his own money which is also treated as a loan. Application for an Inspector [ 22 ]

Section 231 of the BCA grants the Court the authority to appoint an inspector to conduct an investigation of a corporation. That

section reads as follows: 231(1) A security holder may apply to the Court, ex parte or on any notice that the Court may require, for an order directing an investigation to be made of the corporation and any of its affiliated corporations.

(2) If, on an application under subsection (1), it appears to the Court that there are sufficient grounds to conduct an investigation to determine whether …

(

b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted, or the powers of the directors are or have been exercised, in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of a security holder, …, or (

d) persons concerned with the formation, business or affairs of the corporation or any of its affiliates have in that connection acted fraudulently or dishonestly, the Court may order an investigation to be made of the corporations and any of its affiliated corporations. Business Corporations Act , R.S.A. 2000,

Part 18 Appearance of Oppressive Conduct [ 23 ] In order to have an inspector appointed, there must be an appearance of behaviour that is oppressive, unfairly prejudicial, or unfairly disregarding to the Applicants' interests, or an appearance of fraud or dishonesty in connection with the formation, business or affairs of the corporation. Kowch v. Gibraltar Mortgage Ltd. , 2010 ABQB 535 at para. 23 [ 24 ] Oppression and fraud do not have to be proven, but must appear as a distinct possibility.

Kowch at para. 23 [ 25 ] Courts have held that the standard of proof is one of "appearance, an outward show" of oppressive or fraudulent behaviour. Western Canadian Oil Management Services Inc. v. Arlyn Enterprises Ltd. , 2008 ABQB 521 at para. 76 [ Western Canadian ] [ 26 ] Courts have identified the following as indicia of the appearance of oppression: (

a) Failure to provide financial information, including audited annual financial statements and monthly financial statements, or failure to provide information about suspicious transactions; Kowch , supra at para. 32-33 Saunders v. EcoTemp , 2007 ABQB 136 at para. 15 [ Saunders ] (

b) Failure to pay bills and expenses on a timely basis or at all; Saunders , supra at para. 15-16 (

c) Improper use of company funds; Saunders , supra at para. 16 (

d) Failure to call annual meetings of shareholders;

Kowch , supra at para. 32 (

e) Failure to consult directors about decisions, taking actions without Board approval and failing to hold regular Board meetings. Western Canadian , supra at para. 82 [ 27 ] In this case, it is submitted that there is clear evidence of the appearance of oppressive conduct.

The CCS Group has taken actions without the passing of a directors' resolution approving the same, including the acquisition and financing of significant assets, the retainer of Counsel to defend and commence actions and the continued waiver of audited financial statements notwithstanding that there has been no Shareholders' Resolutions waiving the same since 2008 at the latest. [ 28 ] Furthermore, Gerald Murphy has received no information respecting any of these decisions from Margaret Cahill, the other director on the Boards of Directors of the CCS Group.

Accordingly, it is Margaret Cahill has continued to operate the CCS Group without any consultation with Mr. Murphy since 2008, despite the fact that Mr.

Murphy is the only other director of the CCS Group and holds at least an 80% equity and 50% voting interest in the CCS Group on behalf of the Trust. [ 29 ] Furthermore, in the Applicants' submission, there is evidence of oppressive and/or fraudulent or dishonest conduct in the failure to provide financial information as Margaret Cahill has engaged in a pattern of promising to provide such information and then failing to do so. [ 30 ] Even after having signed the Deloitte Access Agreement on behalf of the CCS Group to provide information to Deloitte, Ms.

Cahill has failed to ensure that complete information was provided. [ 31 ] As a result of Ms. Cahill's failure to respond, notwithstanding her agreement to do so, Mr. Murphy has been unable to determine the financial status of the CCS Group, or his investment therein. He is left, as he has been since his investment in the CCS Group was made, to rely on Ms. Cahill's assertions that all is well with the CCS Group and that the value of the companies has gone up.

Accordingly, the Applicant submits that there is a clear appearance of oppressive conduct and fraudulent or dishonest conduct sufficient to require an investigation. Appointment of an Inspector - Conclusion [ 32 ] As the appointment of an inspector is an extraordinary remedy, the Courts have held that the following considerations should be assessed prior to granting such an order: (

a) whether the Applicants still need access to important information, (

b) whether there are better routes, such as litigation, which can be used to acquire that information, and (

c) whether an investigation is prohibitively expensive, in light of the corporation's resources. Kowch at para. 30 [ 33 ] The primary purpose of an investigation is "to bring to light facts which otherwise might be inaccessible to shareholders and security holders". The BCA anticipates that an inspector's report may be relied upon by the parties who may subsequently pursue remedies under s. 242 of the BCA or by the initiation of separate litigation. Re First Investors Corp. , [1988] A.J. No. 244 at page 10 [ 34 ] On the basis of the Deloitte Report, the Applicants still require access to potentially important information. Despite efforts to

obtain information about the financial circumstances and operation of the CCS Group, Mr. Murphy has been denied certain information about these matters. [ 35 ] I conclude that the appointment of an inspector is the most practical way to get this information. Ms. Cahill and the CCS Group have refused or have been anauble to provide it, notwithstanding a signed agreement that they would do so. Furthermore, this application is brought in the context of an Originating Application which does not allow for access to records through the discovery process.

Nor has there been sufficient information provided by the CCS Group to allow the Trust to make the determination of whether or not it should commence other litigation. [ 36 ] In terms of the corporation's resources, Ms. Cahill has represented in her affidavit that the value of the CCS Group has increased significantly since the time of purchase in 2006. Accordingly, on the basis of her evidence, the cost of an inspection would not be prohibitively expensive. [ 37 ] Furthermore, as distinguished from the circumstances in Kowch, in which case the shareholders held only 1.5% of the shares in the Corporation, Mr.

Murphy on behalf of the Trust holds at least 80% of the equity shares in the CCS Group. Accordingly any cost to the corporation will ultimately be disproportionately borne by the Trust, and Mr. Gerald Murphy has in fact agreed to initially pay all costs associated with the appointment of the inspector. [ 38 ] Therefore I conclude that the appointment of the Inspector is necessary to provide the Applicant and ultimately the Court with an accurate assessment of the CCS Group's historical and current financial position.

The Appointment of an Interim Receiver - Manager [ 39 ] The Applicants are also seeking the appointment of an interim receiver - manager because of the failure of the Respondents to call formal Directors’ meetings, because of Margaret Cahill’s actions without legal authority in the management of the companies at issue herein, because the Board of Directors is deadlocked, and because they have failed to provide relevant and important financial information and disclosure.

The Respondents’ position is that this is essentially a shareholders’ dispute resulting from the breakdown in the relationship between two related families. The Applicant Gerald Murphy is the brother of the Respondent Margaret Cahill, and the brother-in-law of the Respondent Christopher Cahill. The Respondent Margaret Cahill, the brother-in-law of the Respondent, Christopher Cahill. [ 40 ] The case law is clear that the appointment of a receiver - manager is an extraordinary remedy, and is a remedy that should be used sparingly, having regard to all of the circumstances.

The test for the appointment of a receiver - manager is comparable to that of the test for injunctive relief. The test for an injunctive relief involved the tripartite test which consists of the following 3 components:

a) there must be a serious issue to be tried;

b) it must be determined that the Applicant would suffer “irreparable harm” if its application was refused; and

c) an assessment must be made to determine which of the parties would suffer greater harm on the granting or the refusal of the appointment of a receiver - manager pending a decision on the merits, otherwise known as the “balance of convenience” test. Serious Issue to be Tried [ 41 ] There is obviously a serious issue to be tried in this matter with respect to the ongoing dispute between the parties so the first part of the test has been met by the Applicants.

Irreparable Harm [ 42 ] As for irreparable harm to the Applicant in the event that a receiver - manager is not appointed in the present circumstances, I note that a number of the specific financial concerns originally cited by the Applicant have now been satisfied. The Applicant referred to a default judgment obtained by Finning (Canada), a division of Finning International Inc., but that judgment has now been paid. Similarly with respect to various Garage Keeper Liens, they have been paid.

The largest debt outstanding at the time this application was first brought was with respect to unpaid property taxes, but those have been paid. The largest financial loss was incurred with respect to the Shear, but that loss has already been capped. [ 43 ] The Applicant cites serious accounting deficiencies, many unanswered questions with respect to financial disclosure in the ongoing financial operation of the businesses, and the operation of those businesses without legal authority.

While these matters do involve serious matters that need to be dealt with at some point, they fall short of his evidence of irreparable harm necessitating the appointment of a receiver - manager to remedy. This is not a case where a receiver - manager is necessary to preserve or protect the property of the companies as the companies continue to carry on business on a basis in which it generally meets its liabilities as they become due. The company continues to increase in value, although its cash resources are admittedly limited.

The companies are involved in certain ongoing litigation in which major claims are being made against it, but those matters, at this stage are either unproven allegations, or involve relatively small sums of money compared to the value of the companies. The company continues to manage to operate without incurring significant debt. Balance of Convenience [ 44 ] The Applicant obviously has made a substantial investment in the present business operations that are the subject matter of this application.

However I conclude that there is no evidence that the Applicant’s substantial investment is at any real risk at this point based on the present evidence before me. Accordingly I conclude that there is no real urgency to do with the appointment of a receiver - manager at this time. The oppression action has been scheduled at the end of September 2012 and while it may take some time to resolve that matter, the risk to the Respondents outweigh the risk to the Applicant if a receiver - manager were now to be appointed.

The Respondents would be ousted from their present role in running these companies, and there is a clear risk of loss of value to the companies, which has increased under their direction. [ 45 ] In the absence of any exigent circumstances requiring the appointment of the receiver - manager as requested by the Applicants pending the disposition of the ongoing actions in this matter, a significant prejudice to the companies and their shareholders exists if they were to have to bear the costs of a receiver - manager at this time. [ 46 ] I also note that the main business operation consists of a salvage yard in which there is a complex cash manager system utilized in recording and purchasing the types of salvage being dealt with.

It is not a conventional business, but rather one that involves many entries, transactions, and the extensive use of cash. Accordingly it is reasonable for such a business to have more accounting and financial disclosure problems than normal.

It is also a unique business from an operational standpoint and the Respondents have the special expertise and qualification just by virtue of having successfully run that business over a number of years. [ 47 ] In all the circumstances I conclude the balance of convenience lies in allowing the Respondents to continue to operate the businesses without the intervention and appointment of a receiver - manager. The appointment of a receiver - manager is not necessary to protect Mr. Gerald Cahill’s interests until the dispute between he and the remaining shareholders is ultimately resolved.

Disposition [ 48 ] I conclude that the appointment of the Inspector is necessary to provide the Applicant and ultimately the Court with an accurate assessment of the CCS Group’s historical and current financial position, however I decline the application to appoint a receiver -

manager. Heard on the 4 th day of July, 2012. Dated at the City of Edmonton, Alberta this 6 th day of July, 2012. Donald Lee J.C.Q.B.A. Appearances: Sandeep K. Dhir and Lindsay E. Miller Field LLP for the Applicants Rostyk Sadownik Wheatley Sadownik for the Respondent - Margaret Cahill Terrence M. Warner Miller Thomson LLP for the Respondent - Christopher Cahill