Morgan v. Dillon, 2012 ABQB 628

Court of Queen ’ s Bench of Alberta Citation: Morgan v. Dillon, 2012 ABQB 628 Date: 20121015 Docket: 1214 00292 Registry: St. Paul Between: Jeffrey Garth Morgan Applicant - and - Cody Robert Dillon and Shock Oilfield Inc. Respondents _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.B. Veit _______________________________________________________

Summary [ 1 ] Mr. Morgan applies for an interlocutory injunction against Mr. Dillon and Shock Oilfield Inc. on the basis that, as the President and 50% shareholder of Shellshock Oilfield Services Ltd., he has not approved the sale of Shellshock ’ s business to Shock. [ 2 ] The application is denied. [ 3 ] Mr. Morgan has not established that it would be just and equitable to grant an interlocutory injunction in the circumstances

[3] Mr. Morgan has not established that it would be just and equitable to grant an interlocutory injunction in the circumstanceshere. In particular, he has not established either that he will suffer harm which can’t be compensated monetarily or that the balance ofconvenience favours the granting of the injunction. As to harm, because the business of Shellshock is effectively continuing as Shock,Shellshock’s assets and management, its reputation and goodwill, will be easily valued.

As to the balance of convenience, the evidenceon this application leads to the conclusion that the granting of an interlocutory injunction would do everyone, including Mr. Morgan,more harm than allowing the contest between the parties to be settled at trial. [4] In order to perfect his application for an interlocutory injunction in a commercial context, Mr. Morgan should haveprovided an undertaking in damages. In the circumstances here, because Mr. Morgan has not made out an entitlement to an interlocutoryinjunction, the absence of an undertaking is not material. If Mr.

Morgan had otherwise made out an entitlement to an interlocutoryinjunction, the court would have granted an adjournment to have allowed him to provide such an undertaking and for the respondents toassess the value of the undertaking. [5] By Mr.

Dillon: RJR-MacDonald Inc. v Canada, (SCC), [1994] 1 S.C.R. 311; CCI ThermalTechnologies Inc. v Lewis, 2005 ABQB 579; Alberta Permit Pro v Booth, 2005 ABQB 317; Cansafe Inc. v Donkin, 2011 ABQB 698;1400467 Alberta Ltd. v Adderley, 2012 ABQB 155; 702011 Alberta Ltd. v Francos Investments Inc., 1998 ABQB 508. [6] By the court: Hyundai Auto Canada v Cross Canada Auto Body Supply (West) 2006 FC 1510, affirmed, 2008 FCA 12 1. Background [7] Jeff Morgan and Cody Dillon incorporated Shellshock Oilfield Inc. as a Saskatchewan corporation in October 2004 andregistered the company in Alberta in December of 2004.

Each of Morgan and Dillon owned, and continues to own, 50% of the issuedshares of the company and is a director of Shellshock; Morgan is its President and Dillon is its Secretary. The business of Shellshock isoilfield well servicing in the Elk Point, Lloydminster and Bonnyville areas. Shellshock uses flushby trucks and pressure trucks toperform well and rig servicing. [8] At the time of this application, the parties are 31 and 34 years of age. This could only be relevant with respect to theperceived business acumen of each party.

Shellshock has no Unanimous Shareholders’ Agreement. [9] The primary secured creditor of Shellshock is Synergy Credit Union Ltd. Both Morgan and Dillon have signedpersonal guarantees of Shellshock’s debts in favour of Synergy. [10] When Shellshock was first incorporated, it financed the purchase of a 66% interest in a body vac truck.

For the first 9 monthsof its existence, Morgan continued his full time employment with Husky and Dillon was employed full time as the operator of the bodyvac truck. [11] In July, 2005, Shellshock bought a 60% interest in one flushby truck, unit 707; the other owners of the truck were EugeneSmith Trucking Ltd. and Ken Veikle Land & Cattle Co. Ltd.

At about the same time, Shellshock bought a 50% interest in anotherflushby truck, unit 808; the remaining interest in that truck was owned by Eugene Smith Trucking Ltd. [12] In the fall of 2005, Morgan began to work full-time with Shellshock. [13] Between 2007 and 2011, Shellshock purchased interests in, or made arrangements with a number of lease operators inrelation to, a number of trucks. For each of units 909, 910, 912, 201, the only person who had a beneficial interest in contracts withShellshock, other than Shellshock itself, was Keith Veikle or Ken Veikle Land & Cattle Co. Inc.

In relation to unit 202, the only otherperson than Shellshock to have an interest was GVM Trucking Ltd. With respect to unit 908, the only other person who had an interestis 101037185 Saskatchewan Ltd.

[ 14 ] Over the years, Morgan had a difficult relationship with the Veikles. Morgan states that, prior to March 2011, Dillon was involved in personal business dealings with Ken Veikle in relation to the lease of farm land. [ 15 ] In February 2011, Dillon asserts that Morgan told him that he wanted “ out of ” Shellshock. Dillon states that he suggested to Morgan that they ask Shellshock ’ s corporate accountants to prepare an estimate of value of Shellshock.

Dillon swears that he and Morgan agreed that they would value Morgan ’ s interest as of February 28, 2011. [ 16 ] Morgan agrees that he did have discussions with Dillon as to the buyout of his interest in Shellshock, but maintains that no agreement was ever reached on an effective date for such purchase, or on the purchase price, or on Morgan ’ s resignation as a director and officer of Shellshock, or on a payment

schedule to repay Morgan ’ s interests in the company. [ 17 ] Morgan did ask the corporate accountants to prepare a valuation of Shellshock as of February 28, 2011. [ 18 ] Dillon states that he and Morgan agreed that Morgan would continue as an employee of Shellshock for two or three months while he found new employment and that, during that time, Shellshock would also pay for Morgan ’ s company truck and cell phone. [ 19 ] In early March, 2011, Ken Veikle became concerned about Shellshock ’ s corporate records which undervalued the work done by unit 912.

Dillon swears that Morgan admitted to him that he had improperly booked the work tickets for that truck. Dillon asserts that Morgan was not able to work things out with the Veikles. Because of that difficulty, Dillon swears that, on or about March 10, 2011, Morgan agreed to cease his employment with Shellshock and left the premises and the business.

Dillon states that Morgan has not done any work for Shellshock since that date in March, 2011. [ 20 ] Morgan agrees that, at least since early March, 2011, Dillon has acted as General Manager of Shellshock. [ 21 ] Dillon swears that, after Morgan left Shellshock, the company ’ s secretary and one of the company ’ s flushby operators told him that, on at least 3 occasions, Morgan had directed them to switch the unit numbers on his time sheets from a lease operator unit to a Shellshock unit, thereby increasing Shellschock ’ s revenue to the detriment of the lease operator. [ 22 ] Dillon swears that, after Morgan left Shellshock, Dillon learned for the first time that Shellshock ’ s CRA payments - for which Morgan was responsible - were late, resulting in interest and penalties of $85,000.00 which Shellshock was required to pay. [ 23 ] In April 2011, Morgan and Dillon received the corporate accountants ’ estimate of value report.

Based on that preliminary assessment, Morgan ’ s interest in Shellshock would be in the six figures. However, Dillon expressed concerns about the valuation, including the expertise of the accountants as business valuers, and also the fact that the valuation did not take into account Shellshock ’ s debts and that the valuation of goodwill did not take into account Morgan ’ s poor relations with a co-owner of Shellshock ’ s assets.

Dillon states that he told Morgan that if Morgan believed that the corporate accountants ’ valuation was reliable, he was willing to sell his interest in Shellshock to Morgan based on that valuation and that Morgan refused. [ 24 ] Dillon swears that Synergy would not extend Shellshock ’ s line of credit because it viewed Shellshock ’ s financial situation as risky at least in part because of the unresolved buy-out of Morgan. [ 25 ] Dillon states that, during the remainder of 2011, negotiations continued between himself and Morgan concerning the value of Morgan ’ s shares.

In October, 2011, Morgan retained a lawyer to negotiate what was described as a “ potential buyout ” of his interest in Shellshock; at that time Morgan requested current Shellshock financial information. In November, 2011, Dillon states that he proposed to Morgan that they use a valuation date of April 30, 2011 as that was the date of Shellshock ’ s fiscal year end. No agreements were reached. [ 26 ] In May, 2012 Dillon decided to wind down Shellshock with the intent to liquidate its assets and pay off all the debt owed to Synergy.

He states that he attempted to discuss this matter with Morgan but that Morgan would not take his calls. On July 16, 2012,

Morgan withdrew $20,000.00 from Shellshock ’ s bank account; he has not justified this withdrawal. [ 27 ] Dillon swears that Synergy continued to pressure him to come to an agreement with Morgan culminating in the refusal of a loan until Dillon had a written agreement with Morgan. On June 1, 2012, Synergy eliminated Shellshock ’ s operating line of credit. [ 28 ] Morgan swears that he never received any communication from Synergy expressing concerns about Shellshock ’ s operations or Shellshock ’ s credit worthiness.

Indeed, Morgan swears that, in January 2012, he was contacted by the loans officer at Synergy concerning the renewal of a loan relating to unit 909, that Morgan executed such renewal documents and that the Synergy loans officer never expressed any concern about Shellshock ’ s operations or credit worthiness; on the contrary, Morgan asserts that Kirby Floen, the Synergy loans officer told him in August 2012 that relations with Shellshock were on a “ business as usual ” footing. [ 29 ] In July, 2012, Dillon told Morgan that he had decided to wind down the operations of Shellshock and that he had started a new company, Shock Oilfield Inc., which would buy out Shellshock ’ s assets, including choses in action and contracts, at market value. [ 30 ] Shellshock stopped operating on June 26, 2012.

All of Shellshock ’ s employees are now employed by Shock and all of the lease operators have entered into verbal agreements with Shock. [ 31 ] On August 7, 2012, Shock posted an advertisement for flushby operators in the St. Paul Journal.

The ad states that Shock is “ formerly Shellshock ” and gives one contact mechanism as an internet connection with a “ cody ” . [ 32 ] On September 20, 2012, Morgan issued a statement of claim asking for special and general damages of $1,000,000.00, punitive damages of $250,000.00 and interlocutory and permanent injunctions against Shellshock operating through Shock. [ 33 ] Morgan has not given an undertaking in damages in support of his application for an interlocutory injunction. 2.

The three main factors in the assessment of whether it is appropriate for a court to issue an interlocutory injunction [ 34 ] The parties agree, and I agree with them, that in determining whether it should exercise its discretion to grant an injunction before a trial has established the rights of the parties, the court should consider, as non-separate but important factors, whether there is a serious issue to be tried, whether Mr. Morgan will suffer irreparable harm if the injunction is not granted and whether the balance of convenience favours the granting of the injunction. 3.

There is a serious issue to be tried [ 35 ] The parties agree, and I agree with them, that there is a serious issue to be tried. 4. Mr.

Morgan has not established that he will suffer irreparable harm if the injunction is not granted [ 36 ] Irreparable harm has been defined by the Supreme Court of Canada as harm which cannot be quantified monetarily or cannot be cured. [ 37 ] In his statement of claim, Morgan asserts that the harm that he has suffered is that Dillon has breached his fiduciary obligations to him and to Shellshock by abandoning his duties and obligations to Shellshock and by actively competing with Shellshock through Shock. In my view, if Mr.

Morgan ’ s claims are upheld at trial, he can be effectively and fully compensated by an award of money damages.

[ 38 ] In coming to that conclusion, I begin by observing that even if Morgan is correct that Dillon has committed a blatant corporate wrong in winding up Shellshock without Morgan ’ s approval, the test for the granting of an interlocutory injunction still requires proof of irreparable harm: Hyundai . In that case, the Federal Court of Appeal approved a trial level decision in which the trial judge had said: 15 I, therefore, can find no clear authority for the Plaintiff's proposition that "blatant infringement" justifies an injunction even in the absence of irreparable harm.

The same principle applies here. [ 39 ] Can Morgan be compensated monetarily if his position is upheld at trial? In the circumstances here, I am of the view that he can be so compensated. Here, Dillon has, in fact, continued Shellshock through the use of Shock; indeed, he has advertised that he is doing that very thing. The evidence on this application is that Shock has taken over the premises, the assets, and even the management - i.e. Dillon - of Shellshock. Shock is not in competition with Shellshock - Shock is Shellshock without Morgan.

This is not a situation of conversion - at least not in the sense of that term as used in the Criminal Code where conversion is a form of theft because it is appropriation without recognizing a duty to pay or account. The evidence on this application is that Shock has undertaken to pay commercial market prices for every asset of Shellshock that it has acquired.

In the sense of change by way of substitution in value, “ conversion ” has no negative or pejorative connotation; on the contrary, it would be well within the normal management role of the manager of a company to sell corporate assets so long as fair value is obtained for them. Morgan is not himself in the business that either Shellshock or Shock are in; therefore, he has not lost anything more by reason of Dillon ’ s winding up of Shellshock than the value of his interest in that company.

Nor is Shellshock ’ s business in any way arcane; on the contrary, it is the kind of business where, so long as truthful records are kept of truck usage, it is easy to track Shellshock ’ s or Shock ’ s right to a management fee or to an owner ’ s fee. In

summary, the value of Morgan ’ s interest in Shock will be easy to quantify. [ 40 ] In addition, Morgan has claimed punitive damages against Dillon; as that claim illustrates, the type of fiduciary wrongdoing which Morgan alleges can, in fact, be compensated monetarily. [ 41 ] Moreover, the Rules of Court, and the common law, provide mechanisms to allow litigants who are of the view that they will clearly be successful at trial to ensure that they will recover double costs if they are successful.

Therefore, assuming that the trial court upholds his position, Morgan will not only be substantively successful in regaining any value that he has lost but it will not cost him much in legal fees to prove that he is right. [ 42 ] Although Morgan being successful at trial is one clear possible outcome of this litigation, this court must also consider the possibility that Morgan will not be successful at trial. We are in the very early days of the legal proceedings initiated by Morgan. So far as I am aware, Dillon and Shock have not filed a statement of defence to Morgan ’ s claim.

It is not impossible that a trial court would uphold Dillon ’ s position on this application, namely that Dillon and Morgan had a contract pursuant to which Dillon would buy Morgan ’ s shares in Shellshock as of February 28, 2011. The fact that no price for the shares was agreed on between the parties is not an insuperable barrier to the finding of a contract: courts can impose a “ reasonable price ” term in an incomplete contract if they find that the intention of the parties was in fact to create a contract of purchase and sale.

Although there are some facts which appear to support Morgan ’ s position that no such contract exists - such as the fact that there has been no share transfer and that Morgan has refused to resign his directorship - some facts appear to support Dillon ’ s position that such a contract does exist - such as Morgan ’ s request for an assessment of value as of February 28, 2011, and Morgan ’ s abandonment of employment and of active involvement with the company as of March, 2011.

If a contract for the sale of Morgan ’ s shares exists, then Morgan does not have any ongoing rights in Shellshock, at least none that would be enforced in equity, although he does have the right to be paid a reasonable price for his shares of Shellshock and the right to obtain interest on the payment for those shares as of February 28, 2011. Again, those rights are rights which are identifiable monetarily. [ 43 ] In

summary on this aspect of the analysis, even assuming that Morgan will be successful at trial on the basis of the rights which he has outlined in his statement of claim, Morgan can be compensated monetarily for the breach of his rights. 5. Mr. Morgan has failed to provide an undertaking in damages

[ 44 ] An undertaking in damages is an adjunct to the notion of irreparable harm in the context of applications for interlocutory injunctions. The granting of an interlocutory injunction provides relief before the claim can be tried, and will often prevent one litigant from doing what they would otherwise have a right to do. Therefore, it stands to reason that the person asking for such a remedy should be required to provide an undertaking in damages, to innoculate against the possibility that they will be unsuccessful, or only partially successful, at trial.

The situations in which an undertaking in damages will not be required from an applicant for an interlocutory injunction in a commercial context are rare. [ 45 ] Mr. Morgan asserts that he is not required to, and should not be required to, provide an undertaking in damages as a pre- requisite to the granting of an injunction. [ 46 ] With respect, I am of the view that nothing in the circumstances here relieves Mr. Morgan of the obligation to provide an undertaking in damages. Morgan argues that he should not have to provide an undertaking because it is so clear that he will be successful at trial.

As indicated above, there are two problems with that reasoning. The first is that, as explained above, there is a realistic possibility that a trial judge would accept Dillon ’ s position, rather than Morgan ’ s, on the substantive contest between the parties.

The second is that, as the Hyundai decision illustrates, even where it is virtually certain that a litigant will be successful at trial, in asking for pre-trial relief, that litigant is engaging a remedy which might have unforeseen negative consequences against which a justice system must guard. [ 47 ] Nevertheless, if Morgan had otherwise established his right to an interlocutory injunction, I certainly would have granted an adjournment to allow Morgan to provide an undertaking and to allow Dillon to assess the merits of the undertaking. 6. Mr.

Morgan has not established that the balance of convenience favours the granting of an injunction [ 48 ] Listing the balance of convenience as one of the factors which a judge should consider in determining whether it is just to grant an interlocutory injunction is one mechanism for ensuring that the judge looks at the overall effect of acceding to the request for an interlocutory injunction: which of the parties will suffer the most harm by the granting of the requested relief. Therefore, the balance of convenience in this context is an amorphous notion.

In part, it encompasses both the relative strength of the position of each of the parties and a consideration of whether the applicant will suffer irreparable harm if the injunction is not granted. Those factors have already been addressed.

The balance of convenience prong of the analysis reminds the judge that it is often useful to consider, in addition to all other pertinent factors, who would suffer the greater harm as a result of the granting of an interlocutory injunction. [ 49 ] Here, the only conclusion which the court can draw from the evidence led on the application is that all parties, including Morgan, would suffer if an interlocutory injunction were granted. Even Morgan agrees that his relationship with the Veikles is poisonous; an ongoing commercial arrangement in which Morgan was an active party is simply unworkable.

The Veikles are, according to the evidence, an important component of the Shellshock business, both as co-owners of important assets and as lease operators. Therefore, any attempt to force the business back into a situation where Morgan has some effective control might have a negative effect on Shellshock ’ s ability to maintain control over its basic assets. Similarly, Morgan ’ s alleged improprieties relative to lease operators obviously poisons an ongoing relationship with those parties without whom Shellshock could not maintain its well servicing contracts.

If Morgan does, in fact, have an ongoing interest in the ongoing business, then it is in Morgan ’ s interest as well as in Dillon ’ s interest to go forward on a basis that will provide the best commercial common sense - which is to continue the effective business in the way in which it has been conducted for the last year and a half, since March, 2011. The assets, contracts and even goodwill are all easily traceable from Shellshock into Shock.

Since the commercial relationships amongst the Veikles, Dillon, Morgan and the lease operators cannot be put back into the situation they were in prior to Morgan ’ s actions, there is no benefit in trying to put the commercial structure back into place either. In

summary on this point, the balance of convenience does not favour the granting of the interlocutory injunction. 7. Conclusion [ 50 ] For the reasons set out above, the court concludes that Morgan has not established that this is a situation in which it is just and equitable to grant an interlocutory injunction. 8. Costs [ 51 ] If the parties are not agreed on costs, I may be spoken to within 30 days of the release of this decision.

Heard on the 1 st and 5 th days of October, 2012. Dated at the City of St. Paul, Alberta this 12 th day of October, 2012. J.B. Veit J.C.Q.B.A. Appearances: Donnon F. Fevering, Hall and Revering for the Applicant Alison Archer, Bennett Jones LLP for the Respondents