Southern Pacific Resources Corp. v. Gulka, 2012 ABQB 676

Court of Queen ’ s Bench of Alberta Citation: Southern Pacific Resources Corp. v. Gulka, 2012 ABQB 676 Date: 20121031 Docket: 0901 05698 Registry: Calgary Between: Southern Pacific Resources Corp . Plaintiff - and - Christopher Gulka and Troy Mochoruk Defendants And Between: Troy Mochoruk Plaintiff by Counterclaim - and - Southern Pacific Resources Corp. Defendant by Counterclaim _______________________________________________________ Reasons for Judgment

of the Honourable Madam Justice B.L. Veldhuis _______________________________________________________ I. Introduction [ 1 ] “Entitlement”: an absolute right to a ([usually] monetary) benefit, such as social security, granted immediately upon meeting a legal requirement ( Black ’s Law Dictionary , 9th ed). [ 2 ] This case concerns a company that knew it was in financial trouble and needed to secure a merger deal, and a president and CEO who was worried about securing his severance and expenses.

He was so worried that he took what he felt he was due and ignored the key qualification to all entitlements: the fulfillment of any legal requirements. In response, his company stopped paying him without firing him. This dispute may be characterized as a question of what the president’s entitlements were and whether or not the legal requirements giving rise to these entitlements were met. [ 3 ] The plaintiff in this action seeks the recovery of monies it believes are owed by a former executive member of a company that has since merged with the plaintiff.

This includes $185,118.92 in “prepaid” severance, $31,200 in improper expenses, interest on these amounts, punitive damages of $50,000, and an award of solicitor and client costs in the action. The defendant seeks the dismissal of this claim and counterclaims for the payment of monies he believes are owed to him by the plaintiff. This includes $39,881.08 in severance pay, $75,000 in unpaid salary, interest on these amounts, and costs in the action. II. Facts and background [ 4 ] Rochester Energy Corp. (“Rochester”) was a publicly-traded junior oil sands exploration company based out of Calgary, Alberta.

The rights and liabilities of Rochester were assumed by Southern Pacific Resources Corp. (“STP”), a growing public oil sands exploration and production company, when the two amalgamated in March 2009. [ 5 ] During the period relevant to this dispute, Rochester’s Board of Directors (the “Board”) consisted of Troy Mochoruk (“Mochoruk”), Scott Reeves (“Reeves”), Joe Dion (“Dion”), and Morgan Tingle (“Tingle”). All four directors testified at trial. [ 6 ] The defendant, Troy Mochoruk served as the President and CEO of Rochester from February 8, 2006 until his resignation on October 28, 2008.

As a witness I found him to be inconsistent and even evasive at times. Accordingly, I afford his testimony reduced weight. [ 7 ] Scott Reeves is currently a lawyer at TingleMerrett LLP and was the corporate secretary of Rochester from December 2007 until March 2009, in addition to his role as director. Due to his consistency, candour, and professional knowledge I found him to be a particularly compelling witness. [ 8 ] Joe Dion is a businessman and currently the chairman and CEO of Frog Lake Energy Resources Corp., a private company wholly owned by the Frog Lake First Nation.

I was impressed with Dion’s candour and sincerity throughout his testimony. [ 9 ] Morgan Tingle was Rochester’s corporate secretary before Reeves assumed that role and was also interim CEO following the resignation of Mochoruk. He currently works as a lawyer with Consolidated Civil Enforcement.

[ 10 ] David Antony (“Antony”) is currently chairman of the board of STP. He was also STP’s CEO from 2007 until early 2009, during which time he was responsible for two rounds of negotiations to amalgamate with Rochester. His background is as a Chartered Accountant. Antony also testified at trial. [ 11 ] Christopher Gulka (“Gulka”) was the CFO of Rochester during the relevant period and resigned from this position at the same time as Mochoruk.

Although initially a co-defendant in this action, Gulka and STP settled their affairs and had a Consent Judgment entered to that effect. [ 12 ] In early 2008 Rochester had a problem. Although it had operated at a loss since its creation, this was not unusual for an oil exploration company. Reeves testified that the matter weighing most heavily on the minds of the directors at that time was a tax flow- through problem.

Basically, if Rochester was unable to spend a given amount by the end of the 2008 tax year, tax writeoffs would be lost and the shareholders would have to cover this loss on their personal income taxes. Most urgently for the directors, the shareholders could potentially seek to recover their losses directly from the directors. [ 13 ] Mochoruk disputed the urgency of this problem in his testimony. However, he was concerned enough to participate in merger discussions with STP that would have resolved the tax flow-through issue.

In early 2008 Mochoruk and Antony met for lunch and several draft letters of intent were exchanged. [ 14 ] Negotiations got more serious in May and culminated in a non-binding Letter of Intent, signed on May 28, 2008 (the “LOI”). During the negotiations, for reasons that are not clear, it was determined that Mochoruk would not be offered a position with STP post- merger. At this point, Mochoruk became concerned that he would not be paid any severance.

In May 2008, Mochoruk had no written contract or arrangements for severance at all, although discussions to formalize an employment contract were ongoing. [ 15 ] Antony testified that it was his general preference for severance not to be paid in merger situations but that in this instance it became a negotiated item. The LOI contemplated that any severance payment made in relation to the proposed amalgamation would not exceed $100,000.

Antony admitted that although his negotiation position was that Rochester needed to resolve severance payments prior to amalgamation, Rochester’s liability for any outstanding contractual severance would ultimately transfer to STP if and when a merger was concluded. [ 16 ] The animosity between Mochoruk and Antony was clear to me from their respective testimony and the tension between them in the courtroom was palpable.

I am satisfied in concluding there was an early breakdown in the relationship between the two, which contributed to the contention in this dispute. [ 17 ] On May 15 2008, before the LOI was finalized, Mochoruk phoned Reeves to talk about the issue of severance. They discussed what amount would be appropriate and when it could be paid. Reeves testified that he told Mochoruk severance could not be paid prior to the closing of the merger transaction. [ 18 ] Mochoruk testified that Reeves agreed a severance payment was appropriate. Reeves did not contradict this.

However, Reeves specifically denied the suggestions that he advised Mochoruk that an immediate payment of severance was appropriate or that any severance should be paid to himself. [ 19 ] On May 16, 2008 three certified cheques were drafted and cosigned by Mochoruk and Gulka. They were in the amount of $225,000 for Mochoruk (the equivalent of 18 months salary), $189,000 for Gulka, and $115,000 for Reeves. Mochoruk deposited his cheque the same day.

The full board of directors never met to discuss these payments prior to this date, nor did Tingle or Dion have any knowledge of the payments at this time. [ 20 ] Reeves testified that he was stunned when he discovered the $115,000 cheque on his desk. He contacted Mochoruk in the following days and asked what the money was for. Mochoruk told him the cheques were a pre-payment of severance the three would be entitled to if the deal with STP was finalized. [ 21 ] Reeves next contacted Tingle to advise him of these developments.

Both individuals told Mochoruk the cheques had to be returned immediately since the payments were improper at that time. Mochoruk recognized that the money needed to be returned and did repay the full $225,000 back to Rochester on May 22, 2008. Reeves returned his cheque in June 2008, without ever having deposited it.

Tingle testified that, until he discovered otherwise in August, he thought that was the end of the matter. [ 22 ] It was not. On May 27, 2008, Mochoruk went back to Gulka and had a new cheque for $225,000 signed and certified. It was deposited in Mochoruk’s personal account on May 30, 2008. While Tingle was unaware a new cheque had been issued, Reeves was unaware that Mochoruk had ever returned the first cheque.

Reeves assumed that Mochoruk had the money all along and continued, informally, trying to convince him to return the money. [ 23 ] At this point Mochoruk became largely absent from the ongoing merger discussions and the business of Rochester generally. Mochoruk testified this was because he felt he was no longer CEO in practice or on paper. Indeed, Mochoruk’s salary was not paid from May 2008 onward. [ 24 ] Reeves testified that, as of May 2008, no one had asked Mochoruk to step back from his duties as CEO, nor did the Board resolve to terminate his employment.

In fact, Reeves considered it disappointing that the president of Rochester and lead negotiator in the merger deal was generally absent at this critical stage in the company’s future. Mochoruk was not completely absent: contact continued with the members of Rochester’s board, he continued responding to email discussions about the merger, and he signed the documents discussed below. [ 25 ] Negotiations between STP and Rochester continued. On June 24, 2008 several relevant documents were signed and executed.

The first document was an Executive Employment Agreement, which formalized the ongoing discussions about the employment relationship between Mochoruk and Rochester. It provided for severance of 18 months salary - equalling $225,000 for Mochoruk - payable under certain conditions. This document was made retroactive to April 15, 2008.

It was not specifically linked to the STP merger deal, although it did include general references to a “Change of Control.” [ 26 ] Next was an Arrangement Agreement between Rochester and STP which constituted a closing document and included the terms on which the merger would be finalized. The amount of working capital, a kind of business “cash float,” required by Rochester was lowered from the $900,000 figure in the LOI to $800,000. It also raised the maximum contemplated severance from the $100,000 figure found in the LOI to $200,000.

These were contentious items because as many witnesses testified, the ability of Rochester to meet the working capital requirement was in doubt. [ 27 ] Coordinated with the Arrangement Agreement was an additional document of Resignation and Release. This document included the details of Mochoruk’s resignation, effective upon the final closing of the merger deal. It included a severance payment of $120,000. [ 28 ] Throughout the summer of 2008 progress on the merger arrangements continued.

STP began to take a role in Rochester’s operations, took Rochester’s furniture and office space, and hired one of Rochester’s few employees. Rochester retained responsibility for its finances, accounting, and corporate governance. [ 29 ] Reeves testified that STP had been looking for grounds under the Arrangement Agreement to cancel the deal and that the working capital amount was vulnerable to becoming such justification. On August 12, 2008 Mochoruk returned $39,881.08 of the severance payment he had taken in an effort to increase the amount of working capital and get the deal done.

Reeves testified that part of the discussions at this time included off-setting the repayment of the owed severance amount by the amount of unpaid salary. It was suggested at trial that this repayment amount was reached by subtracting salary, bonuses, and expenses owed to that date from the $120,000 in severance contemplated by the Resignation and Release. [ 30 ] Antony testified that it was somewhat difficult to obtain all the information related to financial due diligence in the deal, but that by August 2008 STP had discovered the issue of the outstanding prepaid severance amounts.

STP continued to be concerned about the inability of Rochester to meet its working capital requirement. On August 14, 2008 STP exercised its right under the Amalgamation Agreement to terminate the transaction because the working capital requirement was significantly short. [ 31 ] After the deal fell through the Board continued to pursue the repayment of the severance amounts. Reeves testified that although many flexible options for repayment were offered, none were accepted. This prompted the Board to take formal steps.

In late September or early October the Board issued Mochoruk an ultimatum (the “Fall 2008 Ultimatum”) to either repay the remaining amount of the severance payment and resign, or enter into a formal repayment agreement with security and then resign. Barring this, the Board

was considering terminating Mochoruk’s employment for cause. [ 32 ] On October 28, 2008 Mochoruk tendered his resignation to the Board. While this was not accompanied with any repayment, his resignation was accepted. Tingle testified that the Board continued to seek repayment after this resignation. [ 33 ] In November 2008 merger talks between STP and Rochester resumed and resulted in the legal amalgamation of the two entities in March 2009.

STP assumed all the rights and liabilities of Rochester, including those related to this trial. [ 34 ] At various times between September 2007 and September 2008 Mochoruk billed $23,200 in business expenses as Office, Communications, and Office Communications per diems . Exhibit 3 also shows a cash advance of $8000 was paid to Mochoruk. III. Issues [ 35 ] The issues in this trial can be grouped into two broad categories: 1) Was Mochoruk entitled payment and if so, under which circumstances; and, 2) Did those circumstances transpire. [ 36 ] The specific issues to be resolved are:

a) What, if any, was Mochoruk’s severance entitlement;

b) Was severance triggered, either because Rochester stopped paying Mochoruk’s salary, or because a change of control occurred;

c) What was Mochoruck’s salary entitlement;

d) Did anything justify the non-payment of Mochoruk’s salary;

e) What was Mochoruk entitled to claim as business expenses; and,

f) Was Mochoruk entitled to the business expenses he did claim. IV. Mochoruk ’s entitlements

a) Severance [ 37 ] Potentially, three different documents govern Mochoruk’s severance entitlement:

1) the LOI; 2) the Resignation and Release; and, 3) the Executive Employment Agreement. These are contracts and legal documents purporting to bind sophisticated parties. As business professionals of many years of experience it is fair to assume that these individuals were aware of the contractual terms they agreed to. At trial, it was not suggested otherwise. [ 38 ] The LOI was merely a non-binding statement of the progress of merger talks. It did not put into legal effect any of the provisions related to severance, amalgamation, or the termination of Mochoruk’s employment.

Therefore, it does not constitute the legal authority to issue severance. [ 39 ] Similarly, the Resignation and Release, although signed and executed, never carried any legal effect. The document begins with these words: Know all men by these presents that I, Troy Mochoruk, hereby resign as an officer and director of the Corporation effective the date of closing of the arrangement between Rochester Energy Corp. and Southern Pacific Resource Corp., by agreement dated on or about June 24, 2008. [Emphasis added] In the end, the deal with STP fell through. There never was a closing date.

The original Arrangement Agreement was then superceded by a new agreement in 2009. [ 40 ] However, the Executive Employment Agreement was effective from April 15, 2008. It was the only employment document, in relation to Mochoruk, effective at any point in the relevant time period. Although poorly drafted in segments, its terms govern the proper resolution of this dispute. I have made necessary grammatical corrections in square brackets below. In this document, “the Executive” refers exclusively to Mochoruk. [ 41 ] The Executive Employment Agreement refers to severance as the “Payout Amount.” In

Section 1.1(m), the Payout Amount is defined as “18 months salary”. Under the authority of

Section 5.1 monthly salary is set at $12,500. [ 42 ] Severance is not triggered by termination of the Executive by Rochester for cause.

Section 8.3 reads: (

a) The employment of the Executive may be terminated by the Corporation for Just Cause at any time after the Effective Date: (

i) forthwith upon delivery of Notice by the Corporation to the Executive (which Notice shall contain particulars of the Just Cause), in the event of Just Cause as defined in subsection 1.1(i)(ii) or (iii); and (ii) at the expiry of 30 days following the delivery of Notice by the Corporation to the Executive (which Notice shall contain particulars of the Just Cause), in the even of Just Cause other than as defined in subsection 1.1(i)(ii) or (iii), if the Executive has not rectified the failure specified in such Notice prior to the expiry of such 30 days. (

b) In the event of termination pursuant to

Section 8.[3](a);

(

i) the Executive shall have no further right to Salary, Benefits, Perquisites or any other payments due hereunder from and after the Termination Date (other than such payments accrued but unpaid to the Termination Date and other than in respect of any unreceived vacation as provided in

Section 6.1); [...] (iii) for greater certainty, the Executive shall have no right to the Payout Amount (as that term is defined in

Section 1.1(m)). [ 43 ] Severance is triggered by the termination of the Executive by Rochester without cause.

Section 8.4 reads: (

a) The employment of the Executive by the Corporation may be terminated by the Corporation, other than by reason of Permanent Disability, Death, or Just Cause, at any time after the Effective Date, following the delivery by the Corporation to the Executive of Notice of Termination under this

Section 8.[4](

a) and subject to

Section 8.[3](

a) above. (

b) Upon termination of employment pursuant to

Section 8.[4](a), the Executive shall be entitled to receive and the Corporation shall pay or arrange to be paid or provided to the Executive in cash or by certified cheque within 5 Business Days after the Termination Date, or within such other period to effect tax planning at the request of the Executive and to the extent permitted by law: (

i) the Payout Amount less required statutory deductions; provided that the Corporation shall not be required to pay all or any part of the Payout Amount unless and until the Executive shall have executed and delivered a specific release, in form and substance satisfactory to the Corporation (acting reasonably); plus (ii) accrued and unpaid Salary, Benefits, Perquisites and expenses to the Termination Date and in respect of any unreceived vacation as provided in

Section 6.1. [...] [ 44 ] The Executive is entitled to terminate his own employment. Resignation precludes severance unless constructive dismissal is claimed.

Section 8.5 reads: (

a) The Executive may terminate this Agreement and his employment with the Corporation by providing 30 days’ prior Notice to the Corporation. Upon receipt of such Notice of termination by the Executive, the Corporation shall be required to pay the Executive any Remuneration, and provide the Executive with any Benefits, earned up to the Termination Date, and may either require the Executive to continue to perform his duties until the Termination Date, or dismiss the Executive at any time after receipt of the Notice, without additional compensation or obligation to the Executive. (

b) The employment of the Executive by the Corporation may be terminated by the Executive in the event of Constructive Dismissal, following the delivery by the Executive to the Corporation of Notice of such termination, which Notice shall contain particulars of the Constructive Dismissal and must be delivered to the Corporation within 45 days of the occurrence of the act, or the last in a series of acts, of Constructive Dismissal relied upon. The date of termination shall be effective as at the date defined in the Notice. (

c) Upon termination of employment pursuant to

Section 8.[5](b): (

i) the Corporation shall pay to or to the order of the Executive in cash or by certified cheque within 10 days after the Termination Date, or within such other period to effect tax planning at the request of the Executive, acting reasonably, and to the extent permitted by

law, the Payout Amount; provided that the Corporation shall not be required to pay all or any part of the Payout Amount unless and until the Executive shall have executed and delivered a specific release in form and substance satisfactory to the Corporation (acting reasonably); (ii) as expeditiously as possible after the Termination Date, the Corporation shall pay or reimburse the Executive for all expenses incurred prior to the Termination Date, upon submission of proper receipts; [...] [ 45 ] Board approval is not strictly required to make payments under Sections 8.4 and 8.5.

However, the provision of a statement releasing Rochester from its legal liabilities relating to the Executive to the satisfaction of the Board is mandatory. [ 46 ] An entitlement to severance flows in the event of constructive dismissal. This is contemplated in

Section 8.5(b).

Section 1.1(

g) defines “Constructive Dismissal” and includes, among other things: (ii) any failure by the Corporation to continue in effect any benefit, bonus, profit sharing, incentive, remuneration or compensation plan, stock ownership stock option or stock purchase plan, pension plan or retirement plan in which the Executive is participating or entitled to participate or the Corporation taking any action or failing to take any action that would adversely affect the Executive’s participation in or reduce his rights or benefits under or pursuant to any such plan, without in any of the foregoing events providing alternative rights or benefits of reasonably equivalent or greater value, or the Corporation failing to increase or improve such rights or benefits on a basis consistent with practices in effect with respect to the other senior executives of the Corporation; or [...] (vi) the occurrence of a Change of Control. [ 47 ]

Section 1.1(

e) provides four triggering events that constitute a “Change of Control.” They are given as: (

i) the acquisition hereafter, directly or indirectly and by any means whatsoever, in one transaction or a series of transactions, by any person or by a group of persons acting jointly or in concert, of that number of voting shares of the Corporation which is equal to or greater than Fifty Percent (50%) of the total issued and outstanding voting shares of the Corporation immediately after such acquisition, but excluding any issue or sale of shares of the Corporation by way of prospectus or private placement; or (ii) the election at a meeting of the Corporation’s shareholders, as Directors of the Corporation, of a number of persons, who were not included in the slate for election as Directors proposed to the Corporation’s shareholders by the Corporation’s prior Board of Directors, and who would represent a majority of the Board of Directors, or the appointment as Directors of Corporation, of a number of persons which would represent a majority of the Board of Directors, nominated by any holder of voting shares of the Corporation or by any group of holders of voting shares of the Corporation acting jointly or in concert and not approved by the Corporation’s prior Board of Directors; or (iii) the completion of any transaction (including any amalgamation or the sale, lease or other transfer of assets of the Corporation) or the first in a series of transactions which would have the same or similar effect or result as any transaction or series of transactions referred to in subsection (

i) or (ii) above; or (iv) a determination by the Board of Directors of the Corporation that there has been a change, whether by way of a change in the holding of the voting shares of the Corporation, in the ownership of the Corporation’s assets or by any other means, as a result of which any person or group of persons acting jointly or in concert is in a position to exercise effective control of the Corporation.

b. Salary [48] Mochoruk’s salary entitlement is laid out in

Section 5.1 of the Executive Employment Agreement as $150,000 per year($12,500 per month). This remuneration is contemplated as contractual consideration for the services provided to Rochester.

Section 3.1describes these services as such duties and responsibilities as designated by the Board and customary to the position of President andChief Executive Officer in a similarly-sized corporation.

Section 4.1 provides the standard to which these duties are to be performed: During the period of employment, the Executive shall faithfully, honestly and diligently serve the Corporation and shall carry out suchtasks as the Corporation may from time to time reasonably request.

The Executive shall (except in the case of illness or accident) devotesubstantially all of his working time and attention to his employment hereunder, except as directed or permitted by the Board of Directorsof the Corporation, and shall use his reasonable best efforts to promote the best interests of the Corporation. [49] Suspending Mochoruk’s salary payments could be justified by termination under the terms of the Executive EmploymentAgreement. As with Mochoruk’s severance entitlement, the Sections under

Article 8, provided above, spell out the circumstances andconditions under which such termination could properly be triggered. These circumstances include termination for cause, terminationwithout cause, termination by the Executive, and constructive dismissal. c. Expenses [50]

Section 5.2(

a) provides the contractual authority for Mochoruk’s expenses.

It states: The Corporation will, before and after the Termination Date, reimburse the Executive for all reasonable business, promotional, travel andout-of-pocket expenses which may be incurred by the Executive in the course of his employment and in the performance of his dutiesand responsibilities hereunder; provided that the Executive provides the Corporation with appropriate receipts and records of suchexpenses and provided further that the expenses conform to the Corporation’s general expense policies. [51] No Board approval is required by this section.

Payments may be made after the Termination Date for expenses previouslyincurred. Receipts, records, and compliance with Rochester’s general expense policies is mandatory. However, Mochoruk testified thatRochester did not have general expense policies, and instead operated on the “honour system.” V. The circumstances surrounding the end of Mochoruk’s employment with Rochester a.

Severance [52] Throughout the time-frame of this dispute, Mochoruk demonstrated an attitude of disregard for the duties of a corporation’spresident and CEO, and the need to prioritize the best interests of the corporation above those of his own: Business Corporations Act,RSA 2000, c B-9, s 122. [53] On May 16, 2008, the day Mochoruk had his severance cheque certified and signed, there was no contractual or Boardauthority upon which this payment could be made. Although the Executive Employment Agreement was effective retroactively, the finaldetermination of its terms was not concluded until June 24, 2008.

Additionally, the Release and Resignation had been signed but was notyet effective. [54] As Reeves, Dion, and Antony testified, and even Mochoruk conceded, the idea of prepaying severance is virtually unheard ofin the business community. Severance is triggered by the termination of employment: Mattocks v Smith & Stone

(1982) Inc (1990),[1991] 34 CCEL 273, at para 13. Severance does not accrue, if at all, until an employee leaves his employer: Tkach v Tkach (1984), (NS SC), [1985] 65 NSR (2d) 378 at para 79. Here, the transaction giving rise to severance had not yet occurred. It

was not even inevitable. The August 2008 collapse of the merger demonstrated the deal was far from concluded. [ 55 ] Further, Reeves, Dion, and Tingle testified that meeting the working capital requirement was a critical element of the merger negotiations. Although Mochoruk testified that he thought the working capital requirement would be exceedingly difficult to meet, he did not oppose the deal. Incredibly, in cross-examination he testified that he did not think it was the duty of corporate directors to vote against resolutions they believe are not in the best interests of their company. Clearly, this does not conform with the fiduciary duty of corporate directors as spelled out in

Section 4.1 of the Executive Employment Agreement. [ 56 ] Under all these circumstances, the prepayment of Mochoruk’s severance amount was highly improper by the standards of corporate governance. Barring a clear determination from the Board, the source of the suggestion to make this payment in advance is irrelevant. The June 24, 2008 approval of a general severance entitlement, payable upon a triggering event, is very different from a clear determination from the Board to prepay or retroactively approve the prepayment of that amount. The critical difference is when that entitlement accrued.

Far from being a minor matter, compliance with these conditions is the difference between a professional parting- of-ways and, effectively, theft. [ 57 ] Mochoruk’s duties as a director aside, did any triggering event giving rise to Mochoruk’s severance entitlement occur at any point between May 16, 2008 and Mr Mochoruk’s resignation on October 28, 2008? [ 58 ] Under the Executive Employment Agreement, constructive dismissal does trigger severance.

Grounds for believing that the Executive has been constructively dismissed include, among other indicators, the failure to pay remuneration to the Executive and a change of control event. At trial, Mochoruk relied on both of these circumstances. [ 59 ] Indeed, Mochoruk’s salary did cease at the end of April 2008. A failure to remunerate can constitute constructive dismissal: Larochelle v North Yukon Renewable Resources Council , 2006 YKSC 6 at 24. However, in the unique circumstances of this case, it is not clear that it was Rochester’s intention to constructively dismiss Mochoruk by not paying his salary.

Reeves testified that Rochester was desperate to have its president involved in merger negotiations but that Mochoruk had increasingly become unavailable. Tingle testified about the possibility that the salary owed to Mochoruk could have been set off against the preemptively taken severance amount.

I accept that not paying Mochoruk’s salary may have been nothing more than an expression of frustration with his unavailability, absence from negotiations, and failure to return the disputed severance, which did not amount to constructive dismissal. [ 60 ] In any event, the rights of the parties were altered in this case by contract. The procedure for paying severance in the event of constructive dismissal is specifically laid out in the Executive Employment Agreement. Under

Section 8.5(

b) the Executive is obligated to give notice with particulars within 45 days of the act, or the last in a series of acts, giving rise to a belief that constructive dismissal had occurred. It was submitted by counsel for Mochoruk that when an employer ceases paying its employee it is aware of this as

an act of dismissal, and does not require notice. However, the Executive Employment Agreement is clearly worded and requires notice in all circumstances. Mochoruk never provided such notice. [ 61 ] None of the four conditions constituting a change of control as detailed by

Section 1.1(

e) ever occurred. In the summer of 2008, STP did take over much of Rochester’s operations and one of its employees was hired by STP. Rochester did transfer its furniture and shut down its offices. However, it retained responsibility for its finances, accounting, and corporate governance structure. [ 62 ] No majority of shares, nor any shares at all, were transferred to STP:

Section 1.1(e)(i). No majority of new directors from STP, nor any directors at all, were appointed to the Board:

Section 1.1(e)(ii). No determination by the Board that effective control had been transferred was made:

Section 1.1(e)(iv). Ultimately, the fact that the merger deal fell through in August 2008, leaving Rochester as a separate legal entity, is the best proof that no change of control event had occurred. [ 63 ] I accept the

interpretation of

Section 1.1(e)(iii) offered by counsel for the plaintiff as the most plausible reading of this term. This provision concerns a single transaction transferring complete control or the first of a series of transactions that transfer portions of the company’s controlling assets. None of the initial negotiation acts, such as signing the LOI or executing the Arrangement Agreement, amounted to the transfer in majority control contemplated by a change in shares or directors. Assuming some control of Rochester’s operations is not equivalent to assuming effective control of Rochester as a corporation.

[ 64 ] In addition, as in the case of Rochester’s failure to remunerate, Mochoruk failed to provide notice or particulars in regard to any change of control event as required by

Section 8.5(

b) of the Executive Employment Agreement. [ 65 ]

Section 8.5(

a) of the Executive Employment Agreement, does not provide severance upon resignation. Mochoruk argued his resignation was not voluntary in the face of the Fall 2008 Ultimatum to resign or be terminated. Our Court of Appeal has recently provided some guidance in this area.

Although an employee’s resignation is involuntary, if it does not reflect a clear and unequivocal intention to do so, this must be assessed objectively in the context of the transaction: Schumacher v Alberta (Minister of Sustainable Resource Development) , 2007 ABCA 359 at para 1 , [2008] 433 AR 157. [ 66 ] I accept that resignation may not have been Mochoruk’s preference, but that does not mean his choice was involuntary. When presented with the threat of being terminated for cause Mr Mochoruk chose to avoid that result by resigning.

I am confident in concluding that Mr Mochoruk knew the Board had proper grounds to terminate him for cause. Although he did not pay back the amount demanded by the Board, he may have thought that by resigning he would be permitted to keep the disputed severance. He was wrong. In accepting his resignation, the Board specifically reiterated its demand for the full repayment of Mochoruk’s severance.

In the context of the Fall 2008 Ultimatum an objective observer could only conclude that Mr Mochoruk’s resignation was voluntary. [ 67 ] Alternatively, I accept that the Board had sufficient grounds to move forward with the termination of Mochoruk for cause. This would have precluded Mochoruk’s severance entitlement. The definition of “Just Cause” in the Executive Employment Agreement includes, among other things, wilful misconduct, theft, and failure to perform executive duties in

Section 1.1(i). These are accurate descriptions of Mochoruk’s behaviour leading up to his resignation. Given the circumstances and acrimony at this point, I cannot fault Rochester for accepting Mochoruk’s resignation and choosing legal proceedings to enforce the consequences of termination for cause. While no notice was provided to Mochoruk, the need for this was preempted by his resignation. b. Salary [ 68 ] Mochoruk was not paid his salary for a period of six months during which he remained as president and CEO of Rochester.

From the beginning of May 2008 until the end of October 2008 Mochoruk accumulated an entitlement of $75,000 in salary. [ 69 ] The plaintiff claims that Mochoruk did nothing to earn this income. Reeves, Dion, and Tingle testified that Mochoruk was unavailable for significant periods during the merger negotiations. Mochoruk admitted he was on vacation during some of the relevant time. However, no witness could state categorically that Mochoruk fulfilled none of his duties or performed no work whatsoever. Mochoruk was regularly included in emails and corporate correspondence. His input was sought.

Occasionally it was obtained. He was responsible for signing, and one would assume reviewing, the June 24, 2008 documents. It is inconsistent for the plaintiff to point to these indicators to show that Mochoruk was not constructively dismissed and then turn around and claim he was not doing any work. [ 70 ] Just as Mochoruk was obliged to notify Rochester if he thought he was being constructively dismissed, Rochester was obligated to notify Mochoruk if it was unsatisfied with his work performance. Reeves testified that he certainly did try to do this.

Having failed to convince Mochoruk to correct his workplace deficiencies, the next appropriate step should have been to terminate Mochoruk’s employment for cause. [ 71 ] Reeves, Dion, and Tingle testified that they were trying to avoid a public scandal and not do anything to upset the potential deal with STP. Be that as it may, Rochester had to make one of two choices in regard to Mochoruk’s salary. The first choice was to stop paying Mochoruk’s salary by terminating him for cause and deal with the fallout of explaining publicly, as best they could, why Mochoruk was being fired.

The second choice was to continue Mochoruk’s employment and pay in the hope that things could be worked out before the situation had to be reported to the proper regulatory authority. Keeping him employed in order to avoid public scandal and close the deal, while not paying for that continued employment, was never an option. c. Expenses [ 72 ] The Executive Employment Agreement provides for the reimbursement of properly made expenses with appropriate receipts and records under

Section 5.2(a). Vaguely categorized lump sum per diem payments are very different from the kind of expenses contemplated. No receipts or records were submitted in evidence to demonstrate the appropriateness of these claimed expenses.

[73] All three of the other Board members testified that they had no knowledge these payments were being made. Mochorukclaimed that if there is any fault it falls on the Board for not properly supervising or objecting to these expenses. Frankly, such anattitude represents a fundamental lack of comprehension of good corporate governance practices. Successfully keeping any knowledge ofthese expenses from the Board does not constitute approval by omission. [74] Mochoruk testified that the general expenses policy of Rochester was the “honour system.” Even under the “honour system”Mochoruk fell short.

Mochoruk believed he was entitled to claim for the money he had spent during the early days in which Rochesterwas being run out of his own home. However, all three Board members testified that by the time Mochoruk was claiming these expensesRochester had sufficient office space to accommodate Mochoruk’s needs.

Reasonableness, the best interests of Rochester, and“honour”suggests these expenses should have been claimed early, been calculated using receipts or detailed estimates, and with theknowledge of the Board. [75] At trial Mochoruk conceded that the $8000 cash-advance had been taken out in error and remained outstanding. Rochester’sbank statements do indeed show this is the case. VI.

Disposition [76] The defendant Mochoruk is ordered to repay the outstanding amount of the “prepaid” severance, $185,118.92 along withinterest as prescribed by the Judgment Interest Act, RSA 2000, c J-1 [“JIA”]. [77] The six months salary owed to Mochoruk, amounting to $75,000, plus interest as prescribed by the JIA, will be deducted fromthe above amount. [78] Mochoruk is also ordered to repay the improper business expenses and account withdrawal amounting to $31,200, withinterest as prescribed by the JIA. [79] Punitive damages will not be awarded. Punitive damages are reserved for the most extreme of cases.

As Justice Binnieexplained in Whiten v Pilot Insurance Co, 2002 SCC 18 at para 36, [2002] 1 SCR 595: Punitive damages are awarded against a defendant in exceptional cases for “malicious, oppressive and high-handed” misconduct that“offends the court’s sense of decency”: Hill v. Church of Scientology of Toronto, (SCC), [1995] 2 S.C.R. 1130, at para.196.

The test thus limits the award to misconduct that represents a marked departure from ordinary standards of decent behaviour.Because their objective is to punish the defendant rather than compensate a plaintiff (whose just compensation will already have beenassessed), punitive damages straddle the frontier between civil law (compensation) and criminal law (punishment). [80] Although very close to the line, I am not satisfied that this is such an extreme case.

Although Mochoruk behaved in anunprofessional manner, not in accordance with his fiduciary duty as the director of a public corporation, I do not conclude that he wasintentionally “malicious, oppressive and high-handed.” Did he behave selfishly? Yes, but this falls short of a direct intention to causeharm to others. I am convinced that Mochoruk subjectively believed that, although he may not have been legally entitled to severance, hewas honestly owed something in return for his dedication to Rochester, and that he was unlikely to get it without his personalintervention.

Misguided as this belief was, it lacks the malice required by cases where punitive damages have been granted. [81] Corporate structures are important to our shared economy. For those owning shares in a corporation, the conduct of corporatedirectors in handling the money entrusted to them is of special concern. The betrayal of that trust is not a matter to be treated lightly. [82] The general rule as to costs is to award costs against an unsuccessful party on a party-party basis: McCarthy v Calgary RomanCatholic Separate School District No 1 (1980), (AB KB), [1981] 30 AR 208 at 210, [1980] 5 WWR 524 (QB). In the

circumstances of this matter, I find that an award of costs in the action against Mochoruk is warranted. Amounts should be set with reference to Column 3 under

Schedule C of the Alberta Rules of Court , Alta Reg 124/2010. Heard on the following dates: Trial: 10 th , 11 th and 12 th days of April, 2012 Written Argument: 27 th day of April, 2012 and the 7 th and 14 th days of May, 2012. Dated at Calgary, Alberta this 31 st day of October, 2012. B.L. Veldhuis J.C.Q.B.A. Appearances: Timothy P. Chick and Laura A. Easton (Student-at-law) Davis LLP for the plaintiff/defendant by counterclaim Southern Pacific Resources Corp Byron W. Nelson of McGuigan Nelson LLP for the defendant/plaintiff by counterclaim Troy Mochoruk