Malley v Copper Rock Homes Ltd, 2016 ABQB 653

Court of Queen ’ s Bench of Alberta Citation: Malley v Copper Rock Homes Ltd, 2016 ABQB 653 Date: 20161121 Docket: 1201 16022, BE01 668685, BE01 641975, BE01 627666 Registry: Calgary Between: Action No. 1201 16022 Brad Malley, Annette Malley, Nicholas Lynem and Suzanne Lynem Plaintiffs - and – Copper Rock Homes Ltd., Stephen Paiha, Steven Seiler, Kristi Paiha, Jennifer Seiler, John Doe, Jane Doe and ABC Corporation Defendants And Between: Action Number BE01 668685 In the Matter of the Proposal of Stephen Paiha And Between: Action Number BE01 641975

In the Matter of the Proposal of Steven Mark Seiler And Between: Action Number BE01 627666 In the Matter of the Bankruptcy of Copper Rock Homes Ltd. _______________________________________________________ Memorandum of Decision of J. Farrington , Master in Chambers and Registrar in Bankruptcy _______________________________________________________ The Applications [ 1 ] This matter involves a corporate bankruptcy, two individual proposals, and a civil action in the Court of Queen’s Bench.

It all arises from the insolvency of a homebuilder. [ 2 ] The Plaintiffs in the civil action are buyers who engaged Copper Rock Homes Ltd. (“Copper Rock”) to build homes for them. Stephen Paiha and Steven Seiler, were the directors of Copper Rock. Mr. Paiha dealt primarily with outside and site work for Copper Rock, and Mr. Seiler dealt primarily with administrative and sales work. Kristi Paiha and Jennifer Seiler are their wives. They were not directors of Copper Rock, but they were non-voting shareholders. [ 3 ] Two of the applications before me are

summary dismissal applications in the civil action filed on behalf of all of the individual defendants. The plaintiffs (the “Malleys” and the “Lynems”) oppose those applications. The plaintiffs apply themselves for an order pursuant to

section 69.4 of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 seeking leave to proceed against Stephen Paiha and Steven Seiler, notwithstanding their individual proposals under the Bankruptcy and Insolvency Act . The plaintiffs previously obtained a

section 38 order under the Bankruptcy and Insolvency Act in Copper Rock’s bankruptcy giving them the right to pursue certain causes of action in the place of the trustee against the individual defendants named in the proposals. [ 4 ] The parties suggested that the

summary dismissal applications pursuant to Rule 7.3 be heard first. I agreed, as inevitably the merits of the matter are at least a part of the consideration under the

section 69.4 application in any event. Background Facts [ 5 ] The unfortunate issues in this matter arise because the plaintiffs made significant progress advances pursuant to building

contracts that they signed with Copper Rock. They did not file purchasers’ caveats until well after there were intervening registrations at the Land Titles office. The Lynems advanced a total of $567,679.09 and the Malleys advanced $742,327.67. At least one set of the plaintiffs eventually bought the property they were purchasing in a foreclosure action by a mortgagee in an attempt to salvage their position as best they could. [ 6 ] The Malley purchase agreement is dated August 3, 2011. The Lynem agreement is dated August 5, 2011.

Each agreement contemplated purchase of a lot with a home, and each agreement contemplated progress draws. The purchase agreement in each case did not contain trust language requiring advanced funds to be used on that project alone. The plaintiffs say that such a term should be implied.

The progress advances in each case were used largely to pay amounts not necessarily connected to the construction of the individual homes in question, including trade payables on other projects and payments and draws to the shareholders of Copper Rock. [ 7 ] The last progress payment made on the Lynem agreement was $269,339.02 on or about December 22, 2011.

The last progress payment made on the Malley agreement was $363,851.50 on or about February 10. 2012. [ 8 ] In previous years such as 2009 and 2010, when times were good, payments to the shareholders were characterized after the fact in the year-end financial statements as dividends. The parties do not appear to have engaged in a characterization of corporate withdrawals in consultation with their accountant as they normally would have done in relation to the 2011 and 2012 years. The evidence is that the accounting services stopped when the ability to pay for them stopped.

The plaintiffs say that any payments to the shareholders were dividends because the parties always characterized them as dividends previously. The defendants say that no such characterization was made so they could not be dividends. [ 9 ] The Amended Amended Statement of Claim alleges impropriety in relation to 2009 and 2010 dividends taken by the individual defendants, but that argument was abandoned during the submissions before me.

It further alleges improper dividends in 2011 and 2012. [ 10 ] Money that was taken out of the corporation by the Paihas was detailed in an undertaking response and the amount was $96,850 between July 14, 2011 and May 23, 2012. There were a total of 31 withdrawals. In addition, there was one payment in the amount of $15,000 from Copper Rock to a corporation related to the Paihas on March 2, 2012. The payment was said to be for material purchases and labour provided on multiple homes. [ 11 ] The net amount of money taken out by the Seilers from July 31, 2011 to May 23, 2012 was $22,079.02.

I say “net”, because the Seilers were also injecting money into Copper Rock themselves in attempts to keep it afloat. [ 12 ] Mr. Seiler, being responsible for the administrative and office work for Copper Rock, clearly perceived the financial despair of Copper Rock more than Mr. Paiha did. The Seilers took out $229,663.54 during their subject time period and deposited $207,584.52. The withdrawals included payments on a Seiler Master Card.

It is not clear whether those Master Card payments were for personal expenses or for corporate expense reimbursement. [ 13 ] The following financial injections into or on behalf of Copper Rock were made by the Seilers in January and February 2012: January 3, 2012- $20,000 January 5, 2012- $20,000 January 17, 2012- $700 January 24, 2012- $10,000 Feb. 21, 2012- $433.81 Feb. 21, 2012- $488.31 Feb. 22, 2012- $26,058.00 Feb. 24, 2012- $770.55 Feb. 27, 2012- $152.21 TOTAL- $78,602.88 [ 14 ] Unfortunately, the Malleys and the Lynems did not file purchasers’ caveats at the Land Titles Office at the outset to protect the monies that they were paying.

On March 2, 2012, the first builders lien was filed against the property the Malleys were purchasing. Eventually, there were at least ten builders liens filed against that property. The first builders lien was filed against the Lynem property on March 2, 2012. At least seven builders liens were filed against that property. The Malleys eventually filed a purchaser’s caveat on April 3, 2012 after four builders liens had been filed, and after Copper Rock had placed a mortgage on the property in the amount of $500,000 to try and fund some of its ongoing operations.

The Lynems filed a caveat against their subject property on April 3, 2012 after Copper Rock had placed two mortgages on the property, and two builders liens had been filed. [ 15 ] The final progress advance on each property was paid only shortly before builders’ liens started to arise. Copper Rock made an assignment in bankruptcy on May 23, 2012. [ 16 ] In the Amended Amended Statement of Claim. Copper Rock is a named defendant, but it is insolvent now and the Bankruptcy and Insolvency Act stays proceedings against Copper Rock. The Paihas and the Seilers are also named defendants. Mr. Paiha and Mr.

Seiler filed proposals. Without leave, the action cannot proceed against them because it is stayed as well.

[17] The claim makes several types of allegations. It first alleges unlawful dividends to the Paihas and Seilers on the basis thatCopper Rock was insolvent when they were allegedly declared. Those are claims that would be derived from the trustee under thesection 38 order under the Bankruptcy and Insolvency Act. They are made under the statutory provisions of the Business CorporationsAct, RSA 2000, c B-9 and the Bankruptcy and Insolvency Act. [18] The claim also raises issues based upon the contract between the parties in each case.

It alleges breach of a guaranteed resaleobligation on their previous home insofar as the Malleys are concerned, which would be an unsecured claim, and it alleges a trustobligation to the effect that progress payments were only to be spent upon expenses related to the particular homes in question. Thoseare direct claims against those that handled the money. [19] The Amended Amended Statement of Claim does not appear to pursue any “piercing the corporate veil” types of claims.

Thatmay well be a function of the facts, as the case as argued before me does not appear to fit within the traditional heads under whichpiercing the corporate veil types of claims are often pursued. For example, there was clearly no confusion that the contracting party wasCopper Rock, and there is no suggestion that Copper Rock was set up as a vehicle for fraud for these particular transactions. It hadoperated for a number of years as a builder prior to any dealings with the Malleys and Lynems. [20] With that background in mind, I first consider the

summary dismissal applications of the individual defendants. Analysis [21] Of course, that discussion normally begins with Hryniak v. Mauldin, 2014 SCC 7 , [2014] 1 SCR 87. At paragraphs49 and 50 the Supreme Court of Canada held: There will be no genuine issue requiring a trial when the judge is able to reach a fair and just determination on the merits on a motion forsummary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows thejudge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result. These principles are interconnected and all speak to whether

summary judgment will provide a fair and just adjudication. When asummary judgment motion allows the judge to find the necessary facts and resolve the dispute, proceeding to trial would generally not beproportionate, timely or cost effective. Similarly, a process that does not give a judge confidence in her conclusions can never be theproportionate way to resolve a dispute.

It bears reiterating that the standard for fairness is not whether the procedure is as exhaustive as atrial, but whether it gives the judge confidence that she can find the necessary facts and apply the relevant legal principles so as toresolve the dispute. [22] Another important point in the discussion is the “best foot forward principle”. In Windsor v Canadian Pacific Railway Ltd.,2014 ABCA 108 the Court of Appeal held at paragraph 21: The appellant’s evidence that it was not foreseeable that the migration of TCE would cause harm to neighboring lands is uncontradictedon this record.

A party faced with an application for

summary judgment must put its best foot forward, and present evidence to showsufficient “merit” to establish a genuine issue requiring a trial with respect to the outstanding issues: Lameman at para. 19. Speculatingthat evidence might be available at a trial is not sufficient to create a genuine issue requiring a trial. [23] The Court is to assume that the plaintiff has put its best foot forward, and I do so here (see for example CondominiumCorporation No 0225118 v Tamarack Ventures Inc, 2016 ABQB 63 among other cases). [24] In this case, the plaintiffs clearly knew that they were dealing with Copper Rock.

The building contracts were with CopperRock. The Amended Amended Statement of Claim pleads no confusion about the identity of Copper Rock. There is an entire agreementclause. If there are individual claims against the Paihas and Seilers, they must arise from individual causes of action rather than throughclaims against Copper Rock. [25] It is firstly argued that inappropriate dividends were paid to the Paihas and the Seilers. The evidence, however, is that thepayments in issue had not yet been categorized as dividends.

Even assuming the best possible position for the plaintiffs, and categorizingthem as dividends for the purposes of this analysis, the amounts paid in 2011 and 2012 were not out of the ordinary with respect to theamounts that were previously paid to the Paihas and Seilers and they received no other payments or wages from the corporation for thework and livelihood that they derived from the corporation. Building homes through Copper Rock is how they made their livings.

Thereis nothing in the evidence which shows out of the ordinary payments, or payments that appeared to be excessive for the jobs that thefamily units did for Copper Rock. [26] No expert evidence was tendered on the issue of whether Copper Rock was insolvent at the time that the payments weremade. In fact, the plaintiffs’ own informal analysis shows marginal improvement in the financial position of Copper Rock near the endof 2011 which is when the issues arose in this case. [27] In my view, the prohibitions in

section 43 of the Business Corporations Act, and

section 101 of the Bankruptcy andInsolvency Act, are not meant to prohibit and attach after the fact normal and ordinary course payments made to sustain a livelihoodwhile working for a struggling corporation. [28] That view is supported by Re Telsten Services Limited 1981 CarswellOnt 197. In Telsten the payments were specificallyearmarked as dividends, but they were clearly intended to represent payment for service to the corporation and Justice Anderson declinedto apply what is now

section 101 of the Bankruptcy and Insolvency Act on the basis that the

section was not intended to be used toattack normal payments for services rendered to the corporation. [29] Technically, the sections require earmarking payments as dividends for them to be challenged, and that was not done here.Even if they had been formally earmarked as dividends, I am not satisfied that the plaintiff’s best foot forward has shown an issue ofmerit for trial. The plaintiffs have significant issues in showing that dividends were paid and that they were inappropriate, without even

considering the insolvency issue. [30] On the issue of any improper dividends, I am satisfied that the dividend claims against the Paihas and the Seilers ought to bedismissed. [31] The remaining issue in relation to Mr. Paiha and Mr. Seiler is whether there is some other cause of action in the AmendedAmended Statement of Claim which ought to survive. [32] Both Mr. Paiha and Mr. Seiler filed proposals. Both are entitled to the benefit of those proposals, unless there are claims thatwould survive the completion of the proposal under

section 178 of the Bankruptcy and Insolvency Act. Sections 178(1)(

d) and (

e) of theBankruptcy and Insolvency Act provide: 178 ) An order of discharge does not release the bankrupt from… (

d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in theProvince of Quebec, as a trustee or administrator of the property of others; (

e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debtor liability that arises from an equity claim; [33] I agree with counsel for Mr. Paiha and Mr. Seiler that they were not fiduciaries in relation to the plaintiffs based upon thefacts in this matter. There is no trust language in the purchase agreements, and their fiduciary duties, if any, were owed to Copper Rockas directors.

One cannot be a fiduciary to everyone when there are competing interests involved. [34] At best, the facts of this case might engage some of the principles in Bhasin v. Hrynew, 2014 SCC 71 , [2014] 3 SCR494 regarding good faith duties and obligations and honesty in the performance of contracts. At paragraph 86 Cromwell, J. held: The duty of honest performance that I propose should not be confused with a duty of disclosure or of fiduciary loyalty. A party to acontract has no general duty to subordinate his or her interest to that of the other party.

However, contracting parties must be able to relyon a minimum standard of honesty from their contracting partner in relation to performing the contract as a reassurance that if thecontract does not work out, they will have a fair opportunity to protect their interests. That said, a dealership agreement is not a contractof utmost good faith (uberrimae fidei) such as an insurance contract, which among other things obliges the parties to disclose materialfacts: Whiten.

But a clear distinction can be drawn between a failure to disclose a material fact, even a firm intention to end thecontractual arrangement, and active dishonesty. [35] The timing of matters is of some importance in that regard. I did have some concerns during argument about whether thecircumstances with a particular case could give rise to a duty to warn of an impending insolvency so that the purchaser could takeappropriate precautions, and perhaps consider withholding a progress payment, if it becomes clear that a contract is not capable ofcompletion by the party receiving the payment.

While not specifically plead in those terms, the point was argued. I am satisfied that theAmended Amended Statement of Claim is broad enough to include that type of claim. I considered its possible application very carefullyon the facts as presented, and I explored those facts in the context of the timing, particularly that of the last progress advance in eachinstance. [36] There was no evidence that Mr. Paiha and Mr.

Seiler had an immediate appointment scheduled with a trustee at or about thetime of receipt of the last progress draw in relation to Copper Rock, and there is no evidence to suggest anything other than that theywere attempting to keep Copper Rock afloat. It is particularly telling that during the months of January and February, 2012 the Seilersinjected $78,602.88 into Copper Rock, either by way of direct injection, or by paying amounts on behalf of Copper Rock.

Those actionsare indicative, in my view, of persons trying to keep the corporation afloat rather than of a corporation that is headed for bankruptcy withcertainty. While a duty to warn could be engaged in some circumstances, the circumstances here did not rise to that level, even to theextent of forming an issue of merit for trial. [37] Accordingly, I also find that Mr. Paiha and Mr. Seiler are entitled to dismissal of the action in relation to the broaderallegations raised against them.

While the losses suffered by the Plaintiffs are both large and unfortunate, the fact situation is not onewhich extends to personal liability for the reasons set out above. [38] Had it been necessary to formally rule on the

section 69.4 Bankruptcy and Insolvency Act application for leave to proceed, Iwould have found that leave was necessary notwithstanding the

section 38 order of Mr. Justice Poelman. The leave issue is notaddressed in his ex-parte order, and a leave application is not made ex parte in any event. I would not have granted leave because themerits of the action would not have warranted my doing so, and the claims argued would not be of a nature that would survive theproposals of Mr. Paiha and Mr. Seiler. Conclusion [39] By way of

summary, all of the claims against the Paihas and the Seilers are dismissed, including the guaranteed value claimon the Malleys’ previous home. [40] I thank all counsel for their very able argument, and particularly for their synthesis of a large amount of material and argumentinto the time allotted.

[ 41 ] Costs may be spoken two within 60 days of these reasons if the parties cannot otherwise agree. Heard on the 12th day of October, 2016. Dated at the City of Calgary, Alberta this 21st day of November, 2016. J. Farrington M.C.C.Q.B.A. and Registrar in Bankruptcy Appearances: McLeod Law LLP Jeff W. Moroz for Brad Malley, Annette Malley, Nicholas Lynem and Suzanne Lynem Miles Davison LLP Susan L. Robinson Burns, QC for Stephen Paiha and Kristi Paiha Machida James McCall G. Stephen Panunto for Steven Seiler and Jennifer Seiler