Bacexha Ltd v Karam, 2018 ABQB 1020

Court of Queen’s Bench of Alberta Citation: Bacexha Ltd v Karam, 2018 ABQB 1020 Date: 20181214 Docket: 1703 00973 Registry: Edmonton Between: Bacexha Ltd and Rhonda-Lynn Karas Chartrand Plaintiffs/Respondents - and - Pedro Karam, Marlene Hudema, Robert Karam, Lilia Shlomovitch, LS Booking Services Ltd, Avi Isackson, Avi Isackson Management Consultant Ltd., MGM Stone Inc, Cristina Budnea, Marun Hallal, Opulence by Design Inc and 1719700 Alberta Ltd Defendants/Applicants _______________________________________________________ Reasons for Decision of W.S.

Schlosser , Master, Court of Queen's Bench of Alberta _______________________________________________________ [ 1 ] This is an Application by eight of twelve Defendants for

summary dismissal of the claims against them. The Plaintiff has agreed to let out Marun Hallal, Cristina Budnea and MGM Stone Inc. So now we are down to five Applicants. It is really a question of weighing up the evidence to see if it tips the scale in favour of letting the action proceed, or whether, on balance, the Plaintiff’s case against these remaining Applicants is hopeless.

List of Authorities By the Plaintiffs/Respondents 1. Hryniak v Mauldin, [2014] SCC 7 (SCC); 2. Rule 7.3(1) of the Alberta Rules of Court; 3. Composite Technologies Inc v Shawcore Ltd, [2017] ABCA 160; 4. Stefanyk v Sobeys, [2018] ABCA 125 (ABCA); 5. Rotzang v CIBC World Markets Inc, [2018] ABCA 153 (ABCA); 6. Whissell Contracting Ltd v Calgary (City), [2018] ABCA 204 (ABCA); 7. Ghost Riders Farm Inc v Boyd Distributors Inc, 2016 ABCA 331; 8. Queen v Cognos, SCC; By the Defendants/Applicants 1. Hryniak v Mauldin, [2014] SCC 7 (SCC), at para 57; 2. Sunshine Village Corporation v Chevalier, 2018 ABQB 484; 3.

Windsor v Canadian Pacific Railway Ltd, 2014 ABCA 108; 4. 776826 Alberta Ltd (cob Budweiser Motorsports Park) v Ostrowercha, 2015 ABCA 49 ; 5. Murphy Oil Co v Predator Corp, 2004 ABQB 688 , aff’d 2006 ABCA 69 ; 6. TWT Enterprises Ltd v Westgreen Developments (North) Ltd, 1992 ABCA 211 ; 7. Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Liebig & Keown LLP, 2015 ABQB 669; 8. Opron Construction Co v Alberta,

(1994) CLR (2d) 97; 9. Mraiche Investment Corp v Paul, 2012 ABCA 95 , 524 AR 151; 10. Commercial Construction Supply Ltd v Ghost Riders Farm Inc, 2016 ABQB 165, upheld on appeal at 2016 ABCA 331; 11. Bank of Montreal v Tortora, 2010 BCCA 139; 12. Environmental Refuelling Systems Inc v Dougan Senior, 2018 ABQB 208; 13. Goska J Nowak Professional Corp v Robinson, 2016 ABCA 240; 9. McLean v Gonzalez-Calvo, 2007 BSSC 648. Facts [2] In the most general terms, Bacexha Ltd and its principal, Rhonda-Lynn Karas Chartrand, invested a large amount of moneyin 1719700 Alberta Ltd (“171”).

Pedro Karam, the first named Defendant, owned 171. 171 operated under the registered trade name“Opulence By Design”. They were in the business of selling and installing granite and quartz (primarily for countertops), tile, flooringand cabinets. [3] In the May/June timeframe of 2014, Rhonda began negotiating with Pedro to have Bacexha buy an interest in Pedro’sbusiness. In January 2015, pursuant to a Share Purchase Agreement, Pedro sold 50% of the issued outstanding shares in 171 to Bacexha.Rhonda became a director and an employee of 171.

The intent was that they were going to run 171 as equal partners. [4] Bacexha acquired 500 Class A voting shares and 200 non-voting redeemable preferred shares with a value of $1 each.Rhonda and Bacexhas’ injection of $675,000 was immediately released to Pedro to reduce his shareholder loan in 171 to $875,000 (from$1,550,000). As part of the share sale, the injection of $675,000 was secured by way of a Promissory Note payable to Rhonda withinterest at 4% per annum. The goodwill of Opulence By Design was to be assigned to 171. 171 did not own its business premises. [5] 171’s financial statements were attached as a

schedule to the Share Purchase Agreement. Rhonda acknowledged that she,personally, inventoried all of the stock and pieces of granite prior to completing the purchase. [6] A little over a year ago, 171 ceased carrying on business and its assets were seized and sold by secured lenders. Pedro saysthis was largely due to the loss of a major client and a downturn in the economy.

[7] The lawsuit has to do with pre-contractual representations, misrepresentations. [8] The Applicants say that the Plaintiffs are only fishing in a pool they keep making deeper and wider. Rhonda and Bacexhahave now commenced four successive lawsuits. Lawsuit number 1 was commenced against Pedro in January, 2016 and sought to compela forensic audit of 171 pursuant to

section 170 of the Business Corporations Act. Pedro opposed a forensic audit but did not oppose anaudit. The Court declined to order a forensic audit but did order (in January, 2016) that an audit be carried out. A second application tohave a forensic audit completed at 171’s expense was launched but dismissed.

An audit at the corporation’s expense was resisted as itwould require 171 to draw on its line of credit to complete it. (An audit completed at the Plaintiff’s own expense was not opposed). [9] The second lawsuit was commenced in June, 2016 naming Pedro and 171: alleging pre-contractual misrepresentations,breach of fiduciary obligations, oppression, and constructive dismissal. [10] The third lawsuit was commenced in December, 2016, claiming against 171 on the basis of the Promissory Note issued tocover the shareholder loan.

Summary judgment was granted on the Note in May, 2017. [11] This (fourth) lawsuit was commenced in February 2017. The allegations overlap with the second action, but with addedDefendants. These added Defendants are the ones now seeking to get out. [12] Apart from conceding the relief against Marun, Cristina and MGM, the Plaintiff’s also concede that Robert, Marlene, Liliaand LS did not make any pre-contractual representations to the Plaintiffs.

The Plaintiffs further concede that they have not tendered anyevidence to suggest that Robert, Marlene, Lilia or LS received a fraudulent conveyance of any property from 171 after it ceased to carryon business.

The Plaintiffs acknowledge that the claim against those three individuals and LS are based upon representations made afterRhonda and Bacexha become involved in 171 and primarily, in relation to the tort of conspiracy. [13] The thrust of the lawsuit is that Robert, Marlene, Lilia and LS withheld information from the Plaintiffs, misleadingly blurredthe distinction between the companies and altered the accounting records of 171. In short, they deliberately, or negligentlymisrepresented the economic health of 171 to the detriment of the Plaintiffs. [14] The allegations are particularized as follows: (

a) Improperly tracking, accounting for and reporting inventory to financial institutions on various monthly accounting recordsand financial statements; (

b) Improperly tracking, recording and reporting on shareholder’s loans to financial institutions on various monthly accountingrecords and financial statements; (

c) Improperly recording expenses to 171 that belonged to other corporations such as 102 and OBD Inc. including, but notlimited to Russell Farrow Ltd., Bendix and employee wages; (

d) Improperly tracking jobs for 171 on the job board; (

e) Improperly accounting for expenses, such as the invoices from Global Supply & Trading; (

f) Improperly withholding information from the Plaintiffs; (

g) Improperly overvaluing remnant pieces; (

h) Improperly representing that accounts payable, such as inter-corporate payments to 102, are lower than they actually were; (

i) Improperly representing that the value of capital assets, such as the Bavelloni machines, are higher than accounted for; and (

j) Deliberately blurring the distinction between related corporations relating to employees, trade names, premises and businessactivities. [15] This allegedly inaccurate financial picture is said to have deprived the Plaintiffs of the opportunity to recover judgmentagainst 171, to redeem preferred shares or, ultimately, to stave off 171’s insolvency. [16] The elements of the civil tort of a conspiracy are summarized at para 40 of the Mraiche Investment Corporation case (citingCan-Dive Services, (BCCA) per McEachern, CJBC). The tort consists of: 1. an agreement between two or more persons; 2. concerted action taken pursuant to the agreement; 3. (

i) if the action is lawful, there must be evidence that the conspirators intended to cause damage to the plaintiff; (ii) if the action is unlawful, there must at least be evidence that the conspirators knew or ought to have known that their action wouldinjure the plaintiff (i.e., constructive intent); 4. actual damage suffered by the plaintiff. [17] ‘Direct evidence is rarely available to prove the conspiracy and the court must often resort to inference or circumstantialevidence’ (e.g. Ghost Riders at para 16 and Mraiche Investment Corporation at para 42). But caution is necessary. In Mraiche, theCourt stated:

[43] So the question on a

summary judgment motion is whether there is any triable case of evidence on all of the essential ingredients of the conspiracy tort. It is not enough that there is some evidence of some parts of the tort if there is no evidence of any one or more essential ingredients. What is important in the present context is the existence of an actual agreement. The artificial imposition of a deemed agreement arising from a purely constructively determined 'ought to know' state of mind would make this tort so elastic as to make it mere negligence without proximity, privity, or fiduciary duty. This Court in Maguire v.

Calgary (City) , 1983 ABCA 121 , 43 AR 268, [1983] 4 WWR 342 at paras. 11 to 13 said: 11 The wording "concerted action taken pursuant to agreement" was used by Lord Diplock in Lonrho et al. v. Shell Petroleum Co. et al. , [1981] 2 All E.R. 456, at 463 . 12 In order to be found to be a party to a conspiracy one must know the facts of the alleged agreement or combination and intend to be a party to the "combining". This principle was adopted by the English Court of Appeal in Belmont Finance Corp. v.

Williams Furniture et al. (No. 2) , [1980] 1 All E.R. 393 , wherein both Buckley, L.J., and Waller, L.J., referred to Churchill v. Walton , [1967] 2 A.C. 224 , approving the words of Viscount Dilhorne at p. 237: ... I would say that mens rea is only an essential ingredient in conspiracy in so far as there must be an intention to be a party to an agreement to do an unlawful act; that knowledge of the law on the part of the accused is immaterial and that knowledge of the facts is only material in so far as such knowledge throws a light on what was agreed . (emphasis in original) [ 18 ] I also accept the

summary of the elements of misrepresentation set out in the Plaintiffs’ material (taken from Queen v Cognos ): 1. there must be a duty of care based on a “special relationship” between the representor and the representee; 2. the representation in question must be untrue, inaccurate, or misleading; 3. the representor must have acted negligently in making the misrepresentation; 4. the representee must have relied, in a reasonable manner, on the negligent misrepresentation; and 5. the reliance must have been detrimental to the representee in the sense that damages resulted. [ 19 ] The Plaintiffs allege the following particulars of misrepresentation: (

a) The calculation and reporting of shareholder’s loans; (

b) The calculation and reporting of inventory; (

c) The inter-corporate transactions between OBD Inc. and 171 regarding employees; (

d) The interaction between 171 and 102 regarding the sale of land and the lease arrangements for the 170 St. Premises; (

e) The invoices relating to Global Supply and Trading; (

f) The transactions relating to Bendix; (

g) The transactions relating to Russell Farrow Ltd.; (

h) The accounting of expenses such as the purchase of inventory and employee expenses; (

i) The accounting for accounts payable, such as the invoices to 102; (

j) The accounting for remnant pieces; and (

k) The accounting for capital assets, such as the Bavelloni machines. [ 20 ] What remains, then, is to examine the evidence to see whether the Plaintiffs have an arguable case or, conversely, whether the case of these Applicant Defendants is presently unassailable. [ 21 ] The Plaintiffs want this lawsuit to proceed to flesh out the evidence. But that is not really an option. These types of applications are all-or-none, not wait-and-see. The Evidence [ 22 ] I can do no better than to repeat the

summary of the evidence provided by the Applicants in their very thorough brief. Marlene Hudema 49. Marlene is Pedro’s sister in law and is married to Pedro’s brother Robert. 50. Marlene was the sales woman for 171 and she also helped manage staff. She provided these services to 171 between 2013 and

2016 through her company 1222406 Alberta Ltd., operating as MBH1 Consulting. These services included sales services and dealing with customers as well as helping to manage the staff. She did not deal with any of the bookkeeping or accounting. 51. Marlene has given evidence that she did not: (

a) Have any pre-contractual dealing with Rhonda respecting the share sale agreement; (

b) Have anything to do with the financial statements or records of 171 or provide information to the external accountant; (

c) Review or see financial statements provided by the external accountant; (

d) Have involvement with tracking inventory. 52. Marlene has sworn that she has never done anything in concert with any of the other defendants to cause harm to the Plaintiffs nor has she transferred or received any assets from 171 or another defendant to avoid creditors. 53. Marlene, through 122 is currently providing similar services to an unrelated corporation 1967008 Alberta Ltd. Operating as Roma Stone (“Roma Stone”) and has been since September 2017. 54. Rhonda acknowledged that she did not talk to Marlene about the business before she bought in nor did Marlene influence her decision. 55.

Rhonda also acknowledged that Marlene tried to improve the inventory system and was basically stuck in the middle of a fight between Rhonda and Pedro. Rhonda was telling her one thing, Pedro another. Robert Karam 56. Robert is Pedro’s brother. 57. Robert was employed by OBD and subcontracted to 171. Robert was the showroom and back Shop Manager at 171 and oversaw fabrication of all the countertops. 58. Robert did not: (

a) Have any pre-contractual dealings with Rhonda respecting the share sale agreement; (

b) Have involvement in the accounting side of the business (aside from having signing authority when Pedro was away); (

c) Track inventory; (

d) Have familiarity with the accounting software and was in fact restricted from accessing it by Rhonda (but even before being restricted he never did anything with it); 59. Robert has also sworn that he has never done anything in concert with any of the other defendants to cause harm to the Plaintiffs nor has he transferred or received assets from 171 or another defendant to avoid creditors. 60. Prior to the seizure by ATB Robert was unaware of any tools, equipment or inventory being moved. 61.

Robert is currently providing services to 1719700 Alberta Ltd. operating as Roma Stone and has been since August 2017. 62. Rhonda acknowledged that she did not talk to Robert about the business before she bought it nor did Robert influence her decision. 63. Rhonda also acknowledged Robert (and the other employees) were also stuck in the middle of a fight between her and Pedro. Rhonda was telling her one thing, Pedro another. Lilia Shlomovitch and LS Bookkeeping Services Ltd. 73.

Lilia is the principal of the defendant LS Bookkeeping Services Ltd. (“LS Bookkeeping”) and one of two employees of LS Bookkeeping that provided contract bookkeeping services to 171 (along with other businesses in Edmonton). 74. Lilia is registered as a bookkeeper but she is not a CA or a CMA or a CGA. 75. None of the LS Bookkeeping staff had pre-contractual dealings with Rhonda. 76. Lilia or her other employee would go to 171’s premise to complete the services. Her job included inputting the invoices into the system. 77.

Lilia had access to the Simply Accounting software and completed the bookkeeping services for 171, 102 and OBD. 78. Lilia did not approve or verify the financial statements. She took the backup information to the accountant’s office (Avi Isakson) where the financial statements were done. 79. Essentially Lilia’s role was to input all of the financial information into the Simply Accounting program and input different information based on requests from management (being Rhonda or Pedro). She stated “I received the invoices, and I posted them in the system...”.

80. Lilia did not track inventory. 81. At the end of the year she did not review the financial statements 171 but took the draft statements to Avi’s office. While she would answer small questions about the finances, the more important financial questions were discussed between Avi and the owners (Pedro and Rhonda). 82. Lilia has also sworn that she has never done anything in concert with any of the other defendants to cause harm to the Plaintiffs nor has she transferred or received assets from 171 or another defendant to avoid creditors. 83.

Rhonda acknowledged that she did not talk to Lilia about the business before she bought in nor did Lilia influence her decision. 84. Rhonda also acknowledged that Marlene tried to improve the inventory system and was basically stuck in the middle of a fight between Rhonda and Pedro. Rhonda was telling her one thing, Pedro another. 85. Of significance, Rhonda acknowledged that Lilia had alerted her to potential issues about inventory and invoicing and asked her to talk directly to Pedro as she had been instructed by Pedro to not provide Rhonda with information.

Rhonda specifically stated “I think she would make an attempt to get it, yes”. Application Conspiracy [ 23 ] There is no evidence of any agreement between these Applicants. In fact, there is (their) direct evidence to the contrary. The actions and activities that these Defendants were engaged in were lawful (but possibly negligent). There is no evidence of an intent to harm.

I acknowledge that it is difficult to have direct evidence of the elements of conspiracy but, in my view, there is no evidence to support an actual intent to harm. [ 24 ] Not only is there no evidence of an agreement beyond an inference the Plaintiffs wish draw from the result, there is positive evidence against it. There are no badges of fraud and no real reason to question the trustworthiness of Lilia, Robert and Marlene’s evidence. At this stage there is no ‘triable case of evidence’ on all the elements of conspiracy.

I acknowledge that this type of application will sometimes put the Plaintiff at a disadvantage but it is not appropriate simply to ‘wait and see’. With allegations as serious as these something more than a theory is necessary. [ 25 ] As I see it, the Plaintiffs are essentially treating the existence of harm as having created a rebuttal presumption of a conspiracy. In effect, they want to reverse the onus. I concede that this would be convenient for all plaintiffs suffering harm where there are multiple defendants but, despite the difficulties of proof, the onus in the lawsuit remains on the plaintiffs.

On the evidence before me, they would not succeed at trial. [ 26 ] The inferences the Plaintiff invites the Court to draw are also, to my mind, counterintuitive. Employees seeking to harm the Plaintiffs also harm themselves by ending their employment. The picture that is painted is that they, through their combination and misrepresentations, rather than the economy, took the company on a downward spiral until it crashed, harming the Plaintiffs. Not only does this seem counterintuitive, it is contrary to the evidence.

There does not appear to be a sound basis for impugning the evidence of the other than to presume that the Plaintiffs’ theory of the case is correct. I note also that the Applicants were not at a (management) level that might otherwise give rise to an inference (e.g. Ghost Riders ). The Applicants are a sales-person, a bookkeeper and a shop manager. I also note that a family relationship (Marlene is married to Robert who is Pedro’s brother) is not in itself enough to give rise to an inference of conspiracy (e.g.

Bank of Montreal v Tortora ). [ 27 ] In my view, the allegations of misrepresentation are equally vulnerable on the evidence. Lilia’s job as a bookkeeper was to input data. She posted invoices and put information into the system given her by Rhonda or Pedro. The information was ultimately provided to an accountant who prepared the financial statements. Lilia’s evidence is that she alerted Rhonda to inventory issues but that resolving them was caught in the middle of a dispute between Rhonda and Pedro. [ 28 ] Robert oversaw the fabrication of countertops.

He had little or nothing to do with inventory or financial information. [ 29 ] Marlene was a sales-person and had virtually nothing to do with financial statements, bookkeeping, or accounting. In fact, Marlene tried to improve the inventory system but she too was caught in the middle of a conflict between Rhonda and Pedro. A fluctuating inventory does not equate to a badge of fraud. [ 30 ] If we follow the

summary provided in Queen v Cognos ¸ we need a misrepresentation made negligently, an allegation that it was untrue, inaccurate or misleading, and relied on the Plaintiff to her detriment, causing harm in the form of damages. The allegations in the Statement of Claim are very general. They do not, for example, say that Marlene said ‘X about the inventory on such and such a date’; that this statement was untrue, inaccurate or misleading; made negligently, and relied upon by the Plaintiff. Instead, the misrepresentations have to do with categories of information. It is not for the Defendants to prove a negative.

And on the evidence, the likelihood that the Applicants made misrepresentations in the categories set out in the Statement of Claim, that were relied upon by the Plaintiffs, seems unlikely and improbable. The allegations of misrepresentation, such as they are, are inconsistent with the evidence given by these Applicants. I have no reason to doubt the veracity of this evidence. [ 31 ] I also acknowledge the burdens are somewhat different in a

summary dismissal application. The legal persuasive burden is on the Applicant throughout. Once the Applicant discharges her evidentiary burden, the evidentiary burden then falls to the respondent to demonstrate at least an arguable case. That is the part that is wanting here. [ 32 ] The Applicants have discharged their evidentiary burden. The Plaintiffs have little to show beyond a mere inference based on

harm; which could also be explained on the basis that the loss was the Plaintiffs’ own fault, or the fault of circumstances outside of the control of the Plaintiffs or Defendants. None of these things are sufficient to satisfy me that the case should proceed to trial against these Applicants. Disposition [ 33 ] The application is allowed. The case is dismissed. The parties may speak to costs. Heard on the 5 th day of September, 2018. Dated at the City of Edmonton, Alberta this 14th day of December, 2018. W.S. Schlosser M.C.Q.B.A. Appearances: Ben A. Guido and Amie W. Heil Odishaw & Guido for the Applicants Edward R. Feehan Duncan Craig LLP for the Respondents