Kulhawy v Commerx Holdings LLC, 2018 ABQB 986

Court of Queen’s Bench of Alberta Citation: Kulhawy v Commerx Holdings LLC, 2018 ABQB 986 Date: 20181204 Docket: 1801 16809 Registry: Calgary Between: Robert Kulhawy Applicant - and - Commerx Holdings LLC and Lotus Innovations Private Equity Fund also known as Lotus Innovations LLC and Commerx Corporation Respondent _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice K.P. Feehan _______________________________________________________ [ 1 ] Robert Kulhawy is the founder, CEO and President of Commerx Corporation.

Commerx Holdings LLC is the 51% majority shareholder of Commerx Corporation. Lotus Innovations Private Equity Fund, also known as Lotus Innovations LLC, is the corporate owner of Commerx Holdings LLC. [ 2 ] Robert Kulhawy asks for an emergent Interim Interlocutory Order allowing Commerx Corporation to borrow up to $500,000 CAD in a form akin to a Debtor-In-Possession financing for the purpose of assisting in its operations, at an interest rate not to exceed 14% annually, with a commitment fee not to exceed 3%, a line of credit to be secured against up to a maximum of 70% of Commerx

Corporation’s accounts receivable under 120 days, to be repayable on or before June 30, 2019. [ 3 ] I have been provided with an Originating Application dated November 26, 2018, an Affidavit of Robert Kulhawy also dated November 26, 2018, and a Supplemental Affidavit of Robert Kulhawy dated November 30, 2018 in support of the Application.

I have also been provided with an Affidavit from Christian Mack, the chair of the Board of Directors of Commerx Corporation, manager of the General Partner of Lotus Innovations Fund LLP, and CEO and director of Commerx Holdings LLC, dated November 30, 2018, opposing the Application. [ 4 ] In his first Affidavit, Robert Kulhawy alleges oppression or unfair prejudice against him as an officer of Commerx Corporation by that corporation and its affiliates Commerx Holdings LLC, Lotus Innovations Private Equity Fund, and Lotus Innovations LLC. [ 5 ] He says that on December 30, 2016, he entered into a Purchase Agreement with Lotus Innovations LLC and Lotus Innovations Private Equity Fund whereby he sold to Lotus Innovations Private Equity Fund and Lotus Innovations LLC 51% of the Class A shares of Commerx Corporation for $2,000,000 USD; $500,000 USD to be paid before January 31, 2017 and $1,000,000 USD to be paid before November 30, 2018.

He says the original amount was paid late on July 4, 2017, but he has been advised the second payment will not be made on November 30, 2018. In fact, it was not.

He also says that Lotus Innovations Private Equity Fund and Lotus Innovations LLC did not provide the working capital credit promise of $3,000,000 USD to be available from December 31, 2016 to December 31, 2018. [ 6 ] Robert Kulhawy also alleges breach of a Shareholders Agreement, Stock Purchase Agreement, and Settlement Agreement. [ 7 ] As a result, Robert Kulhawy says that subsidiary corporations of Commerx Corporation in India and Mexico have become insolvent and while Commerx Corporation has significant accounts receivable and back-orders it needs to fill, it cannot continue without immediate working capital to be secured against the accounts receivable. [ 8 ] Mr.

Kulhawy also says that Lotus Innovations Private Equity Fund and Lotus Innovations LLC have entered into a financing arrangement with Alberta Treasury Branch providing that $1,500,000 CAD of contemplated loan proceeds and a $2,000,000 CAD term note are to be paid back to Lotus Innovations Private Equity Fund and Lotus Innovations LLC conditional upon Robert Kulhawy renegotiating the terms of the Purchase Agreement including a further divestment of his interest in the company and the repayment obligations of Lotus Innovations Private Equity Fund and Lotus Innovations LLC. [ 9 ] Finally, he says he has been served with a letter from Fortitude Financial Investments Inc. dated November 23, 2018 demanding immediate payment of the redemption amount for 1,148,381 Class “F” preferred shares issued to Fortitude. [ 10 ] Given all of the above, Robert Kulhawy alleges he is being held hostage to unreasonable demands of Lotus Innovations Private Equity Fund and Lotus Innovations LLC, to the extent that this constitutes oppression and unfair prejudice under

Section 242 of the Alberta Business Corporations Act . [ 11 ] In his Supplemental Affidavit, Robert Kulhawy deposes that as at November 30, 2018, Commerx Corporation has $175,117 USD cash on hand and an expected $164,303 USD accounts receivable by Friday, December 7, 2018.

He deposes that total expenses due by Friday, December 17, 2018 total $604,364 USD resulting in a shortfall of $264,944 USD. [ 12 ] Robert Kulhawy deposes that Commerx Corporation requires $228,377 USD by Tuesday, December 4, 2018 to fund the payroll for 96 employees, failing which payment the company will not be able to fund that payroll. [ 13 ] Robert Kulhawy further deposes that on November 30, 2018, Hennley Investments has offered a Business Line of Credit of up to $500,000 CAD on the following terms: (

a) The interest rate is fixed at 14% annually, to be calculated and paid monthly; (

b) In the event of a default, compound interest is payable at the rate of 14% annually; (

c) The line of credit is secured against up to a maximum of 70% of Commerx Corporations accounts receivable under 120 days; (

d) The agreement terminates on June 30, 2019; and (

e) Commerx Corporation may repay any borrowed sums in advance of the termination date but shall repay any borrowed sums on that date.

Robert Kulhawy deposes that this proposed agreement is arm’s length. [ 14 ] Robert Kulhawy requests that although the line of credit extends to $500,000 CAD, the company only be authorized to spend a maximum of $264,944 CAD without further Court Order and that those funds be limited to pay employee payroll, employee expenses, insurance, taxes, severance and vendor obligations. [ 15 ] In the Reply Affidavit of Christian Mack, he deposes that the proposed interim financing sought by Mr.

Kulhawy in the Application is against the wishes of the Board of Directors of the company, adverse to the interests of Commerx Corporation’s stakeholders other than Mr. Kulhawy and is neither necessary nor appropriate for Commerx Corporation. He says Commerx Corporation currently has working capital of approximately $160,000 USD including cash of approximately $125,000 USD, although in argument counsel agreed these are only quick estimates. He says the Commerx payroll is not due until December 6, 2018 and the amount owing on that date is approximately $80,000 USD on a bi-weekly payroll cycle.

Christian Mack says Commerx Corporation is not in danger of missing that payroll nor of ceasing business in the immediate future.

[16] Christian Mack advises that Mr. Kulhawy has not presented the Board with any financing proposals to address CommerxCorporation’s working capital needs nor has he sought authority from the Board for Commerx Corporation to seek any financing asdescribed in Mr.

Kulhawy’s affidavit, as is his duty. [17] Christian Mack deposes that Commerx Holdings LLC has, since December 30, 2016, been prepared to provide a line of creditto Commerx Corporation contingent upon that company’s achievement of operating targets, which has not occurred. [18] Christian Mack confirms discussions with “a large Alberta-based lender”, which I take to be Alberta Treasury Branch, toprovide a multi-million dollar credit facility which would immediately ameliorate Commerx Corporation’s liquidity situation.

He alsoadvises that Fortitude Financial Investments Inc. has communicated its desire to pursue claims against Robert Kulhawy personally underhis personal guarantee of Commerx Corporation’s obligations and believes the impetus for this application is Robert Kulhawy’s attemptto protect himself from personal liability. [19] Finally, Christian Mack indicates that despite requests from the Board, Robert Kulhawy has refused to provide the Board andits agents with access to appropriate books and records to allow them to ascertain the scope of the financial problems of CommerxCorporation. [20]

Section 242 of the Business Corporations Act (“BCA”) provides: 242(1) A complainant may apply to the Court for an order under this section.

(2) If, on an application under subsection (1), the Court is satisfied that in respect of a corporation or any of its affiliates (

a) any act or omission of the corporation or any of its affiliates effects a result, (

b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or (

c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, theCourt may make an order to rectify the matters complained of. [21] The powers of the Court are contained in s 242(3), including allowing the Court to make any Interim or Final Order it thinksfit to rectify the matters subject to complaint. [22] In R Floden Services Ltd v Solomon, 2015 ABQB 450, Renke J reviewed the relevant authorities, and concluded atparagraphs 27-29: How should s 242 be interpreted? [27] The test for determining whether conduct “is oppressive or unfairly prejudicial to or … unfairly disregards the interests of anysecurity holder” was established in BCE Inc. v 1976 Debentureholders, [2008] 3 S.C.R. 560, 2008 SCC 69 ; see also Sandhu atpara 50; 1216808 Alberta Ltd. (Prairie Bailiff Services) v Devtex Ltd., 2014 ABCA 386 at para 18; Frydman v Pelletier, 2015ABQB 289 at paras 301 – 303; Krulc v Krulc, 2015 ABQB 213 at para 18; Luebke v Manluk Industries Inc., 2013ABQB 264 at para 32; Builders’ Floor Centre Ltd. v Thiessen, 2013 ABQB 23 at para 87; Hunter v Ingarfield, 2010ABQB 74 at para 58. [28] The test has two elements, described in BCE Inc. at paras 68 and 56: (

a) does the evidence support a reasonable expectation asserted by the claimant? (

b) does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression,”“unfair prejudice” or “unfair disregard” of a relevant interest? [29] The claimant bears the burden of establishing the asserted expectation, the reasonableness of the expectation, and the violation ofthe expectation by conduct that was oppressive or unfairly prejudicial or that unfairly disregarded a relevant interest: 1216808 AlbertaLtd. (Prairie Bailiff Services) v Devtex Ltd. at para 39; BCE Inc. at paras 119, 137. [23] The Supreme Court of Canada in Wilson v Alharayeri, 2017 SCC 39 , [2017] 1 SCR 1037, 2017 SCR 39, atparagraph 24 reaffirms the Court’s decision in BCE Inc. v 1976 Debentureholders. [24] The issue before me is whether I should intervene by way of granting the interim interlocutory remedy sought.

Relief undersection 242(3) is discretionary. Wilson v Alharayeri gives guidance on remedies at paragraphs 26 and 27: [26] Section 241(3) thus gives a trial court broad discretion to “make any interim or final order it thinks fit,” before enumeratingspecific examples of permissible orders. But this discretion is not limitless. It must be exercised within legal bounds, and, as a startingpoint, it must be exercised within the bounds expressly delineated by the CBCA. [27] Any order made under s. 241(3) exists solely to “rectify the matters complained of,” as provided by s. 241(2).

The purpose of theoppression remedy is therefore corrective: “. . . in seeking to redress inequities between private parties . . .” the oppression remedy seeksto “apply a measure of corrective justice” (J. G. MacIntosh, “The Retrospectivity of the Oppression Remedy” (1987), 13 Can. Bus. L.J.219, at p. 225; see also Naneff v. Con-Crete Holdings Ltd. (1995), (ON CA), 23 O.R. (3d) 481 (C.A.) (“Naneff”);820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 (Ont. C.J. (Gen. Div.)), at p. 197 (“Ballard”)).

In other words,an order made under s. 241(3) should go no further than necessary to correct the injustice or unfairness between the parties.

[ 25 ] In Caron v Canadian Energy Inc , 2017 ABQB 767 , Supplementary Reasons at 2017 ABQB 782 , Graesser J said that business disputes or business decisions are at the root of many oppressive conduct claims. Courts are not in the business of telling people how to run their businesses, or what investments to make, or what opportunities to pursue or forego.

Courts are in the business of telling directors, officers and shareholders what they cannot do, which is to unfairly disregard the legitimate interests of other stakeholders. [ 26 ] As such, where a prima facie case of oppressive conduct is made out, I see no impediment in the Court intervening in as minimal a way as possible in the circumstances, to address the imbalance or the conduct subject of complaint. The ultimate test requires an assessment of the best interests of the corporation, its shareholders, directors and officers.

It involves a balancing of competing interests. [ 27 ] On the evidence before me, which I realize was brought on an emergent basis without full affidavits, cross-examinations on affidavits or detailed written argument, I conclude there is sufficient prima facie evidence of oppressive and unfair prejudice against Robert Kulhawy by Commerx Corporation, Commerx Holdings LLC, Lotus Innovations Private Equity Fund and Lotus Innovations LLC to warrant an interim interlocutory remedy.

I find that the evidence supports a reasonable expectation by Robert Kulhawy that the Respondents would pay $1,000,000 USD pursuant to the Purchase Agreement by November 30, 2018, provide working capital credit of $3,000,000 USD between December 31, 2016 and December 31, 2018, and meet its other commitments pursuant to the Purchase Agreement, Shareholders Agreement, Stock Purchase Agreement and Settlement Agreement.

I find that reasonable expectation was violated by the conduct of the Respondents within the definition of oppression and unfair prejudice. [ 28 ] I find that the conduct of the Respondents has put at risk the ability to fund payroll for 95 employees on December 4, 2018, collect significant accounts receivable, and fill current backorders by Commerx Corporation. I find also that the actions of the Respondents have put at risk the liability of Commerx Corporation to Fortitude Financial Investments Inc. and Mr.

Kulhawy’s personal guarantee of that liability. [ 29 ] Given my determination on the question as to whether or not there has been prima facie oppression of Robert Kulhawy, I grant the Order as requested limited however to allowing Commerx Corporation to spend only up to $264,944 CAD of the loaned funds without further Court Order, and only for the purposes of employee payroll, employee expenses, insurance, taxes, employee severance and vendor obligations. Heard on the 29 th and 30 th days of November, 2018. Dated at the City of Edmonton, Alberta this 4 th day of December, 2018. K.P. Feehan J.C.Q.B.A.

Appearances: Justin R. Fogarty and Scott C. Chimuk Regent Law and Burstall LLP for the Applicant Navdeep (Gulu) S. Punia and Andrew Dixon Fasken Martineau DuMoulin LLP for the Respondents