Biocomposites Group Inc v, 2019 ABQB 937

Court of Queen’s Bench of Alberta Citation: Biocomposites Group Inc v 0975138 BC Ltd (DH Manufacturing), 2019 ABQB 937 Date: 20191209 Docket: 1703 02005 Registry: Edmonton Between: Biocomposites Group Inc Plaintiff/Applicant - and - 0975138 BC Ltd, operating as DH Manufacturing Defendant/Respondent - and – Daniel Madlung Third Party Defendant/Applicant _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice T.D. Clackson _______________________________________________________ I. Introduction

[ 1 ] This is an application by the third party to summarily dismiss the third party claim against him. He also seeks to compel the Defendant to discharge its counsel on the basis that lawyer will be a witness in the proceeding. Both applications are dismissed. II. Analysis A.

Summary dismissal of the third party claim [ 2 ] This case has been the subject of a prior decision by this court. Justice Khullar was called upon to determine an application by Biocomposites Group Inc. for

summary judgment in its claim against 0975138 BC Ltd, operating as DH Manufacturing. She rejected that application but ordered the Defendant to post $25,000 as security for costs. In her reasons, the background circumstances were outlined as follows: [3] In January of 2007, Dennis Hotte and his spouse Denise Hotte, through DH Manufacturing, purchased a facility in Houston, British Columbia which manufactured finger-joint lumber, a form of wood blocks made from unusable wood leftover from sawmills.

The purchase was partly financed by Daniel Madlung and his spouse Brenda Madlung, and resulted in Daniel and Brenda Madlung owning 50% of the shares in DH Manufacturing. [4] In the fall of 2013, Dennis Hotte and Daniel Madlung decided to establish a facility in Drayton Valley to manufacture finger joint lumber from wood that would be received from the Weyerhaeuser Sawmill in Drayton Valley, Alberta. The parties agreed that DH Manufacturing would sublet from BCG a portion of an industrial building in Drayton Valley (Drayton Valley Premises).

BCG rents the Drayton Valley Premises from the owner, 1709198 Alberta Ltd., whose sole shareholders are Daniel and Brenda Madlung, and whose sole director is Daniel Madlung. Daniel Madlung is also the sole director of BCG. The sole shareholder of BCG is 1709198 Alberta ltd. [5] It is undisputed that Mr. Madlung and Mr. Hotte jointly operated DH Manufacturing. [6] DH Manufacturing and BCG entered into a written sublease that saw DH Manufacturing occupy a portion of the Drayton Valley Premises for the purposes of the manufacturing of the finger joints.

They agreed on space that would be occupied exclusively by DH Manufacturing, as well as certain space that would be shared between DH Manufacturing and BCG. During the time period that the Drayton Valley property was being adapted to be able to facilitate DH Manufacturing’s business, Mr. Madlung was a director and a shareholder of both BCG and DH Manufacturing. In that capacity he made decisions with respect to both businesses. He would consult with Mr.

Hotte about some of those decisions related to DH Manufacturing. [7] In November 2014, Dennis Hotte passed away, which delayed the start of DH Manufacturing’s Drayton Valley operations. [8] In April 2015, Denise Hotte, the widow of Dennis Hotte, exercised a provision in the unanimous shareholders agreement allowing her to purchase the shares of DH Manufacturing owned by Daniel and Brenda Madlung. It does not appear disputed that this triggered a contentious process for valuing those shares for DH Manufacturing.

Eventually the Madlungs sold those shares for $2,668,083.50 in a deal that closed on January 4, 2017. [9] On the same day that the sale of those shares occurred, January 4, 2017, BCG issued to DH Manufacturing a notification that raised, among other issues, that DH Manufacturing was: • Not in compliance with the sublease agreement because it was using an area greater than what had been contemplated in the sublease; and • Using equipment that was not owned by DH Manufacturing including the Electrical Panels and the Dust Collector (the Notice). [10] The Notice provided two weeks to comply with the sublease and two weeks to cease using the Electrical Panels and Dust Collector and return them in good working order or to purchase them for $100,000. [11] While there are many issues in dispute in this lawsuit, including whether DH Manufacturing is in breach of the sublease, what is clear is that while Mr.

Madlung still owned shares in DH Manufacturing and was still a director of DH Manufacturing, DH Manufacturing was able to operate in the Drayton Valley Premises without issues being raised by BCG. However, on the same day that the shares sale purchase closed and Mr. Madlung ceased being a director or shareholder of DH Manufacturing, BCG issued its Notice against DH Manufacturing claiming a breach of the sublease agreement, and among other things, return of the Electrical Panels and Dust Collector. III.

The Evidence in Relation to the Electrical Panels and Dust Collector [12] The evidence in relation to the ownership of the Electrical Panels and Dust Collector is found in an Affidavit sworn by Mr. Madlung on February 15, 2017: 27. As I was a director and shareholder of both BCG and DH Manufacturing during the Installation Period [November 2013 to April 2014], I allowed DH Manufacturing to use electrical panels belonging to BCG (the “electrical panels”) to connect its machinery to the Drayton Valley Building’s power supply, in order to help DH Manufacturing defer costs.

Dennis Hotte and I discussed and agreed that the Electrical Panels remained the property of BCG. These discussions occurred after the execution of the Written Sublease and were not relating to the leasing of the Drayton Valley Premises in any way. ... 32. In October, 2014 the Drayton Valley operation installed a trimmer to further process the trim blocks. As I was a director and

shareholder of both BCG and DH Manufacturing at this time I allowed DH Manufacturing to use a dust collection system owned by BCG (the “Dust Collector”) in order to defer costs. At the time that BCG allowed DH Manufacturing to use the Dust Collector, Dennis Hotte and I agreed that it would remain the property of BCG and that DH Manufacturing’s use of it would be temporary. These discussions occurred well after the signing of the Written Sublease and were not related to the leasing of the Drayton Valley Premises in any way. [13] BCG argues that there is no evidence contradicting Mr. Madlung’s Affidavit.

Therefore the ownership of the Electrical Panels and Dust Collector are not in dispute and partial

summary judgment should be granted. [14] DH Manufacturing disputes BCG’s claim of ownership and relies on the following: • The belief of Dustin Hotte, the son of Dennis Hotte, who was involved in the DH Manufacturing business, that his father would never have made such an agreement with Mr. Madlung. There is a dispute in the evidence as to the degree of Dustin Hotte’s involvement in the business and how closely he worked with his father; Dustin Hotte claims that he worked very closely with his father whereas Mr.

Madlung claims that Dustin had no ownership or involvement in the management of DH Manufacturing’s business. For instance, Mr. Madlung deposes that neither Dustin nor Denise Hotte had any involvement in the decision to sublease space from BCG at the Drayton Valley Premises or were involved in the discussion and negotiations between Dennis Hotte and Mr. Madlung in relation to the arrangement between BCG and DH Manufacturing in Drayton Valley. • An email dated December 1, 2013 between Dan Madlung and Dennis Hotte that addresses how DH Manufacturing and BCG ought to share costs. In that email, Mr.

Madlung identifies the items which DH Manufacturing is receiving free of charge from BCG: some electrical equipment traded BCG rebar (value of $70,000), a bunch of steel left over from another project (value of $10,000), and free use of a forklift and other tools and equipment. DH Manufacturing says that the Electrical Panels and Dust Collector are not identified in this email, which confirms that they are not BCG’s property.

The email does raise questions about the Electrical Panels that were being installed between November 2013 and April 2014, however, I note that the Dust Collector does not become an issue until October 2014. • There is no written documentation such as an invoice or written agreement showing that the Electrical Panels or Dust Collector were owned or purchased by BCG. • Dustin Hotte deposes that DH Manufacturing paid for the installation of the Electrical Panels and the Dust Collector. • Mr.

Madlung has been acting in bad faith in demanding return of the Electrical Panels and Dust Collector and in enforcing the strict terms of the sublease. This is seen in an email from Mr.

Madlung to his accountant on September 17, 2016 wherein he states “I’m thinking that right after we receive the funds in our account we send a notice to DHM with the following” referring to, among other things: - Retroactive operating expenses invoice; - Notice that DH Manufacturing is occupying more space of the Drayton Valley Premises than permitted by the sublease; - An offer to lease the back area and shared access in one of the buildings; - Offer to sell the electrical equipment owned by BCG or DH Manufacturing needs to replace it within a certain period; - Offer to sell the dust system BCG owns for $50,000.

The email ends in the following manner: “Thoughts? We can have some fun with this!” • DH Manufacturing also points to Mr. Madlung’s conduct during the time period that the Madlung shares were being valued. A valuation report was prepared by Kingston Ross Pasnak LLP to determine DH Manufacturing’s value as of January 31, 2016. During that process, Mr. Madlung was required to identify equipment at the Drayton Valley Premises that DH Manufacturing needed to operate but did not own. He did not identify the Electrical Panels and Dust Collector.

All he identified was “electrical gear and small cyclone” which he valued at $5,000. Either the Electrical Panels and Dust Collector are not BCG’s property or, if the “electrical gear and small cyclone” is synonymous with the Electrical Panels and Dust Collector, they have been grossly overvalued by BCG in this lawsuit. [ 3 ] Justice Khullar said this relative to Mr. Madlung in explaining why

summary judgment was inappropriate: [24] At the heart of this litigation is a dispute about the conduct and intentions of Daniel Madlung when he was a director and shareholder of DH Manufacturing at the same time he was the director and shareholder of BCG. The theory of the defendant is that Mr. Madlung is taking advantage of the fact that Mr. Dennis Hotte died.

Specifically, there is no paper trail with respect to the Electrical Panels and Dust Collector and how DH Manufacturing and BCG addressed that equipment from the 2013 to 2015 time period as the Drayton Valley Premises was getting prepared and beginning to operate for DH Manufacturing. Generally, DH Manufacturing challenges Mr.

Madlung’s ability to act in the best interests of DH Manufacturing at the relevant time. [25] The claims for ownership of the Electrical Panels and the Dust Collector by BCG, while apparently discrete from the sublease and operating costs issues raised in the Amended Statement of Claim, really fall into the same factual and legal matrix of Mr. Madlung’s conduct and good faith: specifically, Mr. Madlung’s conduct from when Dennis Hotte died until Mr.

Madlung was paid over $2.6 million for his shares in DH Manufacturing and BCG’s issuing of the Notice of January 4, 2017. [26] I am mindful of the argument made by BCG that DH Manufacturing did not put before the Court any cross-examination of Mr. Madlung on his Affidavit regarding the ownership of the Electrical Panels or Dust Collector, so his evidence that BCG owns the equipment is uncontradicted. However, questions regarding Mr. Madlung’s credibility arise in several ways:

• The timing of the Notice of January 4, 2017 being the same day that he received over $2.6 million for the shares in DH Manufacturing; • The Notice from BCG claiming that DH Manufacturing is in breach of a number of agreements with BCG, when up until January 4, 2017, Mr. Madlung was responsible for these dealings for both companies; • Mr. Madlung’s email of December 17, 2016, setting out his strategy to his accountant about the timing of the Notice and his statement that he could have “some fun with this”; • The defence being raised about Mr.

Madlung’s breach of his competing duties to both DH Manufacturing and BCG which has led him to act at the detriment of DH Manufacturing; and • Mr. Madlung’s conduct during the valuation process and his failure to identify the Electrical Panels or the Dust Collector as equipment that belonged to BCG. Alternatively, if the reference in the valuation to “electrical gear and small cyclone” is referring to the Electrical Panels and Dust Collector, then they are valued only at $5,000.

Either he undervalued the equipment, or is now grossly overvaluing it, or he failed to identify it as equipment belonging to BCG during the valuation process. [27] Another consideration is that in the context of the overall claim, severing the issues dealing with the ownership of the Electrical Panels and a Dust Collector would not necessarily result in any economy with respect to the balance of the litigation since the same issues really arise with respect to Mr. Madlung’s credibility, and his role in acting behalf of both DH Manufacturing and BCG. [28] In considering the test for

summary judgment, I do not think that a

summary disposition would be fair and just to both parties. The defendant’s position raised in the pleadings, evidence and argument in this application place Mr. Madlung’s conduct at the centre of its case. While there is no evidence directly contradicting his assertion of ownership of the Electrical Panels and Dust Collector by BCG, Mr. Madlung’s conduct after Dennis Hotte died, while he was a director of both BCG and DH Manufacturing, through the valuation process, and sending the Notice on January 4, 2017, is central to the entire lawsuit.

What a trial judge might conclude about that conduct may colour the claims of ownership of the Electrical Panels and Dust Collector. As such, the defendants have established a foundation to challenge Mr. Madlung’s credibility, which is potentially a decisive material fact.

Summary judgment is denied. [ 4 ] In this application, Mr. Madlung argues that the release which he obtained as part of the share sale forecloses the third party claim brought against him by DH in the BCG action. In effect, he says that because he seems to have been able to hoodwink DH Manufacturing, in part by the use and, arguably, the abuse of his directorship of both BCG and DH, this court is constrained to approve of his shenanigans, because of the release. [ 5 ] I agree with Justice Khullar that BCG seems to be Mr. Madlung’s foil. His conduct could very well color the claim made by him through BCG.

In addition, obligations of good faith, fidelity and other fiduciary responsibilities could very well, once determined, undermine the claim made by Mr. Madlung and his reliance on the shield that the release represents. [ 6 ] In addition, as was the case before Justice Khullar, there is no saving in hiving off the third party claim and determining it at this juncture. The same parties and virtually all of the same issues will remain extant. [ 7 ] As for the argument that DH was aware of the claims which BCG was entitled to make, before the release was signed, that fact is very much in dispute.

Whether DH did in fact know and whether that knowledge was sufficient is key to this litigation. Mr. Madlung argues that DH had that knowledge but the evidence shows only that DH may have had an idea that it may have some of BCG’s equipment and have used more space than was leased. Both of those facts would have been the result of Mr. Madlung machinations, presumably to somehow benefit both BCG and DH. As well, the evidence suggests that the potential claims of BCG against DH were represented as so minor as to be of virtually no reasonable concern and yet in the hands of Mr.

Madlung came to have a purported value of hundreds of thousands of dollars. [ 8 ] These issues cannot be resolved without viva voce testimony and determination of the credibility of Mr. Madlung. Accordingly, the application by Mr. Madlung to summarily dismiss the third party claim is dismissed. B. Disqualifying litigation counsel for DH [ 9 ] The second application involves the premise that the knowledge of DH relative to the obligations it owed to BCG is key to this litigation.

In fact, the claims by BCG are met with arguments asserting ownership of the claimed assets, arguments respecting the terms of the sublease and arguments relating to a claim for setoff. DH’s knowledge of the claims by BCG prior to closing of the share transaction is not particularly relevant to those issues. [ 10 ] Plainly, however, that knowledge is relevant to the third party claim against Madlung. What DH knew about the extent of DH’s liability to BCG at the time that Madlung was released and sold his shares to Mr. Hotte is a key factor in that part of the litigation. [ 11 ] Mr. Madlung argues that Mr.

MacEachern was the legal counsel and lead negotiator for DH in the share purchase transaction. That included representing DH relative to the negotiated release. Mr. MacEachern is now DH’s litigation counsel, in this case. [ 12 ] Of note, the pleadings and affidavits filed by Madlung do not positively aver that DH had knowledge of the claims by BCG. Instead, those claims are made in argument. Specifically, it is argued that the court hearing this case cannot determine DH’s knowledge without hearing the evidence of Mr. MacEachern. As such, Mr. Madlung argues that Mr.

MacEachern must resign as counsel since he cannot be both counsel and witness. Since he has not done so, Madlung seeks to have this court declare Mr. MacEachern to be disqualified. [ 13 ] There is evidence beyond the correspondence exchange between counsel for BCG, Mr. Conner and Mr. MacEachern. There is

the correspondence from Mr. Conner to Randy Popik of March 8, 2016, referring to the electrical gear and cyclone having a value of $5,000. There is also the correspondence exchange between Madlung and his account, Randy Fries, which strongly suggests Mr. Madlung was setting and looking forward to trapping DH.

That correspondence certainly contradicts the argument that DH had knowledge of the potential significance of the possible claims by BCG. [ 14 ] All of the foregoing would appear to undermine Madlung’s reliance on the release and therefore buttress DH’s claim for indemnity. [ 15 ] Against that, Madlung argues that there may be relevant evidence as to the discussions between MacEachern and Conner beyond what is contained in their exchange of correspondence. If there is, that would make both men witnesses. [ 16 ] Disqualifying a party’s chosen counsel is not a step taken lightly.

In this case, I am asked to act on speculation. That is not enough. If Mr. Conner offers evidence beyond the correspondence exchange with MacEachern that bears on DH’s knowledge of the potential claim by BCG, then DH may decide, at that point, that MacEachern has relevant evidence to give. At that point, MacEachern would have to withdraw as counsel as he would then become a witness. When and if those may occur is completely speculative at this juncture. [ 17 ] Alternatively, DH may decide that MacEachern does not have relevant evidence to offer or that DH prefers not to have him give that evidence.

Either way, there would be no basis upon which to disqualify MacEachern. [ 18 ] In result, the application must fail. At best, it is premature. [ 19 ] The parties may speak to costs on appointment. Heard on the 6 th day of November, 2019. Dated at the City of Edmonton, Alberta this 9 th day of December, 2019. T.D. Clackson J.C.Q.B.A. Appearances: Mathieu LaFleche, Bennett Jones LLP for Biocomposites Group Inc. and Daniel Madlung Richard Hajduk, agent for counsel for the DH Manufacturing, Coady B. MacEachern, Giddings MacEachern Law