Hierath v Shock, 2021 ABQB 185

Court of Queen’s Bench of Alberta Citation: Hierath v Shock, 2021 ABQB 185 Date: 20210315 Docket: 1508 00280 Registry: Medicine Hat Between: Teresa Hierath Appellant/Plaintiff - and - Dean Shock and Shockware Wireless Inc. Respondents/Defendants Docket: 1901 13285 Registry: Calgary And Between: Teresa Anne Healy Appellant/Plaintiff - and - Dean Alan Shock, Shockware Wireless Inc., and 1963927 Alberta Ltd. Respondents/Defendants

_______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J.C. Kubik _______________________________________________________ Appeal from the Memorandum of Decision of Master A. R. Robertson, Q.C., Master in Chambers Dated the 17 th day of January, 2020 (Hierath v Shock, 2020 ABQB 35 ) Introduction [ 1 ] Teresa Hierath (now known as Healy) and Dean Shock are former spouses. In 2016 they were also parties to a shareholder oppression remedy action, commenced by Healy against Shock and their shared corporation, Shockware Wireless Inc. (“Shockware”).

Shockware represented a significant portion of the parties’ matrimonial property. [ 2 ] The oppression remedy action was scheduled to proceed to a

summary trial on May 9, 2016, but was settled on May 12, 2016, following several days of negotiation.

The terms of the settlement were incorporated into a Memorandum of Agreement, which was later approved by Consent Order, entered before Langston J on May 13, 2016. [ 3 ] Between May 9, 2016 and June 29, 2016 (the execution date of the Loan Agreement) the parties negotiated and drafted the various contracts and security documents which gave effect to their Memorandum of Agreement. [ 4 ] The general terms of the agreement between the parties were that Shock would buy Healy’s shares in the corporation for the sum of $1,416,697 payable by way of a deposit of $16,697, with the remaining balance of $1.4 million dollars to be paid in fifty-nine equal monthly installments of $27,336.04, reflecting principal and interest. [ 5 ] Healy was the lender in the transaction.

As a result, in addition to the Share Purchase Agreement, a Loan Agreement and various security documents were executed to secure repayment of the loan. The shares of the corporation were also placed in escrow pending completion of the sale. [ 6 ] The Loan Agreement included a mutual release of all past, present and future spousal support claims and a salary cap.

The salary cap limited Shock’s dividend and other remuneration from the company to $350,000 per annum, while the loan balance was outstanding. [ 7 ] The Loan Agreement also provided that if Shock was not in default of the Loan Agreement, he could pre-pay the outstanding principal and interest balance in full after thirty-six months. On August 27, 2019, Shock tendered payment in the sum of $544,636.73 reflecting the outstanding principal balance plus interest up to September 10, 2019.

The payment was tendered on conditions, which included that Healy acknowledge receipt of full payment of the Loan Agreement and Promissory Note, including interest, and release all claims against the borrowers.

The letter tendering payment included the following paragraph: Your account for fees on a time basis and any disbursements incurred by your office may be sent to the writer who undertakes to pay the same forthwith. [ 8 ] Healy asserted that the tendered amount was incorrect and that Shock owed her legal costs associated with the negotiation and preparation of the Loan Agreement in the sum of $47,295.33. [ 9 ] While the parties were in dispute over the issue of costs and the tendered funds were in trust, Shock failed to pay two monthly loan installments.

Healy served notice of default, and when the time for rectification passed, instructed seizure of the shares of the corporation. [ 10 ] In addition, just prior to the tender of funds and in the context of concurrent family law proceedings in British Columbia, Healy learned that Shock had violated the salary cap provisions of the Loan Agreement. Subsequent to the tender of funds, Healy also served notice of this default, which was not cured. [ 11 ] The Calgary action is Healy’s action seeking recovery arising from breach of the Loan Agreement (1901 13285).

[ 12 ] On October 22, 2019, Shock applied to the Court for advice and direction, and on October 23, 2019 Healy filed an application seeking partial

summary judgment for costs, amongst other relief. Hartigan J granted an interim order on October 24, 2019, adjourning both applications to special Chambers, directing payment of the seized funds to Healy and discontinuing the enforcement proceedings. The substantive applications were heard by Master Robertson, Q.C on December 11, 2019. [ 13 ] On January 17, 2020, the Master dismissed Healy’s

summary judgment application and ruled that the tender by Shock was valid and in full satisfaction of the debt owing. Despite the fact that no such motion was before him, he effectively granted

summary dismissal of Healy’s claim for costs and damages arising from the alleged acts of default by Shock. [ 14 ] Healy appeals the entirety of the Master’s Decision. Standard of Review [ 15 ] An appeal from a Master is a hearing de novo . The standard of review is correctness and no deference is owed: Bahcheli v Yorkton Securites Inc , 2012 ABCA 166 , at paras 19-30 . New Evidence [ 16 ] On June 26, 2020, prior to the hearing of the appeal, Healy filed a new affidavit.

At the appeal hearing, I ruled that the affidavit was admissible pursuant to Rule 6.14(3) on the basis that it, at least in part, spoke to the surrounding circumstances at the time the parties entered into the various agreements effecting settlement of the oppression remedy action, and in particular the Loan Agreement, and was therefore relevant to

interpretation of the contract. Other portions of the affidavit speak to the alleged defaults by Shock and are relevant and material to the issue of whether the tender was valid. There are portions of the affidavit which are evidence of Healy’s subjective intentions or understanding, which are not admissible in relation to

interpretation of the contractual provisions. During the oral hearing, I indicated to the parties that in these reasons I would specify those portions of the affidavit which I relied upon in coming to my decision. The Respondents declined an opportunity to adduce responsive evidence. Issues on Appeal [ 17 ] The issues on appeal relate to both contractual

interpretation of the Loan Agreement and the availability of

summary judgment on the facts of the case. [ 18 ] The first issue for consideration is whether Healy is entitled to

summary judgment for the costs associated with the Loan Agreement. The second issue for consideration is whether Shock is entitled to a declaration that his tender, pursuant to the Loan Agreement, was valid. This involves an analysis of whether Shock was in default at the time he tendered the funds, or came to be in default thereafter. [ 19 ] For the reasons that follow, the appeal is allowed. Legal Test for

Summary Judgment [ 20 ] Weir-Jones Technical Services Incorporated v Purolator Courier Ltd , 2019 ABCA 49 , at para 47 , established that

summary judgment is to be granted where there is no genuine issue requiring trial and the Court is able to reach a fair and just determination on the merits of the case, based on the material before it.

Summary judgment is appropriate when the record is such that the Court can make the necessary findings of fact, apply the law to those facts, and arrive at a just result in an expeditious fashion. [ 21 ] The burden rests on the party seeking

summary judgment to show that there is no merit or no defence to the claim, that there is no genuine issue requiring trial, and to prove the factual elements of their case, all on a balance of probabilities. The party opposing

summary judgment must demonstrate that there is an insufficient record on which to make a final, just, and fair disposition. Such a disposition may not be available if there is a dispute as to material facts or issues of credibility which warrant a full trial. [ 22 ] Each party must put its best foot forward. Issue One [ 23 ] Sattva Capital Corporation v Creston Moly Corporation , 2014 SCC 53 , provides that while the

interpretation of contractual provisions is grounded in the text of the document, read in the context of the entire agreement, the circumstances surrounding the formation of the contract are relevant to understanding the objective intention of the contracting parties. Surrounding circumstances include evidence as to the background facts at the time the contract was executed which were, or reasonably ought to have been, in the knowledge of both parties at, or before, the date of the contract.

While surrounding circumstances are an interpretive aid, they cannot be used to overwhelm the words of the agreement. [ 24 ] The contractual provision relevant to the issue of costs reimbursement is Clause 6.1 of the Loan Agreement, which reads: Dean Alan Shock, 1963927 Alberta Ltd. and the Guarantor and each of them covenants with the Lender that so long as any amounts advanced under the Credit together with interest remain outstanding:

a) Each of them will:

vii) Pay or reimburse the Lender on a full reimbursement basis for all costs, charges and expenses (including legal fees) of or incurred by the Lender in connection with this Loan Agreement or any Security taken in pursuance of this Loan Agreement, including, but not limited to, all costs, charges and expenses in connection with the recovery or enforcement of payment of moneys advanced under the Credit and costs, charges and expenses to hire a receiver to liquidate the shares or assets of the Guarantor or 1963927 Alberta Ltd. pursuant to the Escrow Agreement. [ 25 ] The plain language of Clause 6.1 states that during the currency of the Loan Agreement, Shock will pay or reimburse Healy for all costs, charges, and expenses, including legal fees incurred in connection with the Loan Agreement or security taken in furtherance of the Loan Agreement.

By the language of the Clause, those costs are not limited to enforcement costs. [ 26 ] Clause 10.7 of the Loan Agreement is the entire agreement clause and Clause 10.13 incorporates various attached schedules into the Loan Agreement. Read together, Clauses 10.7 and 10.13 provide that the Loan Agreement, inclusive of its schedules, the security and other documents executed in furtherance of the Loan Agreement, the Memorandum of Agreement and the Consent Order constitute the entire agreement between the parties.

As a result, all of these documents serve as interpretive aids to determine the meaning of Clause 6.1 of the Loan Agreement. [ 27 ]

Schedule J to the Loan Agreement is the TD Bank Term sheet.

It sets out the standard terms of a commercial lender, including that the Borrower would reimburse the Lender for “all expenses (including legal expenses) incurred by the Bank in establishing, completing due diligence, documenting and monitoring the facility”. [ 28 ] The use of the TD Bank Term Sheet during the negotiations, its inclusion as part of the Loan Agreement, and the express language in that document addressing costs associated with the loan, provide context to the bargain reached between the parties, including as relates to security for the loan and costs and expenses. [ 29 ] The affidavit of Healy provides evidence as to how the TD Bank Term sheet came to be incorporated into the Loan Agreement.

In this regard, I rely on paragraphs 69, 70, and 77 of Healy’s sworn affidavit filed on June 26, 2020. The TD Bank Term sheet was provided by Shock’s counsel to Healy at the outset of the negotiations between the parties. On May 9, 2016, Shock’s counsel communicated to Healy the proposed terms of the settlement of the action and provided a comprehensive list of the security documents required to give effect to the share purchase and sale and the Loan Agreement.

The proposal specifically provided that Shock would deliver “any other clauses that normally form the security position of a lender” and included a copy of the TD Bank Term Sheet. The provision of the TD Bank Term Sheet to Healy, along with the language of the settlement proposal, is consistent with Healy’s evidence that she would be treated as a commercial lender, and entitled to the same terms and conditions as TD, including as related to the reimbursement of costs incurred. Her evidence is uncontroverted in these proceedings.

Further, the evidence, and in particular Exhibits 33 and 34 to Healy’s June 26, 2020 affidavit, discloses that legal counsel for both parties actively negotiated the terms of the various documents and shared the task of preparing the documents giving effect to the settlement. Both parties were well aware of the contents of those documents. [ 30 ] Various other clauses in the Loan Agreement also address the issue of costs and support Healy’s position. [ 31 ] Clause 2.3 is a due on sale clause.

It provides that in the event of a sale of the shares, the loan will be repaid in full from the sale proceeds, in a sum equivalent to all of the outstanding principal and interest, costs, and expenses which may be due to the Lender. [ 32 ] Clause 3.1(

c) sets out conditions precedent to the Loan Agreement including a mutual release by Healy and Shock of all claims for past, present and future spousal support.

That clause states that Healy’s release is conditional on Shock’s performance of the contract, such that, in the event of default, Healy’s release would be cancelled, and in the absence of default, the release would be in effect during the term of the loan, and permanently in effect after payment in full of the $1,400,000 and all accrued interest together with all costs of Healy. [ 33 ] In addition, provisions in other documents, including the Memorandum of Agreement and the Consent Order, assist in interpreting the terms of the Loan Agreement, as relates to costs. [ 34 ] The Memorandum of Agreement is a

summary of the terms of the parties’ settlement and contemplates that further documents will be negotiated and prepared to give effect to the settlement. The Memorandum of Agreement provided at paragraph 6(

e) that a Loan Agreement with reference to the settlement amount would be executed and would include, amongst other things, “such further covenants as may be reasonably practical in ordinary commercial practice of securing repayment of a loan, including, but not limited to…all costs of Teresa in enforcing the Loan Agreement and related documents shall be paid by the Borrowers on a solicitor and own client basis” (para. 6(e)(x)(a)).

The reference to “covenants as may be reasonably practical in ordinary commercial practice” is consistent with the TD Bank Term Sheet and the discussions surrounding Shock delivering “any other clauses that normally form the security position of a lender”. This is consistent with Healy’s contention that she was to be treated like a commercial lender. [ 35 ] The Consent Order was an order of the court confirming the resolution of the oppression remedy action.

It included a specific declaration that Healy had been oppressed and directed that she be remedied by Shock buying her shares, on the terms set out in the Memorandum of Agreement. The Consent Order included a costs clause which reads as follows: The parties shall bear their own costs and disbursements of this application, all intervening steps and this

summary trial but any party is hereby given leave to apply to this Court for any directions respecting concluding the sale directed herein, and such application may entitle any Applicant therein to costs in the discretion of the Court. [ 36 ] The Consent Order addresses the costs associated with the legal action and cannot be construed as limiting any costs payable to Healy in relation to preparation of the documents which would give effect to the terms of the settlement.

On the plain language of the Consent Order, the parties were agreeing to bear their own costs in relation to the litigation leading up to the Consent Order being presented to the Court, which logically included all of the litigation costs up to the

summary trial, the negotiations of the settlement as set out in the Memorandum of Agreement, and the application for Court confirmation of the settlement, which culminated in the presentation of the Consent Order for signing. The Consent Order did not preclude costs arising from negotiation and preparation of the

Loan Agreement and additional security documents, or any subsequent Court applications for advice and directions to assist in concluding the sale. The inclusion of costs in Clause 6.1 (amongst others) of the Loan Agreement, supports that

interpretation. [ 37 ] The Master, in reviewing the various clauses of the contract, construed Clause 6.1 to provide only for the costs of enforcement, in the event of default. On plain reading of the costs provisions in Clause 6.1 of the Loan Agreement, this is not so. That Clause specifically provides for payment or reimbursement of all costs associated with the Loan Agreement and any security taken in pursuance of the Loan Agreement, including, but not limited to enforcement costs .

The Master relied heavily on the language in the Memorandum of Agreement to support his finding that any costs entitlement related to enforcement costs only. In doing so, he failed to give primacy to the language of the Loan Agreement. This resulted in considerable weight being accorded to the Memorandum of Agreement, which reflected a mere

summary of the parties intentions with respect to settlement and, by its own language, provided a general framework as to what would be included in the Loan Agreement. [ 38 ] Further, the Master relied on the fact that the Loan Agreement was backdated to May 10, 2016 to support his finding that the costs associated with negotiation and preparation of the Loan Agreement were captured by the Consent Order and therefore not payable. However, there is another reason for the backdating of the Loan Agreement, which is that the deposit was paid this date and the loan amortization

schedule was calculated in reference to this date. Given that the parties continued to negotiate aspects of the Loan Agreement after the May 13, 2016 Consent Order, including the release of spousal support and the salary cap, the simple explanation that the Loan Agreement was backdated to May 10, 2016 in order to reflect the initial payment is the more logical conclusion in the context of the loan. [ 39 ] In addition, the Master interpreted Clause 6.1 to mean that once the monies were tendered there could be no liability for costs owing to Healy, because the credit did not remain outstanding.

This reasoning is entirely results driven and assumed that Shock’s only obligation was to pay the loan, not meet the other covenants and obligations contracted for.

Applying this reasoning, if Healy incurred costs to monitor the credit facility in any given year, as contemplated by the TD Bank Term Sheet, simple payout of the loan balance plus interest would result in her losing any right to collect the same. [ 40 ] It is interesting to note in this context, however, that when counsel for Shock tendered the balance of the loan principal plus interest to Healy’s counsel in August 2019, the covering letter stated: “Your account for fees on a time basis and any disbursements incurred by your office may be sent to the writer who undertakes to pay the same forthwith.” This gratuitous statement is entirely inconsistent with Shock’s argument that costs would only be payable on default of the Loan Agreement. [ 41 ] Accordingly, based on the record before me, and the principles of contractual

interpretation, the Loan Agreement provides for costs associated with the preparation of the Loan Agreement and supporting documents to be paid to Healy. I have reviewed the invoices reflecting the costs incurred. The costs recoverable will not include any legal fees or expenses associated with negotiation of the terms of the Memorandum of Agreement or Consent Order or the appearance before Langston J for the entry of the Consent Order.

Similarly, the appearances before Langston J in June and July 2016 will not be included in the costs as they are specifically contemplated by the Consent Order, and no independent costs were ordered in relation to those appearances. [ 42 ] This would leave for recovery all costs incurred for accounting and legal advice after May 13, 2016, and associated with the negotiation and preparation of the Share-Purchase Agreement, Loan Agreement, other security documents, releases and registrations.

This includes negotiations relating to matrimonial issues, and in particular the inter-connected issues of the release of spousal support claims, the salary cap, and the capital gains waiver. In the context of negotiating the terms of the Loan Agreement, these elements required tax advice, legal advice and draftsmanship. They are integral terms to the contract between the parties and are compensable based on Clause 6.1.

I rely on paragraphs 94, 95, 97, 113, 114, 115, 116, 119, 120, and 121 of Healy’s affidavit, and in particular the exhibits evidencing the exchanges between legal counsel on issues contractual terms, draftsmanship, and accounting issues intertwined with the resolution and finalization of the issues. [ 43 ] On the basis of the record before me I am satisfied that

summary judgment with respect to the amount of loan costs owing under the Loan Agreement can be granted.

There is no evidence which gives rise to a genuine issue requiring trial and a fair and just determination can be reached on the filed record. [ 44 ] I therefore award Healy judgment for costs in the sum of $38,765.13, broken down as follows: (a) $6,256.69 reflecting the entirety of the MNP accounting invoice of May 18, 2016, which included necessary accounting advice; (b) $2,822.75 reflecting the Reed Pope legal fee invoice for work done between May 24, 2016 and June 29, 2016; (c) $28,346.94 reflecting the Courtyard Law invoice, reduced by those amounts incurred through May 13, 2016, and captured by the Consent Order, as well as 1.5 hours associated with discussions around mortgage renewal, not related to the Loan Agreement; and (d) $1,338.75 reflecting the MNP invoice of November 14, 2016, also reduced by those amounts associated with mortgage advice.

All amounts are inclusive of fees, disbursements and GST. Issue Two [ 45 ] The Loan Agreement defines the events of default to include a failure to perform or observe any of the covenants in the Loan Agreement. [ 46 ] The Loan Agreement included a covenant which provided that Shock would not take remuneration, in the form of dividends or otherwise, in excess of $350,000 per annum. The negotiations reveal that the salary cap was negotiated in the context of the parties

exchange of a mutual release of all past, present and future spousal support, and Healy giving up her entitlement to utilize capital gains exemptions on the loan payments. There was a positive duty on Shock to inform Healy of any defaults in the Loan Agreement, including drawings in excess of the salary cap. [ 47 ] Healy began requesting Shock’s income information in August 2017. It was not until 2018 that he provided his 2016 tax return and advised Healy that he had taken $359,000 in 2016, and that the additional $9,000 reflected unanticipated costs associated with finalizing the dispute.

Healy accepted that this was a small, one-time deviation and, in effect, waived any right to call the loan. After 2016, Shock did not comply with his obligation to report such default. In August 2019, in the course of the family law proceedings, Healy became aware that Shock took dividends from the corporation, substantially in excess of the salary cap – including the sum of $570,990 in 2017 and $411,967 in 2018. This information was not filed in the British Columbia matrimonial proceedings until July 25, 2019, and was first seen by Healy in August 2019.

On August 26, 2019, Shock tendered the money to pay the loan. To the date of this appeal, he had not provided information as to his 2019 income, despite being served with more than one request. I rely on paragraphs 35, 36, 37, 38, and 39 of Healy’s affidavit and in particular the exhibits evidencing the requests for financial information and the ultimate exchange of documents. [ 48 ] The salary cap was an important provision because it was tied to the negotiation of the release of spousal support.

During the term of the Loan Agreement, both parties were effectively receiving the equivalent value from the shared matrimonial asset and were foregoing claims for past, present and future spousal support in return. But Healy’s release was conditional on Shock’s performance of the contract, such that an event of default cancelled her release, leaving her free to pursue spousal support. [ 49 ] The Master held that because Shock had already tendered the full payment of principal and interest, breach of the salary cap was no longer relevant. But, pre-payment was not a cure for default.

There was prima facie evidence before the Master that Shock was in breach of the terms of the salary cap covenant, an event of default, which prohibited him from pre-paying the loan. Accordingly, the Master’s decision to declare the tender valid and effectively grant

summary judgment to Shock was incorrect. [ 50 ] At this stage, full financial disclosure has not been provided, and it is not possible to make a final determination, in the nature of

summary judgment, as to whether a breach occurred, the extent of this breach, and the resulting damages which may flow from the cancellation of the waiver of spousal support. As a result, a trial of this issue is necessary to the determine the rights and remedies of the parties.

Accordingly, the tender cannot be declared valid. [ 51 ] Having made this determination, it is unnecessary for me to decide the issue of whether a conditional tender is valid at law. [ 52 ] Finally, the Order of Hartigan J, at para 2 directed that the funds seized during enforcement proceedings, be paid directly to Healy, effectively rectifying the default in loan payments for the months of September and October 2019, which occurred while the parties were disputing the validity of the tender. At the time the matter came before me, the loan was in good standing, and the seized property had been released.

As a result, there is no basis on the record before me to declare the loan in default and order

summary judgment in favour of Healy for the remaining principal and interest balance, plus loan costs, plus enforcement costs. Conclusion [ 53 ] Accordingly, I allow the appeal and set aside the Orders arising from the Memorandum of Decision dated January 17, 2020. [ 54 ] Healy is granted

summary judgment for costs associated with the Loan Agreement in the sum of $38,765.13. [ 55 ] The parties are directed to

schedule a Rule 4.10 Case Conference to establish a litigation plan to address the outstanding issues. [ 56 ] Healy is awarded the costs of the appeal. If the parties are unable to agree, they may make arrangements to speak to costs within 30 days of this decision. Heard on the 20 th day of November, 2020. Dated at Lethbridge, Alberta this 15 th day of March, 2021. J.C. Kubik J.C.Q.B.A.

Appearances: Trevor R. McDonald Burnet, Duckworth & Palmer LLP for the Appellant (Plaintiff) Kenneth C. Reeder MacLean Wiedemann Lawyers LLP for the Respondent (Defendants)