Business Development Bank of Canada v., 2014 BCSC 611

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Business Development Bank of Canada v. 0792989 B.C. Ltd., 2014 BCSC 611 Date: 20130409 Docket: 10-0642 Registry: Victoria Between: Business Development Bank of Canada Plaintiff And: 0792989 B.C. Ltd. and Evergreen Industries Ltd. Defendants - and - Docket: 10-3889 Registry: Victoria Between: Walter Eric Berndt and Donna Marie Berndt Plaintiff And: Business Development Bank of Canada Defendant Before: The Honourable Madam Justice J. A. Power Reasons for Judgment Counsel for Business Development Bank of Canada: M. J.

Hargreaves Counsel for Walter and Donna Berndt: P. G. Guy Place and Date of Trial/Hearing: Victoria, B.C. November 19 - 23, 2012 and March 27, 2013 Written Submission Received: October 3, 2013 Place and Date of Judgment: Victoria, B.C. April 9, 2014 INTRODUCTION [ 1 ] The trial in this matter related to two actions that were heard together since the actions arose as a result of the same set of facts. [ 2 ] Business Development Bank of Canada v. 0792989 B.C.

Ltd. and Evergreen Industries Ltd. relates to a 4.2 million dollar loan that the Business Development Bank of Canada (the “BDC”) says is secured by a mortgage on a property in Langford, British Columbia. In that action, the BDC assert the validity of the mortgage and seek to enforce against the subject property. 0792989 B.C. Ltd. (the “company”) says that the mortgage is a nullity, on the basis that the mortgage documents were not signed by a person authorized to sign on behalf of the company.

As I will discuss further in reviewing the facts, the company takes the view that the mortgage was obtained through a fraud on the part of Connie and Gary Johnson, who were involved with the operation of the company but were not directors or shareholders. [ 3 ] The BDC relies on s. 146 of the Business Corporations Act , S.B.C. 2002, c. 57, which codifies the common law “indoor management rule,” to claim a valid mortgage. In essence, they say that the person who signed the mortgage was held out by the company as an authorized signatory and that they are entitled to rely on that representation.

Alternatively, if the mortgage is void, the BDC asserts a claim against the company for unjust enrichment.

[ 4 ] The company also filed a counterclaim against the BDC, alleging that the BDC owed the company contractual duties and a duty of care to ensure that they were dealing with authorized agents of the company in issuing the mortgage. The company seeks $200,000 in special damages, an amount which (as discussed further below) was earmarked under the loan in question for a share purchase agreement between the company’s shareholders. [ 5 ] Evergreen Industries Ltd. was joined as a defendant because it is a holder of a builders lien on the subject property.

Evergreen was not represented at trial in this matter. [ 6 ] Walter Eric Berndt and Donna Marie Berndt v. Business Development Bank of Canada is a claim in contract and negligence against the BDC. In many ways it involves the same position taken under the company’s counterclaim, but is instead a personal claim on behalf of the Berndts, who were 50% shareholders in the company.

The Berndts have abandoned a claim based on fiduciary duties, although they continue to point to equitable principles in urging the court to order the BDC to pay damages of $200,000. [ 7 ] Many of the main players in this dispute did not appear at trial. In particular, Connie Johnson, who negotiated the loan documents with the BDC, and Gary Johnson, who signed on behalf of the company, did not testify.

It appears that the Johnsons have absconded to Italy and may be facing criminal charges in relation to other matters. [ 8 ] The subject property is now in foreclosure and there is an estimated shortfall for the BDC in excess of 2.4 million dollars.

Were the court to accede to the Berndts’ argument, that amount would rise to 2.6 million dollars. [ 9 ] Throughout argument in this case, the Berndts conflated various arguments to urge the court that, out of two innocent parties, both of whom were impacted by the Johnsons’ apparent fraud, the BDC should bear the loss and be ordered to pay the Berndts $200,000. [ 10 ] I am not persuaded by the Berndts’ arguments on either action and I am not satisfied that the Berndts have established any legal basis upon which the court can make the order sought.

BACKGROUND FACTS [ 11 ] Walter Berndt (“Wally Berndt”) testified at trial, both on his own behalf and on his wife’s behalf, since he was primarily involved in the business transactions that led to the claim. He was the Berndts’ only witness and the majority of the evidence relating to the narrative of events comes from Wally Berndt. [ 12 ] The BDC called Chris Boissevan, a business manager at the BDC and the BDC representative who dealt with Connie Johnson and arranged the loan financing.

The BDC also called Alan Peterson, who was the corporate solicitor who handled the BDC mortgage. [ 13 ] Wally Berndt is currently employed as a salesperson of roofing materials for Slegg Lumber. In June 2007 he was in a similar position and he met as customers Connie and Gary Johnson who were the principals in a business called Johnson Brothers Roofing (“Johnson Bros.”). Johnson Bros. was a roofing contracting firm involved in residential and commercial projects. [ 14 ] In his employment context Wally Berndt would meet with Connie Johnson about once per month in order to review invoices.

In the course of one of these meetings, Wally Berndt expressed an interest in building a warehouse. Wally Berndt had construction experience in building his own house and in several other renovation projects and wanted to bring his experience to a larger warehouse project. [ 15 ] In the course of one of Wally Berndt’s meetings with Connie Johnson, and when talking about the warehouse project, he expressed his frustration with the banking requirements for a commercial loan. Connie Johnson asked how much financing he needed and then in his presence phoned an appraiser and then a banker.

When Connie Johnson got off the phone, she told Wally Berndt words to the effect, “I’ve got you 3.5 million”. The banker was Peter Fast of Vancity Credit Union (“Vancity”). [ 16 ] As a result of those discussions, Wally Berndt ended up going into business with the Johnsons for the purpose of building the warehouse.

The company was incorporated in June 2007 and the subscribing shareholders were Wally and Donna Berndt who held 25 Class A common shares each for a total of 50% of the shares in the company, and Bianca Di-Ubaldo and Gabriel Di-Ubaldo who held 25 Class B common shares each for a total of 50% of the shares of the company. [ 17 ] The Di-Ubaldos are Connie Johnson’s parents. They had limited involvement in the events that give rise to these actions and they did not testify at trial. Wally Berndt testified that the Di-Ubaldos were only at a few initial meetings and their involvement with the company was minimal.

According to Wally. Berndt, Mr. Di-Ubaldo ran a barber shop and Ms. Di-Ubaldo did not work outside the home. Wally Berndt testified that the Di-Ubaldos had a limited ability to communicate in English. As a result, the vast majority of Wally Berndt’s involvement in this project was with the Johnsons, specifically Connie Johnson. [ 18 ] Wally Berndt testified, and there is no dispute, that the Berndts were really in business with the Johnsons. The Di-Ubaldos were named in the corporate documents in order to protect the Johnsons’ investment from claims by Gary Johnson’s ex-wife.

In submission, counsel generally referred to the Di-Ubaldos as the “puppets” of the Johnsons and that appears to fit with Wally Berndt’s understanding of their role in the project. Wally Berndt testified that he thought that was unusual but that Mr. Fast at Vancity seemed comfortable with this arrangement. [ 19 ] By resolution dated June 1, 2007 (Exhibit 1, Tab 118) the number of directors of the company was set at two. Wally Berndt and Bianca Di-Ubaldo were named Directors. Wally Berndt was President and Bianca Di-Ubaldo was Secretary.

The registered office of the company was set at a law office in Langford and the company banker was Vancity. Wally Berndt testified that these corporate governance resolutions were never changed and that they were recorded in the records maintained for the company in the British Columbia Companies Office. Accordingly, Wally Berndt remained President of the company throughout all of the events that give rise to this action.

[ 20 ] Once the corporate governance was set up, Wally Berndt primarily assumed responsibility for construction of the warehouse. His role was construction/project manager. In his evidence, Wally Berndt indicated that Connie Johnson’s main role was in financial matters and securing financing for the project. Throughout the entire project, Wally Berndt dealt primarily with Connie Johnson and that Gary Johnson’s role was “almost zero”. [ 21 ] On July 1, 2007, land was purchased for construction of the warehouse on Ed Nixon Terrace in Langford. The land was purchased for one million dollars.

The Berndts initially put $25,000.00 into the purchase of the land. That sum rose to a total contribution of $200,000 by the end of the project. The Di-Ubaldos/Johnsons put in matching funds. Vancity granted a mortgage (Exhibit 1, Tab 24). The land was initially purchased at a 75% loan to value so that $750,000 to purchase the land was secured by the Vancity mortgage. [ 22 ] Vancity had agreed to a construction mortgage so that the mortgage funds were advanced as submitted by a costs consultant as construction proceeded. The construction mortgage eventually rose to approximately 3.1 million dollars ($3,100,000).

The Vancity construction mortgage included personal guarantees by both the Berndts and the Di-Ubaldos.

In his evidence Wally Berndt indicated that he had never signed as much paper as he did for the construction mortgage. [ 23 ] Although Connie Johnson conducted the negotiations with Vancity, Wally Berndt testified that the Vancity commitment letter was sent to the company and Wally Berndt signed the Vancity construction mortgage as President of the company. [ 24 ] The warehouse was constructed in late 2007 and throughout 2008, with an occupancy permit issued in December 2008. [ 25 ] During this time frame, Wally Berndt acted as construction project manager in addition to his regular employment.

He was not paid for his work as construction manager on the warehouse project and the understanding was that the parties would split the proceeds from any profits in the project. The warehouse was to be divided into strata units and initial appraisals indicated that the value of the completed warehouse would be in excess of 5 million dollars. [ 26 ] In February 2008, Wally Berndt accepted employment as General Manager of Johnson Bros. so that he was working directly for Connie and Gary Johnson in addition to his involvement in the warehouse project.

That employment only lasted until June 2008 when the Johnsons came to him and told him they were feeling the burden of too much overhead and they offered him an alternate position which he declined. Ultimately, Wally Berndt obtained alternate employment as a roofing salesperson with Slegg Lumber, which was the position that he held at trial. [ 27 ] At around the same time that he left his position with Johnson Bros., June or July 2008, Wally Berndt was feeling “burned out” by his role as construction manager as he was doing it in addition to his regular employment.

He approached Connie Johnson and asked to be bought out of the warehouse project if at all possible. All he was seeking was his initial investment in the project which was $200,000. Connie Johnson indicated that she was willing to consider a share purchase, but that she would need to pay out the purchase by securing a new mortgage. [ 28 ] Wally Berndt testified that the warehouse project was going well and was still a profitable project at the time that he asked to be bought out.

The company had secured leases for approximately 62% of the building and his request was made before the global economic downturn in the fall of 2008. Notwithstanding this evidence, I conclude that Wally Berndt must have had some concerns about the viability and profitability of the project at the time he requested to be bought out. Otherwise, limiting the request to his financial investment in the project does not make sense, considering all of the work that he had put into the project.

I am of the view that Wally Berndt’s concerns about profitability of the project would have only increased in the fall of 2008 in light of the economic conditions and since a major prospective tenant for one of the units had to cancel a lease because of construction delays. [ 29 ] As a result of his discussion with Connie Johnson, Wally Berndt attended at a lawyer, Ron Hunter, who assisted in drafting and finalizing a share purchase agreement. A copy of a draft was sent to Connie Johnson in September 2008 (Exhibit 1, Tab 78). The agreement was between the Berndts (as Vendors) and the Di-Ubaldos (as Purchasers).

Of note is clause 8.1, entitled Mutual Covenants, which reads: The Vendor and Purchaser agree that immediately upon execution of this agreement the Purchaser and Vendor will cause the Company to apply to a financial institution to obtain replacement financing for the construction financing currently in place and in that regard, will execute applications, financial disclosures and guarantees from the Purchaser as may be required by the financial institution in the usual course of making such loan.

The amount of such loan shall be sufficient to payout the existing financing and the purchase price of the Vendor’s Interest. The parties agree to make best efforts to obtain such financing. [ 30 ] Wally Berndt and his wife Donna signed the share purchase agreement in front of a witness and Wally Berndt eventually received it back from fully signed by the Di-Ubaldos.

Of note is that the signed copy was undated, and a provision under clause 6 entitled “Closing”, has a date of November 15, 2008 crossed out and a date substituted in handwriting as follows: December 15, 2000 or upon occupancy permit [ 31 ] In his evidence, Wally Berndt indicated that December 15, 2000 was an error and it was meant to read December 15, 2008, which is when the occupancy permit was issued for the warehouse. [ 32 ] Wally Berndt received the executed share purchase agreement from his lawyer, Mr. Hunter by letter dated November 19, 2008 (Exhibit 1, Tab144).

Once the share purchase agreement was executed, and the occupancy permit for the warehouse was issued, Wally Berndt had virtually no involvement with Johnson Bros. or with the company. Johnson Bros. moved its business operations and was occupying one of the larger strata units in the warehouse and was paying the interest portion on the construction loan with Vancity. Wally Berndt went on with his life and his new employment.

He was essentially sitting back and waiting for payout on the share purchase agreement once replacement financing was obtained. [ 33 ] In December 2008, prior to the occupancy permit being issued, Wally Berndt wrote a $200,000 cheque from the company

account to his lawyer in trust in order to secure the $200,000 under the share purchase agreement. This action was taken prior to the closing date in the share purchase agreement and prior to any financing being obtained as required by that agreement. It appears from the evidence that he took this action without the knowledge of the Johnsons, but he paid that money back within ten days when it became clear that without those funds the company could not meet its obligations.

I conclude that this action was taken because of Wally Berndt’s concerns about the financial viability of the warehouse project and his desire to get out of the project with his investment. [ 34 ] Wally Berndt indicated in his evidence at trial that Connie Johnson told him it was Johnson Bros. which was pursuing the mortgage financing. He stated in his evidence that he understood that Johnson Bros. required additional financing for leasehold equipment, financing and to buy out his position in the company.

Wally Berndt admitted in cross-examination that the first time he stated this position was at his examination for discovery. [ 35 ] The Berndts’ counsel points to a $125,000 loan for equipment to Johnson Bros., which was granted at the same time as the mortgage, as evidence in support of Wally Berndt’s belief. [ 36 ] I do not accept Wally Berndt’s evidence that he believed Johnson Bros. was seeking the replacement financing. That evidence simply makes no sense.

There is no evidence in front of me that Johnson Bros. had any assets of sufficient value that could secure a mortgage loan sufficient to pay out the Vancity construction mortgage and to retire the $200,000 share purchase agreement. Wally Berndt was aware that Johnson Bros was feeling the pressure of too much overhead since his employment was terminated.

The only asset which could secure such a loan was the warehouse property which was owned by the company. [ 37 ] Further, Wally Berndt’s evidence combined with the share purchase agreement make it clear that Connie Johnson was negotiating for new financing on behalf of the company. The share purchase agreement at clause 8.1 contemplates that the company was going to apply to a financial institution to obtain replacement financing. The parties were going to use their best efforts to obtain such financing. Wally Berndt did not make any such efforts on behalf of the company.

There is no evidence that the Di-Ubaldos made any efforts. That is because all of the efforts were being made by Connie Johnson. That is consistent with the role she played in the project throughout and with the division of responsibilities at the outset of the project. Those efforts are also consistent with the Johnsons’ role as investors. Finally, the letter from the Berndts’ lawyer, Mr. Hunter, to the BDC’s solicitors on July 23, 2009 (Exhibit 1, Tab 77) indicates that the Berndts were “generally aware” that Connie Johnson was negotiating with the BDC for replacement financing. [ 38 ] Mr.

Hunter was not called as a witness at the trial by the Berndts and the court was asked to draw an inference that Mr. Hunter had evidence adverse to the Berndts regarding Connie Johnson’s role in negotiating replacement financing. It was noted by counsel for the BDC that this case is unlike other cases where it is open to the opposing party to call the witness. Mr.

Hunter, as solicitor for the Berndts, would be bound by solicitor/client privilege and thus could only be called to testify if they waived the privilege. [ 39 ] I am of the view that while it is open to me in these circumstances to draw an adverse inference, I do not find it necessary to do so in order to resolve this factual issue. As I have indicated, I am of the view that Wally Berndt was aware that Connie Johnson was negotiating for replacement financing on behalf of the company and was doing so with his full support as President and shareholder.

I find that Wally Berndt was content to have Connie Johnson use her expertise in obtaining replacement financing. His interest in being bought out of the company was dependent on that financing. He admitted at trial he did not have any interest in how the company was going to be structured going forward as long as he was bought out as part of any refinance. [ 40 ] Once the occupancy permit was obtained on December 15, 2008, Wally Berndt had very little to do with the project.

As early as October 2008, there were emails put in evidence in which Wally Berndt informs the realtor for the warehouse project that he should deal with Connie Johnson for any sale offers on the strata units as Connie Johnson was intending to buy his interest out. The emails also make clear that Connie Johnson at the time was signing the offer documents related to the strata sales. Those emails were forwarded to Chris Boissevan at the BDC. [ 41 ] In addition, as I have noted, Wally Berndt made no efforts to assist in obtaining replacement financing.

He was aware that Connie Johnson was talking to the BDC and other banks in the fall of 2008 and the spring of 2009. [ 42 ] In June 2009, Wally Berndt became aware that refinancing must have gone through by reviewing company bank statements and learning that the Vancity mortgage had been paid out. [ 43 ] He phoned Chris Boissevan who was the representative of the BDC who had primary responsibility for the BDC mortgage loan.

He learned that the BDC had granted a 4.2 million dollar mortgage which was registered against the warehouse property on Ed Nixon Terrace. [ 44 ] Wally Berndt learned that the mortgage had been registered at the Victoria Land Title Office on the basis of the signature of Gary Johnson as President of the company.

Ultimately, in July 2009, his lawyer wrote a letter to the BDC indicating that the mortgage was granted without the Berndts’ knowledge or consent. [ 45 ] Wally Berndt’s initial concern when he phoned Chris Boissevan on June 29, 2009 was that the BDC had funded the entire loan and had not allowed for proceeds to pay out the share purchase agreement. He ultimately learned that by Letter of Offer dated March 31, 2009 (Exhibit 1, Tab 27) the BDC had set aside $200,000 to “Buy-Out Minority Partner”. Included as conditions precedent to any advance was a number of terms, two of which are relevant: 4.

No Material Adverse Change shall have occurred. … 7. Prior to disbursement of the $200,000 programmed to buy out the minority partner, the Bank will be in receipt of an executed Purchase Agreement with terms and conditions satisfactory to the Bank. [ 46 ] As 50% shareholders the Berndts could not be considered “minority shareholders”. However, all of the evidence, including the

evidence of Wally Berndt, satisfies me that the Di-Ubaldos/Johnsons had invested more in the project and had not only matched the $200,000 invested by the Berndts, but had invested a substantially greater sum. In Wally Berndt’s evidence, he estimated that amount was in the range of $300,000 more than the Berndts. [ 47 ] Gary Johnson’s signature is on the Letter of Offer as an authorized signing officer of the company. Connie Johnson and Gary Johnson have signed as Guarantors both personally and on behalf of a holding company that was to be established.

The Letter of Offer provided the following for the Loan Purpose and Financing: Retire construction financing $3,100,000.00 Building Improvements $305,000.00 Buy-Out Minority Partner $200,000.00 W/C - Advance to Related Co. $595,000.00 [ 48 ] Mr. Peterson was the solicitor for the BDC who handled the transaction. In May 2009, he received documents from a James Farley, Notary Public, who was acting on behalf of the Johnsons. He received a mortgage and assignment of rents over the Strata Lots signed by Gary Johnson as President of the company. [ 49 ] The documents received by Mr.

Peterson included a Directors’ resolution of the Borrower and a Statutory Declaration executed by Gary Johnson which represented that Gary Johnson was the President of the Borrower and had authority as President of the Borrower to execute the security documents. [ 50 ] The mortgage transaction was completed and registered at the Land Title Office on May 27, 2009. At this point, although approximately 4 million had been disbursed to pay out the Vancity mortgage and to the Johnsons, the $200,000 remained undisbursed.

This was because the condition precedent for the final $200,000 was not satisfied; that is, the BDC was not in receipt of an executed share purchase agreement with terms and conditions satisfactory to it. [ 51 ] Wally Berndt, by letter to Chris Boissevan dated June 30, 2009, provided a copy of the share purchase agreement to the BDC. The share purchase agreement copy he provided was dated by hand, “August 17, 2008”. That date was inserted by Wally Berndt sometime in November 2008 after he had received the signed copy back from the Di-Ubaldos.

He had received an undated signed copy and he presumed that the date the process to buy the shares had begun was the most appropriate date to insert. [ 52 ] In his discussions with Mr. Boissevan, Wally Berndt did not express concern with the company having granted a mortgage, nor did he indicate that he believed Johnson Bros. should have granted the mortgage. Wally Berndt’s sole concern at the time was receiving payout of the $200,000 due under the share purchase agreement. In an email on July 13, 2009 to Mr.

Boissevan, Wally Berndt references the mortgage and appears to accept its validity as he asks the BDC to pay out “the last segment” of the mortgage. [ 53 ] When Mr. Boissevan received the share purchase agreement from Wally Berndt he was concerned because the August 17th date pre-dated the unexecuted draft agreement which he had received in September 2008. [ 54 ] As a result, Mr. Boissevan contacted Connie Johnson and learned from her that that the share purchase was not finalized. By e- mail dated July 14, 2009, Mr.

Boissevan advised Wally Berndt, “…Once I receive clear direction from the company we will commence disbursement.” [ 55 ] By e-mail dated July 16, 2009, (Exhibit 1, Tab 76) Connie Johnson advised Mr. Boissevan that she was in the process of resolving some issues with the Berndts involving some financial transactions and that those would need to be resolved prior to disbursing the funds. [ 56 ] I have considered this evidence, not for the truth of its contents, but to explain the narrative and to give context to actions taken by Mr. Boissevan on behalf of the BDC. [ 57 ] At some point Mr.

Boissevan became concerned that condition precedent 4 to the share purchase advance was no longer met; that is, what was perceived as a friendly share purchase transaction was now a dispute between shareholders, which would increase the BDC’s risk on the transaction. Accordingly from the BDC’s perspective a material change of circumstances under condition precedent 4 had occurred, and that condition precedent to the disbursal of funds was no longer met. [ 58 ] As I have indicated, Wally Berndt’s position throughout the trial was that the financing was to have been sought on behalf of Johnson Bros.

Roofing Ltd. and not the company. [ 59 ] Throughout the fall of 2009, Mr. Boissevan on behalf of the BDC was attempting to communicate with Connie Johnson about the outstanding issues surrounding the share purchase agreement. By e-mail dated November 6, 2009 Chris Boissevan advised Connie Johnson that the situation was causing a concern for the BDC and “… could possibly result in us having to cancel the undisbursed $200,000 …” [ 60 ] Ultimately, in December 2009, the BDC became aware that Johnson Bros. had closed its business and by way of a notice on its doors had advised employees to find other employment.

The Johnsons are believed to have left Canada and are residing in Italy. [ 61 ] In January 2010, the BDC took action and cancelled the undisbursed $200,000. [ 62 ] All of the units in the warehouse have now been sold resulting in a shortfall for the BDC in excess of 2.4 million dollars. [ 63 ] Wally Berndt admitted in cross-examination that in all likelihood based on the financial circumstances of the company and the sales of the warehouse strata units, the Vancity mortgage which had his personal guarantees would have been in default.

THE PARTIES’ POSITIONS The Berndts’ Position [ 64 ] Throughout argument in this case the Berndts relied on an ultimate argument in equity that out of two innocent parties, the BDC should bear the loss and be ordered to pay the Berndts $200,000, the sum due under the share purchase agreement. [ 65 ] The Berndts acknowledge that the first issue that must be determined is whether the mortgage is valid. The Berndts argue that the mortgage was invalid because it was not signed by a person authorized to sign on behalf of the company.

The Berndts acknowledge that if the mortgage is found to be invalid that there should not be an unjust enrichment and they are not seeking anything more than the $200,000 due under the share purchase agreement. [ 66 ] The Berndts argue that the BDC was under a contractual duty under the loan agreement and it was not for Connie Johnson to tell the BDC not to advance the funds.

As part of that argument the Berndts argue that the share purchase agreement should have been concluded first and the share purchase monies should have been advanced before any other funds were advanced. [ 67 ] The Berndts further argue that as persons affected by the financing that the BDC was granting to the company, the Berndts were in a proximate relationship to the BDC such that the BDC owed a duty of care to the Berndts. The Berndts argue that it was reasonably foreseeable that negligence on the part of the BDC would cause the Berndts loss and damage. [ 68 ] The Berndts argue that if the BDC’s solicitor Mr.

Peterson had paid attention to the corporate search he would have seen that Gary Johnson was not an authorized signatory or President of the company and was not authorized to execute documents on behalf of the company. [ 69 ] The Berndts argue that it was entirely reasonable for them to sit and wait for the financing knowing that in time, if there was to be a refinancing, they would have to be contacted.

At that point they could exercise their rights as 50% shareholders and effectively require their shares to be purchased. [ 70 ] As I have indicated, the Berndts argue equitable principles and argue that out of two relatively innocent parties, the party who caused the loss, the BDC, should bear the loss. [ 71 ] The Berndts took essentially these same positions in the counterclaim on behalf of the company.

The BDC’s Position [ 72 ] The BDC agrees with the Berndts that the first issue that must be determined is the validity of the mortgage. [ 73 ] The BDC argues that the mortgage is valid based on the indoor management rule, codified in s. 146(1) of the Business Corporations Act . The BDC argues that Connie Johnson had actual and ostensible authority to act for the company and that she held out Gary Johnson as having ostensible authority to sign the mortgage on behalf of the company.

If the mortgage is not valid, the BDC argues unjust enrichment, which, as I have indicated, the Berndts accept would apply. [ 74 ] With respect to the claim in negligence, the BDC argues that the Berndts have not proven the claim. They argue that the Berndts have not established that a duty of care existed, they have not established a breach of the standard of care, and that finally the Berndts have not established any loss. [ 75 ] In its argument the BDC has pointed out numerous problems with the pleadings and the arguments.

Among other issues, they point to: - the Berndts are not parties to the foreclosure action and as such their claim rests on their own action; - the Berndts’ pleadings on the foreclosure action (on behalf of the company) and on their own action are inconsistent; - the Berndts have an action against the Di-Ubaldos/Johnsons, but not against the BDC; - the share purchase agreement contemplated financing being completed before the share purchase agreement was finalized so that Wally Berndt understood throughout the transaction that getting paid for his shares was dependent on the company getting the mortgage and all condition precedents being met; - the court cannot make an order that deprives the Di-Ubaldos of their rights under the share purchase agreement. [ 76 ] On the equitable principles, the BDC argues that the Berndts were more responsible for the circumstances that allowed the fraud to occur, and accordingly they should bear the loss. [ 77 ] Essentially, the BDC says that, whether the mortgage is valid or not, there is no basis on which the court can order that it pay $200,000 to the Berndts.

ANALYSIS [ 78 ] At the outset I wish to note, as argued by the BDC, that many of the difficulties created by the analysis in this case are created by the inconsistent nature of the claims. By way of example, the Berndts argue that the mortgage is invalid because it was signed by Gary Johnson who was not authorized by the company, but they argue for payment of the $200,000, which was earmarked under the mortgage for the payout of the share purchase agreement. Validity of the Mortgage

[79] I turn first to the issue of whether the mortgage held by the BDC is valid. [80] I agree with the BDC that since the Berndts are not personally party to the mortgage action they are precluded by the pleadingsfrom arguing the validity of the mortgage on the mortgage action and their claim rests on their pleadings in contract and negligence ontheir own action.

As I have noted, the Johnsons/Di-Ubaldos as 50% shareholders of the company were not represented at the trial, andthe Berndts’ personal interest was being argued in this case. [81] The BDC argues that the mortgage is valid based on the indoor management rule, both as expressed at common law and ascodified in s. 146 of the Business Corporations Act. [82]

Section 146 reads as follows:

(1) Subject to subsection (2), a company, … or a person claiming through a company may not assert against a person dealing withthe company, or dealing with any person who has acquired rights from the company, that … (

c) a person held out by the company as a director, officer or agent (

i) is not, in fact, a director, officer or agent of the company, as the case may be, or (ii) has no authority to exercise the powers and perform the duties that are customary in the business of the company or usual forsuch director, officer or agent … (2) Subsection (1) of this

section does not apply in respect of a person who has knowledge, or, by virtue of the person’s relationshipto the company, ought to have knowledge, of a situation described in paragraphs (

a) to (

e) of that subsection. [83] The rule at common law is set out by Owen-Flood J. in Cavell Developments Ltd. v. The Royal Bank of Canada (1990), (BC SC), 48 B.L.R. 80 (B.C. Co. Ct.), quoting from British Thomson-Tiouston Company, Limited v.

Federated European Bank Ltd., [1932] 2 K.B. 176: … if [persons dealing with a company] find an officer of the company openly exercising an authority which the directors have the powerto confer upon him, they are relieved from the duty of further inquiry and are entitled to assume that the power has been regularly andduly conferred. [84] I note that the facts in Cavell, where the court refused to apply the rule to uphold the validity of a cheque issued by the bank, aredistinguishable from the case at bar.

In Cavell the bank accepted a resolution written out in the presence of its manager which wasmaterially inconsistent with an earlier letter the bank was aware of regarding the requirements for authorized signatures on behalf of thecompany. The court held that: … the bank, which was under a duty to exercise a reasonable standard of care in accordance with its ordinary banking practice, shouldhave realized that something was amiss.

That situation corresponds to the caveat in s. 146(2); the defendant bank in Cavell had actual knowledge that the company’s director didnot have the authority to exercise the power that he was purporting to exercise. [85] In this case, the issue is whether the company can be taken to have held Gary Johnson out as an officer or agent with theauthority to sign for the mortgage on behalf of the company.

If Gary Johnson was held out as president and an authorized signatory bysomeone who had authority to do so on behalf of the company, the BDC was, by virtue of s. 146, under no duty to investigate further asto do so would be to inquire into the company’s “indoor management”. [86] A company cannot act for itself; it can only act through “individuals who are conferred authority to enter into obligations on thecompany’s behalf”: Oxford Holdings Limited v. Peoples Trust Company, 2002 BCSC 957 , 2002 BCSC at 957.

A person mayhave either actual or ostensible authority to act on behalf of the company. [87] The BDC acknowledges that they cannot simply rely on Gary Johnson’s own assertion that he was president and therebyauthorized to sign for the mortgage. In order to find that the company held Gary Johnson out as an agent or officer of the company, theBDC must show that he was held out by a person who had authority to act on the company’s behalf. In this case, they say he was heldout by Connie Johnson, who they say had actual authority to act on behalf of the company.

They say that if Connie Johnson in herdealings with the BDC held Gary Johnson out having ostensible authority to bind the company to the mortgage, then the mortgage isvalid. [88] There are therefore two questions that must be answered in determining whether s. 146 applies in this case: 1. Was Connie Johnson a person with authority to act on behalf of the company, and therefore a person who could holdsomeone out as a director, officer or agent for the purposes of s. 146? 2. If so, did Connie Johnson hold Gary Johnson out as an agent or officer of the company?

In other words, did ConnieJohnson act in such a way as to represent that Gary Johnson had ostensible authority? [89] Much of this argument turns on the law of agency, and the requirements for actual and ostensible authority. Actual authority“involves a company expressly or impliedly authorizing an individual to enter into particular transactions on behalf of the company”(Oxford, para. 35). [90] In Cavell, the court quoted Freeman & Lockyer (A Firm) v. Buckhurt Park Properties (Mangal) Ltd., [1964] 2 Q.B. 480, to set

out the requirements for ostensible authority: … Diplock L.J. stated that for the doctrine of ostensible authority to apply: (1) that a representation that the agent had the authority to enter on behalf of the company in a contract of the kind sought tobe enforced was made to the contractor; (2) that such representation was made by a person or persons who had “actual” authority to manage the business of thecompany either generally or in respect of those matters to which the contract relates … [91] In Rockland Industries, Inc. v.

Amerada Minerals Corporation of Canada, (SCC), [1980] 2 S.C.R. 2 at 15,again relying on Freeman, the Supreme Court noted that the representation that creates ostensible authority may take a variety of forms,including representation by conduct. This may include “permitting the agent to act in some way in conduct of the principal’s businesswith other persons.” [92] The case of Pacific National Leasing Corp. v. Brian Jessel Toyota Ltd., [1991] B.C.J. No. 177 provides an example of theindoor management rule in a case involving ostensible authority to act.

The action involved a debt under a lease and the defence wasthat the lease agreement was executed without the defendant company’s authority and was therefore unenforceable. The businessmanager had no actual authority to enter into contracts binding the defendant corporation other than in certain limited areas, which didnot include the subject lease. In upholding the lease, the court said as follows: The argument of the Defendant is that the business manager did not have real authority. I think there can be no argument on that point. The evidence establishes that he did not. But did have ostensible authority?

That is a more difficult question … It was argued that here the Plaintiff had a duty to inquire into the authority of the business manager; that it had not negotiated theagreement with the Defendant; that the business manager was not a person known to anyone in the Plaintiff’s operation; and that itpresented the agreement for execution at the time of delivery. In other words, the argument goes, the Plaintiff had taken no steps toascertain the degree of authority and it could not, therefore, claim that there was ostensible authority.

I do not agree. … there is no requirement to inquire into the indoor management of a company where the authority is held out. Here thebusiness manager clearly held himself out as a person in authority; the agreement asserts that fact. When that fact is combined with theevidence of the title bestowed upon the person signing on behalf of the company (business manager) and the presence of the corporateseal, my view is the creditor is not required to go further.

Indeed to go further would be to embark upon an inquiry into the indoormanagement of the company … [93] The BDC says that the only logical finding on the evidence is that Connie Johnson was an agent of the company with actualauthority to obtain financing on the company’s behalf, as Wally Berndt (and the Di-Ubaldos) both knew of and approved of ConnieJohnson representing the company in its dealings with the BDC. [94] With regard to Gary Johnson, they rely on Connie Johnson’s course of conduct to establish his ostensible authority to act.

Bysigning the loan documents in his presence, which indicated that he was president, and by bringing him to the BDC to complete thetransactions in the first place, she represented that he had authority to do so. Further, she made indirect representations by forwardingthe statutory declarations and other documents through the notary, again representing that Gary Johnson had authority to sign. [95] Turning now to the application of the principles discussed to the case before me, I conclude that Connie Johnson did have actualauthority to obtain refinancing on behalf of the company.

I find that the Berndts and the Di-Ubaldos were aware that she was doing soand approved of her actions. As such, I find that she was a person who had authority to act on behalf of the company in dealings with theBDC, and a person who could therefore hold Gary Johnson out as an agent or officer of the company. [96] There is no evidence and indeed no suggestion that either the Berndts or the Di-Ubaldos made any efforts to pursue or negotiatemortgage financing pursuant to clause 8.1 of the share purchase agreement.

As I have indicated, I do not accept Wally Berndt’s evidencethat he believed that it was Johnson Bros. that was pursuing mortgage financing.

There is no evidence to suggest that Johnson Bros. hadany assets that could support such a level of financing. [97] Since all of the parties including the BDC were aware that the Di-Ubaldos really represented the Johnsons’ interest in thetransaction, the BDC was approaching the negotiation with Connie Johnson as representing the company. [98] It is clear that Wally Berndt wanted out of the warehouse project and that he was reliant on the efforts of Connie Johnson toobtain the new financing.

All of the evidence satisfies me that he was more than just “generally aware” that she was negotiating onbehalf of the company. Rather Wally Berndt was fully aware that Connie Johnson was pursuing financing and she had his full supportand trust to represent the company. That trust continued right up until about the time that he learned the mortgage had been registeredand the Vancity mortgage paid out without his knowledge. He acknowledged in his evidence that Connie Johnson was far more skilledat obtaining financing than he was. [99] I note that Connie Johnson forwarded the emails from Wally Berndt to Mr.

Boissevan. As discussed, in those emails WallyBerndt expressly approves of Connie Johnson handling financial transactions on behalf of the company, including the fact that she wasauthorized to sign the offer documents.

This further demonstrates the extent of Connie Johnson’s authority and also provides evidence ofWally Berndt making representations as to that authority to third parties. [100] Since I have found that Connie Johnson had actual authority to act on behalf of the company in pursuing and obtaining themortgage financing with the BDC, I turn now to the question of whether or not she held out Gary Johnson as an agent. Since there is noevidence to suggest that Connie Johnson expressly designated Gary Johnson an agent, such a holding out would have to be implied byconduct.

[ 101 ] The Letter of Offer was signed by Gary Johnson as President of the company and with Connie Johnson and Gary Johnson as guarantors. That action alone would suggest to the BDC that Gary Johnson had authority.

The Johnsons’ signatures on the term sheet represented a state of affairs in the company that likely would have occurred after the share purchase agreement went through. [ 102 ] I agree with the BDC that Connie Johnson’s behaviour, both directly (in having him sign and signing alongside him) and indirectly (by providing the statutory declarations as part of the paperwork to the loan), represented Gary Johnson as a person -- either officer or agent -- with authority to sign. [ 103 ] In my view, the conditions precedent outlined by Diplock L.J. and cited by Owen-Flood, J. in Cavell apply in this case in respect of the representations made by Connie Johnson who had actual authority on behalf of the company. [ 104 ] The very nature of the share purchase agreement that the Berndts seek to enforce contemplated a restructuring consistent with the Johnsons/Di-Ubaldos having a 100% interest in the company. [ 105 ] Wally Berndt does not take any issue with how the company was structured going forward.

He would not take issue with anything that occurred in this case if he had been paid out on the share purchase agreement. In his initial contact with Chris Boissevan, he did not express concern about the fact that the mortgage had been registered. Instead, his concern related to the fact that the funds for the share purchase relating to his shares had not been provided.

He was admittedly reliant on the Johnson Bros.’ business acumen and contacts in all aspects of the financing for the project both initially for the Vancity mortgage and then for the purpose of the refinance. [ 106 ] It was argued on behalf of the Berndts that the BDC “put the cart in front of the horse” in the manner in which they paid out the mortgage proceeds. The Berndts argue that the first thing that should have been done on closing by the BDC’s solicitor, Mr.

Peterson, was the completion of the share purchase agreement so that the Johnsons controlled all the shares in the company. [ 107 ] However, I agree with the BDC that the share purchase agreement itself required the new mortgage before the purchase could conclude. The BDC proceeded on the basis that the share purchase would conclude quickly because it was a friendly transaction.

Indeed, it was a friendly transaction up until the point where Connie Johnson instructed the BDC to hold off on paying out the share purchase. [ 108 ] I conclude the actions and representations of Connie Johnson, who had actual authority on behalf of the company, implied that Gary Johnson had authority to sign on behalf of the company. [ 109 ] In all of the circumstances, I am of the view that the indoor management rule does apply on the facts of this case. In the result, I find the BDC mortgage to be valid based on the indoor management rule.

The Berndts’ Action Contract, Negligence and Equity [ 110 ] In order to complete the analysis in this case, and in the event that I am in error with respect to the indoor management rule, I turn now to the Berndts’ claim against the BDC in contract, negligence and equity. [ 111 ] The Berndts’ Notice of Civil Claim says this in respect of the claim: The first legal basis for the Plaintiff’s claim is that the Defendant owed them contractual duties, and duties of care to ensure that the Defendant dealt with individuals who were in fact authorized to act on behalf of the Company and that the Bank’s conduct in entering the refinancing agreements and documents with Gary Johnson to the exclusion of the Plaintiffs, was a breach of the duties owed to the Plaintiffs that caused the Plaintiffs loss and damage.

Contract [ 112 ] In my view there is no contractual basis to support the Berndts’ claim. The BDC was never in a contractual relationship with the Berndts and therefore, no breach of contract arises. [ 113 ] Although there was a mortgage contract with the company, the payment out of the share purchase had conditions precedent attached to that payout which were not met by the company.

The BDC was never provided with an executed share purchase agreement with terms and conditions satisfactory to it, a material adverse change of circumstances had occurred, and a friendly share purchase transaction had become a dispute between shareholders. The BDC has not breached the loan contract with the company, so no remedy can flow on that basis. [ 114 ] As noted by the BDC in argument, the Berndts are privy to a contract with the Di-Ubaldos, not with the BDC.

I accept the argument of the BDC that this court cannot do anything with the shares that are subject to a contract with individuals who are not parties to this action.

Negligence [ 115 ] Turning to the issue of negligence, the BDC argues that the Berndts have not established a duty of care in these circumstances; that the standard of care cannot be established without reference to expert evidence, which was not called by the Berndts; and finally, that the Berndts have not established that they have suffered any loss or damage arising from the alleged breach. [ 116 ] In this case, the BDC knew of the existence of the share purchase agreement and knew that the Berndts were impacted by the mortgage.

Without deciding this point, even if I was satisfied that the Berndts were in a sufficiently proximate relationship for a duty of care to arise and that harm was reasonably foreseeable as a result of the BDC’s acts, I am not satisfied that the Berndts have established a breach of the standard of care or that they have proven that they have suffered any loss or damage as a result.

[117] The Berndts did not call any expert evidence related to the standard of care in this case. The only evidence on standard of carecomes from Mr. Peterson, who acted as the BDC’s solicitor on the mortgage transaction. [118] The essence of the Berndts’ submission is that if Mr.

Peterson had paid attention to the corporate records search for thecompany (Exhibit 1, Tab 30), he would have seen that Gary Johnson was not an authorized signatory or the president of the company andhe would have recognized that in order to make the loan and obtain valid security the BDC had to deal with Wally Berndt. [119] During his evidence, Mr. Peterson, who is an experienced commercial solicitor, explained the process he followed. Hedescribed and identified the statutory declarations he received from a notary, Mr.

Farley, which appeared regular on their face and set outthe state of affairs of the company, including the fact that Gary Johnson was president. Although Mr. Peterson did not get a certificate ofincumbency as required by the BDC Service Standards - Loan Taking (Exhibit 1, Tab 136), the only evidence on practice standardscomes from Mr. Peterson who stated that his practice was his routine practice as a commercial solicitor.

He further stated that it iscommonplace in a transaction where there is going to be a change of ownership of the borrower that the company will appoint someoneto act who prior to that date might have been a stranger to the company. [120] I am of the view that the words of Southin J.A. in Roy v. British Columbia (Attorney General), 2005 BCCA 88 are applicablehere. The Roy case dealt with an allegation of negligence against two police officers relating to the death of Roy who died in policecustody.

At para. 36 Southin J.A. stated: … Where, as here, at issue is the standard of a competent member of a trade or profession (and the occupation of peace officer fallswithin that rubric), evidence of those carrying on that occupation is necessary unless, in the words which McPherson C.J.M., in Andersonv. Chasney, (MB CA), [1949] 2 W.W.R. 337 (Man.

C.A.) at 341, adopted from the American case of Mehigan v.Sheeham, 51 Atlantic Rep. 2nd series, 632, the matter is one of “non-technical matters or those of which an ordinary person may beexpected to have knowledge.” [121] I am of the view that the standards of practice for a commercial solicitor handling corporate transactions and loans is not the typeof matter that an ordinary person may be expected to have knowledge of. In order to establish a breach of the standard of care in thecircumstances of this case, it would have been necessary to call expert evidence.

As no such evidence was called, I cannot find a breachof the standard of care. [122] Turning now to the issue of loss, I conclude that the Berndts have not established any loss. They still have an executed sharepurchase agreement which may be enforceable against the Di-Ubaldos/Johnsons.

There is no evidence that any action has been takenagainst the Di-Ubaldos/Johnsons although I recognize that there may be practical difficulties with such action at least against theJohnsons since they have now left the country. [123] The position of the Berndts is that the BDC deprived the Berndts of the control they had over the situation as 50% shareholders.

The argument is that the Berndts lost the control to force the conclusion of the share purchase agreement since they would not haveagreed to the new funding unless they received the funds due under the share purchase agreement. [124] In the Notice of Civil Claim, the Berndts describe their loss as follows at para. 22: The Plaintiffs say that the failure of the Defendant to ensure that the refinancing documents were signed by an authorized signatory ofthe Company resulted in Connie Johnson and Gary Johnson being allowed to strip all value and equity from the Company to theprejudice of its directors and shareholders and to the prejudice of the Plaintiffs that the Company has been unable to carry on in businessand/or meet its liabilities generally as they fell due. [125] There is no evidence before me as to how the value or equity in the company has been stripped to the prejudice of the directorsand shareholders.

In fact the evidence at trial establishes that the Berndts have been advantaged by the BDC mortgage since the Vancityconstruction loan, which included their personal guarantees, was paid out. The Berndts have no personal guarantees under the BDCmortgage. [126] Further, Wally Berndt was forthright in his evidence that the ultimate sales of the warehouse units would not even have coveredthe Vancity loan. [127] The Berndts’ argument on loss is speculative and assumes that the share purchase agreement is enforceable.

There are someirregularities on the face of the document that may have been resolved in an action between the parties to the share purchase agreementbut which I cannot resolve in this action. I cannot proceed on the basis that the agreement is enforceable and should be concluded. [128] Further, as noted on behalf of the BDC in argument, if the BDC had involved the Berndts at an earlier stage, and a shareholders’dispute had arisen at that earlier point, then a material change of circumstances would have occurred and the BDC might have refused toadvance the funds.

If the BDC had discovered at an earlier stage that Gary Johnson was not the President of the company and that thestatutory declarations were fraudulent, then the BDC would likely not have advanced the funds. [129] I conclude that the Berndts have not met the burden on them and established that they have suffered any loss in this case.

Equity [130] In both opening and closing argument, counsel for the Berndts framed their individual claim as an action to determine which oftwo relatively innocent parties, the Berndts or the BDC, will suffer a $200,000 loss. [131] As I have indicated, I am not satisfied that the Berndts have established on the balance of probabilities that they have suffered aloss. [132] In argument, I asked the parties to address the equitable principle from Lord Ashurst L.J.’s dictum in Lickbarrow v. Mason

(1787), 100 E.R. 35, 2 T.R. 63 at p. 70 : We lay it down as a broad general principle, that, wherever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss must sustain it. [ 133 ] That principle has been considered in a modest number of Canadian cases and has been criticized as being overly broad.

I am of the view that the maxim does not apply to assist the Berndts in obtaining relief in this case. [ 134 ] I do not accept the argument that once the share purchase agreement was concluded it was entirely reasonable for the Berndts to merely sit and wait, knowing that in the fullness of time they would be contacted by any bank involved in the refinancing. [ 135 ] As I have indicated, the Berndts had provided Connie Johnson with actual authority to negotiate the financing, and it is my view that it was incumbent on the Berndts as 50% shareholders to take an active role in obtaining that financing.

As noted, the share purchase agreement required them to take such an active role. If the Berndts had taken the active role required under the share purchase agreement, then they would have been able to prevent the Johnsons’ apparent fraud. [ 136 ] I conclude that Wally Berndt as President of the company, general contractor for the warehouse project and former employee of Johnson Bros., and the individual who initially conceived of the warehouse project, was far better positioned to prevent any loss than the BDC.

CONCLUSION [ 137 ] In the result, I cannot find any legal basis upon which to make the orders sought by the Berndts and the Berndts’ action is dismissed. “J. A. Power, J.” The Honourable Madam Justice J. A. Power