Private Debt Partners Senior Opportunities Fund GP Inc v Davidson, 2022 ABKB 691

Court of King’s Bench of Alberta Citation: Private Debt Partners Senior Opportunities Fund GP Inc v Davidson, 2022 ABKB 691 Date: 20221020 Docket: 2203-10785 Registry: Edmonton Between: Private Debt Partners Senior Opportunities Fund GP Inc. D.B.A. Private Debt Partners Applicant - and - Andrew Davidson and 2087212 Alberta Ltd. Respondent _______________________________________________________ Reasons for Decision of the Honourable Justice S.D. Hillier _______________________________________________________

Preamble [ 1 ] This dispute engages two cross-applications: one to affirm the Interim Order at issue and the other to set it aside. Accordingly, it is somewhat unhelpful to use the terms Applicants or Respondents. Consistent with the submissions, I will refer to the Plaintiff lender Private Debt Partners as “PDP”; the borrower Home Solutions Corporation as “Home Solutions”; and the Defendant guarantor on the debt (together with his holding corporation where appropriate) as “Davidson”. [ 2 ] As expressed to counsel at the close of oral argument, I regret that late filing to upload materials and post-hearing commitments have impeded the delivery of these written reasons on a more timely basis.

Overview [ 3 ] PDP obtained an ex parte Mareva Injunction and Attachment Order from the Court of Queen’s Bench on July 14, 2022 (the “Interim Order”).

The transcript of that court appearance has been referenced by both sides during argument as a brief emergency application to protect net proceeds payable to Davidson from the anticipated sale of two properties owned jointly by Davidson and his spouse, namely: • A home in Calgary where Davidson had been residing with his wife and four children (the “Calgary Residence”); and • A cabin in Marion, Montana (the “Montana Cabin”). [ 4 ] Because the terms of the Interim Order were due to expire before this matter could be reviewed on the merits, the parties obtained a Consent Order on August 3, 2022 to extend the terms and set a

schedule for preparation of further evidence and formal briefs of argument. [ 5 ] Having filed a Statement of Claim alleging fraud against Davidson and now alleging that he may be relocating to the United States, PDP urges on this review that the Court should extend the Interim Order. Davidson strenuously denies all fraud allegations.

He specifically asserts that the evidence simply does not support any inference that assets are being liquidated as part of a plan to leave Alberta or otherwise dissipated to avoid enforcement of any judgment against him. [ 6 ] In the alternative, counsel for Davidson profiles that the Court may direct release of some portion of any net proceeds to enable Davidson to pay ordinary living expenses and reasonable legal fees. [ 7 ] Without disclosure of net proceeds, it now appears that the sale of the Montana Cabin closed on June 30, 2022 and that the Calgary Residence closed on July 14, 2022. [ 8 ] The bulk of extensive submissions focused on the relative strength of the allegations of PDP as may support injunctive relief.

Background [ 9 ] Home Solutions was first established in Calgary by Soren Neilson and Wendy McAllister in 1990 as a glass and closet supply and manufacturing company. The scope of business involved contracts in both the commercial and residential new-builds industry. The initial owners were financed by the Toronto Dominion Bank (TD) for nearly 30 years. [ 10 ] In the summer of 2018, Davidson and other entities expressed interest in acquiring Home Solutions.

An Agreement for the purchase of Home Solutions closed on January 1, 2019 for $13.3M, the terms of which are not particularly relevant today except that it involved a significant term loan from TD, as well as a vendor takeback mortgage issued by the prior owners Nielson and McAllister. [ 11 ] Davidson effectively acquired a controlling interest, with appointment as president, chief executive officer, and a director of Home Solutions. [ 12 ] PDP commenced its business in about April 2020, as a specialized private debt firm that acts as a lender to mid-market Canadian companies.

The principal and managing partner of PDP is Jeffrey Deacon (“Deacon”). [ 13 ] During the summer of 2021, PDP expressed interest in assisting Home Solutions with supplementary financing. Home Solutions had retained an advisory firm, Diamond Willow Advisory (“Diamond Willow”) to assist with refinancing efforts. From approximately July 2021 to January 2022, PDP engaged in a due diligence analysis in support of a potential loan arrangement with Home Solutions.

Various reports were prepared, and discussions were held, including such matters as: operating systems, business projections, the effects of supply on collection of receivables, the reliability of inventory reports, and other financial topics with PDP and TD. [ 14 ] One such report was a ten-page review of issues raised by PDP for which responses were provided by Home Solutions with involvement of Diamond Willow on a variety of ongoing matters as of September 2021 (the “Due Diligence List”). [ 15 ] There were personnel issues at Home Solutions, and Andrew Sheer (“Sheer”) was hired by Home Solutions as its new controller for September 2021. [ 16 ] During this period, two other corporations, Gemstone Lights Calgary Ltd. and 3M Holdings Ltd., injected approximately $1,200,000 as an investment to assist cash flow issues for Home Solutions. [ 17 ] On January 11, 2022, Davidson executed a personal guarantee for 15% of the repayment obligations of Home Solutions to PDP on specified terms tied to a Loan Agreement for $9.135M, in conjunction with TD under a Credit Account/Funding Facility.

Under the Loan Agreement, monies were advanced by PDP to address several priorities affecting the business of Home Solutions, including repayment of specified loans to TD and working capital (the “Funding”). [ 18 ] Over the next several weeks, issues continued to affect the business of Home Solutions, including impacts of Covid-19 on invoicing, an unreliable inventory system, as well as global supply issues. By March 2022, financial specialists were retained on directions of Deacon.

Cash flow difficulties persisted, raising a distinct need for infusion of more capital from investors. [ 19 ] In late April and facing default with TD, the directors of Home Solutions proposed to file a Notice of Intention to Make a Proposal pursuant to the Bankruptcy and Insolvency Act , RSC 1985, c B-3 (" NOI "), but Deacon rejected the idea. The parties dispute

how and when Deacon was first made aware that TD noted Home Solutions in default. [ 20 ] PDP issued a Notice of Default on loan payments on May 5, 2022, and the relationship between Davidson and Deacon deteriorated.

With input from other participants, the parties negotiated a forbearance on May 10, 2022 on terms which included that: • Davidson’s corporation transfer its 79% share interest in Home Solutions to PDP; • Davidson resign as President, Director, and CEO of Home Solutions and Deacon take over responsibility as sole director; • PDP forbear on enforcement of its loan, security, and guarantees for 6 months; and • PDP cause Home Solutions to engage a Chief Restructuring Officer and file a Notice of Intention to initiate a sale process of the business supervised by a proposal trustee with a stalking horse bid by May 31, 2022.

Court Proceedings [ 21 ] On May 20, 2022, Home Solutions was assigned into bankruptcy on application of TD, and MNP was appointed as Insolvency Trustee. [ 22 ] On June 28, 2022, PDP obtained its own receiver in respect of the Home Solutions bankruptcy.

Under the terms of the Order of Nixon J, the office of Grant Thornton was appointed as Receiver of assets, excluding Inventory and Accounts Receivable secured by TD. [ 23 ] In the ex parte application on July 14, 2022, Counsel for PDP relied on the first Affidavit of Deacon (“First Deacon Affidavit”) which identified the Calgary Residence and the Montana Cabin as the two main assets listed in the net worth statement of Davidson in support of his Personal Guarantee.

Counsel noted the Statement of Claim and asserted a strong prima facie case to support relief, including “... reasonable grounds for believing Davidson is dealing or likely to deal with Davidson’s exigible property otherwise than to meet reasonable and ordinary business or living expenses in a manner that would be likely to seriously hinder the Plaintiff in the enforcement of judgment against the Defendant; and reasonable grounds to believe there is a risk of dissipation or removal before judgment or satisfaction.” [ 24 ] Counsel acknowledged the duty of full disclosure to the Court and offered to review the details of the alleged financial misrepresentations; the Court declined the offer to review, stating (Transcript at 4, ll.6-9): No, I see that from – it’s a lengthy affidavit and I will not claim to have read every word of it - but I am on a numbered page.

But in para 93 after you’ve talked about the alleged fraudulent activities and so on, you are talking about the sale of Mr. Davidson’s residence. [ 25 ] As reflected in the Transcript and the form of the filed Interim Order, a number of amendments were made by the Court to narrow the template to net proceeds of sale for the two properties. [ 26 ] On August 3, 2022, Fagnan J endorsed a Consent Order for extension of the Injunction to August 26, 2022.

Pursuant to the terms of the Consent Order, the status of any funds held in trust from the sales of the Calgary Residence and the Montana Cabin have been reported to counsel for Davidson.

In turn, Davidson has instructed counsel to provide that sworn evidence of his assets to the Court to remain sealed, unless the Court finds it necessary to review that evidence in consideration of the alternative remedy. [ 27 ] When it became apparent that a written decision was required in this application and cross-application, the Court extended the interlocutory injunction on a without prejudice basis and authorized the release of a portion of funds not to exceed $75,000 for Davidson to support his family and contribute to the costs of this litigation.

Alleged Fraud [ 28 ] The dispute between Deacon as principal for PDP and Davidson as former President of Home Solutions in particular centres on a number of allegations of fraudulent misrepresentations. These were initially listed in the First Deacon Affidavit (at para 22) under four categories (although the Statement of Claim listed only the first three). a. Financial Statements : allegations that Davidson caused Home Solutions to prepare internal, non-audited financial statements, which showed a positive trend in revenues, especially in Q4 of 2021 (the period immediately prior to funding).

Deacon deposed that these trends were clearly based on information which Davidson knew to be inaccurate and that he believes these financials were concocted in order to bring Home Solutions into purported compliance with PDP's conditions precedent to induce PDP to advance funding to the company. b. Projection Documents: allegations that Davidson caused Home Solutions to prepare internal projection documents, including a 13- week cash flow statement, which purported to show that several hundreds of thousands of dollars in accounts receivable were expected to be collected in January and February 2022.

Again, Deacon asserts that these documents were concocted in order to comply with PDP's conditions precedent for the sole purpose of inducing PDP to lend under false pretenses. c. Inventory Overstatements: allegations that Davidson misrepresented the value of Home Solutions’ inventory in January and again in May 2022 by more than $1,600,000. As later determined in an inventory liquidation process for auction dated June 14, 2022, the

inventory was valued at approximately $40,000. Although Davidson was aware of issues with the inventory system, at no time did he initiate an inventory count. d. Default of Loan Agreement: allegations that Davidson signed off on the Credit Facility knowing full well from and after PDP advanced funds on January 12, 2022 that Home Solutions was in breach of the covenant in the Loan Agreement to maintain a minimum of $500,000 available on its line of credit with TD. According to

section 1.1 of the Loan Agreement, Home Solutions had committed to reducing their line of credit with TD to $1,250,000. In order to stay within the terms of the Loan Agreement, however, Home Solutions covenanted that it could only draw down on the line to a maximum of $750,000 in order to maintain the $500,000 of available credit. Although more than $600,000 was paid down within days, Home Solutions still exceeded the maximum draw by $368,000 and failed to disclose this default to PDP at any time. [ 29 ] Davidson unequivocally denies each allegation, including his alleged role and motives.

Equally, he attributes a significant level of information and knowledge to Deacon derived from the five-month due diligence inquiry of PDP before funds were advanced; also, Davidson maintains that the financial issues affecting the business of Home Solutions in 2022 continued to be provided to Deacon by the accounting staff, including through communications from the Controller and Davidson with Deacon or consultants retained at his directions. [ 30 ] Davidson deposes that certain communications on key issues were reflected in materials attached to the First Deacon Affidavit.

However, they were not noted in the Brief for the July 14 hearing. In other instances, Davidson states that the communications were distorted by Deacon’s selective

interpretation as demonstrated by additional materials provided by Davidson. [ 31 ] The submissions on behalf of the parties related to the fraud allegations – both oral and written – are as profoundly discordant as they are laboriously detailed. Analysis [ 32 ] Although counsel for the parties have submitted a significant volume of case law and academic material dealing with the test for attachment orders, as well as Mareva injunctions, the principles are largely settled.

Attachment Order [ 33 ] The Civil Enforcement Act, RSA 2000, c C-15 , s 17 sets out the requirements for an attachment order: • proof of commencement or intention to commence action in Alberta; • a reasonable likelihood that the claim against the defendant will be established; and • reasonable grounds for believing that the defendant is dealing or is likely to deal with its exigible property other than for the purpose of meeting its reasonable and ordinary business and living expenses and in a manner that would likely seriously hinder the claimant in the enforcement of a judgment against the defendant. [ 34 ] In addition, an undertaking to pay damages is required; inconvenience is to be minimized; the value of property attached must not exceed the claim, unless such a limitation is unworkable; and there must be an expiry date not longer than 21 days from the date the order is granted unless it is extended: Civil Enforcement Act , ss 17-19.

Mareva Injunction [ 35 ] Many similar requirements apply to applications for the extraordinary relief of Mareva injunctions. As expressed in Secure 2013 Group Inc v Tiger Calcium Services Inc , 2017 ABCA 316 [ Tiger Calcium ] at para 67 , quoting Cho v Twin Cities Power-Canada ULC, 2012 ABCA 47 at para 5 : There are a number of procedural requirements, and the usual tripartite test for ordinary injunctions probably also must be satisfied.

On the merits, the plaintiff must show a strong prima facie case for his suit, and also that there is a real risk that the respondent will remove assets from the jurisdiction, or dissipate them, in order to avoid execution (enforcement) under a judgment. [ 36 ] In R v Canadian Broadcasting Corp , 2018 SCC 5 , the Supreme Court explained that a strong prima facie case means a strong likelihood on the law and the evidence presented that the applicant will be successful at proving the allegations at trial: at para 17.

In other words, it means that the case is “very likely” to succeed at trial: ibid . [ 37 ] The procedural requirements for a Mareva injunction are similar to an attachment order and include: utmost good faith with full, fair, and candid disclosure, including adverse facts and potential defences as part of a comprehensive brief, in order to protect the integrity of the legal system ( Tiger Calcium at paras 44-50 and cases cited). Interim Order [ 38 ] As in Tiger Calcium , the Interim Order conflated the Attachment Order and the Mareva Injunction.

As the Court observed in Tiger Calcium (at para 116 ): “This combination is discouraged because it makes it difficult to determine whether the provisions of the

Civil Enforcement Act are intended to govern or whether the principles of the law of equity apply.” [39] It is also complicated because some courts have articulated that a strong prima facie case is higher than a “reasonablelikelihood”: Osman Auction Inc v Belland, 1998 ABQB 964 at para 39; First Mortgage Fund (

V) Inc v Boychuk, 2003 ABQB 217 atpara 16; 1498587 Alberta Inc v Devani, 2012 ABQB 324 at paras 21-22; 1007374 Alberta Ltd v Ruggieri, 2013 ABQB 420 at para 26;GEMBA LLC v Nixious Investments Inc, 2014 ABQB 197 at paras 33-34; 1773907 Alberta Ltd v Davidson, 2016 ABQB 2 at para 89,aff’d 2017 ABCA 267; Pinto Ventures Ltd v Soost, 2016 ABQB 454 at paras 73-75, aff’d 2017 ABCA 25; Royal Bank of Canada vMcLaughlin, 2016 ABQB 80 at para 30; Athabasca Minerals Inc v Syncrude Canada Ltd, 2017 ABQB 47 at para 140.

In Bank ofNova Scotia v Five Star Motor Group Ltd, 2020 ABCA 244, the Court of Appeal held that the reasonable likelihood standard is“arguably lower” than a strong prima facie case: at para 17. [40] I am respectful of these expressions of the standard but will apply the test of a strong prima facie case. I will also bear in mindthe principles of the law of equity.

In that regard, I clarify as a matter of fairness that at least in the circumstances presented by this case,the proof of a “reasonable likelihood” is not materially lower than a strong prima facie case. [41] As such, the factors which will inform my conclusion under the law of equity are entirely consistent with the CivilEnforcement Act. Accordingly, I will not review the case separately under both regimes for which there is near-complete overlap.

Iinterpret the presentations of both parties to support this approach. [42] I will then return to the “usual tripartite test” (set out in RJR McDonald v Canada (AG), (SCC), [1994] 1SCR 311 [RJR-McDonald]), including irreparable harm and the balance of convenience. Addressing two of the procedural prerequisitesfor an attachment order, PDP has filed its Statement of Claim and has recently perfected an undertaking as to damages. [43] However, it is important to address the objections to the ex parte proceedings held on July 14, 2022.

Ex Parte Hearing [44] As noted earlier, the judge in emergency chambers (the “Emergency Judge”) very briefly declined the offer of counsel to gothrough the background of the alleged financial misrepresentations. With great respect, that exchange does not discharge the duty.

Anemergency judge without an advance opportunity to review materials must be properly advised of the basis to support a strong primafacie case or reasonable likelihood that the claim against the defendant will be established. [45] As an officer of the Court, counsel must also alert the Court to the risks associated with the extraordinary relief soughtwithout notice, including some sense of differing

interpretations and possible defences. PDP did include three paragraphs in the writtenbrief presented to the emergency chambers judge referring to some potential factual disputes.

At minimum, those needed to be drawn tothe specific attention of the emergency Judge. [46] Davidson’s initial critique is that the Interim Order should not have been issued because PDP “deliberately” failed to point outextensive evidence which contradicted the allegations against Davidson, both in the First Deacon Affidavit and also as otherwise knownto Deacon. [47] Mindful that an extension hearing ought not to condone the limited account of circumstances in support or opposition toextraordinary relief at first instance (even where a Court declines the offer of some review of the circumstances), I find it to be bothunnecessary and imprudent to conclude that any failures were deliberate.

My reasoning is specific to the circumstances as presented, butit is founded in the case law to be applied. [48] Firstly, it is important not to speculate or generalize as to the extent of disclosure if the Emergency Judge had encouraged andprobed the evidentiary support for the allegations.

The materials provided to the Emergency Judge included some potential defences inthe brief, and the Court did express appreciation for the full disclosure, even though that comment may have been more connected to theamendments to tighten the wording of the Interim Order. [49] Notably, the review of the Interim Order granted ex parte is a hearing de novo: Tiger Calcium at para 173, citing Marcil vEllefson, 2014 ABCA 169 at para 23.

As will be seen from a review of the allegations of fraudulent misrepresentation to be consideredbelow, the Interim Order must be set aside, because, based on what has been presented to this Court, there is not a strong prima facie casewhich is reasonably likely to succeed at trial.

That determination will be dispositive of these cross applications. [50] Moreover, the dynamics between Davidson and Deacon leading up to the bankruptcy do not reflect objectivity; a hearingbased on transcripts and a large volume of documents is not conducive to attributing motive over an extended period, particularly wheresuch findings will be central to a trial on the merits. [51] The consequences of non-disclosure on application for extraordinary relief are within the discretion of the Court.

In TigerCalcium at para 47, the Court of Appeal quotes from Duke Energy Corp v Duke/Louis Dreyfus Canada Corp, 1998 ABCA 196 to saythat the Court will sometimes set aside an order based on breach of full disclosure. It declines to define the circumstances as may triggersetting aside on this ground. [52] Davidson has amplified the

interpretations from the evidence which speak against fraudulent misrepresentations.

Becausediffering versions of events and document content must be weighed fully in relation to the onus on PDP to prove its case, that evidence ismost reliably analysed as part of a full trial rather than a mini-trial: National Bank Trust v Yurov, [2016] EWHC 1913 at para 19;Alliance Bank v Zhunus, [2015] EWHC 714 at para 67; Polar Supplies Ltd v Cape Dorset (Hamlet), 2013 NUCA 11. [53] Nonetheless, the simplistic presentation of the initial application by PDP as critiqued does constitute a relevant factor inreviewing whether the Interim Order ought to be extended or set aside.

The failure of PDP to refer to two instances where Davidson andDeacon discussed possible sale of the Calgary Residence and Montana Cabin (in March and May) is ostensibly relevant to any inference

or attribution of a hasty intent to dissipate. I will examine the arguments as to substantive shortcomings of the PDP evidence as part of whether a strong prima facie case exists to support continuation of the Interim Order.

Strong Prima Facie Case [ 54 ] As set out in Hryniak v Mauldin , 2014 SCC 7 at para 87 , the elements of fraud in a civil context requires the following proofs: • a false representation by the Defendant; • some level of knowledge of the falsehood of the representation on the part of the Defendant (whether knowledge or recklessness); • the false representation caused the Plaintiff to act; and • the Plaintiff's actions resulted in a loss. [ 55 ] This is a pre-trial and by no means final assessment.

To determine whether the evidence meets the strong prima facie onus to support continuation of the Interim Order, I will examine in turn each of the four allegations of fraud summarized earlier. [ 56 ] Counsel for Davidson raised some concern that Deacon has prepared two additional affidavits to “bootstrap” the evidence in support of extending the Interim Order.

To address that briefly, the Court’s discretion to admit new evidence on review must balance both legal and practical considerations. [ 57 ] The parties agreed to a process for the preparation of affidavits, Questioning, and true reply evidence, as well as written briefs. Evidence which was available but not profiled initially must be treated with caution: Tiger Calcium at para 176 . However, despite some obvious overlap and repetition, the supplementary and reply affidavits do not amount to bootstrapping or otherwise offend the fairness of the assessment of the merits of the positions advanced.

Financial Statements [ 58 ] PDP asserts that Davidson caused the preparation of the financial statements to show a positive trend in revenue from April 2021prior to the Funding; that the Statements were based on information which Davidson knew to be inaccurate; and that the Statements were concocted to induce PDP to advance funding to Home Solutions. [ 59 ] From Questioning, Deacon identified two documents in support: 1. An email from Sheer, as Controller, to Davidson, Deacon, and a consultant party with the November 2021 reporting package to TD; and 2.

A similar reporting package to TD for October 2021 without any email to reflect how and by whom it was prepared. [ 60 ] While Deacon asserts that Davidson caused preparation of the Statements with trends he knew to be inaccurate, such a conclusion would require the Court to draw serious inferences from limited information that: • Davidson’s review of data assembled by the accounting team from electronic and other records of Home Solutions for the Controller on a regular report format to TD was a sustained sham by him; and • Davidson had actual knowledge that figures were falsely generated, because he had a strong knowledge and awareness of the financial situation. [ 61 ] Those inferences are not compelling, nor can they reasonably oust other explanations of the alleged inaccuracies.

He did not prepare or control the electronic and other inputs for the statements; as well, the nature, extent, and cause of any inaccuracies remains unclear. [ 62 ] After the Funding, Davidson was the person who enclosed the financial statements for January and February in an email to Deacon on March 23, 2022, where he identified eight questions for consideration. By that point, PDP had placed financial specialists on site.

Nothing would support that Davidson’s questions were distractions to what he identified as unreliable figures. [ 63 ] What the evidence does support is that Davidson recognized and acknowledged ongoing financial challenges from at least the Spring of 2021. Home Solutions required refinancing and it had retained Diamond Willow to assist, which is how PDP first began to look at the request for refinancing. [ 64 ] Issues were identified by PDP in the Due Diligence Document. Deacon also wrote to Diamond Willow about the effect of supply chain matters.

The Questioning of Deacon confirms that discussions continued on numerous financial issues before and after the Funding in January 2022. The level of knowledge by Davidson and the control of reporting is unclear. His affidavit evidence pointed to a need for more liquidity to take on more and larger projects as the company grew.

The extent to which this may have tied into problems with financial reporting and the inventory system is unclear. [ 65 ] The affidavit and Questioning of Sheer speak not only to the preparation of financial statements for TD and others according to typical business practices; he also expressly disagreed with the allegations of dishonesty against Davidson, based on his knowledge.

[66] The evidence presented to date may support the suspicions and concerns as articulated. It does not amount to strong primafacie proof of fraud by Davidson as a concoction to induce the Funding. Projection Documents [67] PDP asserts that Davidson caused Home Solutions to prepare internal projection documents, including a 13-week cash flowstatement, which purported to show that several hundreds of thousands of dollars in accounts receivable were expected to be collected inJanuary and February 2022.

During Questioning, Deacon confirmed that the projection was prepared and emailed by Sheer, although hemaintained that Davidson was involved and had full knowledge of the financial affairs of Home Solutions. [68] The evidence does not ascribe the level of control by Davidson of the information upon which the projection is based. Toomany business variables are at play to draw firm conclusions at this stage. Davidson’s response evidence noted at least two factors: 1. Optimism derived from a large backlog of orders; and 2.

Supply chain issues impacting payments and completions. [69] Even dramatically faulty projections will seldom support a characterization of fraud without significant evidence ofconcoction.

A statement of belief in concoction must be supported in the evidence: Hembruff v Ontario Municipal EmployeesRetirement Board (2005), (ON CA), 78 OR (3d) 561, [2005] OJ No 4667 at paras 76- 77; see also MotkoskiHoldings Ltd v Yellowhead (County of), 2010 ABCA 72 at paras 43-45; Hogarth v Rocky Mountain Slate Inc, 2013 ABCA 57 at paras59-60. [70] Inferences to be derived from lower accounts receivable, evidence of invoicing for incomplete work, or difficulties incollection will not support deliberate concoction as evidence of fraud. [71] There is some evidence that some invoices were issued by Home Solutions, before and after the Funding, for work that wasincomplete.

Davidson alleges that some projects will be invoiced for completed portions where other parts are incomplete, and collectionis a matter of working with the customer. The Court must always be alert to the potential colourability of receivables, which may bebased in whole or in part on work in progress. [72] Nonetheless, at this stage, suspicions and concerns as articulated do not enable the Court to find a strong prima facie proof offraudulent misrepresentations to PDP by Davidson to induce the Funding.

Inventory Overstatements [73] PDP alleges that Davidson misrepresented the value of Home Solutions’ inventory both in January and in May 2022. Thistopic was a central aspect of all affidavits, Questioning, and argument. For the purposes of this analysis, I reject any material distinctionbetween problems with the inventory system and problems with the accuracy or reliability of stock count. The two are inextricablylinked.

In an email to Deacon dated March 11, 2022, Davidson reported a number of points, including that “We need to do an inventorycount so the inventory number can be corrected, system problems with the inventory are slowing us down when we invoice and makingthe monthly reporting slower.” [74] Inventory was included in the monthly Borrowing Base Certificates (“BBC”) provided by Home Solutions to TD throughout2021 and into 2022.

All parties had awareness of problems with inventory. [75] Deacon specifically acknowledged awareness by September 2021 that: • Home Solutions were implementing a new inventory system in September 2021 and that Home Solutions was uncertain why itsrecords showed a $400,000 increase in inventory levels in 2021; • The new system would require working out the bugs and training staff for better use; and • One explanation for the 2021increase may be bad entries on the unit of measurement for certain products. [76] Since the Interim Order, the allegations of fraud in regards to Inventory shifted from an alleged lack of knowledge of the issueby PDP; rather, the allegation became that the amount or magnitude of the problem was not reported and no count was completed.Davidson asserts strenuously that he and others alerted Deacon to the unreliability of inventory prior to the Funding and then over aperiod of 5 months as reflected in a text message dated May 12, 2022 that Deacon acknowledged was sent.

Deacon’s only response inthese proceedings repeats the alleged distinction between the inventory system and the count, which I have rejected. [77] The evidence indicates a significant call down on inventory as supplies were held up and Home Solutions became strapped forcash in the months of February through to May 2022. Davidson admits in Questioning that the inventory value of 2.9 million wasprovided just 10 days prior to bankruptcy, following which the trustees ascribed an actual value of approximately $500,000.

Even thoughinventory was secured by TD, the magnitude of the difference is a legitimate matter of concern to PDP. [78] PDP urges that the handwritten note on the May 2022 BBC prepared by Sheer on directions of Davidson was the first writtennotification that inventory was unreliable. Sheer’s evidence is that he knew of the inventory problem from when he was hired, and it wasknown by TD and PDP as a problem from discussions.

The note was because Sheer “was concerned that if they were passing the MayTD BBC onto others who did not also have this awareness, I did not want those people to be misled.” [79] In the context of proving a strong prima facie case of fraud, the Sheer evidence, if believed at trial, would support thatconcerns about inventory were sufficiently disclosed to PDP.

[ 80 ] So too, the assertion that Davidson was making excuses and blaming others must be weighed fully against the difference between reported and actual inventory. The impact of any bar coding, the shift to Excel, and the changes in personnel and reporting must all be carefully assessed. The last annual inventory count by Home Solutions was done in March 2021. [ 81 ] It may be problematic that Davidson represented that an inventory count was under way on May 10, 2022 when on Questioning he clarifies that only preparatory work was yet under way.

He may be open to criticism for not ensuring that an accurate inventory count was undertaken and completed on a more timely basis, even in the face of Covid, lack of personnel, and other business priorities. [ 82 ] But Davidson does not bear that fault alone.

It was clearly available to others with a vested interest in the financial success of Home Solutions to initiate the count as a priority: • PDP not later than March when it put two financial specialists in place; • TD – essentially whenever it may have considered necessary, because importantly it was TD that held its security claim attached to the Inventory of Home Solutions. [ 83 ] And perhaps given the earlier involvement and the status as Landlord on a take back mortgage and a promissory note, the prior owners may have been entitled at minimum to raise concerns to warrant closer attention to inventory, as would affect their financial interests. [ 84 ] Without any measure to correlate the inventory issue to the current bankruptcy, it was part of the challenge leading up to the Notice of Default.

However, for the purposes of this application, the evidence overall is inadequate proof of a false representation by Davidson, much less that it was misrepresented by Davidson knowingly and in order to induce the Funding from PDP, whereas TD held the security on inventory.

Default of TD Credit Agreement [ 85 ] PDP alleges that Davidson signed off on the Credit Facility knowing full well from and after PDP advanced funds on January 12, 2022 that Home Solutions was in breach of the covenant to maintain a minimum of $500,000 available on its line of credit. [ 86 ] Davidson specifically deposed that he understood the Funding would include sufficient monies directly to TD to reduce the credit with TD to within the minimum required, and he believed that Home Solutions was compliant. He was not questioned on this statement.

While it may be a faulty account based on the actual numbers, it is difficult to ascribe any fraudulent misrepresentation without at least some cross-examination. [ 87 ] Even the reduced flow of funding to TD because of fees and transaction costs does not fix a level of knowledge by Davidson to support a strong prima facie case for fraudulent misrepresentation.

Davidson’s expectation that everything would be fine based on the anticipated collection of receivables may well be colourable; however, there is no evidence to indicate that PDP was unaware of those charges as part of the disbursement from Funding. [ 88 ] As to alleged non-compliance with the credit restrictions after the Funding, alleged concealment could not form an inducement for the Funding.

Deacon agreed in Questioning that PDP knew and discussed with TD that Home Solutions was offside its existing credit facilities with TD in the fall of 2021 and was in the special loans group because of financial distress and a lack of data caused by hacking. Whether that level of knowledge is sufficient as a defence, it certainly affects the current assessment of a strong prima facie case on this ground. [ 89 ] In addition, Davidson raises further uncertainty as to the mechanism that may trigger default on access under the TD Credit Agreement.

The BBC statements did not necessarily reflect the status of the operating line, and TD did not freeze or issue a Notice of Default until the end of April. The tolerance of TD’s funding pursuant to the Credit Agreement is a genuine issue for trial. Other Matters [ 90 ] PDP raised a number of issues that were, at best, ancillary to the allegations of fraudulent misrepresentation against Davidson upon which PDP profiled its claim for injunctive relief.

These included the timing of notification to Deacon that a lawsuit of which he was aware had been settled; whether Davidson’s spouse actually provided marketing services for Home Solutions; the continued relationship of Home Solutions with Kluane Group; and the payment of insurance premiums after Davidson was terminated. [ 91 ] PDP also argued that Davidson canceled jobs after the Funding that are inexplicable; failed to disclose a $120,000 invoice owing to Diamond Willow; and failed to provide particulars of his reported $40,000 interest in a builder corporation, Element Building Group Inc. [ 92 ] These points may warrant careful attention in a full trial, where the credibility of Davidson’s perspective can be weighed in the full circumstances.

As presented, they do not materially assist this Court in relation to the four allegations of fraudulent misrepresentation. [ 93 ] Having reviewed the original allegations as amplified by the supplementary evidence, Questioning, and responses to undertakings as argued, the case of PDP does not establish a strong prima face case or a reasonable likelihood that it will prevail at trial. Removal or Dissipation [ 94 ] PDP argues that specific factors support the reasonable inference of a significant risk of removal or dissipation by Davidson of the proceeds of sale of the Calgary Residence and the Montana Cabin:

• The nature and context of the fraudulent misrepresentations; • The haste of listing and sale of the properties; and • Information about plans for Davidson to move to the United States. [ 95 ] Davidson asserts that selling the Calgary Residence and the Montana Cabin was not a dissipation.

These properties had been listed as part of the Net Worth statement of Davidson; however, neither property was pledged as security on the personal guarantee to PDP. [ 96 ] The evidence is that Davidson and his spouse looked at listing both properties in the fall of 2021 because of concerns whether Home Solutions could survive without refinancing. Significantly, the sale of these properties was specifically proposed by Deacon in March 2022 in the context of the need for fresh capital.

Nothing specific derived from those discussions at the time, but Davidson insists that he was always transparent about those assets. [ 97 ] Deacon acknowledges that the sale of the properties arose again in early May in connection with a proposed NOI in which Davidson would participate; however, Davidson says he heard nothing from Deacon to support this proposal. [ 98 ] Davidson did not specifically report the listings of the properties for sale to Deacon in May 2022. His evidence was that he and his wife were both discharged from Home Solutions at that point and needed money to support the family.

The sale of these assets falls within the scope of disposition to address reasonable, ordinary business and living expenses. [ 99 ] Once again this is not the proper forum to determine the full strength of these divergent

interpretations of the circumstances surrounding the listing and sale of the properties. It is sufficient in the face of the reliance on hearsay and suspicions, to note that the circumstances as described by Davidson in response to alleged dissipation are at least plausible. [ 100 ] The Court rejects any inference that the evidence of consultation by Davidson with a tax advisor after the sale of the Montana Cabin demonstrates any intention to flee Alberta and set up a new business in the United States. The effect of a sale by a non-resident can easily justify a request for tax advice without more.

Deacon fairly confirmed in Questioning that he did not know what advice Davidson may have sought. Inference of Dissipation [ 101 ] PDP points to the case law that the risk of dissipation may be inferred in cases of fraud.

In Ice District Development Partnership v Hahn, 2020 ABQB 786 at paras 42-43 , the Court quotes from Tiger Calcium: In some cases of alleged fraud, even in the absence of such evidence, courts have been prepared to draw an inference from all of the circumstance, including the circumstance of the fraud itself, that there is a serious risk that a defendant will attempt to dissipate assets or put them beyond the reach of the plaintiffs: 1773907 Alberta Ltd v Davidson , 2016 ABQB 2 at paras 81–83 , [2015] AJ No 1463 (QL). [ 102 ] The Court also referred to Sibley & Associates LP v Ross , 2011 ONSC 2951 , 334 DLR (4th) 645, where the judge attempted to reconcile inconsistent decisions on this issue in the context of a Mareva injunction (see also 1773907 Alberta Ltd v Davidson , 2017 ABCA 267 at paras 31-36 ). [ 103 ] The assertions by Deacon as to Davidson’s intentions are conjoined with serious business issues and the discord between them in the months leading up to the bankruptcy.

No evidence supports that the circumstances of either transaction – including price, timing, non-arms length purchasers, terms of disbursement, or other aspects of closing – taints the sales in support of injunctive relief. Certainly, at this juncture, there is nothing unreasonable about a decision to sell properties where Davidson and his spouse are without employment and responsible for raising a family. [ 104 ] Noting that injunctions are an exceptional remedy, it is insufficient to simply allege that PDP will be hindered in the enforcement of a judgment against Davidson.

Non-secured assets cannot simply be identified as subject to sale that should trigger a freeze on access to the proceeds; there must be some colourability to justify exceptional intervention by the Court. Fleeing the Jurisdiction [ 105 ] PDP argues further that the risk that Davidson is exploring business opportunities in the United States imposes a taint because it is reasonably likely that he is fleeing the jurisdiction.

Deacon relies on hearsay evidence from discussions with Nielson in late June 2022 that he had heard “through the industry that Davidson was looking to purchase a business in the US and was relocating out of Calgary.” Further conversations with others led Deacon to a discussion with Lyle Tomie who “disclosed to me that he had been approached by Davidson to find investors for his ‘new venture’ located in Portland, Oregon.” [ 106 ] Davidson did acknowledge in his own affidavit that he was exploring the possibility of starting a business in the United States.

He requires investors and has not made any decisions; he notes that one reason his search to support his family extends beyond Alberta relates to the risk that “PDP's conduct with respect to Home Solutions might have damaged my personal goodwill in the industry in Calgary.” [ 107 ] Overall, the evidence does not support that the sale of the two properties is for the purpose of fleeing Alberta to avoid judgment. Irreparable Harm

[108] Turning briefly to the second part of the tripartite test, “irreparable harm” has been defined in Ominayak v Norcen EnergyResources (1985), 1985 ABCA 12 , 36 Alta LR (2d) 137 at 145: We accept the proposition in High on the Law of Injunction, 4th ed., vol. 1, p. 36 that: By irreparable injury it is not meant that the injury is beyond the possibility of repair by money compensation; but it must be of such anature that no fair and reasonable redress may be had in a court of law and that to refuse the injunction would be a denial of justice. [109] In RJR-MacDonald at 341, the Supreme Court explained: "Irreparable" refers to the nature of the harm suffered rather than its magnitude.

It is harm which either cannot be quantified in monetaryterms or which cannot be cured, usually because one party cannot collect damages from the other... The fact that one party may beimpecunious does not automatically determine the application in favour of the other party who will not ultimately be able to collectdamages, although it may be a relevant consideration (Hubbard v.

Pitt, [1976] Q.B. 142 (C.A.)). [110] The risk that proceeds from the sale of two properties listed in a Net Worth statement but otherwise unsecured may beunavailable in the event of a judgment does not constitute irreparable harm to PDP in these circumstances. Balance of Convenience [111] The third part of the test engages a weighing of the relative impact on the positions of parties affected by proposed continuationof the injunction. The arguments on this aspect are equivocal as both sides risk financial consequences.

While PDP is correct that anextension of the Interim Order would oblige disclosure of Davidson’s financial circumstances as provided to the Court by counsel but notyet reviewed, that is not a point which affects the relative convenience of both sides. The other factors which have been reviewed aremuch more informative of the Court’s exercise of discretion. [112] I return to a topic raised much earlier in the context of the relative merit of the positions taken by the parties.

While Davidson’scriticisms of the level of disclosure at the initial application are not fatal, they do serve as a factor in assessing the case to be met and theCourt’s discretion to extend or set aside the Interim Order. The Court is not persuaded that the balance of convenience favors PDP onthis application.

Summary [113] The application to extend the Interim Order is dismissed, and it is accordingly set aside effective as of the date of this Decision. [114] In consequence of this direction, the Court confirms that it has not reviewed the financial information regarding the proceedsfrom sales of the properties as provided by Davidson through his counsel. That material will remain sealed. [115] As agreed between counsel, the proceedings are transferred to the Judicial Centre of Calgary effective immediately.

Costs [116] As stated at the close of oral argument, submissions on costs are impacted by the disposition of the applications. [117] These reasons do not determine whether the allegations of fraud will be proven at trial, only that the evidence is insufficient atthis stage to support the Interim Order. The principles cited in Tabs 31 to 37 of the Defendant Brief as to solicitor-client full indemnitycosts are not triggered in these circumstances. [118] Davidson has been successful and is entitled to costs.

If the parties are unable to agree on quantum, either party may apply tothe Court within 60 days of the date of this decision to set the amount payable in all events of the cause. Heard on the 26th day of August, 2022. Dated at the City of Edmonton, Alberta this 20th day of October, 2022. S. D. Hillier J.C.K.B.A. Appearances:

Michael Kirk Miller Thompson LLP for Private Debt Partners Kelsey Meyer Bennett Jones LLP for Andrew Davidson and 2087212 Alberta Ltd.