Evans v. Barnes, 2018 BCSC 1008

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Evans v. Barnes, 2018 BCSC 1008 Date: 20180619 Docket: S155902 Registry: Vancouver Between: Blair Evans Petitioner And Dennis Barnes, Ron Chester Nalewajek, Edmonton Elevator Advertising Corporation, R 234 Enterprises Ltd. and 493586 Alberta Ltd. Respondents Before: The Honourable Mr. Justice Ball Reasons for Judgment Counsel for Petitioner: M. Ellis Counsel for Respondents: S. Schwartz Place and Date of Hearing: Vancouver, B.C. May 14, 2018 Place and Date of Judgment: Vancouver, B.C. June 19, 2018 Introduction [ 1 ] Blair Evans, as the petitioner, has applied for a declaration on a

summary basis that the affairs of R 234 Enterprises Ltd. (“R234”) have been conducted in a manner oppressive to the petitioner as a shareholder.

Further, the petitioner seeks a variety of orders related to the shareholdings of R234 and to accounting matters. [ 2 ] The petitioner also seeks an order that an auditor be appointed by the Court to conduct a review of the financial records of R234 to identify the correct distributions of shareholder loans and/or dividends payable to the petitioner and the respondents as of December 31, 2013 — the costs of such accounting to be borne by R234. [ 3 ] The respondents dispute the basis for the petition and oppose the granting of the orders sought. [ 4 ] The petition herein was filed on July 17, 2015.

Since that date, because the business for which it was incorporated has been completed, R234 has not been maintained in good standing and was struck from the Register of Companies. R234 has no ongoing business at this time. Background [ 5 ] R234 was incorporated on June 21, 1994.

The respondents, Ron Chester Nalewajek and Dennis Barnes were responsible for incorporating R234 with Gary Tebbutt, who is not now a party to this proceeding (the “Original Shareholders”). [ 6 ] The purpose of incorporating R234 was to purchase and develop a piece of bare land located along the Trans Canada Highway in West Kelowna, British Columbia (the “Land"). The plan was to develop the Land to be leased for commercial purposes.

The Original Shareholders agreed to equally contribute the capital necessary to fund the purchase and eventual development of the Land. [ 7 ] Each of the Original Shareholders was to play an ongoing role in the development of the Land to obtain a financial success for R234. The Land was held for several years before the development of Phase 1. In 1995, Mr. Tebbutt introduced the petitioner to Mr. Nalewajek and Mr. Barnes for the purpose of having the petitioner involved in the development of the Land.

A holding company belonging to the petitioner became the fourth equal shareholder in R234. [ 8 ] In or about 2000, Mr. Tebbutt decided not to participate in the development of the Land and left the development group. As a result, the three remaining equal shareholders were: 493586 Alberta Limited (“493”), controlled solely by Mr. Nalewajek; Edmonton

Elevator Advertising Corporation, (“Edmonton Corp.”), a holding company controlled by Mr. Barnes; and 818690 Alberta Ltd. (“818”), a holding company controlled by the petitioner. Messrs. Nalewajek, Barnes and Evans were the directors of R234. [ 9 ] In 1999, each of the three shareholders made a shareholder loan of $149,800.91 to R234. Each of 493 and Edmonton Corp. made an additional contribution of $27,400 to R234. The petitioner did not contribute any additional monies at that time. As a result, the shareholder contributions into R234 were no longer equal.

By the end of the year 2000, the costs of development of the Land and related cash flow problems required further regular cash contributions from the shareholders. [ 10 ] To address this need, Mr.

Barnes offered to have Edmonton Corp. extend a loan of $100,000 to R234 for a period of five years (the “Loan"). [ 11 ] It is the respondents’ position that the three shareholders agreed to repay the Loan on the following terms: a. each shareholder would contribute equally to repay the Loan in five years; b. if any shareholder defaulted on making a regular contribution: i. that shareholder would be required to give up 20% of its ownership in R234, which would include that shareholder's shares and shareholder loans; and ii. 10% interest, compounded annually, would be charged on any shortfall in the accounts of R234. (The “Loan Agreement”). [ 12 ] Mr.

Nalewajek suggested the following additional terms to the Loan Agreement: a. that interest of prime plus 2% over a five-year period would be applied to a payout at any time; b. that as a penalty, if a payment was missed, 20% of the ownership of the defaulting party would be transferred to Edmonton Corp.; and c. if the defaulting party wishes to buy back any such interest that had been transferred through the penalty provision, then interest for the missed payment would be at the rate of prime plus 5%, with the opportunity for buyback only possible during a five month period after the transfer has taken place. (The “Additional Terms”). [ 13 ] By way of email on or about June 29, 2000, Mr.

Evans and Mr. Barnes indicated they agreed with the Additional Terms to be added to the Loan Agreement. Therefore, it is the respondent's position that the Loan Agreement with the Additional Terms was finalized at that time. The petitioner does not agree. There is a dispute with respect to the terms agreed to by the parties. [ 14 ] Between March 2000 and March 2001, the petitioner contributed $21,842.37 to R234.

However, between April 2001 and late 2004, the petitioner ceased all communication with the shareholders of R234, and stopped participating in the development of the Land and the business and operations of R234 altogether. [ 15 ] In late 2004, after approximately three-and-a-half years during which the petitioner did not participate in the development nor have communications with the other shareholders, he asked to again participate in the business and operations of R234.

By that time, the first phase of the development had been completed, rented, and sold to a third party. [ 16 ] The second phase of the development was then beginning. During the three-and-a-half years when the petitioner ceased to participate in R234, the other two shareholders were the sole contributors and participants in the development of the Land. In late 2004, the respondents agreed to the participation and re-involvement of the petitioner in the affairs of R234.

Between January 2005 and April 2006, the petitioner's holding company, 818, made some financial contributions to R234 and commenced repayment of the Loan to Edmonton Corp. The last contribution made by the petitioner or 818 to R234 was in April 2006. [ 17 ] The respondents calculate that by April 2006, pursuant to the provisions of the Loan Agreement and defaults thereunder by the petitioner, the shares in R234 belonging to 818 were worth approximately $28,000 (Affidavit of Mr. Nalewajek, paras.36 and 38). [ 18 ] On May 1, 2008, Mr.

Nalewajek gave notice of a directors’ meeting, which notice was delivered to the petitioner in a timely fashion. The petitioner did not respond in any way to the notice of the directors’ meeting and did not attend. Messrs. Nalewajek and Barnes attended the meeting on May 7, 2008. Their presence was sufficient to satisfy the quorum requirements at a meeting of the directors of R234. [ 19 ] At that directors’ meeting a resolution was passed that: a. 2500 Class B voting shares at $100 per share would be issued to Edmonton Corp. and 493.

It is the position of the respondents that this issuance of shares would even out the imbalance which then existed in the shareholders loans; and b. 818 would be allowed to purchase up to an equal number of shares at the same price, for a period of one year from the date of the meeting. This option was never exercised. [ 20 ] In or about 2009, R234 sold the second phase plus the Land to a third party. R234 provided a vendor-backed mortgage to the third-party purchaser with an option to make an early payment without penalty.

The third-party purchaser ultimately exercised the option to make early payment resulting in the mortgage loan being paid in full in or about August 2013. As the business of R234 had been completed at that point in time, the respondents advised the petitioner that it was their view the remainder of the shareholder’s loans or

the value the petitioner would receive from the winding up of R234 was the amount of approximately $28,000. The petitioner disagreedwith this calculation; as a result, these proceedings have been commenced. Legal Issues [21] The parties have essential disagreement over three substantial issues: a. the terms of the Loan Agreement and the effect of defaults thereunder on the subsequent distribution of proceeds of the sale ofthe project; b. the notice of the directors’ meeting; and c. the allegation of oppression. [22] With respect to the issue recited in para. 21(

a) above, the petitioner has set out his calculations at paras. 41 to 50 of Part Two ofthe petition. The respondents’ calculations are detailed in Exhibit G to Mr. Nalewajek’s affidavit. There are significant differencesbetween these calculations and the underlying assumptions upon which the calculations are based. [23] Some of those matters were discussed by the parties by email as follows: (

a) On or about June 28, 2000, the respondent, Dennis Barnes wrote to the petitioner by email as follows: “At our last meeting Iunderstood you and Ron were going to give me a suggested penalty clause. Do you have anything in mind?” (

b) Earlier the same day, the petitioner had written by email as follows: “Also the penalty terms of loosing (sic) it all if missing onepayment is too much! The penalty, whatever it is finalized as being, should have a 60 day time frame, not 30 days…” (

c) Further on the same day, the respondent, Mr. Nalewajek wrote to Messrs. Barnes and Evans by email as follows: “I am inagreement with your proposal of prime plus 2% interest over a five year period with a payout at any time. I propose that as a penalty, if apayment is missed, this would in effect cause 20% of the ownership of that party to change into your hands from that party. That totalwould therefore change into your hands from that party who missed payments after missing five consecutive months of payments.

If thatsame party wishes to buy back that share percent transferred, this would have to be done during the five month period and interest paidfor the missed payment would be paid at prime plus 5%. The opportunity to buyback would only be possible during the five monthperiod…” (

d) On June 29, 2000, the petitioner wrote by email to the respondent, Mr. Nalewajek, as follows: “Ron this appears to be a reasonableproposal and I would be in agreement with such a proposal.” (

e) On or about June 29, 2000, the respondent, Mr. Barnes, wrote to the petitioner and the respondent, Mr. Nalewajek as follows: “Ihave reviewed your proposal with Janet and we are both are in agreement with it.” [24] At the end of the day, it is the respondents’ position that the petitioner has not established on the balance of probabilities thatthe parties agreed to a pro rata distribution of shareholders loans that ignores the terms agreed to in the Loan Agreement.

In particular therespondents say that a pro rata distribution would be patently unfair because the petitioner did not contribute financially or otherwise foryears at a time during the course of the development, and the other two shareholders — the respondents — maintained all theresponsibilities for the operations of R234 and bore the risk of failure. [25] With respect to the notice of the directors’ meeting referred to in para. 21(

b) above, the petitioner's counsel agreed there wasevidence that notice of that meeting on May 7, 2008 was delivered to the petitioner in a timely fashion prior to the meeting. That issue isno longer a matter in dispute. Analysis and Conclusion [26] In order to succeed in obtaining the orders sought under the petition, the petitioner must prove facts necessary to support thepetition on a balance of probabilities. [27] Both parties before the Court cite the well known case of B.C.E.

Inc. v.1976 Debentureholders, 2008 SCC 69 , [2008]3 S.C.R. 560 for the proposition that “fair treatment” is fundamental to the reasonable expectations of a shareholder when the oppressionremedy is claimed. However, as is noted, without an evidentiary basis to determine the terms of the agreement or agreements betweenparties, there is no basis to determine “reasonable expectations”.

At para. 62 of B.C.E., the Court states: “In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonablehaving regard to the facts of the specific case…” [Emphasis added.] [28] The need to establish the facts of the case in terms of agreements made in a commercial context was also made clear in the caseof Shaver v. Rotelick (1998), (SK CA), 163 Sask. R. 248 (C.A.), where a trial court made findings of fact about anagreement having heard viva voce evidence in a trial.

The Saskatchewan Court of Appeal found that the trial judge had erred in lawbased on the terms of the agreement found to have been made by the parties respecting interest. Again the significant issue was decidedbased on the facts of the agreement.

[ 29 ] The petitioner seeks the appointment of “an auditor to conduct a review of the books and records of R234 to identify the correct distributions of shareholder loans and/or dividends payable to the petitioners [sic] and the respondents”, among other things. [ 30 ] In order for an auditor to determine the “correct” numbers, the Court would be obliged to provide definitive instruction to the auditor specifying the interest rates agreed by the parties, duration of default, and the effect of default or penalty clauses resultant from default in providing required funding for R234. The parties do not agree on what agreement, if any, resulted from the email exchange reflected in para. 23 (

a) through (

e) above. I note that despite having received the respondents’ position in writing almost two years ago, there is, in the petitioner’s affidavit materials, no mention of the content or consequences of the email chain to which reference is made above. [ 31 ] Further, the business of developing property in West Kelowna, B.C., for which R234 was incorporated, came to an end when all of the developed property was sold. The financial assets of R234 have been distributed by the respondents or are held in trust.

R234 is no longer in good standing and has been struck off the Register of Companies for failure to file annual reports. There is no agreement by the parties as to how the cost of the auditor, which may be substantial, would be paid if an audit were ordered. [ 32 ] In all the circumstances of this case as presented in the affidavits filed on this application, I am not satisfied on a balance of probabilities that the petitioner has proven the facts necessary to allow this case to be decided on a

summary basis. Therefore, the application of the petitioner is dismissed. The case will have to proceed in the usual way to trial. [ 33 ] An order for costs will therefore follow the event, so that the costs of the respondents shall be payable forthwith and in any event of the cause by the petitioner after assessment pursuant to Appendix B of the Supreme Court Civil Rules , B.C. Reg. 168/2009. “Ball J.”