1st Shot Fire Protection v. Paragon Mechanical Date:, 2016 BCPC 292

Citation: 1st Shot Fire Protection v. Paragon Mechanical Date: 20160810 2016 BCPC 292 File No: S77453 Registry: Surrey IN THE PROVINCIAL COURT OF BRITISH COLUMBIA Small Claims Division BETWEEN: 1 ST SHOT FIRE PROTECTION LTD. AND THOMAS ROCHE CLAIMANTS AND: PARAGON MECHANICAL LTD. AND PETER SCHLIECK DEFENDANTS RULING ON APPLICATION OF THE HONOURABLE JUDGE V. CHETTIAR Counsel for the Claimant: Mr. B. Rachwalski Appearing for the Defendants: Mr. Peter Schlieck Place of Hearing: Surrey , B.C. Dates of Hearing: June 17, 2016 Date of Judgment: August 10, 2016

INTRODUCTION [ 1 ] This is an application by 1 st Shot Fire Protection Ltd. (“1 st Shot”) and Thomas Roche, pursuant to Rule 16(6) (

o) of the Small Claims Rules , B.C. Reg. 261/93, for an order lifting the corporate veil of Paragon Mechanical Ltd. (“Paragon”) and holding Peter Schlieck personally liable in his capacity as former director and de facto officer of Paragon. [ 2 ] Mr. Roche is the President and sole director and shareholder of 1 st Shot. The Applicants are the Claimants, and the Respondent Paragon is the corporate Defendant and the Respondent Mr. Schlieck is the individual Defendant, in the action between the parties, which was heard on December 10, 2015. [ 3 ] The Applicants assert that Mr.

Schlieck abused the corporate form of Paragon and conducted wrongful or illegitimate acts, thereby committing fraud or something akin to fraud. Mr. Schlieck denies these assertions and opposes the Applicants’ application. [ 4 ] I will first provide a brief background and chronology of key events leading up to this application.

BACKGROUND AND CHRONOLOGY [ 5 ] Beth Israel Synagogue is the owner (the “Owner”) of the property at 989 West 28 th Avenue, Vancouver, British Columbia (the “Property”). [ 6 ] Haebler Construction Projects Inc. dba The Haebler Group (“Haebler”) was the general contractor of the construction project (the “Project”) on the Property.

The Project comprised two components: the synagogue and the parkade. [ 7 ] Haebler engaged Paragon as a subcontractor on the Project. [ 8 ] In turn, Paragon engaged 1 st Shot as a sub-trade to supply and install fire protection at the Property, and entered into a contract with 1 st Shot on or about March 13, 2013. [ 9 ] In compliance with the Builders Lien Act , [ SBC 1997]

Chapter 45 , the Owner withheld a percentage of the funds owed to Haebler, Paragon, 1 st Shot, and other subcontractors on the Project.

I will refer to the portion of the withheld funds due to Paragon as the “Trust Funds” and the portion due to 1 st Short as the “Holdback Funds.” The parties do not dispute that all of these funds were impressed with a trust under the builders’ lien legislative scheme. [ 10 ] On or about September 5, 2014, the Project was declared substantially complete and the funds withheld became payable from the Owner to Haebler on October 31, 2014. [ 11 ] 1 st Shot completed its work on the Project in October, 2014. [ 12 ] 1 st Shot submitted the following invoices to Paragon: No. Invoice No.

Invoice Date Description Invoice Amount 1. 1463 July 20, 2014 Supply and install fire protection $7,285.95 2. 1464 July 20, 2014 Supply and install fire protection $1,134.00 3. 1475 August 20, 2014 Supply and install fire protection $2,168.78 4. 1476 August 20, 2014 Supply and install fire protection $1,701.00 5. 1487 October 21, 2014 Supply and install fire protection $154.98 6. 1488 October 21, 2014 Supply and install fire protection $1,499.72 7. HB-1491 October 21, 2014 Supply and install fire protection $8,199.14 8.

HB-1492 October 21, 2014 Supply and install fire protection $6,317.22 9. 1495 – BC October 30, 2014 Supply and install fire protection – Back charge invoice for Rebar Zone Repair -$10,150.00

TOTAL $18,310.79 [ 13 ] The terms on all invoices were: Net 30 days, 2% per month on overdue accounts. [ 14 ] I will refer to the seventh and eighth invoices listed in the table collectively as the “Holdback Invoices” and the first six invoices listed as the “Outstanding Invoices.” [ 15 ] Haebler required Paragon to sign two declarations covering both components of the Project (collectively, the “Statutory Declaration”) that: “all accounts for labour, subcontracts, products, services and construction machinery and equipment which have been incurred directly by the Subcontractor [i.e.

Paragon] in the performance of the work as required by the Subcontract, and for which the Contractor [i.e. Haebler] might in any way be held responsible, have been paid in full as required by the Subcontract up to and including the latest progress payment received, as identified above [namely, September 25, 2014], except for: 1. holdback monies properly retained, 2. payments deferred by agreement, or 3. amounts withheld by reason of legitimate dispute which have been identified to the party or parties, from whom payment has been withheld.” [ 16 ] On October 30, 2014, Mr.

Schlieck signed the Statutory Declaration declaring that he was an authorized signing officer of Paragon, and as such had the authority to bind Paragon and had personal knowledge of the fact that all accounts referenced in the Statutory Declaration were paid.

He also declared that he was making a “solemn declaration conscientiously believing it to be true, and knowing that it [was] of the same force and effect as if made under oath.” At the hearing of this application, he also acknowledged the notation at the bottom of the Statutory Declaration that “[t]he making of a false or fraudulent declaration is a contravention of the Criminal Code of Canada , and could carry, upon conviction, penalties including fines or imprisonment.” [ 17 ] As a condition to releasing the Trust Funds, Haebler also required Paragon to sign two Waivers of Lien waiving any right that Paragon may have to file any builders’ liens against the Property and also indemnifying Haebler from any builders’ liens that Paragon’s sub-trades or suppliers may file against the Property. [ 18 ] On November 5, 2014, Mr.

Schlieck signed the two Waivers of Lien, as President of Paragon. [ 19 ] On November 5, 2014, Haebler released the Trust Funds to Paragon in the form of two cheques totalling $227,342.72. [ 20 ] From November, 2014 until about mid-February, 2015, 1 st Shot made repeated demands to Paragon for payment of the Outstanding and Holdback Invoices, without success. [ 21 ] On February 19, 2015, the Claimants filed a Notice of Claim in this court against Paragon, as the corporate Defendant, and Mr.

Schlieck, as the individual Defendant, for a total of $18,587.79, comprising the amount of the Outstanding and Holdback Invoices of $18,310.79, and certain allowable costs of $277.00. [ 22 ] On March 30, 2015, the Defendants filed a counterclaim against the Claimants for certain damages, for the small claims maximum amount of $25,000 plus allowable costs. [ 23 ] On December 10, 2015, I presided over the trial of the parties’ claims. Both parties were unrepresented at the trial. At the end of the trial, Mr. Schlieck admitted that Paragon owed the amount claimed by the Claimants.

He also agreed to withdraw the Defendants’ counterclaim. Therefore, I awarded judgment against Paragon only in the amount of $18,723.68, comprising the amount claimed plus court ordered interest (the “2015 Judgment”), with the judgment amount payable in full within one month from the date of the 2015 Judgment, as agreed to by the parties. [ 24 ] As of April 11, 2016, Paragon had not made any payments in satisfaction of the 2015 Judgment. [ 25 ] On April 15, 2016, the Applicants filed this application, and served it on Mr.

Schlieck, as Paragon was dissolved effective February 15, 2016 for failing to file its annual reports as required under the Business Corporations Act, [ SBC 2002]

Chapter 57 (the “ BCA ”). [ 26 ] Then on June 17, 2016, I heard this application. [ 27 ] On this application, in addition to the remedy I mention above, the Applicants sought, in the alternative, pursuant to section 348(3) of the BCA that an order be made to lift the corporate veil of Paragon to enforce liability against Mr.

Schlieck in his capacity as the shareholder of Paragon. [ 28 ] However, at the outset of the hearing, counsel for the Applicants informed me that the Applicants will not be seeking this remedy as this court does not have jurisdiction to grant the remedy because the reference to “court” in section 348(3) of the BCA is to the Supreme Court of British Columbia and not this court.

[29] I will now turn to the issues in this application. ISSUES I. The first issue is whether I have jurisdiction under Small Claims Rule 16(6)(

o) to grant the order the Applicants seek or whether Iam functus officio having rendered the 2015 Judgment. II. If I determine that I am not functus officio, and do have the jurisdiction to grant the order the Applicants seek, then the second issueis whether there is any basis to lift Paragon’s corporate veil and hold Mr. Schlieck liable in his personal capacity as a former director andde facto officer of Paragon. ANALYSIS I. Jurisdiction under Rule 16(6)(o) [30] In Lura v. Jazz Forest Products

(2004) Ltd., 2014 BCPC 14 , 2014 BCPC 0014, at para. 6, the Honourable JudgeSkilnick set out the scope and the requirements of Rule 16(6): [6] Rule 16 (6) of the Small Claims Rules contains a list of the types of orders that a judge may make “after a hearing.” Subsection(

o) gives a judge the power to make “any other order that a judge has the power to make and notice of which is served on anotherparty.” This sub-rule presumes three requirements: 1. The responding party has been served with proper notice of the applicant’s intention to apply for the order 2 There has been a hearing of the application for the order at which both parties have been given the opportunity to make submissions 3 The court must have some specific authority (or “power”) to make the order requested. [31] In this case, Mr.

Schlieck was given proper notice and he attended the hearing of the application at which both parties madesubmissions. Therefore, the first two requirements are met. [32] With respect to the third requirement, I must consider whether the court in this case has the “power” to make the order theApplicants seek or it is functus officio having rendered the 2015 Judgment. [33] The principle of functus officio is discussed at length in Morris v.

Cuttler, 2013 BCSC 96, at paras. 23 to 38. [34] The general rule is that where a final decision of a court has been drawn up, issued and entered, the decision cannot be reopenedand the court is functus officio, unless there has been a mistake in drawing up the order, or there has been an error in expressing themanifest intention of the court. [35] The Newfoundland Court of Appeal in McLean v. Carr Estate (1996), (NL CA), 138 D.L.R. (4th) 541(N.F.C.A.) (application for leave to appeal dismissed [1996] S.C.C.A.

No. 484), at para. 8, explained as follows: [8] The general rule is that a final decision of a court cannot be reopened. The basis of the rule was said to be that the power torehear was transferred by the Judicature Acts to the appellate division. The rule applied only after the formal judgment had been drawnup, issued and entered and was subject to two exceptions; where there had been a slip in drawing it up, and where there was an error inexpressing the manifest intention of the court. (Chandler v. Alberta Association of Architects (1989), (SCC), 99 N.R.277; 101 A.R. 321; 62 D.L.R.(4th) 577 (S.C.C.)).

The majority decision in Chandler expressed the application of the principle asfollows at p. 596: “Furthermore, if the tribunal has failed to dispose of an issue which is fairly raised by the proceedings and of which the tribunal isempowered by its enabling statue to dispose, it ought to be allowed to complete its statutory task.

If, however, the administrative entityis empowered to dispose of a matter by one or more specified remedies or by alternative remedies, the fact that one is selected does notentitle it to reopen proceedings to make another or further selection.” [36] The Newfoundland Court of Appeal, at para. 9, also stated that although the majority decision in Chandler was expressed in thecontext of whether an administrative tribunal was functus officio, the principle applies equally to courts. [37] In British Columbia, the first exception known as the slip up rule is codified in Rule 13-1(17) of the Supreme Court Civil Rules,B.C.

Reg. 168/2009, which reads as follows:

(17) The court may at any time correct a clerical mistake in an order or an error arising in an order from an accidental slip or omission,or may amend an order to provide for any matter that should have been but was not adjudicated on. [38] In the provincial court context, Small Claims Rule 17(14) provides as follows:

(14) A judge may correct an accidental slip or omission in an order and may add provisions on expenses, interest or anything else thatwas not but should have been adjudicated on.

[39] With respect to the second exception, where there has been an error in expressing the manifest intention of the court, which isrelevant to the application before me, the court in McLean v. Carr Estate said: [16] Functus officio means, literally, having discharged his duty.

Determining whether a judge is functus officio involves, in light ofrule 15.07 [*], drawing a line between an omission by the trial judge - a failure to do something which should have been done –and thedischarge of the duty but failing to consider some argument which had someone, whether counsel or judge, thought about it might havehad an impact on the result. The line is not easily drawn. If a court was required to answer four questions, but determined only three,clearly, it would not have done something it was required to do.

The judge would not be functus officio, at least, in respect of the fourthquestion. . . . [*Rule 15.07 read “Clerical mistakes in decisions or orders, or errors arising therein from any accidental mistake or omission, or anamendment to provide for any matter which should have but was not adjudicated upon, may at any time be corrected or granted by thecourt, without appeal.”] [40] In Chandler, (SCC), [1989] 2 S.C.R. 848, the Supreme Court of Canada also noted, at p. 864, that “[o]n thecontinuation of the . . . original proceedings, either party should be allowed to supplement the evidence and make further representationswhich are pertinent to disposition of the matter . . .” [41] In the case before me, the 2015 Judgment was rendered immediately after the trial at which Mr.

Schlieck admitted that Paragonowed the amount claimed by the Claimants. Therefore, judgment was issued only against Paragon. [42] Now, in reviewing the trial record and the 2015 Judgment, I note that the Claimants’ claim against Mr. Schlieck, as a personalDefendant, was not dealt with at the trial. Only the claim against Paragon, as the corporate Defendant, was concluded. Since theClaimants’ initial claim was not fully disposed of, I am satisfied that I am not functus officio and do have the power to determine theliability of Mr.

Schlieck in his personal capacity. [43] Also, the Claimants are still within the statutory time limits to pursue their claim against Mr. Schlieck personally under theBCA, but this would require the parties to litigate in BC Supreme Court at considerable expense. [44] As it is, Mr. Schlieck was not represented by legal counsel at the trial or at the hearing of this application because of Mr.Schlieck’s financial constraints. Mr.

Schlieck is not prejudiced in any way in having all matters between the parties disposed of in thiscourt as he was properly served of this application, and he attended the hearing of this application and also provided further evidence andsubmissions on his own behalf. [45] Also, fully disposing of all of the issues raised by the parties is in keeping with the purpose of the Small Claims Act, [RSBC1996]

Chapter 430, which reads as follows: 2(1) The purpose of this Act and the rules is to allow people who bring claims to the Provincial Court to have them resolved and tohave enforcement proceedings concluded in a just, speedy, inexpensive and simple manner.

(2) Subject to this Act and the rules, in conducting a hearing the Provincial Court may make any order or give any direction it thinksnecessary to achieve the purpose of this Act and the rules. [46] I take further guidance from the Law and Equity Act, [RSBC 1996]

Chapter 253, which applies to all courts in BritishColumbia.

Section 10 of this Act provides as follows: Avoidance of multiplicity of proceedings 10.

In the exercise of its jurisdiction in a cause or matter before it, the court must grant, either absolutely or on reasonable conditionsthat to it seem just, all remedies that any of the parties may appear to be entitled to in respect of any legal or equitable claim properlybrought forward by them in the cause or matter so that, as far as possible, all matters in controversy between the parties may becompletely and finally determined and all multiplicity of legal proceedings concerning any of those matters may be avoided. [47] I now turn to the issue of Mr. Schlieck’s personal liability. II.

Should Paragon’s corporate veil be lifted and liability imposed on Mr. Schlieck personally? The Law: [48] There is no question that, at law, a corporation is a legal entity separate and distinct from its shareholders: Salomon v. Salomon& Co., [1987] A.C. 22 (H.L.). Its separate legal personality will not be lightly disregarded: Edgington v. Mulek Estate, 2008 BCCA 505at para. 21. [49] There has been much judicial and academic discourse on the topic of if and when the corporate veil can be lifted.

The debatehas included the question of whether courts actually possess the common law jurisdiction to lift the corporate veil, and the appropriatetest for lifting the corporate veil apart from the situation where a statute permits the court to lift the corporate veil. [50] I do not intend to engage in any lengthy discussion of the law in this area other than to refer to the settled principles applicableto this case. [51] I have reviewed the authorities the Applicants’ counsel referred me to. I summarize below the relevant principles and grounds: a.

The “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice” [Kosmopoulos v.

Constitution Ins. Co. of Canada, (SCC), [1987] 1 S.C.R. 2, at p. 10; L.C.B. Gower, Modern Company Law (4th ed.1979)]; however, lifting the corporate veil does not extend to circumstances where declining to do so would simply be unfair [Edgingtonv. Mulek Estate, supra]. b. Those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all thatshould only be done in the interests of third parties who would otherwise suffer as a result of that choice [Kosmopoulos; Gower onModern Company Law; supra]. c.

The following grounds may lead to the lifting of the corporate veil [Clarkson Co. Ltd. v. Zhelka, (ON SC), [1967] 2O.R. 565 (H.C.J.), at pp. 17-18]: i. if a company is formed for the express purpose of doing a wrongful or unlawful act; ii. if, after a company is formed, those in control expressly direct a wrongful thing to be done; iii. if a company is a mere agent of a controlling corporator – i.e. the company is a sham, cloak or alter ego, or mere agent for theconduct of the corporator’s personal business; or iv. if a statute specifically provides for the disregard of the company’s separate legal personality.

In these circumstances, the individuals as well as the company are responsible to those to whom liability is legally owed. d. Courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and beingused as a shield for fraudulent or improper conduct. First, “Complete control” requires more than ownership; it must be shown that thereis complete domination. Second, is there “conduct akin to fraud that would otherwise unjustly deprive claimants of their rights”? [Transamerica Life Insurance Co. of Canada v.

Canada Life Assurance Co. (1996), (ON SC), at pp. 433-34 (Gen.Div.), aff’d [1997] O.J. No. 3754 (C.A.)] [52] I will now turn to the parties’ submissions and the evidence, and make my findings. Parties’ submissions, evidence and findings: [53] The Applicants submit that Paragon’s corporate veil should be lifted and liability imposed on Mr. Schlieck personally becauseMr. Schlieck’s conduct during the period in question, that is, October 2014 to November, 2014 (the “Relevant Period”), amounts tofraud or something akin to fraud. They point to the following conduct by Mr. Schlieck: A. During the Relevant Period, Mr.

Schlieck held himself out as the President of Paragon even though filings with the Registrar ofCompanies indicate Mr. Schlieck’s wife as the President of Paragon; Mr. Schlieck in essence was acting as the de facto President ofParagon. B. Mr. Schlieck was in complete control of Paragon in his capacity as sole director and de facto President, and he abused the corporateform by committing the following wrongful acts in the name of Paragon: (

i) making false declarations on October 30, 2014 that all of Paragon’s sub-trades on the Project were paid, when Paragon had not paid 1st Shot and other sub-trades on the Project; (ii) directing Paragon to willfully and deliberately breach its contract with 1st Shot by failing to cause Paragon to pay 1st Shot for eitherthe Outstanding Invoices or the Holdback Invoices; (iii) directing Paragon to use the Trust Funds for its own benefit rather than for the benefit of the sub-trades, including 1st Shot, forwhom the funds were earmarked; and (iv) knowingly allowing Paragon to be dissolved when there is an outstanding judgment against Paragon.

C. Mr. Schlieck misappropriated the Trust Funds and Paragon’s assets for his personal benefit by: (

i) withdrawing at least $10,000 from the Trust Funds in Paragon’s main bank account at Canadian Western Bank (the “BankAccount”) for his personal use; and

(ii) distributing Paragon’s assets to himself in anticipation of Paragon’s dissolution and for the purpose of avoiding the judgment debt owed to 1 st Shot. [ 54 ] Mr. Schlieck submits that he did not commit fraud or anything amounting to fraud. At most, he says, he may have been negligent, but that he had no intention to defraud anyone. [ 55 ] I will now address Mr. Schlieck’s conduct that the Applicants complain of. A. Representation as President of Paragon [ 56 ] Mr.

Schlieck does not dispute that he was acting as President of Paragon even though the filings with the Registrar of Companies show that his wife was the named President of Paragon. He says he did not pay attention to the administrative details. [ 57 ] The evidence is clear, as discussed below, and I find that Mr. Schlieck was acting as de facto President of Paragon. B. Was Mr. Schlieck in complete control during the Relevant Period? [ 58 ] Mr. Schlieck’s evidence is as follows: • Paragon was founded in 1988; • Mr.

Schlieck was not involved in Paragon’s day-to-day activities; • his wife was the director of Paragon until October 10, 2013, when she ceased to be a director and Mr.

Schlieck became the sole director, as confirmed by the Notice of Change of Directors filed with the Registrar of Companies on October 31, 2013; • Paragon had two employees: a project manager who was active in managing projects on a day-to-day basis; and a part-time bookkeeper, who was a trusted long-time employee; • he met with the two employees on a monthly basis; • Paragon ran into financial difficulty in 2013; and • Paragon’s operations ceased in November, 2014 and the two employees were relieved at that time. [ 59 ] I do not accept Mr.

Schlieck’s claim that he was not active in the day-to-day operations of Paragon.

I find that he was in complete control of Paragon at least during the Relevant Period as the evidence establishes that he was actively dealing with Paragon’s financial difficulties, including Paragon’s fast diminishing work, the Canada Revenue Agency’s “sizeable (5 digit) dispute,” the lack of Paragon’s operating line of credit with its Bank, the mounting complaints from Paragon’s sub-trades on the Project about unpaid invoices, and the signing of the paperwork to have the Trust Funds released from Haebler and disbursing them. [ 60 ] In addition to Mr. Roche’s affidavit evidence and Mr.

Schlieck’s oral testimony, various email communication, correspondence and documentation entered in evidence support my finding that Mr. Schlieck was active and in complete control of Paragon, at least during the Relevant Period, even though the project manager and the part-time bookkeeper may have assisted in Paragon’s day-to-day operations until they were relieved in November, 2014. Did Mr. Schlieck abuse the corporate form of Paragon? (

i) Did Mr. Schlieck make false declarations? [ 61 ] Mr.

Schlieck insists that he did not make any false declarations. [ 62 ] His evidence is as follows: • Paragon’s project manager approved sub-trades’ invoices; • invoices were paid on a monthly basis; • he checked with the bookkeeper for amounts outstanding; • 1 st Shot’s Outstanding Invoices No. 1487 and 1488, dated October 21, 2014, were not due on October 30, 2014 when he signed the Statutory Declaration, as they had a net-30-days term; • 1 st Shot’s Outstanding Invoices dated July 20, 2014 and August 20, 2014 were held back until the damage claim on the parkade work, that is, the rebar zone repair, was resolved; • the parkade damage claim was not resolved until October 30, 2014 when 1 st Shot credited Paragon with $10,150.00, as noted on the Back Charge Invoice No. 1495-BC, dated October 30, 2014; and • on October 30, 2014, he was aware that Paragon was in financial difficulty and there were a number of invoices outstanding at that time. [ 63 ] Mr.

Roche’s evidence is that as at October 30, 2014, the July and August, 2014 invoices were clearly outstanding, and the

parkade damage claim was also resolved by October 24, 2014 as noted on the CBI Zone Repair Final Costs

Summary that 1 st Shot faxed to Paragon. [ 64 ] Also, Mr. Roche says, as at October 30, 2014, there were many other sub-trades that remained unpaid, as noted on the List of Outstanding Sub-trades (the “List”) that Haebler prepared and provided to 1 st Shot.

The List notes that the sub-trades listed are only the known outstanding sub-trades, suggesting that there could be others that Paragon has not yet paid. [ 65 ] According to the List, the outstanding invoices total $240,857.51; after the holdback amount of $78,276.01 noted on the List, there still remains outstanding $162,581.50 that Paragon owes to various sub-trades. [ 66 ] Mr.

Schlieck disagrees with this List, both in terms of the sub-trades listed and the amounts shown as outstanding. 1 st Shot’s response is that Haebler compiled this List from complaints received from various sub-trades and there is no reason why Haebler would provide incorrect information. [ 67 ] Mr. Roche refers to a letter dated November 21, 2014, addressed to Paragon, to the attention of Mr. Schlieck, in which Ms. Sarah Verweij, Jr.

Project Manager of Haebler, states: Haebler is very concerned that you no longer have the intention to follow through with your obligations at Beth Israel Synagogue. . . .We have also been contacted by some of your sub-trades who have stated you have not paid them their lien holdback funds and are threatening to lien the project. This needs to be dealt with immediately. [ 68 ] Mr. Schlieck admits he received this letter. [ 69 ] Also, the email exchange on November 26 and 27, 2014 between Mr. Roland Haebler, M.A.Sc., P.Eng., the owner of Haebler, and Mr.

Schlieck sheds some light on the status of the outstanding payments to sub-trades as at October 30, 2014, when Mr. Schlieck signed the Statutory Declaration: On November 26, 2014, Mr. Haebler writes: Hi Peter, I am sorry to hear that Paragon Mechanical seems to be closing down its doors. I was hoping that you would have had the courtesy to have called me back. We are very concerned that you appear to have misused the lien holdback funds and also falsely provided us with Statutory Declarations.

Your trades and suppliers are threatening not to return to the site to complete their work since you have not paid them their lien holdback money, and DDC Controls has also made numerous threats, including filing of liens, as had your sprinkler trade. [my emphasis] The misuse of the lien funds is a very serious matter, and I am hoping to avoid having to get involved in legal proceedings, . . . [my emphasis] On November 27, 2014, at 9:50 a.m., Mr. Schlieck writes: Hi Ronald, Sorry for my lack of response, I am trying to deal with a situation that I am not used to.

We are actually seeking ways to continue business, which to a large degree depends on our ability to secure work after we had put all our eggs into the “Haebler basket” for too long and not getting any contracts out of John’s work on your projects. . . . I am currently reviewing subtrade payments and so far I can confirm that no statutory declarations have been made falsely.

The reason why subtrades may have not received full payment, other than the lien holdback, could be either the fact that their claims were not due or not even received by the time the last statutory declaration was issued, or that a deficiency holdback was applied in accordance with the list received through Haebler . [my emphasis] On November 27, 2014, at 3:00 p.m., Mr. Haebler responds: I can well understand that this is not a pleasant situation for you, but I am not sure I agree with your opinion on the stat decs.

We are told many of your trades have outstanding invoices from July, and it also appears that you have not paid your trades their lien holdback money which is a very serious offense . [my emphasis] . . . I also need a response from you as to how you intend to complete the work remaining under your contract. The problem we have is some of your trades are refusing to return to the site. In addition, DDC Controls made a threat yesterday that since they are owed so much money (we are told over $40,000) that unless they are paid something shortly they may turn off the heat!

I was also told that First Short have filed a lien, and we are being told that others may follow suit. [ 70 ] DDC Systems is one of Paragon’s sub-trades shown on the List as being owed a total of $40,042.51. [ 71 ] In this email exchange, Mr. Schlieck acknowledges the existence of a list that Haebler prepared, but it is not clear whether it is the same List that is in evidence. At the hearing, Mr.

Schlieck claimed to have never seen any list prepared by Haebler and questioned the accuracy of the contents of the List. [ 72 ] However, what is clear is that there were a number of sub-trades that were not paid for their work or the holdback funds due to them, resulting in threats to file liens against the Property. I do not find Mr. Schlieck’s explanation to Mr. Haebler that the sub-trades’ “claims were not due or not even received by the time the last statutory declaration was issued” very convincing. [ 73 ] This would be an appropriate point in my reasons to comment on Mr. Schlieck’s credibility.

Credibility assessment : [ 74 ] In short, I found Mr. Schlieck’s testimony untrustworthy and unreliable in many respects. [ 75 ] Throughout his testimony, he was evasive. The Applicants’ counsel had to ask the same question in various forms to try to get a straight answer from Mr. Schlieck. In spite of that effort, and at times also with the court’s direction, Mr.

Schlieck still failed to answer the questions in a direct manner. [ 76 ] Often he claimed he could not remember the events from 2014 or seen some of the key documents, including 1 st Shot’s Invoices, but he adamantly insisted that he did not sign any false declaration or do anything that would amount to fraud or something akin to fraud. [ 77 ] His testimony was also inconsistent on many points. For example, when asked whether he was aware there were a number of outstanding invoices and whether he reviewed them before he signed the Statutory Declaration, he had different answers.

He said: he could not remember because it was a stressful time for him and it was almost two years ago; he relied heavily on his employees; he asked his bookkeeper as to the amounts outstanding; he was aware there were a number of outstanding invoices as at October 30, 2014; he reviewed all the invoices; he was not aware Paragon owed money to other sub-trades; he checked to make sure that Paragon had no outstanding payables to sub-trades. [ 78 ] Some of these statements are internally inconsistent and are also externally inconsistent with the documentary evidence, including the various communications from Haebler. [ 79 ] Mr.

Schlieck was also evasive and imprecise when questioned about his personal financial information, such as the extent and source of his income, and his assets and other business interests. [ 80 ] Also, he would not give a clear explanation as to what happened to the Trust Funds of $227,342.72, which Paragon received from Haebler on November 5, 2014. [ 81 ] There are many other examples of Mr. Schlieck’s evasive and untrustworthy testimony. What is striking is Mr.

Schlieck never produced any documentation relevant to the issues at hand in spite of having been requested to do so by 1 st Shot, and also ordered by this court to do so. He was in clear breach of a court order, but that did not seem to faze him. [ 82 ] Now, getting back to whether Mr. Schlieck made the Statutory Declaration falsely, the Applicants argue that by the time Mr. Schlieck signed the Statutory Declaration on October 30, 2014, Paragon was in extreme financial distress and it was in desperate of need of the funds from Haebler. Therefore, they say there are only two possibilities:

(1) Mr. Schlieck was aware of the Outstanding Invoices; or (2) he did not care to look into the Outstanding Invoices because he had no intention of paying them; either way, he was going to, and did, sign the Statutory Declaration to get the funds from Haebler to relieve some of the financial pressure. [ 83 ] The evidence is clear that Mr. Schlieck was dealing with mounting financial pressure; Paragon’s operating line of credit had

been cancelled and its Bank Account was in a negative balance; and he needed the funds from Haebler. His desperation is reflected, in the aftermath of the collapse of Paragon’s business, in his email of December 8, 2014 to Mr. Haebler, in which he states: After CRA froze our account because of a sizeable (5 digit) dispute amount and our bank cancelled our 300,000 operating line, we are left with no cash reserves to remove the liens . . . If it is helpful: Without having precise numbers available, it appears that First Shot’s claim is about right, except deficiencies from your deficiency list.

The same is true for Apollo, there are substantial deficiency holdbacks. DDC Systems claim seems to be overstated by about 10,000 . . . Despite the fact that, between the bank’s and CRA’s action, we have been severely disabled, I have put my (not Paragon owned) warehouse on the market to raise capital. Meanwhile I can only ask for patience until we have something to offer. [ 84 ] In this email, Mr.

Schlieck acknowledges that at least three of Paragon’s sub-trades, 1 st Shot, Apollo and DDC Systems were owed money and liens had been filed on title to the Property by some of the sub-trades. [ 85 ] The preponderance of the evidence before me leads me to the conclusion that Mr. Schlieck knew there were a number of unpaid sub-trades when he signed the Statutory Declaration on October 30, 2014; some invoices may have been disputed, but there were others that were outstanding. [ 86 ] Therefore, I find that Mr. Schlieck did make the Statutory Declaration falsely. (ii) Did Mr.

Schlieck direct Paragon to willfully and deliberately breach its contract with 1 st Shot? [ 87 ] There is no dispute that Paragon received the Holdback Funds from Haebler, and the two cheques representing all of the Trust Funds, including the Holdback Funds, were deposited into Paragon’s Bank Account on November 5, 2014. [ 88 ] Since none of the Outstanding or Holdback Invoices have been paid, and I have found that Mr. Schlieck was in complete control of Paragon during the Relevant Period, I find that Mr. Schlieck directed Paragon to willfully and deliberately breach its contract with 1 st Shot. (iii) Did Mr.

Schlieck direct Paragon to misuse the Trust Funds for Paragon’s own benefit? [ 89 ] Mr. Schlieck’s evidence is as follows: • in 2013, the Bank had closed Paragon’s operating line of credit; • at the time the Trust Funds were deposited into Paragon’s Bank Account, the Account was in a negative balance due to Paragon’s obligations unrelated to the Project; • corporate payroll and other cheques for payment of Paragon’s suppliers that had been written by the bookkeeper were released for payment, and were processed through Paragon’s Bank Account; and • some time in October/November, 2014, Mr.

Schlieck also authorized payment of a $50,000 credit card balance that Paragon’s bookkeeper had incurred on her personal credit card towards payment of Paragon’s suppliers. [ 90 ] All of these transactions resulted in a continual depletion of the Trust Funds in Paragon’s Bank Account. [ 91 ] Mr.

Schlieck stated that he was negligent in managing the affairs of Paragon. [ 92 ] He admitted that the Trust Funds were used to pay some of Paragon’s suppliers unrelated to the Project and that they should not have been paid. [ 93 ] He said he did not review the bookkeeper’s credit card statement to see if there were any of her personal charges on that statement because she was a long-time, loyal employee, and he implicitly trusted her. He did not produce the credit card statement or any other documentary evidence in this respect. [ 94 ] Mr.

Schlieck admitted it was probably wrong of him to have authorized payment of the bookkeeper’s credit card balance of $50,000. He also admitted that the bookkeeper’s personal charges could have been on that statement, but he still approved payment. [ 95 ] He said it was important for him to ensure that the bookkeeper was repaid as she was a long-time, loyal employee. However, there is no indication that he felt the same sense of obligation to ensure that 1 st Shot and Paragon’s other sub-trades were paid.

In fact, the evidence of his conduct establishes quite the contrary – that he had no intention at all of paying 1 st Shot, and most likely none of the other sub-trades either.

[ 96 ] Therefore, I find that Mr. Schlieck directed Paragon to misuse the Trust Funds for Paragon’s own benefit. (iv) Did Mr. Schlieck knowingly allow Paragon to be dissolved? [ 97 ] Mr. Schlieck’s evidence is as follows: • he received an invoice and notification from Paragon’s corporate solicitors regarding the filing of Paragon’s annual reports; • he did not follow up on the filing of the annual reports; • he was not aware that Paragon was going to be dissolved; and • he did not pay attention to Paragon’s dissolution. [ 98 ] Mr.

Schlieck stated that he was negligent in not following up on the filing of Paragon’s annual reports, which led to the dissolution of Paragon. However, I do not accept that Paragon was dissolved due to Mr. Schlieck’s mere negligence. [ 99 ] In light of the overwhelming evidence before me regarding Paragon’s extreme financial troubles, lack of business, and Mr.

Schlieck’s deliberate conduct in terms of his disregard for his creditors, I find that he knowingly allowed Paragon to be dissolved in an effort to keep his creditors at bay, risking only the resolute ones, such as the Applicants, to pursue Paragon and/or him in his personal capacity. [ 100 ] Based on the wrongful acts I have found Mr. Schlieck to have committed in the name of Paragon, I find that he abused the corporate form of Paragon. C. Did Mr. Schlieck misappropriate the Trust Funds and Paragon’s assets for his personal benefit? [ 101 ] Mr.

Schlieck’s evidence is as follows: • Paragon had no work after November 4, 2014; • he put $50,000 of his personal funds, which he received from Germany as an inheritance, into Paragon as a shareholder loan; • during the Relevant Period, he withdrew $10,000 from Paragon’s Bank Account as repayment of a portion of his shareholder loan; • Paragon’s Bank Account has since been closed; • he received a salary from Paragon about five years ago, but did not receive any salary, dividends or other benefits from Paragon during the Relevant Period; • he did not receive any monies from Paragon after November, 2014; • for the last three years, he reported zero income in his personal income tax returns; • he had about $100,000 of living expenses on his credit cards; • during 2013 and 2014, he also worked as a flight instructor through another company in which he had a business interest; • he has business interests through other corporations; he is the sole shareholder of one of the corporations which owned two pieces of real property; he sold one of these properties to satisfy bank loans and the other is currently mortgaged, with a remaining equity of about $100,000; • he also sold some collectors’ items to raise funds; • in the course of Paragon’s dissolution, he transferred ownership of a smart car from Paragon to himself for a nominal value; and • he still has some of Paragon’s hand tools worth about $5,000 or less. [ 102 ] Throughout the questioning regarding Mr.

Schlieck’s personal financial circumstances, Mr. Schlieck was evasive and imprecise in his answers as to details of dates, amounts, and sources of income and assets. He did not provide any documentary evidence to support any of his statements. (

i) Did Mr. Schlieck misappropriate the Trust Funds for his personal benefit? [ 103 ] Mr. Schlieck admitted that during the Relevant Period, he withdrew $10,000 from Paragon’s Bank Account as repayment of a portion of his shareholder loan. At the time, this amount was withdrawn, the only funds in Paragon’s Bank Account were the Trust Funds. [ 104 ] Mr. Schlieck said that this Account was closed, but was not clear as to when it was closed.

I can only assume that it was closed soon after Paragon ceased operations in November, 2014. [ 105 ] There is no accounting of the whereabouts of the Trust Funds, other than for the following payments: $10,000 to Mr. Schlieck, $50,000 to the bookkeeper, Paragon’s payroll and certain suppliers’ invoices.

[ 106 ] In spite of repeated questioning as to what happened to the balance of the Trust Funds, Mr. Schlieck provided no clear answer. He said he could not remember. He did not produce Paragon’s, or his personal, bank statements in spite of having been ordered to do so. [ 107 ] He did not say that any of the Trust Funds were distributed to any of the sub-trades. Therefore, one is left to wonder whether the balance of the Trust Funds were also distributed for Paragon’s and/or Mr. Schlieck’s benefit, as Mr.

Schlieck alone was in complete control of Paragon at that time. [ 108 ] Regardless of the purpose or the quantum (i.e. be it $1.00 or the full amount of $227,342.72) of the Trust Funds that was distributed, any distribution to anyone, other than the intended beneficiaries (i.e. the sub-trades), amounts to a breach of trust and is clearly a misappropriation. [ 109 ] Therefore, I find that Mr. Schlieck knowingly misappropriated a portion of the Trust Funds for his personal benefit. (ii) Did Mr. Schlieck distribute Paragon’s assets to himself in anticipation of Paragon’s dissolution? [ 110 ] Mr.

Schlieck admitted that he transferred the smart car from Paragon to himself and that he still has some of Paragon’s hand tools worth about $5,000 or less. It is not clear what other assets Paragon had at the time of its dissolution as Mr. Schlieck never produced any of Paragon’s financial statements in spite of having been ordered to do so. [ 111 ] I have found above that Mr. Schlieck knowingly allowed Paragon to be dissolved in an effort to keep its creditors at bay, including 1 st Shot as a judgment creditor.

Even in that context rather than disposing of any remaining assets of Paragon and satisfying its creditors to the extent possible, Mr. Schlieck chose to distribute the assets to himself, which I find is clearly a misappropriation. [ 112 ] I now turn to whether Mr. Schlieck’s conduct as a whole, as discussed above, amounts to fraud or something akin to fraud. Did Mr.

Schlieck commit fraud or something akin to fraud? [ 113 ] The Black’s Law Dictionary defines the term “fraud” as follows: Fraud consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional. . . . Fraud, as applied to contracts, is the cause of an error bearing on a material part of the contract, created or continued by artifice, with design to obtain some unjust advantage to the one party, or to cause an inconvenience or loss to the other. . . .

Fraud, in the sense of a court of equity, properly includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another. [ 114 ] In this case, Paragon owed to 1 st Shot a legal duty in contract and a fiduciary duty in trust as trustee of the Holdback Funds. As an experienced business person in the construction industry operating Paragon for about 28 years, and as a director and de facto officer of Paragon, I find that Mr.

Schlieck knew, or ought to have known, that these duties existed and that any breach of such duties would cause a loss or be injurious to 1 st Shot. [ 115 ] In spite of these duties, the evidence establishes that Mr.

Schlieck knowingly caused Paragon to breach its legal and fiduciary duties to 1 st Shot, thereby failing in his duty as a director to act honestly and in good faith and in the best interest of Paragon. [ 116 ] By misappropriating a portion of the Trust Funds for his own use, he personally benefitted at the expense of the sub-trades, including 1 st Shot. [ 117 ] By misappropriating some of Paragon’s assets for his own use, he personally benefitted at the expense of Paragon and its creditors, including 1 st Shot. [ 118 ] So, does Mr.

Schlieck’s conduct as a whole amount to fraud or something akin to fraud? [ 119 ] There is only one standard of proof in civil cases and that is proof on a balance of probabilities (i.e. Is it more likely than not?): F.H. v. McDougall, 2008 SCC 53 , at para. 40 . [ 120 ] Although Mr. Schlieck claimed he was negligent in carrying out some of his actions and that he did not intend to defraud anyone, I am not persuaded. [ 121 ] Even if any credence is given to Mr.

Schlieck’s submission that he did not intentionally make the Statutory Declaration falsely, there is no mistaking that he knowingly misappropriated a portion of the Trust Funds and some of Paragon’s assets for his personal use when Paragon was unable to meet its financial obligations to third parties. [ 122 ] I find that he was deliberate in his actions and he knew exactly what he was doing. [ 123 ] I am satisfied that the Applicants have led clear and cogent evidence to demonstrate that, on a balance of probabilities, Mr.

Schlieck’s conduct as a whole amounts to fraud or something akin to fraud. [ 124 ] Therefore, based on the totality of the evidence before me, I find that Mr. Schlieck did commit fraud or something akin to fraud. CONCLUSION [ 125 ] Based on my finding that Mr. Schlieck did commit fraud or something akin to fraud, I conclude that the corporate veil of

Paragon should be lifted and liability imposed on Mr. Schlieck in his personal capacity as a former director and de facto officer of Paragon. [ 126 ] It would be flagrantly opposed to justice or a grave miscarriage of justice if Mr. Schlieck were allowed to benefit from his misdeeds at the expense of Paragon and 1 st Shot, and possibly others such as the other sub-trades. ORDER [ 127 ] The Applicants’ application is granted. The 2015 Judgment will also stand, with the effect that now both Paragon and Mr.

Schlieck in his personal capacity are jointly and severally liable to the Applicants/Claimants for the amount of $18,723.68. I also order interest pursuant to the Court Order Interest Act, [ RSBC 1996]

Chapter 79 , from December 10, 2015. [ 128 ] I direct that this matter now be set for a payment hearing on the first available date unless prior to that court date, the parties are able to come to an agreement for payment of the judgment debt. By the Court, The Honourable Judge V. Chettiar Provincial Court of British Columbia