1719349 Alberta Ltd. Plaintiff/Applicant - v. -, 2023 ABKB 207

Court of King’s Bench of Alberta Citation: 1719349 Alberta Ltd v 1824766 Alberta Ltd, 2023 ABKB 207 Date: 20230412 Docket: 2101 04454 Registry: Calgary Between: 1719349 Alberta Ltd. Plaintiff/Applicant - and - 1824766 Alberta Ltd., Afshin Devani, Kelly Devani, Michael Cain, Giovanna Cain, and the Owners of Condominium Plan 1513354 Defendants/Respondents _______________________________________________________ Reasons for Decision of the Honourable Justice S.M.

Bensler _______________________________________________________ Introduction [ 1 ] This is an application by 1719349 Alberta Ltd. (“171”) seeking leave to pursue a derivative action on behalf of the corporation 1824766 Alberta Ltd (“182”). Leave to pursue a derivative action is an equitable remedy requiring the court to consider and apply both the factual matrix and weigh several factors: Meyer v Altex Energy Ltd , 2021 ABQB 582 [ Meyer ], at para 1 .

[ 2 ] In response, the Respondents seek to dismiss the application. Two of the Respondents, Michael Cain and Giovanna Cain (Collectively, the “Cains”) also applied seeking

summary judgment dismissal from this claim, arguing they were improperly named. [ 3 ] For the reasons that follow, I dismiss 171’s application. Background [ 4 ] As is typically the case in real estate development deals, the factual matrix underlying this application is complex. As there are many interlocking players and parts, the following is a

summary of the various parties and events leading up to this application. A. The Tuxedo Project [ 5 ] The underlying background setting up the present application comes from an attempted real estate development deal in northeast Calgary in 2014. [ 6 ] Afshin Devani, Norman Anderson and Keith Thomas discussed working to build a residential development consisting of four condominium units, what became the “Tuxedo Project”. [ 7 ] 182 was caused to be incorporated, intended to be the investment vehicle and registered title holder of the lands relating to the Tuxedo Project. Mr. Anderson and Mr.

Thomas invested through the 171 corporation, while Mr. Devani was investing through 182. [ 8 ] Mr. Devani was the president of 182 while he and Mr. Anderson were both directors. 171 and Mr. Devani were shareholders in 182. Mr. Devani held all the voting shares in 182. Mr. Thomas was at this time also the construction manager of BMP Construction Management Ltd. (“BMP”). [ 9 ] On August 14, 2014, 182 and 171 entered into a financial lending agreement for the Tuxedo Project (the “Agreement”).

Under the Agreement: - 171 would advance a revolving line of credit up to a maximum of $200,000; - 182 agreed to retain the services of BMP; - 182 would provide 171 security which included:

a) a director’s resolution of 182, authorizing 182 to enter into the Credit Facility and the Security Documents;

b) promissory notes from 182 in favour 171; and

c) an undertaking by 182 to provide an update of the construction and report on all advances to 171. There is no evidence of any other signed written agreement between 171 and 182 related to the Tuxedo Project. [ 10 ] As mentioned under the Agreement, 182 engaged BMP as the general contractor pursuant to a Construction Management Contract. The maximum price for the development of the Tuxedo Project in the Construction Management Contract was for $1,877,596. [ 11 ] BMP began work on the Tuxedo Project around November 2014. The construction of the Tuxedo Project was completed around 2015.

Around December 22, 2015 some subcontractors who had worked on the project had not been paid. [ 12 ] Total development for the Tuxedo Project was overbudget, with an estimation by Mr. Devani that it exceeded $1,236,003. BMP demanded payment from 182 by June 2016, and to this day is still owed money from 182 for its work on the project. By July 2016, various subcontractors were also demanding payment from 182. B. Sale of the 442 Units to the Cains [ 13 ] The Tuxedo Project yielded 4 units.

Two of them were Unit 1 and Unit 2 of what were known as the “442 Units” and two were Unit 1 and Unit 2 of the “444 Units”. [ 14 ] Michael Cain, a real estate agent and friend of Mr. Devani, entered into a purchase agreement with 182 for Unit 2 of the 442 Units on January 20, 2016. [ 15 ] On May 6, 2016, Giovanna Cain, Mr.

Cain’s spouse, entered into a purchase agreement with 182 to purchase Unit 1 of the 442 Units. [ 16 ] These units were ultimately purchased for the sums of $423,775.50 and $420,793.50 respectively, although originally all four units in the Tuxedo Project had sale agreements stating that the original purchase price was for $599,900.00. The proceeds from these sales were paid to 182. [ 17 ] There was no caveat or other interest registered by 171 on title to the 442 Units. [ 18 ] The proceeds of the sale of the 442 Units were used, in part, to pay out the mortgages to Chinook Financial in the amount of $734,250.

The remainder was sent to Mr. Anderson’s law firm, in trust, so as to pay builders’ liens that had been registered on the Tuxedo Project. Mr. Anderson admitted that the firm did receive this sum which was used to pay registered builders’ liens and to pay

BMP after the closing of the sale. [ 19 ] The Cains state that they would not have purchased the 442 Units were there not an adjustment made to the sale price of the units, in part, they claim, due to the depressed real estate market at the time. [ 20 ] An independent appraiser, Curtis Pittman, appraised the units and in his view the market values of Unit 1 and 2 of 442 on May 15, 2016, was $465,000 and $455,000 respectively. C. Sale of the 444 Units to Mrs. Devani [ 21 ] On June 21, 2016, Kelly Devani, the spouse of Mr.

Devani, entered into two separate Residential Purchase Contracts with 182 for the purchase of Units 1 and 2 of the 444 Units. Mrs. Devani paid $430,399 and $429,600 for Units 1 and 2 of the 444 Units respectively. [ 22 ] Mr. Pittman’s appraisal of these units found that Unit 1 and Unit 2 would have the market values of $465,000 and $455,000 respectively. D.

Positions of the Parties [ 23 ] 171 is bringing this application for leave to commence and prosecute a derivative action on behalf of 182 seeking, amongst other things, a declaration that 182 and 171 are entitled to constructive trusts against each of the development project lands; a full accounting of the net proceeds; judgment against the Respondents for the purchases of the Units in question. [ 24 ] The Respondents argue that this is not an appropriate case for a derivative action stating that this application is not being brought in good faith and that it is not in the best interests of the corporation to allow this derivative action. [ 25 ] The Cains in their own application seek

summary judgment to remove themselves from the leave application as they claim they are not properly named as they were bona fide purchasers for value without notice and that they were not party to any agreements at issue here. Analysis A. Statutory Framework [ 26 ] There is common ground between the parties that

section 240 of the Alberta Business Corporations Act , RSA 2000, c B-9 applies when seeking leave to commence a derivative action. The relevant provisions are as follows: Commencing derivative action 240(1) Subject to subsection (2), a complainant may apply to the Court for permission to (

a) bring an action in the name and on behalf of a corporation or any of its subsidiaries, or (

b) intervene in an action to which a corporation or any of its subsidiaries is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation or subsidiary.

(2) No permission may be granted under subsection (1) unless the Court is satisfied that (

a) the complainant has given reasonable notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the Court under subsection (1) if the directors of the corporation or its subsidiary do not bring, diligently prosecute, defend or discontinue the action, (

b) the complainant is acting in good faith, and (

c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.

(3) Notwithstanding subsection (2), when all the directors of the corporation or its subsidiary have been named as defendants, notice to the directors under subsection (2)(

a) of the complainant’s intention to apply to the Court is not required. Powers of the Court 241 In connection with an action brought or intervened in under

section 240 or 242(3)(q), the Court may at any time make any order it thinks fit including, without limiting the generality of the foregoing, any or all of the following: (

a) an order authorizing the complainant or any other person to control the conduct of the action; (

b) an order giving directions for the conduct of the action; (

c) an order directing that any amount adjudged payable by a defendant in the action shall be paid, in whole or in part, directly to former and present security holders of the corporation or its subsidiary instead of to the corporation or its subsidiary;

(

d) an order requiring the corporation or its subsidiary to pay reasonable legal fees incurred by the complainant in connection with theaction. [27] As described in Black Fluid Inc v Opulence Clothing Inc, 2014 ABQB 138 [Black Fluid], at paras 20-23, there are fourstatutory tests that must be met to be granted leave to bring a derivative action. First, the applicant must meet the requirements to be a“complainant” under the act. Second, adequate notice to the directors of the corporation must have been given. Third, the complainantmust be acting in good faith in bringing the application.

Fourth, the court must be satisfied that this action would be in the best interestsof the corporation. [28] It is accepted by both parties that 171 is properly a complainant for the purposes of the Business Corporations Act. It is alsoaccepted that notice was appropriately given in this application. [29] What is at issue is whether this application is being brought in good faith and whether it is in the best interests of thecorporation to allow this application for leave. B.

Is 171 Acting in Good Faith? [30] The criterion of good faith was described by our court of appeal in Valgardson v Valgardson, 2012 ABCA 124 [Valgardson]as follows: [20] The question of good faith requires the court to ensure that the proposed action is not frivolous or vexatious: Acapulco at para 17;First Edmonton Place Ltd v 315888 Alberta Ltd, (AB KB), [1988] AJ No 511 at para 67, 60 Alta LR (2d) 122, 40 BLR28 (QB). There is both a subjective and objective component to the requirement of good faith. The subjective aspect requires that theapplicant believes the proposed derivative action has merit.

This guards against actions spurned by self-interest or private vendetta. Buteven where the applicant believes that the proposed action has merit, the court must still consider whether objectively viewed the actionis not frivolous and vexatious. [...] [22] The primary concern when determining the existence of good faith is whether the proposed derivative action is frivolous andvexatious. The chambers judge was concerned that the derivative actions were inconsistent with one of the terms of the SettlementAgreement which contemplated the dissolution of Rivers and the liquidation of its assets.

There was evidence before the chambers judgeshowing that most of the steps had been taken except for the dissolution of the corporation. The derivative actions would delay orpotentially prevent this. The

interpretation and scope of the Settlement Agreement is one of the main issues in the derivative actions, atleast with respect to the claims advanced on behalf of Rivers. While the claims might ultimately be inconsistent with the SettlementAgreement, the chambers judge acknowledged that the effect of the “sophisticated” settlement agreement would not be resolved by achambers application. [31] The Respondents argue that this application is actually a “personal vendetta” by Mr. Thomas against Mr. Devani, and that Mr.Thomas and Mr. Anderson are seeking amounts owed by 182 to BMP, and not amounts owed to 171.

The Respondents cite for examplethat in cross-examination Mr. Thomas responded that he did not sign an agreement related to the Tuxedo Project by saying “I trusted theson of a bitch”. [32] The Respondents also note that during the time of the development of the Tuxedo Project and the sales of the unit, Mr.Thomas was not involved with 171, being instead the construction manager for BMP. The Respondents argue that Mr.

Thomas’sevidence appears to be solely based on information from legal counsel. [33] The Applicant, on the other hand, cites Valgardson’s statement on good faith as well as the discussion of case law in Meyer.171 argues that there is no plausible explanation being put forward by the Respondents for the reduction in the price of the units, andthus the good faith requirement is met. [34] It is not fully clear how this argument from the Applicant follows.

However, it is apparent from the case law that a certainlevel of self-interest is permissible, so long as consonant with the interests of the corporation, Meyer at para 52. Further, animosity aloneis not enough to determine that a complainant is not acting in good faith; see Black Fluid at para 22 and Meyer at para 56. [35] From the evidence presented, it does not appear that this application is frivolous or vexatious, nor do the comments by Mr.Thomas raise this to a level suggesting bad faith. As such, 171 meets the good faith requirement for leave. C.

Best Interests [36] The final consideration, and where this application fails, is whether the proposed derivative action is in the best interests ofthe corporation. [37] To determine whether the proposed derivative action is in the best interests of the corporation requires a balancing exercise tobe undertaken.

As stated in Kevin P McGuiness Canadian Business Corporations Law, Third Edition (Volume Three), (Toronto, Ont:LexisNexis, 2017): §22.184 Granting leave to commence a derivative action is a discretionary remedy arising out of equitable principles rather than a legalone arising out of principles of common law. A second is that a cost/benefit analysis has, from the beginning, been part of the analysisthat is required in determining whether a particular derivative action appears to be in the best interests of corporation.

Indeed, the notionof the cost/benefit assessment can be found in much other case law relating to shareholder remedies.

This quote offers a helpful

summary of the approach taken by courts in Alberta while handling the question of best interests undersection 240 of the Business Corporations Act. [38] What must be considered when determining the best interests of the corporation for a leave to commence a derivative action isably canvassed by Justice Veit in Black Fluid, at paras 23-29. [39] It is well accepted that “[...] it will never be in the interests of a corporation to initiate or prosecute an action which is doomedto fail.”: Black Fluid, at para 25. [40] The analysis does not end, however, solely at demonstrating that the proposed application is not bound to fail.

As the SupremeCourt of Canada stated in BCE Inc v 1976 Debentureholders, 2008 SCC 69 [BCE] at para 43 in relation to the near identical provisionin the Canadian Business Corporations Act, RSC 1985, c C-44: [43] The first remedy provided by the CBCA is the s. 239 derivative action, which allows stakeholders to enforce the directors’ duty tothe corporation when the directors are themselves unwilling to do so.

With leave of the court, a complainant may bring (or intervene in)a derivative action in the name and on behalf of the corporation or one of its subsidiaries to enforce a right of the corporation, includingthe rights correlative with the directors’ duties to the corporation. (The requirement of leave serves to prevent frivolous and vexatiousactions, and other actions which, while possibly brought in good faith, are not in the interest of the corporation to litigate.) [41] Some of the considerations to be taken into account were highlighted by the Saskatchewan Court of Appeal in Jahnke vJohnson, 2018 SKCA 59: [68] That noted, I should clarify that the “interests of the corporation” inquiry is not tightly restricted to nothing more than an assessmentof the apparent strength of the proposed action.

This is because, as recognized in the Dickerson Report itself, there are circumstanceswhen it would clearly not be advisable for a corporation to pursue a claim even where success seems almost certain. I have in mind here,for example, situations such as those where an action will cost far more to prosecute than it can possibly yield in damages, wherepursuing a claim will harm important and ongoing business relationships, or where going to court will generate problematic publicity forthe corporation.

In all of these sorts of situations, the narrow question of whether a claim is arguable will not properly answer thequestion of whether that claim is in the interests of the corporation. This is not a new idea. Cases where a court has been prepared toconsider more than just the chances of success for a proposed action include Schadegg v Alaska Apollo Resources Inc., 1994CarswellBC 2132 (BC Sup Ct), Melnyk v Acerus Pharmaceuticals Corporation, 2017 ONSC 1285, Maxwell v Schuman, 2005 BCSC1430, Discovery Enterprises Inc. v Ebco Industries Ltd. (1997), (BC SC), 40 BCLR (3d) 43 (Sup Ct), and PrimexInvestments.

Thus, while the strength of the proposed action is the central consideration in any s. 232(2)(

c) inquiry, it is not the onlyconsideration or, necessarily, the deciding consideration. [42] It is important at this stage not to treat this as a trial proper on the merits, yet at the same time the court must do more than“skim the surface” and provide “some judicial scrutiny”: Meyer at para 91. D. Limitation Periods [43] Firstly, it seems likely that this action would be barred by the Limitations Act, RSA 2000, c L-12. This was raised by theRespondents both in written argument and in oral argument, although was not addressed by the Applicant.

The Statement of Claim forthis application was filed on March 29, 2021. However, the sales at issue took place between May and July 2016. Mr. Anderson whowas the director of 171 at the time of the sale, as well as legal counsel to 182, acknowledged that he had received the payment from thesale to the Cains. 171 was also a sophisticated investment corporation that should have been aware of the sales that had taken place. Noresponse to the limitations claim was offered by the Applicant. Of course, an action that is statute barred by missing a limitation periodwould not be in a corporation’s best interests. E.

Cost/Benefit Analysis [44] Even without the issue of limitation periods in this case, following a cost/benefit analysis, it does not appear in the bestinterests of 182 to allow this derivative action to proceed. The Respondents argue that the real wrong here was done to 171, where theyacknowledge that 182 was not repaid the amount owing under the Agreement. They note, however, that this is a loss for 171 and not 182. [45] I agree.

From the documentation and argument provided, the wrong appears to have been done to 171 as a shareholder andinvestor in this development deal, and not to 182 as the corporation setting up this deal. [46] Further, the costs required to bring about this derivative action, pursue the monies and get the full accounting on what appearsto have been a failed real estate development hardly appears in the best interests of 182. [47] Finally, as noted in Black Fluid at para 24, “[...] courts must be careful not to interfere inappropriately in the management ofcompanies [...]”.

In the facts outlined above the Tuxedo Project quickly went overbudget and was finding itself with no interest in any ofthe four units. Both BMP and the subcontractors were demanding payment, and thus a decision to sell these units off appears reasonable.There was no indication that Mr. Devani acted contrary to the corporation’s rules, being the sole person with voting shares. Further, atthe time, Mr. Anderson was both director of 171, the other shareholder, and legal counsel for 182.

Although the Units were sold at areduced price from the initial agreements, the final prices were around what the independent appraiser would have considered marketvalue for the time. [48] None of the above should be taken to suggest that this was a particularly effective business, nor that this was organizedperfectly. This business was a money loser, there was no effective accounting, and there are issues as was noted in oral argument withhaving the director of 171 also be legal counsel for 182.

[49] However, the business judgment rule exists to prevent courts from inappropriately demanding perfection from corporations orimposing its own judgment of the preferred course of action. As stated in BCE: [40] In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia, shareholders,employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deferenceto the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule.

The“business judgment rule” accords deference to a business decision, so long as it lies within a range of reasonable alternatives: see MapleLeaf Foods Inc. v. Schneider Corp. (1998), (ON CA), 42 O.R. (3d) 177 (C.A.); Kerr v. Danier Leather Inc., [2007] 3S.C.R. 331, 2007 SCC 44. It reflects the reality that directors, who are mandated under s. 102(1) of the CBCA to manage thecorporation’s business and affairs, are often better suited to determine what is in the best interests of the corporation. This applies todecisions on stakeholders’ interests, as much as other directorial decisions. F.

Residual Discretion [50] As leave to grant a derivative action is an equitable remedy, even if the criteria in s. 240 are met, the court retains a residualdiscretion to refuse it: Meyer at para 100. [51] Even if the good faith and best interests of the corporation criteria had been satisfied, I would have been inclined to exercisemy discretion to refuse leave for the proposed derivative action.

In my view, the pleadings do not demonstrate a wrong to 182 thatrequires redress. [52] At its core, I am not satisfied as required by the Business Corporations Act that it would be in the best interests of 171 to allowthis derivative action. Conclusion [53] The application for leave to bring a derivative action is dismissed. That being the case, I need not address the question of whatadditional orders might be appropriate. It is also not necessary therefore to determine whether

summary judgment should be granted toremove the Cains as named defendants in this action. [54] If the parties cannot agree as to costs, they may address me in writing within 45 days. Heard on the 3rd day of November, 2022. Dated at the City of Calgary, Alberta this 12th day of April, 2023. S.M. Bensler J.C.K.B.A. Appearances: Victor C. "Dick" Olson Olson Law for the Plaintiff/Applicant Andrew M. Pozzobon Borden Ladner Gervais LLP for the Defendants/Respondents