Eastman Bio-Fuels Ltd et al v Small, 2016 MBCA 112

Citation: Eastman Bio-Fuels Ltd et al v Small, 2016 MBCA 112 Date: 20161129 Docket: AI16-30-08541 IN THE COURT OF APPEAL OF MANITOBA Coram: Mr. Justice Michel A. Monnin Mr. Justice William J. Burnett Mr. Justice Christopher J. Mainella BETWEEN : EASTMAN BIO-FUELS LTD. ) R. C. Roy and ) C. A. Roy ) for the Appellant (Plaintiff) Respondent ) ) J. R. N. Boudreau and - and - ) K. Lenton ) for the Respondent ROBERT SMALL ) Eastman Bio-Fuels Ltd. ) ) J. D. Kendall and (Defendant) Appellant ) R.

Klass ) for the Respondent - and - ) M & C Commodities Inc. ) M & C COMMODITIES INC. ) Appeal heard: ) October 7, 2016 ) (Intervener) Respondent ) Judgment delivered: ) November 29, 2016 MONNIN JA [ 1 ] This is an appeal of the dismissal of the defendant’s

summary judgment motion dismissing the plaintiff’s claim, and also of the granting of an interlocutory injunction preventing the defendant from foreclosing on a mortgage he now holds on the plaintiff’s property until the trial of the action. [ 2 ] The defendant was one of the largest shareholders and, for a period of time, a director of the plaintiff company which was incorporated in 2006.

The defendant was a party to a unanimous shareholders agreement (USA) executed on May 28, 2007. [ 3 ] In 2008, the plaintiff purchased land from a corporation controlled by the defendant, and after obtaining a mortgage from the Manitoba Agricultural Services Corporation (MASC) in the sum of $900,000, erected a commercial building designed to house a bio-fuel facility.

The mortgage was to be repaid in monthly installments of $10,600. [ 4 ] At some time in 2011, the plaintiff stopped producing bio-fuel, the mortgage to MASC went into arrears and the plaintiff stopped paying its property taxes as well as other expenses. [ 5 ] In September of 2011, the directors of the plaintiff, without the knowledge and approval of the defendant, entered into a lease agreement for the land and building with the intervener.

The lease was for a period of five years and provided for lease payments of $3,500 monthly to be increased to $5,000 during the last three years of the lease period. [ 6 ] On May 23, 2012, the defendant tendered his written resignation as a director of the plaintiff. [ 7 ] In July of 2013, again without notice to the defendant, the lease agreement between the plaintiff and the intervener was amended to extend the lease into 2017 with a monthly rent payment of $3,500. [ 8 ] None of the rental payments received by the plaintiff were ever used to pay the arrears under the mortgage or property taxes.

The defendant has no knowledge of what monies were paid to the plaintiff by the intervener nor how the plaintiff disposed of the

funds it received. [9] In February of 2014, the plaintiff was dissolved for failing to file annual returns. [10] In October of 2014, the defendant, without the knowledge or consent of the other shareholders of the plaintiff,purchased the mortgage from MASC for approximately $220,000, which amounted to about $0.25 on the dollar of the outstandingmortgage debt.

In addition, the defendant paid out approximately $38,000 to clear property tax arrears and postpone a tax sale of theland. [11] The defendant started foreclosure proceedings on February 19, 2015. [12] In April of 2015, the plaintiff, notwithstanding that it had been dissolved, issued a statement of claim against thedefendant. In May of 2015, the plaintiff corporation was revived by filing articles of revival. [13] In its claim, the plaintiff alleged that the defendant was in breach of The Corporations Act, CCSM c C225 (the Act), aswell as the USA.

It also sought an injunction restraining the defendant from disposing of the plaintiff’s assets and preventing themortgage sale from proceeding. [14] The gist of the allegations made by the plaintiff against the defendant is that, in contravention of the Act and the USA,he relied on insider information to purchase the mortgage from MASC and was therefore in breach of a fiduciary duty to the plaintiff. [15] In his defense, the defendant denies that he ever was in a position of trust or in the position of an insider when hepurchased the mortgage from MASC.

He further takes the position that he ceased being in a management position with the plaintiff inMay of 2010 and ceased altogether to be associated with the plaintiff in May of 2012. [16] The defendant also counter-claimed against the plaintiff seeking an accounting of the monies received by the plaintifffrom the intervener. [17] The defendant brought a motion seeking

summary judgment dismissing the plaintiff’s action while the plaintiff broughta motion seeking an injunction preventing the defendant from proceeding with his mortgage sale proceedings. [18] In dismissing the defendant’s motion, the judge, relying on this Court’s decision in Bodnarchuk v RBC Life InsuranceCo et al, 2011 MBCA 18, 262 ManR (2d) 225, found that the defendant had failed to demonstrate on a prima facie basis that the claim ofthe plaintiff must fail. [19] In addition, in dealing with the request to issue an injunction, the judge stated the following, which is an element to beconsidered in the motion seeking the dismissal of the plaintiff’s claim: A solid argument can be advanced that the USA (Article 15, s. 15.1(c)) prohibits exactly the kind of forclosure action [the defendant]intends to bring.

Section 125 of The Corporations Act of Manitoba C.C.S.M. c. C225, prohibits the use of insider information. The caselaw in Mr.

Boudreau’s brief (document #26) sets out the case law on fiduciary duty applying to shareholders and those with a vestedinterest in the corporation. [20] As to the injunction request itself, the judge, relying on the test set out in RJR-MacDonald Inc v Canada (AttorneyGeneral), (SCC), [1994] 1 SCR 311, found that there was a serious issue to be tried, that the plaintiff would sufferirreparable harm if the injunction was not granted and that the balance of convenience favored the plaintiff and the intervener. [21] Although there is before us an appeal from the granting of an injunction restraining the defendant from proceeding withexercising his power of sale under the mortgage he holds, the real issue in this appeal is the disposition of the motion for

summaryjudgment dismissing the claim. If the appeal is dismissed, in my view, little issue can be taken with the judge’s granting of theinjunction. However, if the appeal is upheld, there is then no basis on which to maintain the injunction as there is no claim. Consequently I will say nothing further with respect to the injunction. [22] The test to be applied in deciding a motion for

summary judgment dismissing a claim, as well as the standard of reviewfor an appellate tribunal reviewing such a decision, are both set out in Bodnarchuk. Scott CJM wrote (at paras 10-13): Both parties properly rely on the recent decision of this court in Homestead Properties (Canada) Ltd. v. Sekhri et al. (2007), 2007MBCA 61 , 214 Man.R. (2d) 148; 395 W.A.C. 148; 2007 MBCA 61, with respect to both the standard of review and theapproach to be taken by a motions court judge when considering a motion for

summary judgment (at para. 13): “The applicable standard of review with respect to errors of law is correctness. For errors of mixed fact and law, or of fact alone, thestandard is palpable and overriding error, unless an error of mixed fact and law involves an error relating to an extricable principle oflaw, in which case the standard of correctness applies to that extricable legal question: Housen v. Nikolaisen et al., 2002 SCC 33, [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1; 2002 SCC 33, at paras. 8, 10, 37. Moreover, the granting ordenying of a motion for

summary judgment is in a judge’s discretion, and that discretion should not be overturned unless the judge hasmisdirected himself or if his decision is so clearly wrong as to amount to an injustice (Elsom v. Elsom, (SCC), [1989]1 S.C.R. 1367; 96 N.R. 165, at 1375; see also R. v. Regan (G.A.), 2002 SCC 12 , [2002] 1 S.C.R. 297; 282 N.R. 1; 201 N.S.R.

(2d) 63; 629 A.P.R. 63; 2002 SCC 12, at para. 117).” This statement on the applicable standard of review for

summary judgment motions has more recently been updated and elaborated uponby this court in Towers Ltd. v. Quinton’s Cleaners Ltd. et al. (2009), 2009 MBCA 81 , 245 Man.R. (2d) 70; 466 W.A.C. 70;2009 MBCA 81, a decision that will be applied later in this decision (see para. 35). Returning to Homestead Properties, with respect to the test for

summary judgment (at para. 14): “... The test is to the same effect regardless of whether the moving party is the plaintiff or the defendant. When the defendant moves, ashere, he must prove, on a prima facie basis, that the plaintiff’s action must fail. If he meets that burden, then the plaintiff has the burdento establish that there is a genuine issue for determination. He must show that his claim is ‘one with a real chance of success’ (seeHercules Management Ltd. et al. v.

Ernst & Young et al., (SCC), [1997] 2 S.C.R. 165; 211 N.R. 352; 115 Man.R.(2d) 241; 139 W.A.C. 241, at para. 15, see also Hydro Electric Board (Man.) v. Inglis (John) Co. et al. (1999), (MB CA), 142 Man.R. (2d) 1; 212 W.A.C. 1 (C.A.)). If he fails to do so,

summary judgment dismissing the claim will follow.” Thus, an application for

summary judgment, whether by plaintiff or defendant, is a two-step process. See Homestead Properties; PerthServices Ltd. v. Deloitte Haskins & Sells et al., [2005] Man.R. (2d) Uned. 4; 2005 MBCA 14, and Beavis et al. v.PricewaterhouseCoopers Inc. (2010), 2010 MBCA 69 , 258 Man.R. (2d) 15; 499 W.A.C. 15; 87 C.P.C. (6th) 392; 2010MBCA 69. Firstly, the moving party (in this case, Assante) must demonstrate on a prima facie basis that the claim or defence, as thecase may be, should fail. If this first hurdle is not met by the applicant, that is the end of the matter.

In this instance, the motions courtjudge found, correctly in my view, that Assante had met this burden. Once a prima facie claim or defence has been shown, the onusshifts to the respondent (in this case, Bodnarchuk) to establish that the claim or defence has a real chance of success; in other words, thatthere is a genuine issue for trial. At this stage, the court must take a good hard look at the merits of the claim.

See Blanco et al. v.Canada Trust Co. et al. (2003), 2003 MBCA 64 , 173 Man.R. (2d) 247; 293 W.A.C. 247; 2003 MBCA 64, at para. 24, andHomestead Properties. [23] The defendant alleges that the judge erred when he failed to find that the defendant had established a prima facie casethat the claim against him must fail and there was no genuine issue for trial. He alleges this on the basis that the normal rule governingan application to prevent a mortgage sale is that, absent fraud or an irregularity in the proceedings, the sale should be allowed toproceed.

See Burnett v CIBC Mortgage Inc, 2016 MBQB 13 at para 21, 325 ManR (2d) 100. [24] Further, he alleges that the judge erred in coming to the conclusion that, either under the provisions of the USA or theAct, his conduct in purchasing the mortgage from MASC was, or may have been, contrary to the interests of the plaintiff. [25] The defendant finally alleges that the judge erred when he failed to find that there existed no fiduciary relationshipbetween the defendant and the plaintiff.

The defendant argues that he did not purchase the mortgage from MASC in his capacity as ashareholder of the plaintiff, but in his capacity as an adjoining property owner attempting to protect his own interest. He takes theposition that there was no evidence that he attempted to exploit a business opportunity of the plaintiff or that he used confidentialinformation obtained from the plaintiff in purchasing the MASC mortgage. He argues that he should be considered as simply anordinary mortgagee attempting to realize on his security. [26] The plaintiff and the intervener take similar positions.

They argue that the judge’s discretionary order is owed a highlevel of deference, as the judge has not misdirected himself nor is his decision so clearly wrong as to amount to an injustice. [27] The plaintiff further argues that its insolvency is not a given and that such an issue can only be determined by a trial.

Insupport of its position that the defendant breached his fiduciary duty to it, the plaintiff relies on the decision of the British ColumbiaCourt of Appeal in Canadian Metals Exploration Ltd v Wiese, 2007 BCCA 318, 242 BCAC 152, where Newbury JA wrote (at para 20): “In my opinion, this ethic disqualifies a director or senior officer from usurping for himself or diverting to another person or companywith whom or with which he is associated a maturing business opportunity which his company is actively pursuing; he is also precludedfrom so acting even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish toacquire for himself the opportunity sought by the company, or where it was his position with the company rather than a fresh initiativethat led him to the opportunity which he later acquired.” (At 607.) After noting Phipps v.

Boardman, supra, and Industrial Development Consultants Ltd. v. Cooley, [1972] 2 All E.R. 162 (Q.B.), hecontinued: “What these decisions indicate is an updating of the equitable principle whose roots lie in the general standards that I have already

mentioned, namely, loyalty, good faith and avoidance of a conflict of duty and self-interest. Strict application against directors and senior management officials is simply recognition of the degree of control which their positions give them in corporate operations, a control which rises above day-to-day accountability to owning shareholders and which comes under some scrutiny only at annual general or at special meetings.

It is a necessary supplement, in the public interest, of statutory regulation and accountability which themselves are, at one and the same time, an acknowledgment of the importance of the corporation in the life of the community and of the need to compel obedience by it and by its promoters, directors and managers to norms of exemplary behaviour.” (At 610.) [ 28 ] The plaintiff finally argues that the defendant, in his capacity as a shareholder, is bound by the provisions of

section 15 of the USA and

section 125 of the Act . [ 29 ]

Section 15 of the USA provides:

ARTICLE 15 LIMITATIONS OF SHAREHOLDERS AND MANAGEMENT OF THE CORPORATION 15.1 No Shareholder in their capacity as a shareholder shall, without the unanimous written consent of the other Shareholders, do any of the following things, namely:

a) loan money, or give credit, on the security of any goods belonging to the Corporation;

b) compound or discharge any debts owing to, or any claim of, the Corporation without receiving the full amount thereof; and if any of the Shareholders do so, he shall, if required by the other Shareholders, pay to the Corporation the full amount of such debt or claim;

c) give any bond, or do or knowingly permit to be done, anything whereby the capital or property of the Corporation may be seized, attached, or taken in execution;

d) enter into any contract on behalf of the Corporation or buy, order, or contract for any goods or articles for the Corporation; in the event that any Shareholder does so, the other Shareholders shall have the option of ratifying such contract or of accepting the goods or articles so bought, ordered or contracted for, on behalf of the Corporation, or of leaving such Shareholder personally liable for the contract so entered, and leaving such goods or articles bought, ordered or contracted for, for the separate use of the Shareholder so buying, ordering or contracting for, and such Shareholder shall then be personally liable for the amount of such contracts and such purchases; or

e) buy, order, or contract for any article, or enter into any contract in the Corporation name, including, among other things, contracts to employ individuals to work in the Corporation business or otherwise on behalf of the Corporation. [ 30 ]

Section 125 of the Act states: “Insider” defined 125(1) In this

section “ insider” means, with respect to a corporation, (

a) the corporation; (

b) an affiliate of the corporation; (

c) a director or an officer of the corporation;

(

d) a person who beneficially owns more than 10% of the shares of the corporation or who exercises control or direction over more than 10% of the votes attached to the shares of the corporation; (

e) a person employed or retained by the corporation; and (

f) a person who receives specific confidential information from a person described in this subsection or in subsection (3), including a person described in this clause, and who has knowledge that the person giving the information is a person described in this subsection or in subsection (3), including a person described in this clause. Further

interpretation 125(2) For the purposes of this section, a director or officer of a body corporate that is an insider of a corporation is deemed to be an insider of the corporation. Deemed insiders 125(3) For the purposes of this section, (

a) if a body corporate becomes an insider of a corporation, or enters into a business combination with a corporation, a director or officer of the body corporate is deemed to have been an insider of the corporation for the previous six months or for such shorter period as he was a director or an officer of the body corporate; and (

b) if a corporation becomes an insider of a body corporate, or enters into a business combination with a body corporate, a director or an officer of the body corporate is deemed to have been an insider of the corporation for the previous six months or for such shorter period as he was a director or officer of the body corporate. [ 31 ] The issue to be resolved is not a particularly complicated one. Did the judge apply the correct test and, if so, did he apply it correctly? [ 32 ] The endorsement reasons clearly set out that the judge was aware of the test to be applied.

He found that the defendant had not met the first leg of the test. Essentially he decided that a trial was required to determine the purpose of the purchase of the discounted mortgage and what information the defendant used to make that decision.

The judge was entitled to find what he did and, as that is a discretionary decision, this Court can only set aside that finding if we are persuaded that the judge misdirected himself or if his decision is so clearly wrong as to amount to an injustice. [ 33 ] Notwithstanding the fact that the defendant has advanced valid arguments in support of his position that prima facie, the plaintiff’s case must fail, I have not been persuaded that the judge’s decision is so clearly wrong that it must be set aside. [ 34 ] To the contrary, I am satisfied that there exist sufficient issues and conflicting evidence as between the parties, as to the state of solvency or insolvency of the plaintiff, as well as the duties that the defendant owed or did not owe to the plaintiff, that a trial is warranted. [ 35 ] Accordingly I would dismiss the appeal with costs.

JA I agree: JA I agree: JA