Alberta Court of Queen's Bench  
Bank of Nova Scotia v. Dumphy Leasing Enterprises Ltd.  
Date: 1990-03-26  
Roland K. Laing and Paul Edwards, for the plaintiff, Bank of Nova Scotia;  
G. Lyle Ford and Patricia L. James, for the defendant borrowers.  
(No. 8201-14168; 8201-32649; 8201-32646; 8801-03015)  
March 26, 1990.  
[1]  
POWER, J.: — This trial was originally set for 15 days of trial time. The trial  
started on January 10, 1989, and ended 62 days later on April 26, 1989. Written argument  
was submitted by both counsel on November 10, 1989, written rebuttal argument was  
submitted on January 15, 1990. Final argument was made by both counsel on February 6,  
1990, in open court. There were 774 Exhibits entered at the trial.  
[2]  
The case came on for trial as a consolidation of four separate actions:  
1. The Bank of Nova Scotia v. Dunphy Leasing Enterprises Ltd. (the “Dunphy Leasing  
Action”);  
2. The Bank of Nova Scotia v. S & D Rent–A–Car Ltd., R.F. Sturgeon Leasing and  
Warehousers Ltd., Duncan Phyper, Ronald F. Sturgeon and Dunphy Leasing Enterprises  
Ltd. (the “S&D Action”);  
3. The Bank of Nova Scotia v. 106315 Canada Inc., Duncan Phyper and Duncan Leasing  
Enterprises Ltd. (the “106315 Action”);  
4. The Bank of Nova Scotia v. Duncan Phyper (the “Phyper Action”).  
[3]  
In the Dunphy Leasing Action, the Bank of Nova Scotia (the “Bank”) seeks to  
recover from Dunphy Leasing Enterprises Ltd. (“Dunphy Leasing”) the sum of $1,042,931  
representing the balance of funds advanced by way of loan to Dunphy Leasing (including  
interest at prime plus 3/4% per annum to December 31, 1988) and remaining unpaid  
following the receivership of Dunphy Leasing.  
[4]  
In addition the Bank seeks:  
1. interest on $23,281.68 (representing the principal portion of the balance owing) at prime  
plus 3/4% per annum from January 1, 1989 to the date of payment; and  
2. a judgment, declaration or order directing that the Bank is entitled to recover from  
Dunphy Leasing all of its legal and other costs, charges and expenses incurred in pursuing  
recovery of the subject indebtedness; such costs to be taxed on a solicitor and client basis  
(i.e., indemnification).  
[5]  
In the S&D Action the Bank seeks to recover from S&D Rent–A–Car Ltd.  
(“S&D”) and its guarantors the sum of $71,397.06 representing the balance of funds  
advanced by way of loan to S&D (including interest at prime plus 1% per annum to  
December 31, 1988) and remaining unpaid following realization by the Bank on its  
security. The Bank also seeks to recover from the guarantors of S&D the sum of  
$53,210.79 representing the balance of funds advanced by way of loan to British and  
European Coach Works Ltd. (“British & European”) and guaranteed by S&D (including  
interest at prime plus l½% per annum to December 31, 1988) and remaining unpaid  
following realization by the Bank on its security.  
[6]  
In addition the Bank seeks:  
1. interest on $38,687.21 (representing the principal portion of the S&D loan balance  
owing) at prime plus 1% per annum from January 1, 1989 to the date of payment;  
2. a judgment, declaration or order directing that the Bank is entitled to recover from S&D  
and its guarantors all of its legal and other costs, charges and expenses incurred in  
pursuing recovery of the subject indebtedness; such costs to be taxed on a solicitor and  
client basis (i.e., indemnification).  
[7]  
In the 106315 Action the Bank seeks to recover from 106315 Canada Inc.  
(“106315”) and its guarantors the sum of $363,793.15 representing the balance of funds  
advanced by way of loan to 106315 (including interest at prime plus 1% per annum to  
December 31, 1988) and remaining unpaid following realization by the Bank on its  
security. The Bank also seeks to recover from 106315 and its guarantors the sum of  
$72,247.84 representing the unrecovered overdraft (including interest at the Bank’s  
standard overdraft rates to December 31, 1988) following realization by the Bank on its  
security.  
[8]  
In addition the Bank seeks:  
1. interest on $200,000.00 (representing the principal portion of the loan balance owing) at  
prime plus 1% per annum from January 1, 1989 to the date of payment;  
2. interest on $29,583.31 (representing the principal portion of the overdraft balance  
owing) at the Bank’s standard overdraft rates from January 1, 1989 to the date of payment;  
and,  
3. a judgment, declaration or order directing that the Bank is entitled to recover from  
106315 and its guarantors all of its legal and other costs, charges “and expenses incurred  
in pursuing recovery of the subject indebtedness; such costs to be taxed on a solicitor and  
client basis (i.e., indemnification).  
[9]  
In the Phyper Action the Bank seeks to recover from Mr. Duncan Phyper  
(“Phyper”), as guarantor of the indebtedness referred to in the Dunphy Leasing Action, the  
sum of $1,042,931.52.  
[10]  
In addition the Bank seeks to recover from Phyper the same additional relief  
sought in the Dunphy Leasing Action.  
[11]  
Each of the Borrowers, Dunphy Leasing, S&D, 106315 and Phyper (the  
“Borrowers”) has both defended the claim advanced by the Bank and counter–claimed,  
alleging the following:  
1. Breach of Contract by the Bank;  
2. Failure by the Bank to give reasonable notice of its intention to enforce payment,  
trespass and conversion;  
3. Noncompliance by the Bank with the provisions of the Interest Act  
(Canada);  
4. Dunphy Leasing claims that the Bank wrongfully appointed a receiver for it, and abused  
the process of the Court.  
Facts  
[12]  
Dunphy Leasing, S&D, and 106315 are all affiliated companies. Phyper is the  
sole beneficial owner of all the shares of Dunphy, which in turn is the sole beneficial owner  
of all the shares of 106315. One–half of the shares of S&D are owned by Dunphy Leasing  
and the remaining one–half of the shares of S&D are owned by R.F. Sturgeon Leasing and  
Warehousers Ltd. (“Sturgeon Leasing”), a company controlled by Ronald F. Sturgeon  
(“Sturgeon”).  
[13]  
The Bank is not, at this time, seeking any relief against Sturgeon Leasing and  
Sturgeon. The request of the Bank is granted that its claim against Ronald F. Sturgeon  
and R.F. Sturgeon Leasing and Warehousers Ltd. be stayed pending further order of the  
Court.  
[14]  
Phyper is President of both Dunphy Leasing and 106315 and is an officer of  
S&D. Until June 9, 1982, Dunphy Leasing was engaged in the automotive leasing  
business, and was then the owner of more than 600 vehicles, all of which were leased  
under written contracts to third parties or to S&D.  
[15]  
S&D was in the daily rental car business, and leased its daily rental cars from  
Dunphy Leasing. Sturgeon was the President of S&D, in charge of its day–to–day  
operations. In June of 1982, S&D had in excess of 150 cars in its daily rental car fleet, all  
of which were being leased from Dunphy Leasing.  
[16]  
Prior to March, 1981, Dunphy Leasing did its banking with the Toronto–  
Dominion Bank, and was indebted to that Bank for a sum in excess of two million dollars.  
The rate of interest then being paid by Dunphy Leasing was prime plus 2% per annum.  
Phyper had dealt with the Toronto–Dominion Bank for approximately twenty years and  
was highly regarded by that Bank.  
[17]  
In late 1980 Phyper became acquainted through business with Mr. Stork  
(“Stork”) who was at that time the manager of the Rundlehorn Branch of the Bank of Nova  
Scotia. Stork solicited Dunphy Leasing’s banking business. He promoted the Bank as  
specializing in automotive financing loans, having facilities designed for the automotive  
leasing industry, and suggested to Phyper that the Bank could provide Dunphy Leasing  
with a five million dollar line of credit at an interest rate of prime plus 3/4% per annum.  
[18]  
One of the Bank’s specialty sytems designed for the automotive leasing industry  
was a computerized accounting system which produced on a monthly basis a lease  
transaction register (“1tr”) and a lease financing statement (“1fs”). These statements  
provided, for each vehicle financed by the Bank, a description of the vehicle, the date on  
which it was financed, the amount originally financed, the sum owing in respect of the  
vehicle, the amount of the monthly payment of both principal and interest due to the Bank  
in respect of the vehicle, the amount of the final or “balloon” payment which would become  
due to the Bank upon the expiry of the original term of the lease, and the number of  
months remaining until the expiry of the lease. The system also provided totals of the  
interest, principal, and balloon payments due or past due each month.  
[19]  
An additional selling feature offered by the Bank to Dunphy Leasing was the  
Bank’s Pre–Authorized Chequing (“PAC”) system, which enabled lessees of vehicles to  
make their monthly lease payments directly to the Bank to the credit of the lessor. Neither  
the PAC system nor the 1tr and 1ts systems were available to Dunphy Leasing at the  
Toronto–Dominion Bank.  
[20]  
The automotive leasing business derives its profit in part from the “spread”  
between the rate at which the lessor borrows funds and the rate of return which can be  
achieved through leasing. The interest rate offered by the Bank to Dunphy Leasing was far  
more attractive than the rate at which Dunphy Leasing had previously been borrowing and  
that factor, combined with the additional benefits offered by the Bank, led Dunphy Leasing  
to transfer its business to the Bank.  
[21]  
In January, 1981, Dunphy Leasing submitted an application for financing. The  
application was accompanied by financial statements for prior periods, a pro forma  
financial statement, various projections prepared by Dunphy Leasing, and a handwritten  
statement of personal assets and liabilities of Phyper. One of the projections prepared by  
Dunphy Leasing was indicative of the business growth which Dunphy Leasing was then  
contemplating. It projected that Dunphy Leasing’s financing requirement would reach a  
maximum of $6.3 million by January, 1983, with borrowing requirements reducing  
thereafter as Dunphy Leasing became able to finance new car purchases from its own  
cash flow.  
[22]  
In or about 1976/77, Dunphy Leasing was incorporated as a vehicle leasing  
company designed principally to facilitate the leasing of vehicles by Phyper, his consulting  
company, Automated Land Inventory Systems Ltd., his family and friends. It provided  
Phyper with a means of sheltering from tax his income from Automated Land Inventory  
Systems Ltd. Phyper was the President and sole shareholder of Dunphy Leasing.  
[23]  
In or about 1981, S&D was incorporated as a vehicle leasing company. Its  
business was that of short–term or daily rentals in contrast to that of Dunphy Leasing  
which customarily leased vehicles for terms of one to three years. The shares of S&D were  
owned 50% by Dunphy Leasing and 50% by Sturgeon Leasing. The management of S&D  
was left to Sturgeon although the signature of Phyper was required on all cheques written  
by S&D, providing some sense of control to Phyper.  
[24]  
In or about 1981, 106315 was incorporated as a wholesaler, retailer and service  
centre for specific lines of radiophones and related equipment. The company was a wholly  
owned subsidiary of Dunphy Leasing and from October 1981 to June 1982 was managed  
by Phyper’s son, Bruce Phyper.  
[25]  
The common denominator in each of these companies was Phyper. Phyper saw  
the companies as providing employment opportunities for himself and members of his  
family: Dunphy Leasing for Duncan Phyper, Neil Phyper (son) and Terry Dyler (daughter);  
and 106315 for Bruce Phyper (son).  
[26]  
On or about February 11, 1981, the Bank agreed to provide to Dunphy Leasing  
a $5 Million line of credit (Exhibit #9) and subsequently set out the terms of its agreement  
in a commitment letter dated March 6, 1981 (Exhibit #16).  
[27]  
The commitment letter, otherwise known as the loan agreement, sets forth the  
basic terms and conditions upon which the Bank agreed to lend money to Dunphy  
Leasing. It was drafted by the Bank’s Calgary Regional Office (“Regional Office”)  
personnel and approved by the Bank’s Toronto Head Office (“Head Office”) before being  
submitted to Dunphy Leasing for execution. Dunphy Leasing had no input into either the  
form or the substance of the loan agreement.  
[28]  
The important provisions of the loan agreement are as follows:  
“… [the Bank] will make available credits on the terms set out below:  
“Purpose:  
Finance inventory of automotive equipment for lease  
“Interest Rate:  
Interest will be payable on the outstanding principal amount as well after as before  
maturity at 3/4% per annum over the Bank’s prime lending rate from time to time.  
“Calculation & Payment Of Interest:  
Interest will be payable on the 22nd day of each month as calculated on each such  
day on the basis of a calendar year for the actual number of days elapsed.  
“Periodic Review:  
This credit is subject to periodic review with no material adverse change occurring in  
the financial position of the Borrower.  
“Advances:  
Advance(s) will be made to the Borrower (subject to the security as outlined) at this  
Branch on receipt of a promissory note for the amount of the advance.  
Advances are to be subject to and supported by the following:  
– …  
– Up to 10% of the leasing credit is available to finance used vehicles, in which  
case the maximum term of the lease is to be 24 months.  
– Leases for new vehicles are to be written for 24, 36, or 48 months. All leases  
are to be open–end, non–maintenance.  
“Repayment:  
The individual notes processed under the credit shall be repaid in minimum monthly  
principal payments, according to the following schedule.  
Leases – up to 24 month term 2.25%  
25 – 36 month term 2.00%  
37 – 48 month term 1.67%  
with payout to be made in the month following expiry or termination of the lease.  
“Security:  
General Assignment of Book Debts.  
Assignment of lease income.  
Chattel mortgage on leased vehicles.  
. . . . .  
Postponement agreement supported by hypothecated note. Automated Land  
Inventory Systems Ltd. $277,000. Demand debenture in the maximum principal  
amount of $2,000,000. with interest at the rate of 21% per annum.  
The Debenture will be secured by:  
(1) A first floating charge on your undertaking and all your other property and assets  
of every nature and kind.  
“Affirmative Covenants:  
The Borrower agrees it will:  
maintain a minimum tangible net worth of $800,000.  
“Events Of Default:  
If any of the following Events of Default occurs, the Bank may at its option declare  
the unpaid principal amount of the advances and accrued interest thereon to be  
immediately due and payable and the Borrower shall forthwith pay all such amounts  
to the Bank. The obligation of the Bank to make additional advances shall cease  
when:  
a) the Borrower fails to make any payment of interest or principal within 30 days  
of the due date.  
b) there is a breach by the Borrower of any term or condition of this letter.  
c) …”  
[29]  
The loan agreement was actually executed near the middle of April, 1981, and  
back–dated. The document was executed by Dunphy Leasing in the belief that it set forth  
the terms and conditions which were to govern the banker–customer relationship between  
the Bank and Dunphy Leasing.  
[30]  
Insofar as the Bank was concerned the line of credit was to be used to purchase  
vehicles which would then be leased out by Dunphy Leasing on leases having terms of 24  
months to 48 months. The Bank did not contemplate the leasing of the vehicles for short–  
term or daily rental nor did the commitment letter provide for it.  
[31]  
On or about February 11, 1981, the Bank did not address the relationship  
between Dunphy Leasing, S&D and Sturgeon Leasing and did not appreciate the fact that  
Dunphy Leasing had, at that time, a handful of vehicles on lease to S&D and Sturgeon  
Leasing which were in turn being leased out for short–term or daily rental.  
[32]  
On March 3, 1981, approximately $2.8 Million of the new line of credit was used  
to retire the indebtedness of Dunphy Leasing at the Toronto–Dominion Bank, leaving the  
balance of the line of credit available to be drawn down as required.  
[33]  
When Dunphy Leasing commenced doing business with the Bank on March 3,  
1981, it financed 31 daily rental vehicles, 26 of which were leased to S&D and five of  
which were leased to Sturgeon Leasing. By the end of September, approximately 175 daily  
rental cars had been financed with the Bank.  
[34]  
S&D was itself a customer of the Bank, having dealt with the Bank since late  
1980. As of May 26, 1981, S&D was indebted to the Bank for approximately $32,500, and  
an application was then submitted by Stork to Regional Office to formalize lines of credit  
for S&D at $49,000. The relationship between Dunphy Leasing and S&D was then known  
to the Bank, as was the fact that the accounts receivable of S&D were owed to a large  
extent by insurance adjustment firms or insurance companies which leased daily rental  
cars for insured parties while their vehicles were being repaired.  
[35]  
During its fiscal year ending September 30, 1981, S&D basically broke even on  
business operations conducted since the date of its incorporation. The daily car rental  
business is, however, a cyclical business, and during the winter and spring of 1981 82, the  
business of S&D had deteriorated to the extent that by June of 1982, S&D was in arrears  
in its monthly lease obligations due to Dunphy Leasing.  
[36]  
A decision had been taken in early 1982 to reduce the S&D daily rental car fleet  
during the forthcoming months, and to close down the S&D business operations entirely in  
the fall of the year. The intention to dispose of excess cars was not speedily implemented,  
but by early June of 1982, the fleet had been reduced to approximately 155 cars and the  
plan was to dispose of an additional 50 cars during that month.  
[37]  
Although it was in arrears in its obligations to Dunphy Leasing on June 1, 1982,  
S&D was current in its obligations to the Bank, was current in its trade payable, wages and  
rent, and had never had a cheque dishonoured by the Bank. Its indebtedness to the Bank  
had been reduced from a high of approximately $124,000 owing in March, 1982, to  
approximately $119,000 owing in June.  
[38]  
Dunphy Leasing and S&D originally dealt with the Rundlehorn Branch of the  
Bank, but in mid–April, 1981, Stork was transferred and became manager of the Franklin  
Park Branch (the “Branch”). The accounts and loans of the Borrowers moved with Stork  
and the Borrowers dealt with the Branch thereafter.  
[39]  
106315 dealt with the Bank from the commencement of its business. On June 1,  
1981, an application was submitted by Stork to the Bank’s Regional Office for a $200,000  
operating line of credit for 106315; the application was approved and by July 6, 1981, the  
entire line of credit had been utilized. 106315 also had a substantial, fluctuating overdraft  
with the Bank almost from the commencement of their business dealings.  
[40]  
Business initially did not go well for 106315 but by the end of 1981, steps had  
been taken to reduce the Company’s overhead and put it on a profitable basis. The  
Edmonton outlet was closed and half of the staff was laid off.  
[41]  
106315 had succeeded in reducing its total indebtedness to the Bank from a  
high of nearly $310,000 in February of 1982 to a total of approximately $237,000 by June  
of that year. The Company’s account was consistently overdrawn but it continued to meet  
its interest obligations to the Bank as well as its obligations to its trade creditors and  
employees. Until June of 1982, the Bank had always honoured cheques drawn by 106315.  
[42]  
Phyper recognized several facts with respect to the leasing business which  
would later play a significant role in Dunphy Leasing’s business. Dunphy Leasing’s  
prospect of a positive cash flow on any lease in any month would be realized only if there  
was a “spread” between the amount owing by Dunphy Leasing to the Bank for principal  
and interest for that month and the amount received by Dunphy Leasing as a lease  
payment for that month. Dunphy Leasing’s agreement with the Bank was based on a  
floating rate of interest; Dunphy Leasing’s payments from lessees were fixed, and Dunphy  
Leasing’s profits would be eroded as interest rates rose.  
[43]  
The payment structure for new leases was such that during the early months of  
the lease (26 months approximately on a 36 month lease) the lease payment received by  
Dunphy Leasing would be less than the amount owing to the Bank for principal and  
interest, thereby creating a monthly cash shortfall in relation to that vehicle. With a rapidly  
expanding lease portfolio arising from new leases, the monthly aggregate cash shortfall  
would be significant until the portfolio matured. The cash shortfall would have to be made  
up from some other cash source.  
[44]  
The creditworthiness of each lessee was essential to Dunphy Leasing’s  
business. Phyper told Stork that he would personally screen all applications, obtain  
banking reports and personally interview the client in order to make a credit decision. The  
failure of any lessee to pay its lease payment and its insurance amount would increase the  
cash shortfall and therefore the timely recovery of all lease payments was extremely  
important. Because of the complexities of a lease portfolio, the requirements of the Bank  
with respect to documentation, the cash shortfall element and the vulnerability of profits to  
erosion due to rising interest rates and the potential failure of lessees to make their  
payments, extremely close management of the company’s business was essential.  
[45]  
The line of credit was not an open–ended line of credit, but one which had a limit  
of $5 Million.  
[46]  
The monthly aggregate cash shortfall created by the new leases and indeed any  
shortfall however created, would be funded from the following sources:  
– revenues from leasing of Dunphy Leasing’s owned vehicles not pledged to the Bank as  
security for financing and therefore not the subject of a monthly payment of principal and  
interest to the Bank;  
– revenues from mature leases which had reached the cross–over point where the  
monthly lease payment was more than sufficient to meet the monthly principal and interest  
payment to the Bank;  
– monies from the Bank within a line of credit which would be drawn down by Dunphy  
Leasing “discounting” leases with the Bank on Dunphy Leasing’s owned vehicles not  
previously pledged to the Bank as security for financing;  
– deposits taken from lessees representing the first and last month’s lease payments;  
– Phyper’s personal resources.  
[47]  
It was Phyper’s expectation that the “mix” of the lease portfolio would be such  
that notwithstanding the presence of a significant number of new leases, the excess  
revenues generated by mature leases, coupled with careful management, would result in  
there being no significant shortfall in the short–term and no shortfall at all in the long term.  
[48]  
[49]  
To Phyper and Dunphy Leasing, cash flow was always a very important matter.  
Between March 3 and June 30, 1981, growth of the Dunphy Leasing lease  
portfolio was greater than anticipated. The portfolio which Dunphy Leasing had developed  
in the three years prior to coming to the Bank doubled in approximately three months.  
[50]  
In this same period, applications for credit for S&D and 106315 were made to  
the Bank and, in each case, approved. In each case the credit was approved on the  
strength of guarantees being given by Dunphy Leasing and Phyper due to the lack of  
independent creditworthiness of S&D and 106315.  
[51]  
By the end of June, 1981, Dunphy Leasing had drawn down its line of credit to  
the extent of $4,815,294.52 and anticipated a need for an extension of its line of credit to  
$7.5 Million to permit further growth. On June 30, 1981, an application for that increased  
line of credit was made. Upon presentation of that application, the Bank came to fully  
appreciate for the first time that Dunphy Leasing was leasing vehicles to its affiliate S&D  
where those vehicles were leased out on short–term or daily rentals. By that time Dunphy  
Leasing had approximately 138 to 150 vehicles on lease to S&D. The Bank’s concern was  
based primarily on two factors:  
– The creditworthiness of S&D was such that it was not entitled to the amount of credit  
then being provided in the form of outstanding obligations to Dunphy Leasing; and  
– the vehicles were being leased out on short–term or daily rentals giving rise to a higher  
rate of physical depreciation of the vehicles but without a commensurate increase in the  
repayment schedule to the Bank.  
[52]  
While considering the June 30, 1981, application for credit, the Bank’s Head  
Office made inquiries of its Regional Office and in turn its Branch for more details with  
respect to the Dunphy Leasing/S&D connection, indicating that until their questions were  
answered satisfactorily and current financial statements for Dunphy Leasing were  
obtained, the Bank would not consider the June 30, 1981, credit application further.  
[53]  
When responding to the Regional Office’s inquiries on July 14, 1981, Stork  
indicated that it was imperative the Bank approve an interim increase in the leasing credit  
of $700,000 until the requested financial statements could be prepared. He indicated  
further that without the requested interim support for Dunphy Leasing the company would  
be out of the retail leasing business.  
[54]  
At July 20, 1981, the status of the accounts of Dunphy Leasing with the Bank  
was as follows:  
– amount drawn down on $5 Million line of credit (Exhibit #576):  
– overdraft in current account (Exhibit #552):  
$4,861,890.54  
213,651.60  
$5,075,542.14  
[55]  
Dunphy Leasing had, prior to obtaining any interim increase of its line of credit,  
already exceeded the authorized limit of $5 Million.  
[56]  
The application to increase Dunphy Leasing’s line of credit ran into difficulty  
when the Bank’s Head Office realized that the Dunphy Leasing fleet included  
approximately 150 vehicles leased to S&D and that S&D was 50% owned by Dunphy  
Leasing. Although those facts were well–known to Stork, they had not been adequately  
communicated to the Bank’s Head Office and its personnel became concerned upon  
learning the true state of affairs. The concerns of Head Office resulted in requests for  
further information regarding Dunphy Leasing and S&D and the application to increase  
Dunphy Leasing’s line of credit was held in abeyance pending receipt of that further  
information. By the time the required information had been obtained, Head Office had  
become concerned about other matters, and the net result was that the application to  
increase Dunphy Leasing’s line of credit was neither approved nor rejected. It was simply  
not acted upon.  
[57]  
In addition to having already spent in excess of its authorized line of credit,  
Dunphy Leasing had, prior to July 20, 1981, committed itself to purchase and lease 47  
additional vehicles having an aggregate value of $451,541.35, of which only part had been  
paid for prior to July 20. When these purchases and lease commitments were made,  
Dunphy Leasing had no line of credit left with which to pay for these vehicles.  
[58]  
The vehicles are identified by lease numbers 813 to 869 in the Chattel Mortgage  
dated August 7, 1981 (Exhibit #715). The commencement date of the leases is shown on  
Exhibit #107. With the exception of lease #869, all of the leases shown in Exhibit #715  
were committed to prior to July 20, 1981, when a temporary leasing overrun of $700,000  
was authorized thereby providing funds to Dunphy Leasing to cover expenditures and  
commitments already made.  
[59]  
The temporary leasing overrun of $700,000 was an accommodation to Dunphy  
Leasing made subject to the following conditions, amongst others:  
– no further units were to be leased to S&D without the Bank’s prior consent;  
– Dunphy Leasing was to provide by August 15, 1981, a financial statement prepared by a  
chartered accountant for the period ending April 16, 1981;  
– Dunphy Leasing was to continue providing monthly financial statements to the Bank;  
– repayment of the credit as it related to units leased to S&D was to be made at 2.75% per  
month rather than the rates stated in the commitment letter;  
– a lease audit was to be performed; and  
– the temporary leasing overrun was to expire on August 31, 1981. (Exhibit #684)  
[60]  
The conditions of this temporary accommodation made to Dunphy Leasing as  
outlined above were communicated in their entirety to Phyper by Mr. August (“August”) of  
the Bank’s Regional Office as Stork was away. This occurred on July 20 or 21, 1981.  
These conditions were not unilateral amendments to the commitment letter made by the  
Bank. They were conditions agreed to by Dunphy Leasing in consideration for which the  
Bank agreed to the $700,000 overrun.  
[61]  
Phyper testified that he was not told by August nor anyone else that the  
$700,000 overrun was of an interim or temporary nature. He intimated that only a fool  
would borrow money on a short–term basis and commit that money to long–term business  
purposes in the form of long–term leases. His point was that by committing short–term  
money to long–term purposes he would run the risk of the loan being called and being  
unable to repay the Bank.  
[62]  
On the conflict of testimony between Phyper and August, the Court accepts the  
version of Phyper based on his business approach and candour in giving his evidence.  
The record of the Bank in dealing with the Borrowers does not indicate that it  
communicated well with its customers. It is typical of the Bank to insist on reports by the  
branch and regional levels of its personnel to the senior level of management. The Bank  
did not reciprocate by communicating well from senior management to the regional and  
branch levels. The Bank communicated, on the majority of occasions, verbally through its  
branch manager, but any serious concern or issue was never dealt with in writing between  
the Bank and its customers. Had the Bank outlined in writing its concerns about certain  
areas of the loan relationship, this litigation would not have been necessary.  
[63]  
It is not clear what the Bank intended on August 31, 1981, when the interim  
increase in Dunphy Leasing’s line expired, if the application to increase Dunphy Leasing’s  
available credits to $7.5 Million had not then been approved. What in fact happened was  
that both the Bank and Dunphy Leasing continued to conduct themselves after August  
31st as if the “interim” increase had become permanent. In each of the following months of  
September, October and November, Dunphy Leasing’s loans were consistently in excess  
of $5 Million and in each of those months the Bank made loan advances of sums  
exceeding $200,000. No written communication was exchanged regarding this state of  
affairs. What Dunphy Leasing’s authorized line of credit was is unknown. At a later stage,  
when a similar situation developed, Phyper was not alarmed because of his prior  
experience. Unknown to him, however, the Bank had then again changed the rules without  
advising of the change.  
[64]  
Dunphy Leasing had already committed itself to (1) the purchase and (2) the  
long–term lease of 47 vehicles before it had the money to pay for all of them. Dunphy  
Leasing made those commitments without a corresponding long–term commitment from  
the Bank. Phyper committed Dunphy Leasing to business obligations on the assumption  
that the Bank would come through with more money.  
[65]  
The conditions of the temporary credit required an audit of Dunphy Leasing’s  
lease records and this was performed by Mr. Trcka of Regional Office (“Trcka”) along with  
Bank Branch personnel. His audit report of August 10, 1981 (Exhibit #723) records several  
significant audit deficiencies:  
– The files did not disclose proper vehicle registration in the name of Dunphy Leasing. This  
deficiency placed the Bank’s position in jeopardy as improper registration might result in  
the vehicle being disposed of by the lessee without accounting to the Bank for the monies  
owed against the vehicle.  
– The files did not disclose proof of proper insurance coverage. This deficiency placed the  
Bank’s position in jeopardy as a lack of insurance might result in an inability to recover the  
indebtedness against a vehicle if damaged or destroyed.  
– Leased units had been sold by Dunphy Leasing, but the proceeds of sale had not been  
paid to the Bank to discharge the indebtedness against each individual vehicle and  
thereby achieve a release of that vehicle from the Chattel Mortgage security.  
[66]  
The Bank’s position throughout was that immediately upon the sale of a vehicle,  
the proceeds of sale were to be paid to the Bank to discharge the indebtedness in relation  
to that vehicle, and thereby achieve a release of that vehicle from the Chattel Mortgage  
security given when the vehicle was financed.  
[67]  
That position was based on the provisions of the Chattel Mortgages (e.g. Exhibit  
#606) which stated that at the time of mortgaging the vehicle, Dunphy Leasing transferred  
its entire interest in the vehicle to the Bank. That interest could only be redeemed upon  
payment to the Bank of the monies advanced to Dunphy Leasing against the security of  
that vehicle.  
[68]  
When the vehicle was sold, the Bank’s tangible security was beyond the control  
of its customer Dunphy Leasing and the Bank was entitled to have the proceeds of sale in  
place of the tangible asset, namely the vehicle. The Bank’s position in relation to this issue  
was supported by the language of the Chattel Mortgage which states:  
“The Mortgager shall not, without the prior written consent of the Mortgagee, … part  
with the possession or control of the Property or sell or transfer any interest in the  
Property …”  
The Bank as mortgagee gave no such consent, written or otherwise.  
[69]  
On the issue of repayment, Phyper testified that as he understood the  
arrangement with the Bank, upon the expiry or termination of a lease, Dunphy Leasing had  
until the end of the month following the month in which expiry or termination occurred to  
discharge the obligations to the Bank in relation to that vehicle. Dunphy Leasing was  
entitled to use the proceeds of sale for its general business purposes until the end of the  
month following the month in which expiry or termination occurred.  
[70]  
In support of this position, Phyper relied upon the repayment provision of the  
commitment letter/loan agreement which states in part as follows:  
“… with payout to be made in the month following expiry or termination of the lease.”  
[71]  
The Court recognizes the loan agreement letter dated March 6, 1981, from the  
Bank to Dunphy Leasing as the basic contract that existed between the parties.  
[72]  
It was understood that each advance by the bank was to be supported by the  
following:  
“Copy of invoice/bill of sale  
Copy of lease agreement  
Delivery receipt  
Copy of vehicle registration  
Proof of insurance coverage  
Conditional sales contract/  
Chattel Mortgage  
Comments re credit registration  
lessee  
Repayment:  
The individual notes processed under the credit shall be repaid in minimum monthly  
principal payments, according to the following schedule:  
Leases – up to 24 month term  
25 – 36 month term  
2.25%  
2.00%  
1.67%  
37 – 48 month term  
with payout to be made in the month following expiry or termination of the lease.”  
Dunphy Leasing carried out the terms of the loan agreement letter with respect  
[73]  
to paying for sold units in the month following sale until March 26, 1982, when Mr. Eckardt,  
who replaced Stork as manager of the Branch on November 4, 1981 (“Eckardt”), advised  
as follows:  
“The situation regarding payouts … [Phyper] has now been advised that the Bank will  
not tolerate slow and or bulk payout of units. The branch is reviewing the customer’s  
deposits daily to inspect for cheques that relate to vehicles sold and retired from  
lease.”  
[74]  
The Bank ignored the conditions in the loan agreement dealing with the subject  
of payment for sold vehicles and unilaterally changed the practice and effectively amended  
the loan agreement.  
[75]  
Dunphy Leasing sold vehicles and used the proceeds of sale for general  
business purposes, advising the Bank of the sale of the vehicle after it had been sold and  
after the date when Phyper’s interpretation of the repayment provisions of the commitment  
letter/loan agreement would call for payment (Exhibit #605).  
[76]  
Dunphy Leasing’s delay in advising the Bank of the sale of vehicles is illustrated  
by having reference to the lease ledgers and Bills of Sale attached to the letter of June  
24th, 1981 (Exhibit 605). Those documents indicate that the vehicles for which Dunphy  
Leasing was providing the Bank with notice of sale by its letter of June 24th, 1981, were  
sold on the following dates:  
Lease Number  
333  
Date of Sale  
April 28, 1981  
357  
396  
413  
448  
455  
460  
501  
April 14, 1981  
March 27, 1981  
June 8, 1981  
March 5, 1981  
March 10, 1981  
April 27, 1981  
April 1, 1980  
[77]  
The Bank’s only source of information regarding the fact that a sale had  
occurred which would cause it to look for payout was Dunphy Leasing. Vehicles pledged to  
the Bank as security and subject to a Chattel Mortgage in favour of the Bank were sold on  
condition that “the lien will be removed as soon as possible upon receipt of funds” (Exhibit  
#588).  
[78]  
Phyper admitted on cross–examination that he considered himself free to use  
the funds paid by the purchaser to meet Dunphy Leasing’s general financial needs.  
[79]  
By the end of August, 1981, when the $700,000 temporary overrun was  
scheduled to expire, the Bank had not received from Dunphy Leasing the financial  
information made a condition of the credit. Rather than terminate the temporary credit, the  
Bank permitted Dunphy Leasing to operate using that credit as though it was part of the  
revolving line of credit.  
[80]  
The only sources of information upon which the Bank could make its credit  
decisions were financial statements and information from its customers. Phyper admitted  
that he was aware of the importance to the Bank of the financial statements and  
recognized that they were necessary to give the Bank comfort with respect to what he was  
telling them regarding the financial health of Dunphy Leasing and its affiliates.  
[81]  
During the months of September and October, 1981, the Bank continued to  
press Dunphy Leasing for current financial information. In that same period the Bank  
continued to press for the correction of the audit deficiencies noted in the August 10, 1981,  
report prepared by Trcka.  
[82]  
In mid–October Dunphy Leasing, through Stork, the Branch Manager of the  
Bank, requested that the overrun be extended to $1.5 Million pending receipt of the long–  
awaited financial statements (Exhibit #68). Although that request was supported by  
Regional Office, Mr. Penney of Head Office, Vice–President and General Manager  
(“Penney”), wrote on October 19, 1981, indicating that the Bank was not prepared to  
consider an increased credit for Dunphy Leasing until certain matters were resolved:  
a) the Bank was in receipt of financial statements for July through September of 1981;  
b) all audit deficiencies noted in the August 10, 1981, audit report were corrected; and  
c) a 100% lease audit was performed and all deficiencies noted corrected, thereby  
confirming everything was in order. (Exhibit #690)  
[83]  
In late October, 1981, Dunphy Leasing requested an extension of its credit to  
permit the purchase of 19 Ford vehicles which were then on lease to S&D from Ford.  
Stork, writing on behalf of Dunphy Leasing, indicated that the vehicles had to be  
purchased by the end of October or they would be lost to the S&D fleet (Exhibit #72).  
Dunphy Leasing proceeded with the purchase knowing that the Bank had not agreed to  
the extension of credit, but on the assumption that the Bank would agree to it. The  
requested extension was not agreed to.  
[84]  
On November 4, 1981, Eckardt became Manager of the Branch in place of  
Stork.  
[85]  
The Bank publishes and makes available to its branches an “Automotive  
Finance Manual” which sets forth the Bank’s policies and the procedures to be followed by  
Bank personnel in dealing with automotive financing customers, including leasing  
companies. The Bank also has an automotive financing department which employs  
automotive “specialists”. All automotive financing loans are intended by the bank to be  
dealt with in the manner prescribed by the Automotive Finance Manual.  
[86]  
In November, 1981, Trcka, the Bank’s Regional Office automotive specialist,  
conducted a lease audit on the Dunphy Leasing lease fleet. The purpose of the audit was  
to establish the existence and validity of the Bank’s security and compliance with the  
provisions of the Automotive Finance Manual. The audit disclosed the existence of both  
registration and insurance coverage problems which were of concern to the Bank. Such  
irregularities were ultimately rectified and, in the final analysis, did not adversely affect the  
Bank’s security.  
[87]  
The audit also disclosed noncompliance by the Branch with the provisions of the  
Automotive Finance Manual. The primary concern appeared to be that Dunphy Leasing  
was not paying for vehicles sold by it immediately upon the sale having occurred, as was  
required by the Automotive Finance Manual.  
[88]  
The commitment letter/loan agreement made no reference to the “Automotive  
Finance Manual” nor was Dunphy Leasing ever notified that the loan agreement was  
subject to the internal policies of the Bank as contained in the Automotive Finance Manual.  
Dunphy Leasing had no knowledge or information with respect to the contents of the  
Bank’s Automotive Finance Manual.  
[89]  
Dunphy Leasing was neither aware of nor bound by the Bank’s Automotive  
Finance Manual; the loan agreement governed the relationship between Dunphy Leasing  
and the Bank. Although daily rental cars had formed part of Dunphy Leasing’s fleet from  
the date of commencement of the dealings between Dunphy Leasing and the Bank, the  
loan agreement contained no specific provisions dealing with them. As far as the Bank  
was concerned the requirements of the Automotive Finance Manual were paramount and  
most Bank employees who dealt with Dunphy Leasing were either not aware of, or paid no  
attention to, the loan agreement.  
[90]  
Regarding the particular instances of noncompliance with the Bank’s Automotive  
Finance Manual referred to above:  
(a) daily rental units having lease terms varying from 18 to 36 months had been financed  
by the Bank in March, 1981; thereafter the limitation to 12 month terms had been imposed  
by the Bank, even though there was no such limitation contained within the loan  
agreement, and the loan agreement in fact prescribed that leases were to be for terms of  
24, 36 or 48 months;  
(b) a maximum principal repayment rate of 2.25% per month had been prescribed by the  
loan agreement;  
(c) the interest rate prescribed by the loan agreement was prime plus 3/4% per annum.  
[91]  
The Bank’s Automotive Finance Manual requirements were either not dealt with  
by, or were in conflict with, the loan agreement, the Bank set about imposing the  
Automotive Finance Manual requirements upon Dunphy Leasing. It limited the terms of  
daily rental car leases to 12 months, it increased the principal repayment rate payable by  
Dunphy Leasing on daily rental car loans to 2.75% per month and it increased the rate of  
interest payable by Dunphy Leasing in respect of daily rental cars (and used cars – again  
as required by the Automotive Finance Manual) to prime plus 1¼% per annum. No written  
communication was ever exchanged regarding the changes mandated by the Automotive  
Finance Manual and implemented by the Bank. It was amendment by divine right.  
[92]  
Unknown to Dunphy Leasing, which had believed that its relationship with the  
Bank was governed by the loan agreement, the relationship was in fact governed to a  
large extent by a Bank manual to which Dunphy was not privy, and of which Dunphy  
Leasing was not aware. The loan agreement was amended by Bank decree but the  
amendments were not expressed nor communicated in writing.  
[93]  
By mid–November, Trcka had completed his 100% lease audit as instructed by  
Penney of Head Office. Trcka’s audit report of November 17, 1981 (Exhibit #78) noted,  
amongst other things, the following deficiencies:  
(a) significant accounts receivable due particularly from S&D;  
(b) excessive delay in payment of sold units;  
(c) evidence of additional units going to S&D notwithstanding the July 20, 1981, prohibition  
and apparent agreement regarding that matter;  
(d) continuing problems with the registration of vehicles;  
(e) continuing problems with proof of proper insurance coverage for vehicles; and  
(f) evidence of leases being assigned without assignments of leases being provided.  
[94]  
Trcka noted in his audit report that in his opinion certain of the deficiencies  
identified indicated poor control of the account by the Branch and reflected unfavourably  
on Dunphy Leasing. When called to testify as to what he intended to convey by this  
comment, he indicated that while it was the responsibility of Dunphy Leasing to prepare  
proper documentation for the Bank on presenting leases for discounting it was also the  
responsibility of the Branch to see that the documentation was in order before advancing  
funds. He saw the problem as a joint one.  
[95]  
At the end of his report, Trcka recommended that he meet with the Branch  
Manager and the principals of Dunphy Leasing to ensure that they properly understood the  
Bank’s requirements. In his memorandum of November 26, 1981 (Exhibit #80) Eckardt,  
the new Branch Manager, records having addressed all points of the report and the loan  
agreement/commitment letter with Phyper and his support staff. That exercise was carried  
out with the assistance of Trcka.  
[96]  
In view of the numerous irregularities noted in the November lease audit report  
and what Head Office described as a “totally unsatisfactory situation”, Head Office directed  
that Regional Office arrange whatever manpower resources were required to assist the  
branch in correcting all of the deficiencies as quickly as possible (Exhibit #79). Head Office  
requested a full report showing all deficiencies to be corrected by December 14, 1981, or  
they would have to consider cancelling the credit and requesting Dunphy Leasing to seek  
assistance elsewhere.  
[97]  
By mid–November the Bank was also concerned with the fact that Dunphy  
Leasing had advanced funds to its affiliates S&D and 106315 with the result that the  
minimum tangible net worth requirement set out in the commitment letter and the  
debenture was no longer being maintained.  
[98]  
During the months of August to November, 1981, the status of the accounts of  
Dunphy Leasing with the Bank was as follows:  
(Exhibit #576)  
Loan Balance  
(including interest)  
(Exhibit #552)  
Current Account  
Balance  
Total Bank  
Debt  
Aug. 31  
Sept. 30  
Oct. 31  
Nov. 30  
$5,495,512.35  
5,560,979.44  
5,633,732.00  
5,667,384.43  
$135,277.22–  
57,570.51  
$5,630,789.57  
5,503,408.93  
5,775,408.66  
5,944,166.88  
141,676.66–  
276,782.45–  
[99]  
It is apparent that throughout these months the Bank, in anticipation of receiving  
financial information satisfactory to the Bank in relation to Dunphy Leasing, continued to  
support the company not only with the $700,000 temporary overrun whose expiry date had  
long since passed, but also for amounts in excess of the $5.7 Million credit.  
[100]  
Dunphy Leasing continued to grow, purchasing more vehicles and putting them  
out on lease. The cash flow from the leases indicates the following:  
March, 1981  
June, 1981  
–
projected lease revenues  
(Exhibit #598)  
$139,392  
a.  
Bank obligations less balloon  
payments (Exhibit #550)  
116,642  
$22,750  
Surplus  
–
projected lease revenues  
(Exhibit #599)  
$192,945  
b.  
Bank obligations less balloon  
payments (Exhibit #550)  
191,707  
$1,238  
Surplus  
October, 1981  
–
projected lease revenues  
(Exhibit #600)  
223,318  
c.  
Bank obligations less  
balloon payments (Exhibit #550)  
233,418  
Shortfall  
($ 10,000)  
[101]  
Because of Dunphy Leasing’s persistence in purchasing new vehicles for lease  
without an increased line of credit, the status of the accounts of Dunphy Leasing with the  
Bank at December 10, 1981, was as follows:  
(a)  
(b)  
drawn down on line of credit and  
temporary overrun (Exhibit #576)  
$5,424,121.93  
overdraft in current account  
(Exhibit #552)  
613,685.68  
Total  
$6,037,807.61  
[102]  
At December 14, 1981, the Dunphy Leasing accounts were exceeding all  
authorized credits of any description.  
[103]  
The Bank was in a difficult position. If it did not loan additional funds to Dunphy  
Leasing, Dunphy Leasing would nonetheless be required to make payment for vehicles  
already purchased. If it did not have the money to do so, the sellers of the vehicles might  
press Dunphy Leasing for payment with the result that Dunphy Leasing could be forced  
into bankruptcy. Should that happen, the Bank’s position would be potentially worse than if  
it loaned Dunphy Leasing more money and took chattel mortgage security in relation to the  
same. That recommended course of action was approved by Mr. Kavanagh (“Kavanagh”)  
of the Bank’s Head Office, Senior Vice–President and General Manager, Western Canada,  
with the following remarks:  
(a) That Dunphy Leasing had been using lease payments for other than the reduction of  
Bank loans by advancing monies to its affiliates S&D and 106315;  
(b) As the overdraft was unsecured the Bank was “forced” to discount additional leases to  
protect its position with the result that the overall liability was increased;  
(c) There were to be no further leases processed and no further overdrafts permitted  
without the prior approval of Head Office; and  
(d) He was disturbed at the manner in which the account was being handled (Exhibit #85).  
[104]  
In mid–December of 1981, Mr. Sweeney of the Bank’s Head Office, Director,  
Canadian Commercial Banking (“Sweeney”), recommended to Kavanagh certain remedial  
action, including an entire vehicle audit. Mr. Howarth (“Howarth”) of Canadian Commercial  
Banking was to be made available for that purpose (Exhibit #86).  
[105]  
In response to Sweeney’s request, Howarth spent three days in Calgary from  
December 21 to 23, 1981. During that time he had two meetings with Phyper and Mr.  
Einarson, the Assistant General Manager of Regional Office (“Einarson”) and Mr. Berstad,  
Loan Administrator, Regional Office (“Berstad”). Howarth recorded the following in his  
communication to Sweeney regarding the December 22nd meeting (Exhibit #91):  
“On Tuesday afternoon, the Branch Manager and I met with Mr. Duncan Phyper, the  
president of Dunphy Leasing to detail the Bank’s concerns regarding the implications  
of the audit and his apparent lack of attention to our TNW guide requirement. During  
the three hour meeting, we examined the developments since the account was  
acquired that led to the present situation. Although we considered that the credit  
outstandings had peaked, the Branch received two cheques on Tuesday morning for  
a total of $61M to cover the purchase of cars. Mr. Phyper was told that the Branch  
had been instructed by Regional Office to return these cheques and he should be  
aware of this action. Mr. Phyper contended that this would be sudden and severe,  
since the account had been handled on an open–ended basis for several months  
with the indication always being given that we would work things out. He agreed that  
he was aware of our concern regarding the rapid increase in outstandings and had  
discussed alternative financing with two outside sources. He did not dispute our right  
to limit our credit or call our loans, but asked for 60 days to make other arrangements  
if we wanted out.”  
Of his December 23rd meeting, Howarth recorded the following in the same  
communication to Sweeney:  
“Prior to Mr. Phyper’s arrival, Mr. Einarson agreed that we would have to allow some  
time for Mr. Phyper to resolve the problem. Mr. Berstad chaired the meeting and after  
a lengthy review and paying special attention to balance sheet items, it was agreed  
that a proposal would be presented to General Office by telex to establish a game  
plan. This telex was to arrive in Toronto by December 24th and will be the basis of  
further discussions early next week.”  
[106]  
At the meeting of December 23rd, Phyper assured the Bank that other than the  
cheques he had identified, no further cheques were issued for vehicle purchases and no  
further purchases would be made unless funds sufficient to cover those cheques were in  
Dunphy Leasing’s account.  
[107]  
The telex referred to in Howarth’s memo was forwarded by Berstad, Loan  
Administrator of Regional Office, to Kavanagh of Head Office on December 24, 1981  
(Exhibit #90). In that telex he recorded details of the December 23rd meeting and reported  
that Phyper was advised that no more lease commitments were to be made (i.e. no more  
vehicles to be purchased for lease) without the Bank’s prior approval. He also requested  
authorization to discount further leases to cover the existing overdraft in the account and  
authorization to cover cheques then in hand for vehicles purchased ($62,897). By  
communication dated December 31, 1981, authorization for the $62,897 amount was  
given (Exhibit #93). That authorization was given with the admonition that no further  
cheques were to be cleared for vehicle purchases if funds were not in the account to cover  
and no additional leases were to be processed.  
[108]  
The status of the accounts of Dunphy Leasing with the Bank at December 31,  
1981, was as follows:  
(a)  
(b)  
drawn down on line of credit and  
temporary overrun (including  
unpaid interest – Exhibit #576)  
$6,147,627.05  
overdraft in current account  
(Exhibit #552)  
11,376.52  
$6,159,003.57  
[109]  
As a result of a meeting between Phyper and Einarson, Assistant General  
Manager of Regional Office, on January 7, 1982, and as authorized by Head Office, the  
Bank agreed on an exceptional basis and for the month of January only to discount  
additional leases for Dunphy Leasing to generate sufficient funds to meet Dunphy  
Leasing’s obligation of principal and interest to the Bank for the month ending December  
31, 1981. These leases consisted of both new leases and leases of Dunphy Leasing–  
owned vehicles which had not previously been pledged to the Bank.  
[110]  
At the meeting of January 7th, Phyper represented to Einarson that unless the  
Bank provided this exceptional accommodation for the month of January, Dunphy Leasing  
would be out of business. The explanation given by Phyper was that as Dunphy Leasing  
relied upon dealers to refer potential lessees to it, Dunphy Leasing had to be in a position  
to purchase vehicles for these lessees and to put a lease in place. Should it not be able to  
do so, its business would dry up.  
[111]  
The Bank responded to Phyper’s representation. Its willingness to discount  
additional leases to cover the December 31, 1981, payment of principal and interest meant  
that Dunphy Leasing had its January lease revenues available to purchase more vehicles  
provided it set aside sufficient revenues to meet the obligations of principal and interest  
due to the Bank at the end of the month.  
[112]  
Phyper left the January 7th meeting with the clear impression that the Bank  
would not “pull the rug out from under” him and that Dunphy Leasing could continue to buy  
new cars and write new leases provided only that Dunphy Leasing’s total indebtedness to  
the Bank did not exceed the amount then outstanding. As of January 14, 1982 (after the  
partial advance of the loan authorized after the January 7th meeting) Dunphy Leasing’s  
indebtedness to the Bank stood at $6.253 Million. It never exceeded that sum.  
[113]  
Phyper was made aware at the January 7th meeting that yet another credit  
presentation would be submitted to Head Office to formalize the increase in Dunphy  
Leasing’s line of credit. Phyper knew that it was not within the authority of Regional Office  
personnel to authorize the increase in the line of credit but he left the meeting confident of  
the continued support of the Bank. The fact was that credits had been already authorized  
for a sum in excess of $6.2 Million. Phyper was not seeking to borrow more money; he  
wished only to be allowed to operate within the then–established borrowing limits.  
[114]  
The other significant decision arising out of the meeting on January 7th was a  
decision taken by the Bank’s Regional Office to increase the S&D line of credit to  
$124,000 from its former level of $49,000.  
[115]  
After meeting with senior Regional Office bank representatives on January 7th,  
1982, Phyper reasonably believed that he was at liberty to continue to purchase cars and  
write new leases and that he had been assured of the continuing support of the Bank.  
[116]  
The expression “tangible new worth” is an expression defined in the Bank’s  
internal manuals as, essentially, shareholder’s equity loans postponed in favour of the  
Bank, minus sums owing to the Bank customer by its officers or affiliates. It was a term of  
the loan agreement that Dunphy Leasing maintain a tangible net worth of $800,000. A  
definition of the expression was not provided by the loan agreement; it was known to the  
Bank but not to its borrower.  
[117]  
Dunphy Leasing never did have a tangible net worth of $800,000 using the  
actual financial statements of the Company. In calculating Dunphy Leasing’s original  
tangible net worth to be $822,000, Stork chose to use a pro forma financial statement  
prepared by Dunphy Leasing’s accountants rather than actual financial statements.  
Although actual financial statements were available to Stork, they would not show a  
tangible net worth of $800,000.  
[118]  
Phyper had no input into the original calculation of Dunphy Leasing’s tangible  
net worth and did not understand the expression as it as defined in the Bank’s internal  
manuars. He believed that tangible net worth was to be equated with net worth and that  
the net worth of Dunphy Leasing could be determined by deducting future debt service  
obligations and overhead expenses from future lease revenues in the same manner as  
Stork had originally calculated the value to be attributed to the shares of Dunphy Leasing  
owned by Phyper. It was only by calculation in that manner that a worth in excess of  
$800,000 could be established.  
[119]  
The Bank became aware as early as October, 1981, that Dunphy Leasing’s  
tangible net worth, calculated according to the Bank’s formula, was not $800,000. At the  
meetings held in December, Dunphy Leasing’s tangible net worth deficiency had been a  
subject of discussion and it was then and at the January 7, 1982, meeting that Phyper was  
advised of the manner in which the Bank calculated tangible net worth.  
[120]  
According to the Bank’s calculations of Dunphy Leasing’s tangible net worth, the  
minimum requirement of $800,000 was in existence only for the period from February to  
the end of May, 1981. Thereafter, tangible net worth declined and remained below that  
level. With full knowledge of it, the Bank continued to lend money to Dunphy Leasing in  
each month up to and including April of 1982, excluding February of that year.  
[121]  
On February 2, 1982, a fourth credit presentation had been prepared by the  
Branch for submission to Head Office. The document combined an application to increase  
Dunphy Leasing’s line of credit with the annual review of the Dunphy Leasing loan  
account, a review required by Bank procedures. It contemplated an increase in Dunphy  
Leasing’s line of credit to $6.2 Million, and on the date of the application, $6.105 Million  
was outstanding in loans to Dunphy Leasing.  
[122]  
The presentation also dealt with 106315 and S&D. In the case of 106315, the  
Bank Branch was applying to increase the total authorized line of credit to $295,000 and to  
convert the Company’s overdraft of $53,000 into an operating line of credit. The sum then  
owing to the Bank by 106315 was $293,000. No significant change was proposed for the  
line of credit being extended to S&D.  
[123]  
Shortly prior to submission of the February 2nd application, the Borrowers had  
received audited financial statements for their respective fiscal years ending September  
30, 1981. The financial statements for Dunphy Leasing recorded a loss for the period of  
$332,000, after allowing for depreciation of $1.052 Million, and after deduction of a  
nonrecurring, nonoperational $100,000 expense relating to the disposition by Dunphy  
Leasing of petroleum and natural gas properties. In preparing the financial statements,  
Dunphy Leasing’s accountants had changed the method of calculating depreciation on  
fixed assets from the declining balance method to the straight–line method. This change  
had an adverse effect upon the reported profitability; if the declining balance method had  
been continued, the net loss would have been decreased by approximately $110,000.  
[124]  
The loss recorded on Dunphy Leasing’s profit and loss statement was also  
reflected in its balance sheet. Retained earnings declined from $14,000 to ($318,000),  
giving effect to the recorded loss of $332,000. That retained earnings figure also took into  
account as liabilities, deferred revenue and lease deposits totalling $343,000. Those items,  
although correctly recorded as liabilities for accounting purposes, in fact represented a  
form of unearned (and untaxed) income, not requiring repayment by Dunphy Leasing. The  
funds had been received by Dunphy Leasing, no income tax was yet payable on them, the  
Company had the money, the use of the money, and no repayment obligation.  
[125]  
The impact of Dunphy Leasing’s financial statements for banking purposes was  
to reduce Dunphy Leasing’s tangible net worth to $176,000. That reduction resulted in part  
from the fact that during the period in question, Dunphy Leasing had loaned some  
$227,000 to its officers or affiliates, thereby decreasing its tangible net worth by that  
amount.  
[126]  
The negative cash flow implication of the leasing business was recognized by  
the Bank’s Branch which used the following words in referring to it in the February 2nd  
credit presentation:  
“If the foregoing is representative of a normal 36 month lease, it remains the lease  
does not become profitable until the 18 month. Due to the heavy growth being the  
last six months of 1981, it remains the Company will record a further loss for the year  
ending September 30, 1982. The foregoing however, is a paper loss and recovery  
will commence the latter part of 1982 and continue thereafter, based on the subject’s  
present projections and commitments.”  
[127]  
Because Dunphy Leasing had experienced exceptional growth during 1981, a  
large percentage of its lease fleet was in the “immature” phase in which it generated a  
negative cash flow. Using 18 months as the “crossover” point for a 36 month lease, such a  
lease written in August 1981 would not generate a positive cash flow until January of 1983.  
These factors were recognized by the Branch in its February, 1982, credit presentation.  
[128]  
An additional factor which is relevant in considering the financial position of a  
leasing company is that the largest profit earned by the lessor arises upon expiry of the  
lease term, when the lessee exercises his option to purchase the leased vehicle. At that  
time, the option price to the lessee is less than the market value of the vehicle, thereby  
providing an incentive to the lessee to purchase the vehicle, and the balance of principal  
owing in respect of the vehicle is less than the option price. The lessor is therefore virtually  
assured that the lessee will purchase the vehicle, and that a profit will be generated. A  
further benefit to the lessor arises from the fact that he need not be concerned about  
disposition of, or depreciation of, the leased vehicle since it would be purchased by the  
lessee.  
[129]  
The Branch was aware when the February 2nd credit presentation was written  
that prior calculations by Stork of Dunphy Leasing’s tangible net worth had been incorrect.  
Notwithstanding the reduction in Dunphy Leasing’s tangible net worth, however, Eckardt  
considered the Bank’s loan secure and wrote:  
“We wish to point out that while the worth of the Company is less than that previously  
reported and stipulated, we consider the value of the leases and automotive security  
to hold loans safe. The value of the lease portfolio as at December 28, 1981 was  
$8,453,179 representing an equity position of approximately $1.5MM (inclusive of  
interest cost), if the present lease portfolio was to be liquidated over the term  
remaining on the respective leases.”  
[130]  
The Branch was also aware when the credit presentation was written that  
Dunphy Leasing was continuing to purchase new vehicles and write new leases. That  
knowledge, and the Branch recommendation regarding Dunphy Leasing, are reflected in  
the following words:  
“While the February payment has not been met, sufficient funds will be available from  
January leases representing 14 new leases with approximately $135M of new  
automobiles to finance. When the payment is taken the loan amount will reduce a like  
amount. Considering the foregoing and Mr. Phyper’s commitments to wind down  
[S&D and 106315], we feel safe with our position and with the future of the leasing  
account.”  
[131]  
The business of 106315 had sustained a loss of $46,000 during its fiscal year  
ending September 30, 1981. The credit presentation records that the security held by the  
Bank for the $293,000 indebtedness of 106315 consisted of, inter alia, an assignment of  
its accounts receivable having a value of $140,000 at December 31, 1981, and s. 178  
security over inventory having a value of $160,000 as at that same date. The reported  
surplus of security over debt was $7,000, a far smaller surplus than existed when the loans  
of the Company were called.  
[132]  
The February 2nd credit presentation also records the intentions of Phyper to  
commence disposing of the S&D fleet of daily rental cars, with the entire fleet to be sold by  
September 30, 1982, and to discontinue the business of that company.  
[133]  
The presentation contained explanations and information which would have  
been required reading for any banker wishing to seriously and responsibly address the  
financial positions of the Borrowers, and their continuing eligibility for financing. Regional  
Office obviously considered the presentation and wrote to the Branch requesting further  
information regarding certain of the matter referred to therein.  
[134]  
[135]  
S&D and 106315 were, at that time, experiencing business difficulties.  
S&D management took two steps: the first, to resolve its immediate cash flow  
problems, was to ask the Bank for an increase in its operating loan from $25,000 to  
$70,000. The increase in loans from the Bank to enable S&D to meet its ongoing  
obligations assisted in it resolving its immediate cash needs. It also meant that the  
company would have further ground to make up in order to bring its obligations current and  
become profitable. The second more drastic step, taken by S&D management to attempt  
to resolve its difficulties, was to make efforts to reduce its fleet. Efforts to sell off vehicles  
were commenced in November, 1981. From that date to June 8, 1982, only some 20  
vehicles leased to S&D were sold (Exhibit #651 – N. Phyper’s summary). In an effort to  
correct the downward spiral of the company, management of S&D was terminated and  
Bruce Phyper became manager. He was responsible for scaling down the company’s  
operations as a step towards profitability.  
[136]  
On or about February 2, 1982, Eckardt prepared the Annual Review of Dunphy  
Leasing, S&D and 106315 (Exhibit #122) in which an extension of the line of credit to $6.2  
Million was recommended. That document recorded a number of significant statements  
with respect to the current status of and the future prospects for each of these companies.  
Eckardt testified that the details for the statements were obtained from the financial  
statements and were supplemented by explanations given by Phyper with regard to  
Dunphy Leasing, summarized as follows:  
(a) The present operating losses were to be attributed in part to the shortfall created by  
each new lease, but with the higher interest costs built into the lease payments, those  
same leases should produce significant profits in the future by way of lease payments and  
buyout amounts. The present losses and those forecast for 1982 were seen to be “paper  
losses”, i.e. real for the moment, but ultimately recoverable in the normal evolution of the  
leases to their maturity.  
(b) Although the company had recorded a loss to September 30, 1981, and would also  
experience a loss in 1982, Phyper had made certain commitments to reduce the overall  
loss and to bring the operations to a more favourable and acceptable position. In  
particular:  
i) no further units were to be leased to S&D;  
ii) all units presently leased to S&D were to be sold;  
iii) sale of the S&D units was to commence immediately and it was expected that the  
bulk of the units would be sold between March 1982 and June 1982 with full  
liquidation of the S&D rental fleet to be completed by no later than September 1982;  
and  
iv) Dunphy Leasing would expect to write no more than 20 new leases per month as  
a result of being more selective and with the intention of maintaining a manageable  
portfolio of between 650 and 700 leases.  
(c) There had been a reduction in cash flow and working capital positions due to  
investments in affiliated companies.  
(d) Dunphy Leasing had experienced exceptional growth in the past year, creating an  
unprecedented demand for funds.  
(e) The unsatisfactory features of leasing in such large quantities to an affiliated company  
(S&D), the investment of $125,000 in the wholly–owned subsidiary 106315 and the  
improper administration of the lease portfolio, both by Dunphy Leasing and by the Branch,  
had led to legitimate concerns in dealing with required credit lines.  
(f) The value of leases (lease payments and buyout values) was considered to hold loans  
safe in that the cash flow from existing leases was considered to be sufficient to cover  
principal and interest payments to the Bank.  
(g) In light of these observations and Phyper’s commitments to wind down S&D and  
106315, Eckardt felt safe with the Bank’s position and with the future of the leasing  
account.  
[137]  
On February 9th, 1982, the Bank’s Regional Office wrote to Head Office  
requesting authority for, and recommending, an advance to Dunphy Leasing of $175,000  
to be secured by chattel mortgages granted upon new vehicles which had been purchased  
and paid for by Dunphy Leasing. The proposed procedure was identical to that which had  
been followed in January (after the January 7th meeting), namely, that the new loan  
advance would be utilized to enable Dunphy Leasing to make its required payment of  
principal and interest to the Bank and Dunphy Leasing’s cash flow would then be available  
for the purchase of more new cars. The net effect of advancing the $175,000 would be that  
Dunphy Leasing’s borrowings would only increase by $11,000 and Dunphy Leasing would  
acquire additional vehicles over which the Bank could take further security.  
[138]  
The response by Head Office to the Regional Office request was immediate and  
negative. By telex dated February 10, 1982, Head Office made reference to the fact that  
Phyper had been instructed in December not to make further lease commitments without  
the Bank’s prior approval. The telex then went on to note that Dunphy Leasing had  
purchased $135,000 worth of new automobiles. It is obvious that:  
(a) Dunphy Leasing had not received or had not understood the message in December; or  
(b) the Bank had given its approval for further lease commitments; or  
(c) Dunphy Leasing or Phyper were not respecting the instructions of the Bank.  
[139]  
There had been a complete failure of communication. The messages which the  
Bank’s Branch and Regional Office were sending were not being received by Head Office.  
No one was communicating with the Borrowers, who were carrying on business oblivious  
to all the consternation.  
[140]  
The Head Office memo of February 10th continued:  
“… we not prepared to advance further funds as recommended your faxcom pending  
completion annual review account which we wish see finalized soonest possible. We  
require Company to make payments now from whatever source available even if it  
means sale of assets.  
“Branch presentation also records loans $292,613 outstanding to [106315]. This is  
our first knowledge these credits and we wish be advised when and by whose  
authority loans granted.”  
[141]  
Although 106315 had been a customer of and a borrower from the Bank since  
June of 1981, it was not until February of the following year that Head Office became  
aware of that fact. When the fact became known, it became a source of further  
consternation.  
[142]  
The response by Einarson to the memo of February 10th demonstrates the  
extent to which communication between the two levels of the Bank had broken down.  
Regional Office advised Head Office of the following facts:  
1. Although Phyper had been told in December not to make further lease commitments,  
Head Office had, on January 7th, authorized additional leases to be booked, allowing  
Dunphy to use its January lease payments to carry on business for January – i.e., to  
purchase more cars.  
2. Subsequently (in January) Phyper sought approval for an additional loan of $235,000  
secured by new cars – that accommodation was approved by Regional Office (after the  
January 7th meeting) and had been recommended by Howarth from Head Office.  
3. Dunphy Leasing had sought accommodation in February similar to that which had been  
extended in January, and the accommodation had been recommended by Regional Office.  
[143]  
Exhibit #127 points out to Head Office that it had not understood what had been  
transpiring between Dunphy and the Bank since December, and that its refusal to approve  
the last–recommended advance to Dunphy Leasing was based on a mistaken premise.  
[144]  
It was during this period of communication breakdown that the February 2nd  
credit presentation was received by Head Office. The response of Head Office was to  
refuse the requests for further accommodation to Dunphy Leasing, and to comment as  
follows:  
“… but according comments Branch form 1033 dated February 2nd [the February  
2nd credit presentation] would appear the company still losing money. Accordingly  
we do not wish to continue with account and since your aforementioned faxcom  
indicates customer has made tentative arrangements with competitor we wish see all  
business including S&D Rentals and numbered Company removed from our books  
soonest possible.”  
[145]  
Head Office appears to have focused its attention on the loss reported in  
Dunphy Leasing’s audited financial statements, and the foregoing comments provide  
cogent evidence that no considered thought had been given to the February 2nd credit  
presentation and the lengthy observations and explanations which it contained, particularly  
the extenuating circumstances relating to the loss reported in Dunphy Leasing’s financial  
statements, and the explanation by the Branch that the loss was only a paper loss. Nor is  
there any evidence as to what, if any, consideration was given by Head Office to the  
circumstances of Dunphy Leasing’s affiliates.  
[146]  
Einarson did not tell Phyper that Dunphy Leasing’s line of credit had been  
revoked, suspended, or cancelled. The amount of the line of credit following the  
conversation was “in limbo” (according to Einarson). Einarson did not say that the Bank  
would be calling Dunphy Leasing’s loans, he did not demand payment from the Borrowers  
nor did he make demands of any type.  
[147]  
Nothing was communicated in the February 22nd telephone conversation which  
would give Phyper any indication that some three and one–half months later, after having  
made additional loans to Dunphy Leasing, the Bank would demand payment and appoint a  
receiver for Dunphy Leasing. Whatever was communicated was not considered worthy of  
being reduced to writing.  
[148]  
The procedure by which Dunphy Leasing obtained new loan advances from the  
Bank was that Dunphy Leasing would prepare and execute a chattel mortgage and  
promissory note for the amount of the advance. Those documents, together with other  
supporting documents required for the loan advance were presented by Dunphy Leasing  
to the Branch, which then advanced the funds. This procedure was followed for all  
advances other than the first advances made on March 3 and 4, 1981, and the last  
advance made on April 8, 1982.  
[149]  
As of February 2, 1982, Dunphy Leasing was current in its principal and interest  
payments and had leases on hand for discount in an amount sufficient to enable payment  
of the February payment of principal and interest. Both in that month and in March,  
Dunphy Leasing prepared, executed and presented the documentation required to obtain  
advances of $165,000 and $235,000 respectively. No loan advance was made, however,  
and the security documents were returned to Dunphy Leasing. The result was that Dunphy  
Leasing, having purchased new vehicles and written new leases, did not have the  
necessary funds to enable it to both pay for the new vehicles and make its regular  
installments of principal and interest due to the Bank. Dunphy Leasing became delinquent  
in its payments to the Bank.  
[150]  
No new commitments to purchase cars were made by Dunphy Leasing after the  
February 22nd telephone conversation. Commitments made prior to that date obliged  
Dunphy Leasing to purchase and pay for new cars having a value of at least $400,000.  
[151]  
Dunphy Leasing was not asking the Bank to permit a further increase in its debt.  
From a the high of $6.253 Million owing by Dunphy Leasing on January 14th, the principal  
indebtedness was consistently reduced to:  
$6.048 Million at the end of January, 1982  
$6.048 Million at the end of February, 1982  
$5.817 Million at the end of March, 1982  
$5.704 Million at the end of April, 1982  
$5.401 Million at the end of May, 1982  
[152]  
Despite these reductions, repeated requests by Branch and Regional Office for  
further loan advances were either ignored or refused by Head Office. Although the  
required promissory notes and chattel mortgages had been delivered, loan advances were  
not forthcoming.  
[153]  
In a memorandum written on March 3, 1982, by two senior Head Office  
personnel, serious concern was expressed with the fact that the follow–up to the  
November lease audit of Dunphy Leasing was not progressing satisfactorily. It was the last  
memo written jointly by those two senior personnel before they participated in a decision to  
call the Dunphy loans and appoint a receiver, and their serious concerns arose out of an  
audit which had been performed some four months earlier and which other Bank  
employees obviously considered to have been concluded and resolved.  
[154]  
On March 2nd, Head Office had instructed that the Branch was to make weekly  
transfers of funds from Dunphy Leasing’s account to apply on loans. Following those  
instructions, the Branch compounded Dunphy Leasing’s problems by proceeding to take  
payments at an ever–increasing frequency. One payment had been taken from Dunphy  
Leasing in December, 1981, two payments were taken in January, 1982, and no payments  
were taken in February. The Bank took 13 payments in March, eight payments in April and  
15 payments in May of 1982.  
[155]  
No written communication was provided to Dunphy Leasing by the Bank  
advising that there was to be yet another departure from the provisions of the loan  
agreement, which had stipulated that Dunphy Leasing was to make monthly payments of  
interest and (by inference) principal. The Bank simply proceeded to take payments on a  
weekly basis, and even more frequently.  
[156]  
March 2, 1982, was the last date on which payments taken by the Bank from  
Dunphy Leasing’s account were applied on account of interest. Thereafter until June 8,  
1982, the Bank took in excess of $1.048 Million from Dunphy Leasing, all of which was  
applied on account of principal to the exclusion of interest. The loan agreement was  
express in stipulating monthly payments of interest and contained no express requirement  
for monthly payments of principal. For a period in excess of three months in duration,  
payments were taken by the Bank and applied solely on account of principal. The Bank  
has taken the position in this litigation that Dunphy Leasing was in default of its obligations  
because it had not made the required monthly payments of interest.  
[157]  
On March 4th, Eckardt wrote to Regional Office confirming the then–existing  
state of affairs, the reasons for Dunphy Leasing’s delinquency and. the existence of a  
commitment to Dunphy Leasing by the Bank. The Eckardt communication reads, in part,  
as follows:  
“Referring to payments now due on the subject loans, it has been the case that these  
were not met due to advances not being made on financing new leases. It was our  
understanding that funds being deposited were to be used to purchase new leased  
vehicles and the matter of financing lease paper would be dealt with upon  
presentation of the annual review. As you are aware, there were approximately  
$170,000 worth of units purchased in January and subsequently presented to us for  
financing. We still hold the note and chattel for these units and as well, advise that a  
similar amount was purchased and leased for February. If we are unable to finance  
these leases it remains that the principal payments on loans cannot be made for the  
months of February 1st and March 1st, 1982.  
. . . . .  
“We have specific commitments already with respect to certain matters and feel that  
units now leased and not pledged should be put under chattel and notes processed  
accordingly.  
“This will not increase the amount of our commitment as loan payments will be made  
to offset the amount loaned. Mr. Phyper has made the commitment no further leases  
will be made, and the cash flow is sufficient from existing leases to meet monthly  
payments. Interest payments have been made from Company’s cash flow.  
“We anticipate a significant reduction in the loan commitment to [Dunphy Leasing]  
over the next three to six months from liquidation of the S&D fleet, and as well,  
substantial principal reductions from ongoing monthly payments.” (emphasis added)  
[158]  
The meaning of the above emphasized words are that the Bank had a specific  
commitment because it had allowed Dunphy Leasing to commit to new car purchases,  
believing that the necessary financing would be provided.  
[159]  
Because the Bank’s commitment was not honoured, Dunphy Leasing was  
obliged to pay for new vehicles from its cash flow, with the result that Dunphy Leasing’s  
monthly principal and interest payments fell into arrears. The Bank permitted this  
development, as was later confirmed by Mr. Paul Harms, the Bank’s Calgary District Office  
Manager, the immediate administrative superior of the Branch manager (“Harms”), who  
wrote:  
“Substantial arrears exist as a result of our permitting [Dunphy Leasing] to increase  
its lease fleet from cash flow.”  
[160]  
The Bank had permitted Dunphy Leasing to fall into arrears because at or after  
the meeting on January 7, 1982, Phyper had been told that Dunphy Leasing could  
continue to write leases. When Head Office denied authority to finance the leases, the  
Branch and Regional Office allowed Dunphy Leasing to pay for cars with its cash flow and  
thereby to go into arrears. Regional Office continued to press Head Office for authority to  
make loan advances to honour its commitment. Unfortunately, Head Office did not know  
that a commitment had been made and Regional Office did not advise of the commitment  
because it was a commitment made without authority. Dunphy Leasing was the victim.  
[161]  
Sweeney, in 1981–82, was employed as an automotive specialist in Head Office  
of the Bank. His first involvement with the Dunphy Leasing account appears to have been  
in October of 1981 when he discussed the Dunphy Leasing account with Mr. Younker,  
another Head Office employee (“Younker”).  
[162]  
The Younker Report dated October 29, 1981, was extremely critical of the  
manner in which the Dunphy Leasing account had been dealt with by Bank personnel at  
both Branch and Regional Office levels. The criticisms expressed by Younker, although  
directed toward Bank personnel, appear to have made a lasting impression on Sweeney  
as a criticism of Dunphy Leasing. From October, 1981, onward, Sweeney was apparently  
negative toward Dunphy Leasing and it was Sweeney who, in March of 1982,  
recommended that a receiver be appointed.  
[163]  
In December, 1981, Sweeney recommended to senior management in Head  
Office that credit to Dunphy Leasing be suspended pending further investigation and that  
the Bank conduct a physical audit of Dunphy Leasing’s entire lease fleet. The latter  
recommendation was acted upon by Head Office and Howarth was sent to Calgary to  
implement the recommendation. Howarth’s report of December 23rd was written to  
Sweeney, as were the subsequent reports from Howarth dated January 14 and January  
27, 1982.  
[164]  
On March 18, 1982, Sweeney was in Calgary and spent three to four hours  
visiting the Branch. Following this brief visit during a period when the Branch Manager was  
not in attendance, Sweeney wrote a report which led to a formal decision to call the  
Dunphy Leasing loans and appoint a receiver. Sweeney had never reviewed the loan  
agreement and was not even certain that a loan agreement was in existence.  
[165]  
Sweeney referred in his report to “serious irregularities” and “unusual situations”  
which, although not pursued by him, he considered “very suspicious”. The first of the  
suspicious matters identified by Sweeney was an allegation that there had been “serious  
overlendings” by the Branch. That allegation was determined to be unfounded.  
[166]  
Sweeney next mentioned the fact that Dunphy Leasing was paying for sold  
vehicles in the month following the month of sale. Not having been aware of the existence  
of the loan agreement, Sweeney could hardly have been aware that Dunphy Leasing’s  
obligation under it was to pay for sold vehicles in the month following sale.  
[167]  
The next “suspicious” matter reported upon by Sweeney was the fact that the  
Branch had incorrectly calculated the monthly payments due from Dunphy in respect of  
certain financed vehicles.  
[168]  
He itemized three additional concerns relating to the manner in which the  
Branch was dealing with Dunphy Leasing. One of the complaints was that in December,  
1981, the Branch had over–advanced on one loan to Dunphy Leasing by lending more  
than was then warranted by the security provided. The amount of the over–advance was  
$166,000. It was ultimately determined that the amount of the over–advance was in fact  
$43,000.  
[169]  
Sweeney’s report of March 23rd concluded with the following specific  
recommendations:  
(a) That somebody other than the current Branch staff take over ongoing administration of  
the leases.  
(b) That all outstanding irregularities be put right immediately.  
(c) That all security documentation be vetted by legal counsel.  
(d) The Bank appoint a receiver.  
[170]  
With the exception of the first of the above recommendations (which would have  
been extremely difficult to implement) each of the recommendations made by Sweeney  
were carried out, although the advance to Dunphy Leasing was reduced from the  
$340,000 recommended to $306,000. Sweeney did not himself have the requisite authority  
to make a decision to call the Dunphy Leasing loans and appoint a receiver, but his  
recommendations were followed.  
[171]  
Written communications from Head Office to Regional Office virtually ceased  
following Sweeney’s report. Prior to that date, such communications had been frequent but  
thereafter the only such communication in evidence was dated April 5, 1982, and  
authorized in part the recommendation made by Sweeney. The next written  
communication from Head Office to Regional Office was a telex dated June 1, 1982,  
instructing Regional Office to demand payment of Dunphy Leasing’s loans and appoint a  
receiver. There was no further written communication from Head Office after the March 23,  
1982, Sweeney report.  
[172]  
Sweeney’s report and recommendations were made to senior Bank  
management in Head Office and the report was not copied to Regional Office. Sweeney  
testified that he “would have” communicated, and later that he did communicate, the  
substance of his recommendations to Regional Office personnel. I am satisfied that neither  
the Branch nor Regional Office knew what Sweeney’s recommendations had been.  
[173]  
The problems arising from the various lease audits of Dunphy Leasing were  
never resolved to the satisfaction of Head Office Bank personnel. Stork thought the  
significance of lease audit problems was overstated and Eckardt obviously considered  
such problems to have been substantially resolved by February of 1982. Those views on  
that subject did not represent a consensus.  
[174]  
Dunphy Leasing’s practice of paying for sold units in the month following sale  
continued until on or about March 26, 1982, when Eckardt wrote regarding that problem as  
follows:  
“The situation regarding payouts, … has been discussed with Mr. Phyper. He has  
now been advised that the Bank will not tolerate slow and/or bulk payout of units.”  
[175]  
By May, the Bank had imposed upon Dunphy the obligation of providing written  
reports on a daily basis describing the vehicles which had been sold. The Bank then  
immediately took payment for those vehicles. The Bank unilaterally changed the practice  
and amended the loan agreement regarding the subject and, again, no written  
communication of the changes was given to Dunphy Leasing.  
[176]  
Sweeney’s activities during and following his brief visit to the Branch produced a  
flurry of activity. One of the results was that a Mr. Mund, another Head Office automotive  
specialist (“Mund”), was sent to Calgary to do an analysis of the Dunphy Leasing account.  
Another result was that Harms, the Bank’s Calgary District Office manager, went to the  
Branch to review the Bank’s security documentation from the Borrowers. By coincidence,  
Mr. Chambers, the Bank’s Inspection Supervisor from Regional Office (“Chambers”), was  
attending at the Branch at virtually the same time as Mund and Harms. He was reviewing  
the Branch files relating to Dunphy and was to write a report on the results of his  
investigations, dealing exclusively with Dunphy Leasing.  
[177]  
The reports filed by Mund, Chambers and Harms were supportive of Dunphy  
Leasing and critical of Bank personnel, particulary Branch management. The criticism,  
although primarily directed toward Bank personnel, also reflected adversely upon Dunphy  
Leasing.  
[178]  
The investigations conducted by Chambers and Harms disclosed the existence  
of a large number of defects and irregularities in the security documentation taken by the  
Branch and in the procedures which had been followed by the Branch in its dealings with  
Dunphy Leasing. The Bank immediately set about to rectify all of the defects and  
irregularities in its security documentation. Dunphy Leasing, being oblivious of the fact that  
a recommendation had been made for the calling of its loans and the appointment of a  
receiver, co–operated fully with the Bank and executed new or replacement security  
documents as requested.  
[179]  
The investigation and resulting report by Harms were positive insofar as Dunphy  
Leasing was concerned. It indicated that the information which had been provided by  
Dunphy Leasing to the Bank had been accurate, and that there was no indication of any  
impropriety by Dunphy Leasing nor willful attempt by it to defraud the Bank. The report by  
Harms confirmed that the leases being written by Dunphy Leasing were for realistic  
amounts with appropriate pay–down rates, that balloon payments and contractual  
residuals were in reasonable proximity and that the credit investigation and judgment  
being exercised by Dunphy Leasing were satisfactory.  
[180]  
Mund spent eleven days in Calgary dealing with Dunphy Leasing, concluding his  
assignment on April 8, 1982. The written Mund report is dated April 19, 1982. The report is  
basically favourable to Dunphy Leasing and unfavourable to Branch management.  
[181]  
Mund confirmed the findings of Harms that the information which Dunphy  
Leasing had been providing to the Bank was accurate, that Dunphy Leasing was not  
attempting to defraud the Bank, and that Dunphy Leasing was not writing high risk lease  
paper but was dealing with lessees of good credit standing. Mund felt comfortable with the  
results of the physical audit of the Dunphy Leasing fleet, and with the mail and telephone  
verification procedures which had been carried out by the Bank.  
[182]  
Mund is the only Bank employee to have referred in a written communication to  
Bank obligations under the loan agreement. In dealing with the Sweeney allegation of a  
“suspicious” matter of “serious overlending”, Mund diplomatically made the point in his  
report that the Bank’s obligation under the loan agreement was to lend an amount which  
was not to exceed the purchase to Dunphy Leasing of vehicles purchased by it.  
Sweeney’s allegation of overlending arose from his mistaken perception that the Bank was  
only to lend Dunphy Leasing the wholesale dealer cost of vehicles. Sweeney, never having  
reviewed the loan agreement, could not have known what the Bank’s obligations under it  
were. Mund, on the other hand, had obviously reviewed the loan agreement, had spent  
eleven days in Calgary dealing with the Dunphy Leasing account and had concluded that  
the major problems experienced with the Dunphy Leasing account were attributable to  
Branch personnel.  
[183]  
The main purpose of Mund’s trip to Calgary was to perform a cash flow analysis  
on Dunphy Leasing’s fleet and thereby assess the economic viability of the Company. The  
results of that analysis may be summarized as follows:  
(a) on a liquidation of Dunphy Leasing’s fleet, assuming an interest rate of 20%, and  
assuming collection of all accounts receivable and buyouts by lessees, the net surplus  
cash available to Dunphy Leasing after payment of overhead expenses of the liquidation,  
would be $624,000;  
(b) on a liquidation of Dunphy Leasing’s fleet, assuming an interest rate of 17.5%, but  
otherwise on the foregoing basis, the net surplus cash to Dunphy Leasing would be  
$815,000;  
(c) the foregoing surplus cash projections are for Dunphy Leasing’s leased assets only,  
and do not include any value for other assets owned by Dunphy Leasing;  
(d) Dunphy Leasing’s cash flow calculated to December 31, 1982, again assuming  
collection of all of its accounts receivable, and after payment of estimated operating  
expenses, would give rise to a $97,000 cash flow deficiency by September 30th, reducing  
thereafter to a deficiency of $80,000 by December 31, 1982;  
(e) Dunphy Leasing’s cash flow calculated to December 31, 1982, allowing for an overlap  
between lessee payments and Bank payments, and providing an allowance of 5% of gross  
receivables for overhead expenses and lessee delinquency, would give rise to a cash flow  
deficiency peaking at $154,000 in September, declining to a deficiency of $135,000 by the  
end of December and continuing to decline thereafter.  
[184]  
Using any of the approaches selected by Mund, Dunphy Leasing had a positive  
equity position, after payment in full of the Bank debt and all interest which would accrue  
thereon, without giving any consideration to the substantial non–lease assets of the  
Company.  
[185]  
During Mund’s stay in Calgary, he met with Phyper and Phyper was reassured  
that “everything was fine” and gained the impression that Mund “seemed completely  
satisfied that there were no problems”.  
[186]  
The conclusions to be drawn from the Mund report were diametrically opposed  
to those reached by Sweeney. Sweeney, however, was Mund’s superior within the Bank  
hierarchy. The conduct of the Bank suggests that the favourable Mund report, prepared  
following an eleven day analysis, did not have the authoritative support enjoyed by the  
unfavourable Sweeney report, which had been prepared following a three to four hour visit.  
[187]  
During the period while Mund was in Calgary conducting his investigations, he  
remained in touch with Sweeney by telephone. On April 1st, Sweeney wrote another report  
to senior Bank management. In it Sweeney noted that although Dunphy Leasing was  
current in its interest payment obligations, payments of principal were in arrears for the  
months of January and February, such arrears being in the total sum of $306,000.  
Sweeney also noted that the Branch held chattel mortgages prepared and submitted by  
Dunphy Leasing during the months of January, February and March of 1982 and that the  
amount available to be secured by those mortgages was approximately $400,000.  
[188]  
The Bank never attempted to formally renounce its obligation under the loan  
agreement to advance funds “on receipt of a promissory note for the amount of the  
advance”; it simply refused in February and March of 1982 to honour that obligation.  
[189]  
After recording the fact that the Bank held chattel mortgages from Dunphy  
Leasing which would secure approximately $400,000, Sweeney also recorded:  
“Mr. Mund confirmed with Mr. Einarson that the customer was not told until February  
24th (sic) that the Bank would not process further leases and he should desist from  
buying more cars.”  
That notation undermines Einarson’s trial evidence regarding the February 22nd telephone  
conversation.  
[190]  
Sweeney recommended that the Bank process loans to Dunphy Leasing for  
$349,000. This second recommendation from Sweeney that an advance be made was  
followed, but the amount of the advance was decreased from the recommended $349,000  
to $306,000.  
[191]  
On April 5th, Mr. Cumming, who was then the Vice–President and General  
Manager for the Alberta and Northwest Territories Region of the Bank (“Cumming”), wrote  
to Head Office advising as to the then–current position of Dunphy Leasing as established  
by the investigators conducted by Mund, Trcka and Harms. Cumming adopted the  
favourable findings of both Mund and Harms and the results of the financial analysis which  
had been conducted by Mund. Cumming concluded his memo by expressing the opinion  
that Dunphy Leasing should be allowed to wind down its business operations under Bank  
controls.  
[192]  
The advance of $306,000 authorized by Head Office on April 5, 1982, was  
advanced to Dunphy Leasing on April 8th, after the Bank had requested and obtained new  
security documents to rectify security document defects identified earlier. The April  
advance was too little too late. Funds had been required in February and March to meet  
obligations then falling due. The advance was only adequate to cover the January and  
February principal arrears; it was insufficient to meet Dunphy Leasing’s March obligations  
for principal and interest payments, it was insufficient to enable Dunphy Leasing to pay for  
the remainder of the new cars which it had committed to buy prior to February 22nd, and it  
provided no funds for working capital.  
[193]  
From the perspective of the Bank, however, the making of the April 8th advance  
was advantageous. New security documents were taken and defective security documents  
were corrected or replaced. The Bank obtained additional chattel mortgage security over  
$306,000 worth of new vehicles. Dunphy Leasing’s indebtedness was not increased since  
the Bank applied $305,000 out of the $306,000 advance as a principal payment.  
[194]  
Communication between the Bank and Dunphy Leasing was the responsibility of  
the Branch Manager. It was the Manager who signed the loan agreement and it was the  
Manager who ultimately signed the letter demanding payment of Dunphy Leasing’s loans.  
The Manager was the conduit through whom all communication from the Regional and  
Head Offices of the Bank was to be transmitted to the Borrowers.  
[195]  
The Branch Manager was not apprised of all of the internal occurrences  
affecting his customer; there were many channels of communication to which he did not  
have access. There were channels of communication within Head Office to which Regional  
Office did not have access. The Manager was not routinely provided with copies of  
communications exchanged between Regional Office and Head Office nor was he  
provided with copies of the communications exchanged internally within those offices. The  
reports of Howarth, Mund and Sweeney were not copied to Regional Office, not to mention  
the Branch, and Regional Office reports and communications from Chambers, Harms,  
Einarson and Cumming were not copied to the Branch. During the period between  
February 1, 1981 and June 8, 1982, approximately 103 internal communications or  
memoranda relating to Dunphy Leasing were exchanged between various levels or  
departments within the Bank. Of that number, 51 were not copied to the Branch. The  
Branch Manager was not informed of the communications between the decision–makers in  
the Bank.  
[196]  
Throughout the period during which Phyper was dealing with the Bank, he  
believed that his relationship with the Bank was normal and that he need not be concerned  
about the Bank calling the loans. Communications to and from the Branch prior to June,  
1982, would allow Eckardt to be of the same belief as Phyper. It is clear from Head Office  
communications that Bank personnel in that office were not happy with the Dunphy  
Leasing account, but the Branch Manager was not kept informed of the true state of  
affairs. Both Phyper and the Branch Manager were unaware of ominous developments in  
higher echelons within the Bank. The decision by Head Office to demand payment had not  
been expected by either of them.  
[197]  
The failure by higher levels of the Bank to communicate those developments  
which affected Dunphy Leasing is demonstrated in a memo dated April 12, 1982, from the  
Branch to Regional Office in which Eckardt wrote:  
“In order for us to keep abreast of all matters relative to this account, we would  
appreciate receiving copies of all correspondence between your office and [Head  
Office]. Specifically, we request a copy of your writing submitted April 5, 1982.”  
The April 5th writing to which Eckardt was referring was the communication from Cumming  
to Head Office summarizing the results of the efforts of Mund and Harms, and setting forth  
the conclusions and recommendations of Regional Office.  
[198]  
The Bank communicated its original commitment to Dunphy Leasing in writing in  
the loan agreement; no other development of consequence in the relationship between the  
Bank and Dunphy Leasing was communicated in writing and none of the amendments to  
the loan agreement mandated by the Bank were communicated in writing, yet the Bank  
instituted the following changes:  
1. it limited the term of leases which Dunphy Leasing could enter into with S&D;  
2. it increased the interest rate and the principal repayment rate payable by Dunphy  
Leasing on loans for daily and used cars;  
3. it insisted upon immediate repayment for cars sold by Dunphy Leasing;  
4. it declined to make loan advances to Dunphy Leasing although provided with the  
requisite loan documentation;  
5. it proceeded to collect payments from Dunphy Leasing on a weekly basis (or even more  
frequently) rather than monthly.  
[199]  
The above actions by the Bank represented a departure from the loan  
agreement but was not confirmed in writing. The Bank dealt with the loans to Dunphy  
Leasing as if they were demand loans rather than loans made for the terms of the leases  
of the vehicles which the loans financed.  
[200]  
Perhaps even worse than the Bank’s failure to communicate with the Borrowers  
was the indication of failure by Bank employees to honestly communicate with each other  
or with the Board of Directors of the Bank. Self–serving communications were  
acknowledged to be a problem. Criticism of senior Bank management was deliberately  
withheld from those whose judgment was called into question. Reports to the Board of  
Directors were hardly characterized by candour.  
[201]  
Internal Bank communications are replete with references to mismanagement  
by, or the incompetence of, Bank personnel. As early as July, 1981, a Regional or Head  
Office employee had written, in an obvious reference to the Branch Manager, “What is this  
Branch doing? Manager incompetent”, across a memo (Exhibit 47).  
[202]  
In his memorandum of October, 1981, Younker of Head Office, in referring to  
Stork, commented that he was “lacking in the common sense one would expect to find in  
any Branch Manager”, and in referring to Regional Office said, “As brought out in the  
foregoing, the Supervision from Regional Office has not been what we should expect. It  
has been bad”.  
[203]  
Two of the conclusions expressed by Trcka in his lease audit report dated  
November 17, 1981, are as follows:  
“15. The above reflects very poor control on the part of the Branch and reflects  
unfavorably on the customer. The customer is very co–operative and had the Branch  
exercised usual control we would not now be facing such an unfavorable situation.  
“19. I am satisfied the problems in this account are the result of poor Branch control  
and not poor use of the credit by Dunphy.”  
[204]  
In a memo dated December 15, 1981, a senior Bank officer from Head Office  
indicated his displeasure with Regional Office in these words:  
“We extremely disturbed manr in which this acct being handled and U have not  
responded to specific instructions our tlx Nov 25 which requested report by Dec 14  
…”  
[205]  
In December, 1981, Sweeney recommended suspending credit to Dunphy  
Leasing, apparently because Regional Office had not responded to Head Office within the  
time allotted for response. Sweeney had reviewed the Younker report and was aware of  
the criticisms of Bank personnel which it had expressed. He continued to be critical of  
everything done regarding Dunphy Leasing and his attitude was ultimately to be reflected  
in his judgment of Dunphy Leasing itself.  
[206]  
In a report dated April 5, 1982, to the Chief Inspector of the Bank, Chamber  
concluded:  
“… it appears poor management by the Branch is the reason for the current concern  
and not manipulation by the customer.  
“I feel this is a case where poor management practices (Branch and Region) have  
caused great concern and expense and I am sure loss of confidence by a customer.  
It may well work out the customer is in some financial difficulty, however, we are  
likely a contributing factor through our poor management and lack of counselling.”  
[207]  
Following his investigation at the Branch, Harms reported as follows:  
“… considerable security irregularities exist which had not been identified …  
Correction of irregularities appears to be a fairly simple, if time–consuming, matter,  
as long as the customer is cooperative, as he has shown himself to date.  
“… Substantial arrears exist as a result of our permitting the company to increase its  
lease fleet from cash flow.  
“A review of the branch customer files shows very few instructions to the branch on  
the handling of this account and confusion as to who is to do what most certainly  
exists.”  
[208]  
In a document produced following a Branch inspection conducted during the  
latter part of March, 1982, the conclusion was expressed that management of the Dunphy  
Leasing account by Branch officers since origin had been unsatisfactory. The inspection  
report further noted:  
“The officer who performed the lease of audits of July 27 and Oct. 27 [1981] was not  
sufficiently knowledgeable/trained to perform this function …  
“Officers do not pay sufficient attention to detail resulting in significant security  
deficiencies and overadvancing of funds …  
“The mail audit is in a state of stagnation. The Branch does not view itself as  
responsible and the R.O. representative indicates he doesn’t have time to deal with  
it.”  
[209]  
In his response, written on the report, Eckardt accepted responsibility for the  
problems reported upon and stated:  
“We share the concerns expressed with the unsatisfactory administration of this  
account and attribute the deficiencies to the inexperience of all bank officers  
involved. It remains the account has not been handled properly since its acquisition  
and the problems now evident are directly the fault of this ofice.”  
[210]  
Following his eleven day inspection and analysis at the branch in March–April,  
1982, Mund stated in his report:  
“… the writer is of the opinion that the major problems experienced with this account  
were due as a direct result of Branch personnel not receiving adequate training and  
guidance to handle an account of this nature.”  
[211]  
Concerns by senior Bank management as to the competence of subordinate  
personnel were to have a devastating effect upon Dunphy Leasing. By May, 1982, senior  
personnel in Head Office were considering whether:  
(a) Dunphy Leasing should be allowed to wind down its business operations under Bank  
controls; or  
(b) a receiver should be appointed for Dunphy Leasing.  
[212]  
Regional Office had expressed the option that the former alternative should be  
allowed. In reviewing the memo expressing that option, Penney, a member of the Bank’s  
Senior Credit Committee, wrote beside the opinion that Dunphy Leasing should be allowed  
to wind down its operation under proper Bank control these words, “Who does the Region  
have with enoughs competence for the job?” Concern about the competence of bank  
personnel was a factor in the Bank’s decision to appoint a receiver for Dunphy.  
[213]  
It is incumbent upon the Bank to ensure that its employees have the ability and  
are provided with the training and experience necessary to enable them to capably  
discharge their employment duties. If problems arise by reason of the lack of such ability,  
training or experience the institution must accept the responsibility for those problems. In  
the case of Dunphy Leasing, it was the customer which suffered as a result of the inability,  
the lack of training and the lack of experience.  
[214]  
The de facto decision to call Dunphy Leasing’s loans and appoint a receiver was  
made by Sweeney and recorded in his communication of March 23, 1982. Implementation  
of the decision was delayed until the Bank had corrected the security defects and rectified  
the lease audit irregularities identified in the course of the inspections which took place  
immediately after Sweeney’s communication.  
[215]  
The process of correction and rectification of defects and irregularities required  
time, just as Harms had predicted in his memorandum of April 5, 1982, in which he stated  
that “Correction of irregularities appears to be a fairly simple, if time–consuming, matter, as  
long as the customer is cooperative, as he has shown himself to date”.  
[216]  
The time required for correction of defects was taken, and by May 28, 1982, the  
Bank believed that security document defects had been corrected and lease audit  
irregularities substantially rectified. The Wright report of that date stated:  
“All collateral security is now in order and legally valid. Several audit irregularities  
remain outstanding and are being followed.”  
The decision to call the loans and appoint a receiver was made four days later.  
[217]  
The foregoing was adverted to by Einarson in a letter dated March 23, 1983, to  
Head Office, in which he stated:  
“After … [February 22, 1982] … it was discovered that the Bank documentation  
contained numerous errors and the Branch was asked to have these corrected. In  
spite of the fact the Bank had asked Mr. Phyper to have the accounts removed from  
its books he was fully cooperative in the correction of the documents. Mr. Phyper had  
agreed to wind down the business under bank controls.  
. . . . .  
“Shortly after the correction of the collateral irregularities the Bank demanded  
payment (June 8th) and appointed a Receiver one day later on June 9th. I have two  
concerns here. One being that it may be considered the Bank purposely delayed  
action in calling loans until such time as Mr. Phyper’s cooperation was obtained in  
putting the Bank’s collateral documents in order.  
. . . . .  
“The end of March and early April, 1982 personnel from [Head Office] did a full  
review of the lease portfolio and provided information regarding the current position  
of [Dunphy Leasing] … Satisfaction was expressed with regard to the quality and  
value of the lease portfolio.”  
[218]  
Einarson was politely advising Head Office that the Bank’s lack of candour in  
dealing with Phyper, and its precipitate action in appointing a receiver, would not be kindly  
regarded by a judicial tribunal. He could hardly be expected in a letter to his superiors to  
refer to the Bank’s conduct as inept, blundering, and deceitful, but his words impart that  
message.  
[219]  
Einarson referred in his letter to the fact that, “Phyper had agreed to wind down  
the business under bank controls”. Those or similar words are used in numerous Head  
Office demands which refer to the events of 1982, including a report to the Board of  
Directors of the Bank. The obvious concomitant to Phyper’s agreement to wind down the  
business is an agreement by the Bank to allow him to do so. Phyper could not have  
reached an agreement with himself. The point appears to have been lost on those in Head  
Office who read the words.  
[220]  
The situation regarding 106315 is different from that which existed in the cases  
of Dunphy and S&D. In the case of 106315, no steps were taken against the company  
either by the Bank or its receiver until considerable time had passed after June 8th. The  
duty which the Bank breached in the case of 106315 was the duty to give reasonable  
notice that the Bank would no longer extend credit to the company by way of overdraft.  
[221]  
The account of 106315 had been in an overdraft position in every month since it  
had been opened in May, 1981, and by June 1, 1982, the account had been continuously  
overdrawn since November 2, 1981. The recorded overdraft had been as high as  
$187,000 in May, $110,000 in August, and $65,000 in December, 1981. It reached  
overdraft highs of $65,000 in March, $60,000 in April, and $44,000 in May, 1982. Overdraft  
charges collected by the Bank totalled $5,600 for the first five months of 1982.  
[222]  
One of the recommendations made by the Branch and applied for in the  
February 2, 1982, credit presentation was that the 106315 line of credit be increased to  
$295,000 – an increase which would convert the then–existing overdraft of $53,000 into a  
part of the authorized line. That recommendation and application regarding 106315 met  
the same fate as the accompanying applications regarding Dunphy Leasing and S&D – it  
was neither accepted nor rejected; it appears to have been simply ignored and the  
overdraft charges to 106315 continued.  
[223]  
The opening overdraft in the account of 106315 on June 1, 1982, was $44,000.  
At the end of the day, after six cheques were cleared through the account, the overdraft  
stood at $48,–000. On the following day, a $4,900 deposit was made and two additional  
cheques were processed through the account, so that at one point in the day, the overdraft  
balance again stood at $48,000. At that point, the Bank proceeded to dishonour eight  
cheques which had formerly been cleared through the account on that and the preceding  
day. The account statement indicates that the cheques which had formerly been honoured  
were returned NSF. During the entire prior history of the 106315 account, no cheque  
issued by the company had ever been returned NSF.  
[224]  
Having initially cleared the cheques and increased the overdraft of 106315, the  
Bank reversed its position and declared to the payees of the cheques that there were  
insufficient funds in the account to honour the cheques.  
[225]  
The June, 1982, rent cheque for 106315 was dishonoured and returned to the  
landlord who reacted by locking the company out of its business premises. The chain of  
events started which led to the loss of the business assets of the company.  
[226]  
After 106315 had been locked out by its landlord, it regained access to its  
business premises by exchanging mobile telephones for the month’s rent. The company  
had to vacate by the end of June. Bruce Phyper, the then–manager of 106315, telephoned  
the receiver, Doane Raymond Limited (“Doane Raymond”), to obtain permission to move  
the inventory into storage.  
[227]  
Doane Raymond was the receiver manager for Dunphy Leasing privately  
appointed by the Bank of June 9, 1982, until October 8, 1982, when Thorne Riddell Inc.  
(“Thorne Riddell”) was appointed by the Court as receiver manager.  
[228]  
Mr. Dhala (“Dhala”) was the Doane Raymond employee who dealt with Bruce  
phyper. He sent a Doane Raymond employee to the 106315 premises with instructions to  
take a count of the furniture and inventory of the Company. The employee apparently did  
so on June 28th and was assisted by Bruce Phyper.  
[229]  
On June 30th, Bruce Phyper physically moved the 106315 inventory from the  
former business premises to a Mini Mall self–storage facility. The lease contract for the  
self–storage facility named Dunphy Leasing and Doane Raymond as tenants and was  
signed by Bruce Phyper, who had been instructed by Dhala to put the contract in the  
names of Dunphy Leasing and Doane Raymond. The rental for the facility was thereafter  
paid by either Doane Raymond or the Bank, and Bruce Phyper invoiced Dunphy Leasing  
and Doane Raymond for the expense incurred by him in moving the inventory.  
[230]  
The inventory consisted primarily of mobile telephones, two–way radios, and  
replacement parts. It was high–tech equipment of a type which was capable of rapid  
obsolescence. The inventory was seized on June 28th, 1982, when the Doane Raymond  
employee conducted his listing, thereby exercising dominion and control over the  
inventory, or when Bruce Phyper placed the inventory in the Mini Mall storage facility in the  
names of Dunphy Leasing and Doane Raymond, thereby confirming a change of  
possession and control.  
[231]  
Further insight into the status of that inventory while it was stored at the Mini  
Mall facility is derived from the following communications:  
“The inventory for 106315 Canada Inc. is under the control of Doane Raymond  
Limited. (Eckardt, August 20, 1982) (Exhibit #289).  
“Assets under our possession  
We have the following assets of the company still under our control:  
(a) …  
(n) Mobile phone and furniture Mini Mall Self Storage … The mobile phones and  
furniture were the property of the company and its subsidiary, Canada West  
Group. We have a listing of this inventory. (Doane Raymond, October 22, 1982)  
(Exhibit #324).  
“As previously mentioned, [Doane Raymond] have control of this Company’s radio  
phone inventory. We have not as yet formalized our seizure of the inventory and this  
matter is presently being followed … Mr. Forrest has issued a new demand for  
payment, and as well is completing the formal documentation relative to seizing the  
radio phone inventory … To date we have not been able to establish any interest or  
market for the radio phone inventory and will be pursuing this aspect as well.  
(Eckardt, November 18, 1982) (Exhibit #338).  
“We advise having attended the office of [Doane Raymond] on Tuesday, November  
23, 1982 in order that we might obtain access to the radio phone inventory. We  
subsequently attended the office of the Mini Storage, who advised us that they would  
not allow access to anyone other than those officers who signed to put this inventory  
in storage. The officer who had signed the storage rental form was Mr. S. Dhala and  
he was in Grande Prairie on another matter and therefore, not available to allow us  
access to review the radio phone inventory.  
. . . . .  
“Once we are in receipt of an up–to–date confirmed listing of the radio phone  
inventory, that information will be provided to our solicitor and subsequently to the  
sheriff in order that our seizure of the inventory is formalized … We also enclose  
billings received relative to costs of storing the radio phone inventory and request  
your authorization to pay these costs at the debit of the Non–Current loan. (Eckardt,  
December 6, 1982) (Exhibit #345).  
“We advise having received on December 23, 1982, an up–to–date listing of  
inventory and office equipment on the subject [106315] from [Doane Raymond]. We  
have provided this information to our solicitor this date, in order that he may proceed  
to have the sheriff formally seize these goods. (Eckardt, December 23, 1982) (Exhibit  
#349).  
“… I enclose the following:  
(1) …  
(2) Canada West [106315]  
(a) Two copies of the inventory list.  
(b) Keys to the locker at Mini Mall Storage, where the inventory is located.  
(Doane Raymond, December 23, 1982) (Exhibit #353).  
“[106315 was] … essentially wound by [Doane Raymond] pursuant to the lease  
contracts held by [Dunphy Leasing] and as well under private agency appointments  
pursuant to security documents held by the [Bank]. (Thorne Riddell – January 25,  
1983) (Exhibit #359).”  
[232]  
The foregoing communications confirm the possession, dominion and control  
exercised by Doane Raymond and the Bank over the 106315 inventory during the period  
after June 30, 1982, as well as the implicit recognition by the Bank of a de facto seizure  
requiring “formalization” by judicial process.  
[233]  
On November 17, 1982, the Bank’s solicitor, Mr. Forrest, made a demand for  
payment on 106315 pursuant to the company’s demand note dated June 17, 1981 (Exhibit  
#334), and the overdraft in its current account. The demand of November 17th allowed  
106315 five days within which to make payment. Service of that letter on the company was  
not admitted and was a fact to have been proven by the Bank at trial.  
[234]  
On January 19, 1983, the Bank’s solicitors wrote to the Sheriff instructing  
seizure of  
“… all the communications equipment including radio telephones, two–way radios  
and related parts and accessories … pursuant to security under Section 178 of the  
Bank Act, a copy of which notice and security is attached hereto as Schedule ‘A’ . A  
list of the equipment to be seized is attached hereto as Schedule ‘B’ … We enclose  
the keys to the premises to allow you access.” (Exhibit #355).  
[235]  
The inventory was seized by the Sheriff on January 25, 1983, but remained at  
the Mini Mall storage facility, to which the Bank had the key. No notice was given to  
106315 of the seizure and no Notice of Objection to the seizure was filed by 106315.  
[236]  
The seizure by the Bank was from the Bank, pursuant to security which the  
Bank knew was defective.  
Parol Evidence Rule  
In Exhibit 45, a memorandum from Stork to Regional Office dated July 14, 1981,  
[237]  
it was stated that “Repayment of the S&D U–Drive leases @ 2.75% per month was  
discussed and agreed to by Phyper”. What the Bank intended to convey is that the written  
loan agreement for a maximum principal repayment rate of 2.25% per month had been  
amended by oral agreement and increased to 2.75% per month.  
[238]  
The rule known as the “parol evidence rule” encompasses all prior or  
contemporaneous transactions between parties whether they are oral or written. Burton,  
J.A., aptly explained the rationale for the rule in an early Ontario decision, Ellis v. Abell  
(1884), 10 O.A.R. 226 at p. 247:  
“… and it is well to bear in mind the reason of the rule, that when parties have  
deliberately put their engagements in writing in such language as imports a legal  
obligation it is only reasonable to presume that they have introduced into it every  
material term and circumstance; and consequently all parol testimony of  
conversations or declarations made by either of them, whether before or after or at  
the time of the completion of the contract, will be rejected, because such evidence,  
while deserving far less credit than the writing itself, would inevitably tend in many  
instances to substitute a new and different contract for the one really agreed upon.”  
[239]  
The parol evidence rule was applied by the Supreme Court of Canada in  
Hawrish v. Bank of Montreal, [1969] S.C.R. 515, which dealt specifically with an  
allegation of the existence of a collateral oral agreement amending a written agreement.  
Judson, J., reviewed the authoritative judgments and held (at p. 518) that oral evidence  
proving the making of such collateral agreement was inadmissible and (at. p. 520) that a  
collateral agreement cannot be established where it is inconsistent with or contradicts a  
written agreement.  
[240]  
It is impossible to ascertain the date on which the alleged oral agreement was  
made, the date on which it was to become effective or, most importantly, which of the  
terms of the loan agreement were amended, or how.  
[241]  
The Bank did unilaterally amend the loan agreement and change the terms upon  
which it had agreed to lend to Dunphy Leasing – not only regarding principal repayment  
rate but also regarding interest rates, lease terms, interest payment dates, obligation to  
advance, and payment upon sale. In each case the unilateral amendment was made by  
Bank edict, and the change was adverse to Dunphy Leasing’s interests. There was never  
a written amending agreement, and the only suggestion of an oral agreement relates  
solely to principal repayment rate. I reject that Phyper, on behalf of Dunphy Leasing,  
agreed to any of the other amendments made by the Bank.  
[242]  
The Bank contends that it was entitled to immediate payment upon Dunphy  
Leasing selling a vehicle financed by the Bank, notwithstanding the unambiguous  
provision of the loan agreement prescribing that payment was to be made, “… in the  
month following expiry or termination of the lease”.  
[243]  
The defect in the Bank’s argument is the failure to recognize that the loan  
agreement is the master agreement governing the business relations between Dunphy  
Leasing and the Bank. All security documents contemplated or required by the loan  
agreement are subordinate to it. In the event of conflict between the provisions of the loan  
agreement and the provisions of any such subordinate document, the provisions of the  
loan agreement must prevail.  
[244]  
In determining any conflict or inconsistency between the loan agreement and  
documents such as chattel mortgages, assignments of book debts and operation of  
account agreements, it must be kept in mind that the former is an agreement specifically  
prepared for Dunphy Leasing and the Bank, intended to govern their business relations;  
the latter are adhesion contracts for general purpose use by bankers.  
[245]  
The chattel mortgage provision which the Bank relies on is as follows:  
“The Mortgagor shall not, without the prior written consent of the Mortgagee, use the  
Property for hire or part with the possession or control of the Property or sell or  
transfer any interest in the Property or remove or cause or permit the Property to be  
removed longer than thirty days from the country or district in which the said Property  
is situate at the date of the execution of this Mortgage.”  
[246]  
The sole purpose for which vehicles were acquired by Dunphy Leasing was to  
lease or hire out the vehicles. Leasing effected a parting with “possession or control” of the  
leased vehicle. The purpose of the financing was to finance an inventory of automobiles  
“for lease”.  
[247]  
The “notorious industry practice” testified to by the Bank’s witnesses would  
indeed be notorious if it were to prevail over the clear terms of the written agreement  
between the parties. The Bank allowed Dunphy Leasing to make payment for sold vehicles  
a month (or even later) after the date of sale and that practice had been established for  
many months.  
[248]  
It would have been simple for the Bank to prepare an amendment to the loan  
agreement requiring payment upon sale, but the Bank chose not to do so. The Bank  
imposed the amendment on Dunphy Leasing in March of 1982, and now seeks to have the  
imposition confirmed by the Court, to become effective at some unstated point in time  
midway through the dealings between Dunphy Leasing and the Bank. In my opinion, the  
Bank cannot do this.  
Hearsay Evidence  
[249]  
Exhibit 732 is a letter ostensibly written by Sturgeon to Haddad, a Winnipeg car  
dealer who in 1982 was considering the purchase of the car fleet of S&D (“Haddad”), and it  
was introduced into evidence through Haddad, who could only testify as to its receipt. The  
letter is hearsay, and is not evidence to prove the truth of the statements made therein.  
Sturgeon did not give evidence and authorship of the letter was not established. The letter,  
although produced through a Bank witness, was not listed in any of the Bank’s Affidavits  
on Production and, accordingly, is not entitled to the benefit of rule 190 presumptions. It  
contains statements concerning Dunphy Leasing and constitutes double hearsay since  
even if the letter were written by Sturgeon, he had no capacity with Dunphy Leasing and  
no personal knowledge of its business affairs. The letter was not written by a Dunphy  
employee, was not a “normal course” communication, and was not admittedly sent and  
received. Nor does it constitute an admission against interest except perhaps against  
S&D, and then only if there is evidence to establish who wrote it. The letter is not evidence  
to prove the truth of any of the statements which it contains and the letter is inadmissible in  
that it constitutes hearsay.  
[250]  
The central issue in this litigation is whether the Bank allowed Dunphy Leasing a  
reasonable time after demand within which to make payout. The telephone conversation of  
February 22nd, 1982, between Einarson and Phyper has no bearing on that issue. This  
much is now clear:  
1. No demand for payment was made.  
2. No notice was given from which Dunphy could or should infer that a demand would be  
made in the future.  
3. After February 22, 1982, the Bank continued to deal with Dunphy Leasing and to lend  
money to both Dunphy Leasing and S&D.  
4. Neither the Branch nor Regional Office was aware that the end had begun; each  
continued to recommend further accommodation for Dunphy.  
[251]  
The Bank acknowledges that as of March 4, 1982, Dunphy Leasing had 37 new  
vehicles on hand to mortgage, with a value of $423,190. Eckardt at Branch level had  
recommended that the Bank discount the lease paper. Dunphy Leasing’s principal arrears  
totalled $331,–883 and interest was paid up to date.  
[252]  
Two results would necessarily follow on discount of the $423,190:  
1. all arrears of both principal and interest would be paid in full; and  
2. Dunphy Leasing would have approximately $92,000 available for working capital.  
$332,000 would have been applied in payment of interest arrears and Dunphy Leasing’s  
debt would not increase by that amount. The debt would have increased by the $92,000,  
but would still be $112,000 lower than it was on January 14, 1982.  
[253]  
The Head Office of the Bank embarked on a course of action in March, 1982, to  
do everything possible to enhance its security position. Regional Office and the Branch  
were kept in the dark and were allowed to continue to make recommendations for the  
ongoing support of Dunphy Leasing.  
[254]  
Phyper was not a perfect businessman and Dunphy Leasing was experiencing  
lessee delinquency problems by June of 1982, however, the history of mismanagement  
and incompetence demonstrated by Bank personnel at all levels was far greater than the  
deficiencies of Phyper.  
[255]  
Exhibit 630, Appendix 3, discloses the existence of 12 vehicles having a  
“security value” of $161,000. Exhibit 678 shows 13 unencumbered S&D vehicles on hand  
as at June 9, 1982, having loan payout values of $91,000. The only vehicle appearing on  
both lists is lease #834.  
[256]  
A large number of S&D vehicles were coming off lease in May, 1982, and  
thereafter they were coming off lease only because the Bank had unilaterally decreed (in  
April, 1981) that daily rental car leases could only have 12 month lease terms. That decree  
constituted an unilateral amendment of the loan agreement which specified minimum 24  
month lease terms.  
[257]  
The Bank changed the rules after Dunphy Leasing was a customer. One of the  
results of the change in rules was that S&D leases matured earlier than would otherwise  
have been the case.  
[258]  
The reasons provided by Penney for his decision to call Dunphy Leasing’s loans  
and appoint a receiver was his mistaken impression as to the amount of arrears owing as  
of June 1, 1982, an impression mistaken by over half a million dollars. Penney’s reasons  
for his decision to appoint a receiver are summarized as:  
“Due to the lack of experience and the lack of time of the Bank’s Branch personnel  
and the type of experience required for a wind–down of business under present  
management, a Receiver was preferred …”  
[259]  
Dunphy Leasing was placed in receivership because the Bank lacked  
experienced personnel with the time to oversee a wind–down by management.  
[260]  
Kavanagh’s reasons for his decision to appoint a receiver were as follows:  
“Given the account administration problems and the anticipated lack of cooperation  
by Mr. Phyper due to the calling of the loans, the involvement of an independent third  
party (a Receiver) seemed advisable.”  
Kavanagh’s reasons demonstrate an indifference to the factors which would have  
considered – namely, the absence of risk, Phyper’s unquestioned honesty and history of  
cooperation with the Bank, the lack of knowledge of, or experience in, the leasing business  
of the proposed receiver and, most importantly, the benefit to be derived from a receiver  
as opposed to the expense to be incurred.  
[261]  
Without exception, the bank employees who had first–hand knowledge of the  
account (Stork, Eckardt, Chambers, Harms, Berstad, Cumming, Einarson, Mund)  
consistently supported the account; the negative input came from Head Office employees  
(Wright, Sweeney).  
[262]  
Questions which Senior Bank Management should have considered but failed to  
do so include: What risks would the Bank run by allowing each Borrower the time it would  
reasonably require to raise the money to pay out the Bank? Is management honest? Does  
our security exist and is it legally enforceable? Can the Bank security be readily  
absconded with? Is there any basis for believing that management would abscond if that  
were possible?  
[263]  
With regard to S&D, Doane Raymond had the same rights regarding that  
Company as it had regarding Dunphy Leasing – none. The improper appointment of  
Doane Raymond as receiver meant that Doane Raymond had no right to be upon the  
premises of S&D just as it had no right to be upon the premises of Dunphy Leasing.  
[264]  
The causes of action are trespass and conversion. At the time Doane Raymond  
and the Bank took possession of the business premises and all of the assets of Dunphy  
Leasing and S&D and converted those assets to the use of the Bank, the destruction of  
the Companies’ businesses was active.  
[265]  
The Bank attempts to derive justification for its actions regarding S&D from the  
fact that Phyper was involved with the July wholesale auto auction.  
[266]  
[267]  
The wholesale auction was going to proceed with or without Phyper.  
The complaint against the Bank is founded squarely on the principle recognized  
by the Supreme Court of Canada in Ronald Elwyn Lister Limited et al. v. Dunlop  
Canada Limited, [1982] 1 S.C.R. 726; 42 N.R. 181, that a creditor must allow its debtor a  
reasonable opportunity for payment before acting upon its security. In the cases of both  
Dunphy Leasing and S&D, the Bank violated that principle and thereby committed the torts  
of trespass and conversion.  
[268]  
The Borrowers contend that banks have an obligation to their customers to act  
responsibly and intelligently, and to make no decision adversely affecting the borrower  
except upon a reasonable and informed basis. Those obligations could arise in contract as  
an implied term of the banker–customer agreement; they could arise in negligence as a  
duty of care owed by the bank to its customer; or they can simply be recognized as they  
were in Lister, supra, as a duty imposed upon the creditor to give reasonable notice of its  
intentions to enforce payment.  
[269]  
The Bank acted unlawfully and committed trespass and conversion, both in  
realizing upon its security before it was entitled, and in realizing in a manner to which it  
was not entitled. The Borrowers contend that the damages which they sustained are to be  
measured prior to the trespass and conversion. Accordingly, receivership receipts do not  
provide a measure of damages. The measure must be taken as if the receiver had not  
been appointed.  
[270]  
The basis of Dunphy Leasing’s complaint is that a receiver was appointed when  
it was. The basis of S&D’s complaint is that it was put out of business by a receiver  
appointed for another company. The failures to realize market value, to take reasonable  
care and to act in a commercially reasonable manner existed and are relevant to the  
question of damages.  
The Interest Act  
[271]  
It is conceded that Dunphy Leasing would have been in default on June 8, 1982,  
applying the nominal rate method of interest calculation and assuming that no additional  
loan advance had been made.  
[272]  
Dr. Charles Prentice, an Associate Professor with the Faculty of Management at  
the University of Calgary, provided expert evidence regarding the mathematics of finance  
and interest calculation.  
[273]  
The following are the issues which must be decided:  
(a) which method of interest calculation is correct?  
(b) did the Bank cause default by refusing to advance loans to Dunphy Leasing, and did  
such refusal constitute a breach by the Bank of its express obligation under the loan  
agreement to make advances “on receipt of a promissory note for the amount of the  
advance”?  
(c) if there had been default, would its existence relieve the Bank of the obligation to  
provide reasonable notice prior to enforcing its security.  
[274]  
The applicability of the Interest Act is an important legal issue to be determined  
in this litigation.  
[275]  
The Bank contends that s. 4 of the Interest Act has no application in the  
circumstances presently under consideration because the “contracts” under consideration  
stipulate for interest at a rate per annum, even though it is payable monthly. It is the  
monthly payment, however, which makes the Act applicable. That payment is “interest …  
payable at a rate … for a period less than a year”. The period in this case is one month.  
The rate is a stated rate per annum. The interest is therefore payable at a rate (stated rate  
per annum) for a period less than a year (monthly). The section is applicable. All that is  
required for compliance is that interest be calculated by the effective rate method, so that  
the stated rate is the same as the effective rate.  
[276]  
If the Bank’s restrictive interpretation of the Act were correct, a lender could  
collect interest at the rate of 24% per annum, calculated and payable monthly by  
application of the nominal rate method of interest calculation. If, however, the lender chose  
to stipulate that interest were payable at the rate of 2% per month, the lender would be  
restricted by s. 4 of the Act to collection of interest at the rate of 5% per annum – unless  
the lender included in the contract a statement that the effective rate of interest being  
charged was 26.8%. The equivalent of 24% per annum calculated and payable monthly by  
the nominal rate method is 26.8% per annum. Yet in the first case the lender is permitted  
to collect interest at the effective annual rate of 26.8% without disclosure, whereas in the  
second case disclosure is required.  
[277]  
Given a stated rate of 24% per annum, the effective yield to the lender when  
interest is calculated and collected monthly by the nominal rate method is 26.8%. If the  
interest were calculated and collected weekly, the effective yield would be even higher,  
and if calculated and collected daily, higher yet. On the Bank’s interpretation of s. 4 of the  
Act, however, each method of calculating and collecting interest is acceptable provided  
only that the rate of 24% per annum be stipulated – notwithstanding that the effective yield  
is in each case different, and in each case increasingly higher than 24%.  
[278]  
The absurd results are avoided by the requirement that contracts requiring the  
payment of interest be construed as requiring that interest be calculated by the effective  
rate method unless the contrary is expressly stated.  
[279]  
The Act is disclosure legislation. Its purpose is to require truth in lending. That  
purpose cannot be defeated by the expendient of expressing interest at an annual rate,  
and then calculating and collecting it in a manner which results in a higher effective rate.  
[280]  
There are two methods of calculation of interest, one of which costs more to the  
borrower and yields more to the lender. The second step is to analyze the contract  
documents to determine which of the two interest calculation methods has been  
prescribed. In this case the documents are silent on that issue – the documents are  
capable of being construed so as to require payment of interest calculated by either of the  
two methods.  
[281]  
The solution is to interpret the documents as requiring that interest be calculated  
by the effective rate method. That solution produces an effective rate identical to the  
represented, stated rate.  
The question: Where in the contract documents does it say which method of interest  
calculation is to be applied?  
The answer: Nowhere, either expressly or by implication.  
The result: The documents will be construed in the manner which results in the actual  
interest rate being the same as the stated rate and in the manner least favourable to their  
author.  
1. The Bank calculated interest using the nominal rate method because the Bank was  
aware that it was the most profitable method of interest calculation.  
2. The Bank adopted as its standard practice the most profitable method of interest  
calculation.  
3. Phyper was only aware of one method of interest calculation.  
4. The Bank’s operation of account agreement sheds no light on the interpretation to be  
placed on the “contracts”. The agreement provides the basis for a Bank argument quite  
distinct from the interpretation issue.  
5. The fact that one of the parties to the transaction is less sophisticated in business than  
the other is no basis for interpreting documents in the manner least favourable to the less  
sophisticated party.  
[282]  
Use of the Interest Act offensively was specifically authorized by s. 5, which  
states:  
“If any sum is paid on account of any interest not chargeable, payable or recoverable  
under the last preceding section, such sum may be recovered back or deducted from  
any principal or interest payable under such contract.”  
Default  
[283]  
It must first be recognized that neither the Bank’s decision to call the Borrowers  
loans nor the decision to appoint a receiver was based upon the actual or perceived  
existence of de fault. The basis for the decisions is recorded in Exhibit 204 which states,  
“In view deteriorating situation and possible loss these accounts we wish you issue formal  
demand for payment …”.  
[284]  
The Borrower’s loans had been paid down in the five months preceding the date  
of Exhibit 204 by some $1.08 Million.  
[285]  
The possibility of the Bank sustaining losses had been thoroughly investigated  
by Mund, who had concluded, “this account liquidated in an orderly manner with no loss to  
the Bank”.  
[286]  
The Bank called the loans, “based upon its belief that Dunphy Leasing had failed  
for a period of 30 days to make its payments of principal and interest to the Bank when  
due”. What that implies is that the subject of default, as dealt with in the loan agreement,  
had been considered by the Senior Credit Committee. The evidence indicated that the  
loan agreement had not even been discussed. It is the loan agreement which contains the  
30 day definition of default.  
[287]  
The demand letters issued by the Bank did not purport to call loans because of  
default, nor did the letter appointing a receiver for Dunphy Leasing allege default. Both the  
calling of the loans and the appointment of the receiver were an exercise of what was then  
considered an unassailable Bank prerogative.  
[288]  
Dunphy Leasing was in default under the terms of both the loan agreement and  
the debenture in that it had failed to provide the Bank with unaudited financial statements  
within 45 days after quarter end. The existence of other events of default is disputed. The  
Bank did not even take the time to write a letter to the customer requesting delivery of  
financial statements or advising that failure to deliver within some reasonable period of  
time could have adverse consequences. The Bank had acquiesced in the existence of the  
alleged events of default and had never complained in writing.  
[289]  
The existence of default, if any, does not relieve the Bank of the obligation to  
allow reasonable time for payment and the immediate appointment of a receiver  
constituted a breach of that obligation.  
[290]  
A very important distinction must be made between the two Bank decisions –  
the decision to call the loans and the decision to immediately (within 20 hours) appoint a  
receiver. The existence of default, if not waived or acquiesced in, may justify the decision  
to call the loans. The existence of default does not justify the appointment of a receiver  
before a debtor has been given a reasonable opportunity to pay. The basis for Dunphy  
Leasing’s complaint is the immediate appointment of a receiver; the basis for the  
complaints of 106315 is the termination without reasonable notice of its line of overdraft  
credit.  
[291]  
In West City Motors Ltd. v. Delta Acceptance Corp., [1963] 2 O.R. 683, the  
statement by Aylen, J., at p. 689 is applicable to the facts in this case. He stated:  
“It is impossible now to say whether the plaintiffs could have refinanced their  
company, but certainly they were entitled to a reasonable opportunity to do so.”  
The foregoing is a statement of the principle that in determining what constitutes  
reasonable notice, courts need not speculate on the ability of the borrower to obtain  
refinancing or alternate financing.  
[292]  
In Ronald Elwyn Lister Limited v. Dunlop Canada Limited (1979), 27 O.R.  
(2d) 168 (Ont. C.A.), Weatherston, J.A., said at p. 175:  
“Manifestly, the Company did not have money of its own to pay the indebtedness. Its  
liabilities far exceeded its assets.  
. . . . .  
“… So, by early March, the situation facing Dunlop was that the Company [Lister]  
was heavily in debt and insolvent; it was faced with future losses; …”  
The foregoing conclusions were not disturbed by the Supreme Court of Canada which held  
that reasonable time to pay was required and had not been given.  
Reasonable Notice To The Borrowers By The Lender  
[293]  
In the leading case Ronald Elwyn Lister Limited v. Dunlop Canada Limited  
(1978), 19 O.R.(2d) 380 (H.C.J.), per Rutherford, J., reviewed in (1979), 27 O.R.(2d) 168  
(C.A.), the original trial judgment of Rutherford, J., was upheld unanimously by the  
Supreme Court of Canada in Ronald Elwyn Lister Limited v. Dunlop Canada Limited,  
[1982] 1 S.C.R. 726; 42 N.R. 181, the judgment of the Court being given by Estey, J.,  
where he stated at p. 747:  
“… The majority of the Court of Appeal concluded that the appellants were required  
either on these facts or generally to ask for time to pay. No authority was cited for the  
proposition and none was advanced in this Court. Here the Listers allowed the  
receiver to enter into possession and to proceed to liquidate Mr. Lister’s assets and  
those of the Company on behalf of Dunlop. This technical or mechanical  
acquiescence in no way eliminated, by waiver, acquiescence or otherwise, the  
appellants’ entitlement to reasonable notice. In the result therefore, Dunlop and its  
agents, its employees and the receiver were guilty of trespass and conversion.”  
[294]  
A subsequent decision of importance was the case of Mr. Broadloom Corp.  
(1968) Ltd. v. Bank of Montreal (1979), 25 O.R.(2d) 198 (H.C.J.) per Linden, J., reviewed  
(1983), 44 O.R. (2d) 368 (C.A.), the judgment of the Court of Appeal was delivered by  
Blair, J.A. The Court of Appeal waited until the judgment of the Supreme Court of Canada  
in Lister v. Dunlop, supra, was released before deciding this case. The facts of Mr.  
Broadloom are typical. The lender called its loan due to a feeling that the borrower was  
overextending itself, at the same time appointing a receiver. The trial judge, Linden, J.,  
directed the following questions to himself to be considered (at p. 208):  
(1) the amount of the loan;  
(2) the risk to the creditor of losing his money or the security;  
(3) the length of the relationship between the debtor and the creditor;  
(4) the character and reputation of the debtor;  
(5) the potential ability to raise the money required in a short period;  
(6) the circumstances surrounding the demand for payment;  
(7) any other relevant factors.  
[295]  
At the trial one of the partners, Diamond, testified that the Bank demanded  
immediate payment of $1.5 Million. He then asked how much time he would have to raise  
the fund, pointing out the enormity of the debt and the fact that his partner was away.  
Twice the Bank Manager replied that the Bank was not prepared to give any time even  
though the company had dealt with the Bank for 13 years. Diamond made no specific  
proposal to the Bank Manager. He indicated that he could raise the money within a few  
days. The Bank would not wait and appointed a receiver immediately to take over the  
company. It seems as though the failure of Diamond to advance a specific request and  
proposal to the Bank was crucial to the case in the eyes of Linden, J.  
[296]  
Blair, J.A., for the Court of Appeal, pointed out that Linden, J., did not have the  
advantage of considering the reasons of the Supreme Court of Canada in Lister, supra,  
particularly those of Estey, J., which I have already cited. Had he done so his conclusions  
might have been different. Blair, J.A., stated at p. 374 of the Court of Appeal judgment:  
“The decision of the Supreme Court in Lister must be taken as authority that  
creditors may not lay down arbitrary requirements which must be satisfied before the  
question of the reasonableness of time for payment can be objectively considered.  
The weight placed by the learned trial judge on the failure of the appellant to ask for  
time for payment in this case offends the principle laid down by Lister. It is obvious  
that the imposition of an even more onerous condition requiring an immediate  
proposal for payment cannot stand in the face of the Lister decision.”  
[297]  
Saunders, J., endeavoured to distill the meaning of Lister from Estey, J.’s,  
decision in the Supreme Court of Canada in the unreported case of Alpha Engineering v.  
Toronto–Dominion Bank, released September 27, 1984, by saying: (quoted by Holland,  
J., in Camway Trucking Ltd. v. Toronto–Dominion Bank, [1988] O.J. No. 228, p. 6):  
“It seems to me that in 1984 a debtor must be allowed a reasonable time to meet a  
demand if there is any reasonable chance that he would be able to do so.”  
Reasonable Time  
[298]  
One of the questions to be determined in this litigation is whether 20 hours was  
a reasonable time to meet an unexpected demand for payment of a sum in excess of $5  
Million. To quote Blair, J.A., in Mr. Broadloom, supra, at p. 374:  
“… Merely to ask the question is to invite the obvious response that it could not be a  
reasonable time unless there plainly were no resources available to meet the debt or  
unless it were certain that the debtors would abscond with their assets.”  
[299]  
The two conditions were not present in the case of Dunphy Leasing. Mund’s  
report confirmed the existence of assets which were more than sufficient to meet Dunphy’s  
debt to the Bank. Phyper’s honesty in all his dealings with the Bank totally precluded any  
risk of him absconding, and even if he had been inclined to do so, the nature of Dunphy’s  
business assets would have prevented him.  
[300]  
The essence of the decision by the Supreme Court in Lister v. Dunlop, supra,  
is that lenders must act in good faith and give bona fide consideration to the requirement  
of reasonable notice. Estey, J., stated at p. 749:  
“The rule has long been that enunciated in Massey v. Sladen (1868), L.R. 4 Ex. 13,  
at p. 19: the debtor must be given ‘some notice on which he might reasonably expect  
to be able to act’. The application of this simple proposition will depend upon all the  
facts and circumstances in each case. Failure to give such reasonable notice places  
the debtor under economic, but nonetheless real duress, often as real as physical  
duress to the person, and no doubt explains the eagerness of the courts to construe  
debt–evidencing or creating documents as including in all cases the requirement of  
reasonable notice for payment.  
“This authority (Massey) relates back to the dictum of Cockburn, C.J., in Toms v.  
Wilson and Another (1863), 4 B. & S. 442 [at p. 454], 122 E.R. 524 at p. 529.  
Blackburn, J., in concurring, put the matter directly:  
‘But, when, by the express terms of the instrument creating the debt, payment is  
to be made “immediately upon demand in writing”, it must be construed to mean  
within a reasonable time.’  
“Baron Pigott, in Massey, supra, stated (at p. 19):  
‘It is not necessary to define what time ought to elapse between the notice and the  
seizure. It must be a question of the circumstances and relations of the parties,  
and it would be difficult, perhaps impossible, to lay down any rule of law on the  
subject, except that the interval must be a reasonable one. But it is quite clear that  
the plaintiff did not intend to stipulate for a merely illusory notice, but for some  
notice on which he might reasonably expect to be able to act.’  
“… for a modern summation of the rule and its particular application see Mister  
Broadloom Corporation (1968) Ltd. v. Bank of Montreal (1979), 25 O.R.(2d) 198  
(H.Ct.) …”  
[301]  
In Mister Broadloom Corp. (1968) Ltd. v. Bank of Montreal, supra, (Ont.  
H.C.J.) at p. 206, Linden, J., stated:  
“The meaning of payable on demand; is a reasonable time to pay required?  
“When money is payable on demand, what does this mean? Does it mean that the  
money must be paid immediately or does it mean that it must be paid within a  
reasonable time thereafter? Clearly, the debtor does not have the right in every case  
to get as much time as he needs to see if he can raise the money: Cripps  
(Pharmaceuticals) Ltd. v. Wickenden et al., [1973] 2 All E.R. 606. If he did, a  
demand note would be useless. But neither can a creditor expect the debtor to have  
the money ready in his pocket to hand over instantly, especially if a large sum is  
involved. Even the strictest of the old cases permit the debtor enough time to go and  
get the money from his desk or from his bank: …  
“Between these two poles, it is not as easy to determine how much time a debtor has  
to pay the money when it is demanded. It is clear that it need not be paid  
instantaneously. It is also clear that the debtor cannot pay it at his leisure.  
“A reasonable time always had to be given, and what is a reasonable time has  
always depended on the circumstances. The earlier cases allowed for less actual  
time than some of the more recent cases, but the need for a reasonable time in  
which to pay has always been recognized, even when only enough time is given to  
go and get the money from the bank: Toms v. Wilson, supra; Cripps v. Wickenden,  
supra. In the circumstances of those cases, the Courts felt that a few minutes to  
permit a withdrawal from a nearby bank was sufficient time to qualify as ‘reasonable’.  
In other circumstances, more time might be required to comply with the description  
‘reasonable’.  
“More recently our Courts appear to have extended the time allowed, in appropriate  
cases, to ‘at least a few days in which to meet the demand’: see Aylen, J., in West  
City Motors Ltd. et al. v. Delta Acceptance Corp. Ltd., [1963] 2 O.R. 683 at p.  
689, 40 D.L.R.(2d) 818 at p. 824. As Mr. Justice Rutherford stated in Ronald Elwyn  
Lister Ltd. v. Dunlop Canada Ltd. (1978), 19 O.R.(2d) 380 at p. 402, 85 D.L.R.(3d)  
321 at p. 342, 41 C.P.R.(2d) 196, ‘the debtor is entitled to a reasonable time to meet  
the demand, the question of what is reasonable being a question of fact to be  
determined in the circumstances of the particular case’. (See also Griffiths, J., in  
Pullman Trailmobile Canada Ltd. v. Hamilton Transport Refrigeration Ltd. et al.  
(1979), 23 O.R.(2d) 553; 96 D.L.R.(3d) 322.) The reason for this may be the  
increasing complexity of arranging for the payment of large sums of money today and  
the additional time now required to do so. This does not mean, of course, that a  
debtor is entitled as a matter of right in every demand situation to a few days to meet  
the demand. As is so often the case, the amount of time that will be allowed will  
depend on the individual circumstances of each situation.”  
and at p. 208, Linden, J., stated:  
“The creditor must weigh all of these factors in making up its mind about how much  
time it will allow the debtor to raise the money owing. Normally, creditors will act  
responsibly and reasonably. If they do, they will not be held liable, but if they do not,  
then they must be called to account for their errors in the same way as any other  
professional people would be.  
“This should not cause any great degree of fear or uncertainty so as to damage the  
conduct of financial operations in the community, as argued by the counsel for the  
bank. It should only reaffirm the need to act responsibly and reasonably in the  
circumstances, something that cannot be opposed by honest and competent lenders.  
This is not an impossible situation, it is a necessary and common one. Merely  
because this may inconvenience lenders or others cannot be a reason for inaction.  
“Lenders must be supervised by the Courts in the same way as any other individuals  
in society. Whether we like it or not, the law looks over everyone’s shoulder.”  
[302]  
In Kavcar Investments Ltd. et al. v. Aetna Financial Services Ltd. and  
Coopers & Lybrand (1989), 35 O.A.C. 305; 70 O.R.(2d) 225 (C.A.), McKinlay, J.A., stated  
at p. 228:  
“It is acknowledged by Aetna that the receiver was appointed immediately on the  
making of the demand. However, the receiver did not actually take possession of the  
assets of Kavcar until approximately three hours later. The decision of the Supreme  
Court of Canada in Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd. (1982), 135  
D.L.R.(3d) 1; 65 C.P.R. (2d) 1; [1982] 1 S.C.R. 726, must be accepted as  
establishing the law that a debtor must be given a reasonable time to make payment  
of an amount demanded under a debenture or like instrument, even though the  
parties themselves have agreed that on demand by the creditor the amount owing  
under the debenture ‘forthwith’ becomes due and payable and that a receiver or  
receiver–manager may be appointed to enforce the security. I consider that the  
decision of the Supreme Court of Canada in Lister v. Dunlop, and the cases that  
have been decided since, preclude a creditor from realizing on security which  
secures an indebtedness payable on demand, regardless of the wording of the  
security document, unless a period of time which is reasonable in the circumstances  
has been given to the debtor to satisfy the demand. It is, of course, the taking of  
possession by the receiver, and not his appointment, which may render the creditor  
and receiver liable for damages.” (emphasis added by McKin–lay, J.A.)  
and at p. 232:  
“The Supreme Court of Canada in Lister v. Dunlop did not discuss reasonableness  
in terms of the ability of the debtor to raise funds, but merely talked about the  
requirement of payment being made within a reasonable time. In the context of the  
early English cases … those words meant only a reasonable time to obtain from a  
convenient place funds already available to the debtor. The question then arises as  
to whether the law has now developed to a stage where the giving of a reasonable  
time, at least in a commercial context, means a reasonable time, in the  
circumstances, within which to raise funds to meet the demand. The Canadian cases  
do not deal squarely with that issue; indeed, they seem studiously to avoid it. The  
proposition is specifically rejected by the English courts: see Bank of Baroda v.  
Panessar, [1986] 3 All E.R. 751 (Ch.D.), and Cripps (Pharmaceuticals) Ltd. v.  
Wickenden and Another, [1973] 2 All E.R. 606 (Ch.D.). However, the tacit approval  
of the Supreme Court of Canada in Lister v. Dunlop of the factors to be considered,  
listed by Linden, J., in the Mister Broadloom case, as well as this court’s decision in  
Mister Broadloom, seems to indicate that a reasonable time in Canadian law means  
a reasonable time in which to raise money to satisfy a demand – otherwise the fifth  
factor listed by Linden, J., would be meaningless. Also, in the Lister case, the  
Supreme Court of Canada overruled the decision of the Ontario Court of Appeal that  
‘Dunlop was not required to give time to the Company to borrow money with which to  
pay up the indebtedness, unless time had been asked for, and it was not’ (emphasis  
added): see 27 O.R.(2d) 168 at p. 176, 105 D.L.R.(3d) 684 at p. 691, 50 C.P.R.(2d)  
50 (C.A.).”  
and further at p. 238:  
“However, any very short notice period – certainly one of less than a day – is prima  
facie unreasonable, and in such a case it would be up to the creditor to show why, in  
the particular circumstances, the period allowed was reasonable. It is important for  
creditors to keep in mind that while the creditor of a dishonest debtor may well have  
evidence of that dishonesty available to him, to obtain evidence of a debtor’s inability  
to raise funds is a much more difficult matter. Even a technically insolvent debtor may  
have funds available through related individuals or corporations. If a creditor  
demands payment and gives his debtor no time or a very short time to pay, relying on  
the debtor’s inability to raise funds, he takes the risk that he will be unable later to  
prove that inability.”  
[303]  
The Bank’s conduct toward Dunphy Leasing is characterized by an absence of  
good faith and bona fide consideration. The Senior Credit Committee of the Bank did not  
consider the various factors listed by Linden, J., as discussed above or, to the extent that  
those factors were considered, the consideration was based upon incorrect factual  
information and false conceptions.  
[304]  
The Committee made two decisions – to call Dunphy Leasing’s loans and to  
appoint a receiver. Had the Committee given bona fide consideration to the rights of the  
Borrowers, three decisions would have been necessary: firstly, whether to call the loans,  
secondly, what would constitute reasonable notice and, finally, whether to appoint a  
receiver for Dunphy Leasing if its loans were not repaid upon expiry of the notice period.  
Separate consideration should have been given to each of Dunphy Leasing, S&D, and  
106315.  
[305]  
The critical decision – what would constitute reasonable notice –should have  
been made at the highest level, by the Senior Credit Committee. The Committee abdicated  
and delegated that responsibility to Regional Office subordinates. It was delegated in  
language which raises serious doubts as to whether reasonable notice was in fact  
intended. Regional Office was instructed:  
“Demands for payment to be limited to minimum time required by law followed by  
appointment of Receiver under our debenture … You are to consult with your  
Solicitor prior to taking any action to ensure proper sequence of events taken to fully  
protect our position.”  
[306]  
Those instructions are not indicative of good faith and a bona fide effort to  
determine reasonable notice. They indicate a desire to pay lip service to the legal  
requirements and, having done that, to appoint a receiver. Lister v. Dunlop recognizes  
and imposes ethical obligations of good faith, open and honest communication and the  
bona fide exercise of reasonable judgment – its thrust is to require minimum standards of  
business ethics. It was the fundamental failure by the Bank to perform the obligations and  
meet the standards implicit in Lister v. Dunlop which gives rise to liability in this case.  
[307]  
The words of Holland, J., in Camway Trucking Ltd. v. Toronto–Dominion  
Bank (unreported, March 11, 1988, 13227A/82, 7579/82, 1488/87 (Ont. H.C.)), are  
applicable to the circumstances of this case. He said: (p. 8)  
“It is not necessary to say what amount of notice would have been reasonable. It is  
sufficient to conclude that reasonable notice was not given and the bank is liable for  
damages for improper seizure of the Camway vehicles and destruction of the  
Camway business.”  
[308]  
It is not necessary to determine what would have constituted reasonable notice  
to Dunphy and S&D; it is only necessary to recognize that 20 hours did not constitute  
reasonable notice.  
[309]  
The duty to give reasonable notice is a duty which arises after the loans have  
been called, to allow a reasonable time for payment prior to realizing upon or enforcing  
security. It is that duty which the Bank breached in the cases of Dunphy Leasing and S&D  
by having the Bank’s receiver take over or close out their respective business operations  
commencing 20 hours after the demand for payment. Neither company was given a  
reasonable period of time within which to meet the demand for payment prior to the  
commencement of enforcement proceedings.  
The Bank Act – Banks and Banking  
Law Revisions Act, 1980 S.C.,  
c. 40 (The “Bank Act”)  
[310]  
The Bank Act security taken by the Bank was not valid security for the  
$200,000 revolving line of credit to 106315 because the loan predated the security. The  
overdraft arose after the date on which the security was given and the Bank held no  
security for the overdraft of 106315.  
[311]  
If the Bank’s s. 178 security had been valid as regards the indebtedness of  
106315 and if seizure by the Sheriff were an appropriate means of enforcing such security,  
it is not necessary in the absence of a Notice of Objection to apply for removal and sale of  
the seized goods, since the right to sell arises under the security documents and the  
Seizures Act.  
[312]  
An affidavit in support of the application for removal and sale was sworn by Mr.  
Hendricks, the Assistant Manager of the Branch of the Bank (“Hendricks”). Hendricks  
swore that he had a personal knowledge of the facts, that 106315 had executed Bank Act  
security documents, that seizure had been effected by the Sheriff, and that no Notice of  
Objection had been received. The important fact was that the security documents did not  
secure the indebtedness of 106315.  
[313]  
The application for removal and sale was unopposed and was successful. A  
copy of the resulting Order was served upon the solicitors for 106315 and thereafter the  
inventory of 106315 was sold directly by Bank personnel without notice to the company.  
On October 7, 1983, Hendricks swore a statutory declaration declaring on information from  
the Sheriff that the inventory had been “seized from [106–315] … and … subsequently  
removed from its possession”. The seizure referred to must have occurred in June 1982,  
since the inventory of 106315 had been in the exclusive possession and control of the  
Bank or Doane Raymond since then.  
[314]  
Hendricks further declared that the inventory had been sold by the Bank in  
August and September of 1983, for gross sale proceeds of $4,810 and the company was  
charged with net storage charges of $1,457.  
[315]  
The last valuation of the inventory of 106315 prior to June 1, 1982, showed its  
wholesale value to be $150,000 as at April 30, 1982. Through the actions by the Bank,  
commencing with its refusal to honour the company’s rent cheque and continuing through  
to the private sale by the Bank of the company’s inventory in August and September of  
1983, the company was ultimately credited with $3,353 for inventory which had a reported  
wholesale value of $150,000 on April 30, 1982.  
[316]  
The sections of the Bank Act relevant to the security granted by 106315 are as  
follows:  
“178(1) A bank may lend money and make advances,  
(a) to any wholesale or retail … dealer in … goods, wares, and merchandise …  
on the security of such … goods, wares and merchandise …,  
and the security may be given by signature and delivery to the bank by … the person  
giving the security of a document in the form set out in the appropriate schedule or in  
a form to the like effect.  
“(3) Where security on any property is given to the bank under any of paragraphs  
(1)(c) to (j), the bank, in addition to and without limitation of any other rights …, has  
full … right and authority …, in the case of  
(a) nonpayment of any of the loans … for which the security was given,  
to take possession of or seize the property covered by the security, …  
“179(4) In the event of nonpayment of any … loan …, as security for the payment of  
which a bank has acquired security under s. 178, the bank may sell … the property  
mentioned therein … but such power of sale shall, unless that person has agreed …  
otherwise …,  
(a) shall be by public auction  
“(5) In connection with any sale of property by a bank …, the bank shall act honestly  
and in good faith and shall deal with the property in a timely and appropriate manner  
having regard to the nature of the property and the interests of the person by whom  
the security was given and, in the case of a sale pursuant to an agreement, shall give  
the person by whom the security was given reasonable notice of the sale …  
“(6) … where, pursuant to subsection 178(3), a bank takes possession of or seizes  
property given as security to the bank, the bank shall, so soon as is reasonably  
practical having regard to the nature of the property, sell the property …  
“180(1) A bank shall not acquire … security under section 178, to secure the  
payment of any … loan … unless the … loan is contracted or made  
(a) at the time of the acquisition thereof by the bank, or  
(b) on the written promise … that … security under section 178 would be given to  
the bank, in which case the … loan may be contracted or made before or at the  
time of or after such acquisition …”  
[317]  
that:  
With respect to 106315 and the foregoing provisions of the Bank Act, it is noted  
1. The security intended was of the type authorized by s. 178(1)(a) – security on the  
inventory (merchandise) of a wholesale or retail dealer in merchandise.  
2. The rights conferred by s. 178(3) to take possession of or seize property are  
inapplicable in the present circumstances, since that subsection applies only to security  
given under s. 178(c) to (j) and the security intended in this case of the type authorized to  
be given under s. 178(1)(a).  
3. Powers of sale are conferred by s. 179(4); sales must be by public auction unless the  
debtor has agreed otherwise.  
4. The obligations imposed by s. 179(5) to act honestly and in good faith and to deal with  
the property in a timely and appropriate manner were obligations binding upon the Bank.  
The onus of proof of honesty and good faith rests with the Bank; that onus has not been  
discharged.  
[318]  
The obligations to deal with the 106315 in a timely and appropriate manner and  
to effect a sale as soon as was reasonably practical were not observed. The Bank  
(through its agent, Doane Raymond) had exclusive possession of the 106315 inventory in  
June 1982; it effected a judicial seizure (from itself) in January 1983. The seized property  
was of a type which became obsolete rapidly but it was not sold until August and  
September 1983.  
[319]  
The Bank was in breach of the obligations imposed by each of ss. 179(4), (5)  
and (6). As a result of one or more of those breaches, 106315 sustained a loss of  
$145,000 which is the approximate difference between the last recorded wholesale value  
of its inventory and the net realization on sale.  
[320]  
In Notes and Extracts of Judgment on Canadian Imperial Bank of Commerce  
v. Whitman (1984), 46 C.B.R.(N.S.) 124, reported in (1985) 53 C.B.R.(N.S.) 307, the  
headnote states:  
“Sections 179(5) and (6) of the Bank Act sets forth the law and determines the  
duties and obligations of the bank or its agents in conducting sales of goods taken as  
security under the Act. These two subsections do not impose a substantially greater  
obligation on the bank and any agent acting on its behalf than existed prior to the  
new Bank Act of 1980, but it is now a statutory requirement that the security not only  
be disposed of honestly and in good faith but also be dealt with in a timely and  
appropriate manner having regard to the nature of the property and the interests of  
the person by whom the security was given.”  
[321]  
The duties imposed on the creditor by s. 179(5) are designed to prevent  
unfairness by undue delay or by failure to consider any unique nature of the property when  
arranging the sale. The creditor must avoid any practice which would obviously deflate  
bids at the sale. He must see to it that the debtor will receive the maximum benefit from  
the dispersal of his assets consistent with a forced auction sale.  
[322]  
The loans made by the Bank to 106315 were not made either:  
(a) at the time of the acquisition by the Bank of the s. 178 security documents by the Bank;  
or  
(b) on the written promise that security under s. 178 would be given to the Bank,  
and accordingly the security documents obtained by the Bank did not provide security for  
the loans of 106315:  
Clarkson v. Dominion Bank (1919), 46 D.L.R. 281 (S.C.C.);  
Re Boutique Andre Bibeau Inc.; Ernst & Whinney Inc. v. Banque Royale du Canada  
(1983), 49 C.B.R.(N.S.) 56;  
Re El–Rosa Modes Ltd. (1984), 52 C.B.R.(N.S.) 194.  
[323]  
The security documents were not invalid per se, they were only invalid as  
security for the loans which predated them. All of the loans to 106315 predated the Bank’s  
security documents.  
[324]  
It is irrelevant whether the seizure by the Bank was effected in June 1982, or in  
January 1983, since the seizure, whenever made, was only lawful if made pursuant to s.  
178 security which secured the debt owing by 106315. No such security existed. The  
seizure was lacking in a legal basis and nothing done by the Bank subsequent to the  
seizure could create a legal basis.  
[325]  
If the security held by the Bank was security for the indebtedness of 106315, it  
would not confer any security interest in the office furniture of the company, since office  
furniture is not “goods, wares and merchandise” upon which the Bank is authorized by s.  
178(1)(a) of the Bank Act to take security. The seizure of the office furniture of 106315,  
whenever effected, was an illegal seizure and a trespass. Its subsequent sale was a  
conversion.  
[326]  
The Bank was aware in April 1982, that the security documents which it had  
obtained from 106315 did not provide security for the loans made to the Company; a  
proposal to rectify the defect was made, but not implemented.  
[327]  
The Bank employee (Hendricks), who swore the affidavit and statutory  
declaration referred to above, was unaware of the defect in the Bank’s s. 178 security. His  
superior, Eckardt, was certainly aware of the defect, as was the Bank’s Regional Office  
and Head Office.  
[328]  
[329]  
The Bank knew that its security was defective.  
The delivering up of the 106315 inventory was the only alternative left to the  
company after the Bank had refused to honour its cheques and had “frozen” the  
company’s account. The concurrent actions taken by the Bank against Dunphy Leasing  
and S&D rendered all of the Borrowers helpless and the delivering up of the inventory  
cannot be considered a voluntary act.  
[330]  
The contractual provisions of the Bank Act security documents which purport to  
confer authority upon the Bank to seize and sell without judicial process cannot be relied  
upon by the Bank since “the standard contractual arrangement between the borrower and  
the banker permitting such taking of possession without court order is contrary to public  
order and is not enforceable”. (St–Louis Automobiles Ltée v. Banque Nationale du  
Canada (1981), 42 C.B.R.C.(N.S.) 275; Banque Nationale du Canada v. Atomic Slipper  
Co. Ltd. (1988), 16 Q.A.C. 56; 70 C.B.R.C.(N.S.) 1 (C.A.)).  
[331]  
The decision of the Quebec Court of Appeal in Atomic Slipper Co. v. Banque  
Nationale du Canada, supra, is helpful in a consideration of the rights conferred upon  
banks by s. 178 of the Bank Act and the limitations applicable in enforcing such security.  
The following conclusions were reached by the Court:  
1. The Bank Act must be interpreted uniquely by a true interpretation of its provisions.  
2. The powers given to the bank are exceptional.  
3. The provisions of the Bank Act granting the bank such extraordinary power must be  
interpreted restrictively.  
4. In exercising its rights to the security given … the bank must comply with the provisions  
of the Act.  
5. The bank does not obtain a right and title to such security equivalent to that of the  
owner.  
6. The right of the bank to possession is limited to the cases mentioned in (s. 178(3)). It is  
not applicable to (s. 178(1)(a) and (b)).  
[332]  
The essence of the decision in Atomic Slipper was that the bank had acted  
wrongfully in calling its loans and as a result of that wrongful action the bank came into  
possession of the slippers which had voluntarily been delivered up by the borrower. The  
Court held the bank liable for the loss sustained on the disposition of the slippers.  
[333]  
In the present case, the Bank acted wrongfully in refusing to honour the cheques  
of 106315 and “freezing” its account and as a result of that wrongful action the Bank came  
into possession of the inventory of the company. Under those circumstances, the Bank is  
liable for the loss on disposition even if possession of the inventory was voluntarily  
surrendered by 106315 to the Bank.  
[334]  
The facts relating to the accounts receivable of 106315 may be summarized as  
follows:  
1. The company had receivables valued at $126,000 on April 30, 1982, which is the date  
of the last statement prior to the Dunphy Leasing receivership.  
2. Collection actions were underway prior to the receivership but as a result of that  
receivership and the fact that the bank account of 106315 had been frozen by the Bank,  
such actions were not pursued by the solicitors who had initiated them.  
3. By July 12, 1982, the Bank had given notification under its assignment of book debts;  
thereafter, the Bank was solely entitled to enforce and receive payment of the receivables.  
4. The collection files were referred to the Bank’s solicitors on December 1, 1982, but  
collection action was inexcusably delayed to such an extent that nothing appears to have  
been collected.  
5. No accounting has ever been provided by the Bank.  
[335]  
In the case of 106315, the Bank, after having permitted continuous and  
fluctuating overdrafts and without any prior notice to the company, dishonoured the same  
cheques that it had formerly honoured. It did so prior to having demanded payment of the  
company’s loans and notwithstanding that both the loans to the company and its overdraft  
had been consistently decreasing over the previous months. The result of the Bank’s  
action was that 106315 was locked out of its business premises and when it again  
obtained possession of those premises, it was deprived of funds with which to operate  
since its account had been “frozen”. The company was obliged to vacate its premises by  
the end of June or again face the prospect of being locked out. The company had no  
alternatives; it laid off its staff and went out of business.  
[336]  
The Bank was in breach of the implied terms of its agreement with its customer.  
The result of the breach was that 106315 was put out of business and ultimately lost all of  
its business assets through Bank action. The Bank must bear the responsibility for the  
damages which resulted from its wrongful conduct.  
[337]  
A chronology of the significant dates and events relating to the Bank’s s. 178 of  
the Bank Act security is as follows: the promissory note of 106315 for $200,000 is dated  
June 17, 1981; a Notice dated July 31, 1981, was executed by the company and was  
registered by the Bank at the Bank of Canada on August 17, 1981. Also dated August 17,  
1981, are an Agreement as to Loans and Advances and Security Therefor, an Application  
for Credit and Promise to Give Security Under Section 178, and a document entitled  
Security Under Section 178(1) On All Property of Specified Kinds.  
[338]  
By July 6, 1981, 106315 had drawn down all of its $200,000 loan. On July 31st,  
the company’s account was overdrawn $45,000 and by August 17, 1981, the overdraft had  
increased to $80,000. Before the s. 178 security documents had been executed and  
delivered, 106315 was indebted to the Bank for a principal amount exceeding the principal  
amount owing by it in June of 1982 or thereafter. It was this state of affairs which was to be  
the subject of comment by the Bank’s inspectors.  
[339]  
The inspections conducted at the Branch in March and April of 1982 disclosed  
the existence of numerous defects in the security documents which the Bank had obtained  
from the Borrowers. During the period following the inspections and prior to making its  
demands for payment, the Bank endeavoured to rectify the security defects which had  
been identified and was largely successful in that endeavour. One significant defect  
appears to have been overlooked.  
[340]  
An inspection report dealing with 106315 security defects reads in part as  
follows:  
Defect  
Promissory note $200M is dated prior to Sec. 178 security documents.  
Response  
New note to be obtained and old note to be paid.  
Entries in the column entitled “Defect” were made by inspection personnel; the entry under  
the column entitled “Response” was made by Eckardt to record the action which he  
intended to take to rectify the identified defect.  
[341]  
Harms (the Bank’s Calgary District Office Manager) testified at trial as to his  
understanding that s. 178 Bank Act security only secured funds loaned after the date on  
which the security was taken. Similar testimony on the subject was provided by other Bank  
employees. Their understanding of s. 178 security requirements was the basis for the  
inspector’s comment quoted above. Eckardt’s intention, as reflected in his response, was  
to obtain a new note from 106315, thereby paying and discharging the old note dated June  
17, 1981, and replacing it with a note dated subsequent to delivery of the s. 178 security  
documents. That intention was never acted upon.  
[342]  
The significance of the inspection report is that it provides indisputable evidence  
that the Bank was aware in April 1982, that the Bank Act security which it held from  
106315 was not valid security for the funds which had been loaned to that Company.  
Valuation  
S&D – Valuation – Accounts Receivable  
[343]  
The dollar value of the accounts receivable of S&D on June 9, 1982, is in  
dispute. The position of the Borrowers is that the receivables had a value of approximately  
$165,000 on that date. The position of the Bank is that the receivables then had a value of  
$118,000.  
[344]  
It is the duty of a foreclosing creditor to account for its realizations from the  
foreclosure. Had the Bank wished to avoid doubt as to the amount of the S&D receivables,  
it could have provided an accounting through its agent Doane Raymond. The Bank and  
Doane Raymond failed to account for the administration of the S&D receivables.  
[345]  
The Bank admits that Doane Raymond took the accounts receivable ledgers  
and the rental contracts together with “other supporting data which pertained to the unpaid  
accounts receivable”.  
[346]  
Accounts receivable due to S&D from major insurance companies and other  
reputable debtors appear to have gone uncollected, in part at least as a result of the fact  
that the Bank’s actions in closing out the S&D business deprived the Company of the  
services of Sturgeon (President and Manager of S&D).  
[347]  
[348]  
It cost $26,000 to effect collection of $32,000 by Doane Raymond.  
Michael D. Bowie (“Bowie”), a partner with Peat Marwick, Chartered Accountant  
and Chartered Business Valuator, gave expert evidence on behalf of the Bank relating to  
issues of default, solvency and damages. His written report is Exhibit 663. He asserted on  
behalf of the Bank that the receivables of S&D had a value of $118,000 on June 9, 1982.  
[349]  
The monthly records prepared in the normal course of S&D’s business by the  
Bookkeeper employed by S&D, the person whose job it was to prepare such records, Mrs.  
Parvis Virani (“Mrs. Virani”), showed that as at May 31, 1982, the accounts receivable  
totalled $117,620 (Exhibit 641). Of these, the sum of $93,815 related to accounts  
generated out of the Calgary office. The same monthly summary was prepared by Mrs.  
Virani as at the end of June 1982, relating to the Calgary office only; the total was $78,505  
(Exhibit 642). Mrs. Virani testified as to how she prepared these records. She took the  
figures directly from the accounts receivable journal, which it was also her duty to  
maintain.  
[350]  
The Borrowers argued that it is impossible for the accounts receivable of S&D to  
have been only $117,000 and that the correct amount is $167,000. They also argue that  
the total amount collected after June 11, 1982, is $141,585 instead of $64,000 and that, in  
addition, S&D had between $25,000 and $56,000 in doubtful accounts receivable.  
[351]  
Reliance is placed on a noncurrent loan report prepared by Eckardt on June 11,  
1982 (Exhibit 223) which records the value of the accounts receivable as being $168,363.  
This figure is stated in the document to be “as at March 31, 1982”. It was the same amount  
recorded on Exhibit 154, the Bank’s Statement of Accounts Receivable for S&D as at  
March 31, 1982. Eckardt testified that on Exhibit 223 he was not required to exercise  
judgment but simply took information provided by the company to him. The March listing  
was plainly the last one available as at June 11, 1982. There was no statement for April.  
[352]  
Phyper was asked on cross–examination whether the total of $117,620 shown  
on Exhibit 641 seemed right and he answered “I have no idea” and agreed he had no  
more idea about Exhibit 641 than he had about Exhibit 154 when he was asked about it in  
direct examination. Mrs. Virani testified that she could not remember ever seeing Phyper  
at the S&D offices. In the opinion of the Court, he had no personal knowledge of this  
subject.  
[353]  
The calculations of the Borrowers, which they state show $141,585 to have  
been collected on the S&D accounts receivable after June 11, 1982, in addition to doubtful  
accounts, are based on erroneous premises. They are as follows:  
1. The sum of $141,585 is arrived at by adding to the deposits to the account an amount  
“collected, but not deposited” for the various expenses, totalling $26,000. The account  
statements show that the greater portion of these payments were made out of the  
accounts. It is a mistake to add them to the deposits to arrive at “S&D receivables actually  
collected”.  
2. The deposits include numerous amounts which did not represent receivables which  
were outstanding when Doane Raymond commenced taking steps to collect the accounts  
receivable. One such example is the receipts from Montreal Engineering, totalling  
$12,527.15, representing lease rentals for the months following June 1982. Other  
examples are loan account reversals which were made in order to pay expenses and  
agent’s commissions. For example, on October 6, 1982, $5,000 was deposited to Account  
#143–11 (Exhibit 555); this was not a receivable collected, it was paid out of the loan  
account (Exhibit 577).  
3. The deposits include cheques that were later returned.  
4. Mrs. Virani testified that she believed the accounts receivable were reduced in May as  
the records she prepared showed.  
5. Mrs. Virani stated in her evidence of S&D’s “walk–in” customers: “Most of them paid by  
cheques.” Those who paid by cheque would have generated accounts receivable and not  
cash deposits in May.  
6. The Borrowers’ argument is based on the supposed fact that the “total receipts by S&D  
in May were only $56,000”. This was the total of deposits to the company’s Calgary  
account. The argument misses the fact that, in addition to Account #25–18, S&D had a  
bank account in Edmonton to which deposits were made from the Edmonton operation.  
The total deposits for May were therefore greater than the $56,000 stated by the  
Defendants.  
Their comparison of the sum of $47,000, by which the accounts receivable were reduced,  
with the sum of $56,000 as representing total deposits, is not accurate.  
7. The evidence established that the insurance companies were reliable, but slow payers,  
and constituted a greater part of S&D’s business during the winter months than in other  
seasons.  
8. The comparatively low cash deposits in May are consistent with Mrs. Virani’s evidence  
that the company was “going down” and “was losing money”, as well as with the reduced  
scale of the operations.  
9. The Defendants’ argument is based on the supposition that, on the one hand, S&D’s  
own record of its accounts receivable as at May 31 and June 30, 1982, as prepared and  
proved by its bookkeeper, were unreliable; but that, on the other hand, a similar record  
prepared by Mrs. Virani as at March 30, 1982, was reliable. There is absolutely no reason  
to suppose that the later, more relevant records, were any less accurate than the earlier  
ones. They were both prepared by the same person in the same way and were identified  
by her in her testimony.  
[354]  
The Court concludes that the evidence of Mrs. Virani on the subject of accounts  
receivable of S&D is more reliable and accurate. The proper value of accounts receivable  
as of June 9, 1982, is therefore $118,000.  
[355]  
The loan to Dunphy Leasing, in excess of $5 Million, was sizeable. If  
considerations of reasonable time were based on size alone, this factor would point in  
favour of a longer time period.  
[356]  
The integrity of Phyper was never questioned by the Bank. At the outset of the  
relationship, his reputation as a manager was considered to be good.  
[357]  
In relation to Dunphy Leasing’s potential ability to raise the money required in a  
short time, the following facts have been established by the evidence at trial:  
1. When the demands for payment were made, Dunphy Leasing did not have the money to  
make payment nor did they have ready access to amounts of that magnitude;  
2. In order to meet the demands of June 8, 1982, Dunphy Leasing would have had to go to  
another lender (Exhibit 762);  
3. Dunphy Leasing would have required a minimum of 60 days to permit a new lender to  
assess the company and to make a decision (Exhibit 762);  
4. Dunphy Leasing, through Mr. Sullivan of Invesco, did actively pursue replacement  
financing prior to June 8, 1982. Mr. Dobson of the Chemical Bank testified that he did not  
consider Dunphy Leasing to be “bankable” without the supporting guarantee of the Bank  
which was not available to it.  
5. After June 8, 1982, Dunphy Leasing’s efforts to find financing sufficient to pay out the  
Bank were unsuccessful.  
[358]  
By the Borrowers’ own evidence given at Examination for Discovery (Exhibit  
762), Dunphy Leasing would have been required to go to another lender in order to meet  
the demands of June 8th, 1982, and would have required a minimum of 60 days to permit  
a new lender to assess the company and to make a decision. As stated in Whonnock  
Industries v. National Bank of Canada, 16 B.C.L.R.(2d) 320 (B.C.C.A.), at p. 331, “the  
Canadian Law demonstrated in the decisions does not contemplate more than a few days  
and cannot encompass anything approaching 30 days”. The British Columbia courts have  
adopted a very narrow view with respect to the question of what is considered a  
reasonable time to meet the demands of a financial institution.  
[359]  
The evidence established that the amount demanded was an accurate  
expression of the Dunphy Leasing indebtedness up to June 7, 1982 when the demand  
was prepared (Exhibits 209 and 576). Phyper testified that the reasons for the failure of the  
company to meet the demand had nothing to do with any inaccuracy. The June 8th  
demand was sufficient to give Dunphy Leasing notice that the Bank required payment of  
all the outstanding indebtedness.  
[360]  
On February 22, 1982 Phyper was advised that the Bank “wished to see all  
business including that of S&D and 106315, removed from the Bank’s books as soon as  
possible”. The evidence points to the fact that from February 22nd onward Phyper  
understood the precarious position of his companies in relation to the Bank.  
[361]  
The object of the Court in awarding damages for the commission of a tort is to  
place the party in the same position he would have occupied had the tort not been  
committed. The most frequently cited authority for this principle is the statement of Lord  
Blackburn in Livingstone v. The Raw–yards Coal Company (1880), 5 App. Cas. 25, at  
p. 39, a case concerning trespass to goods. He said that the measure of damages was:  
“… that sum of money which will put the party who has been injured, or who has  
suffered, in the same position as he would have been in if he had not sustained the  
wrong for which he is now getting his compensation or reparation.”  
[362]  
I am satisfied on the evidence presented at trial that the Bank was not entitled to  
appoint a Receiver on June 9, 1982 because it had not given reasonable notice.  
[363]  
Can Dunphy Leasing “prove that it could have paid the loan” had it been given  
such reasonable notice? The evidence shows that Dunphy Leasing was not in a position to  
pay off the loan. Phyper’s own evidence was that neither he nor the company could raise  
the money to pay the demand unless they could obtain financing from another lender.  
According to the evidence, the company required 60 days to obtain such financing.  
[364]  
Canadian law has decided that as long as the debtor is not misled, the creditor  
may rely on any default by the debtor when making a demand for payment. However, I do  
not accept the Bank’s position that the failure of Dunphy Leasing to pay the amount owing  
to the Bank in response to its proper demand within a 20 hour period justified the  
appointment of the receiver on June 9, 1982.  
[365]  
The law has evolved where a debtor who has given debenture security to a  
lender cannot be enforced without first, the making of a demand, and second, the giving of  
a reasonable time within which to pay the indebtedness.  
[366]  
The principles outlined in relation to Dunphy Leasing apply to the claims of S&D  
and 106315 to the extent that the Bank is found to have taken steps respecting their  
assets without giving reasonable prior notice.  
[367]  
Mr. Richard Jarand (“Jarand”), C.A., a partner of Touche Ross, Business  
Valuator, gave expert evidence on behalf of Dunphy Leasing relating to the loss of income  
sustained as a result of the appointment of a receiver. His written report is Exhibit 637.  
Jarand and Bowie were substantially in agreement with respect to the identification of the  
assets and liabilities of Dunphy Leasing, although differences of opinion were apparent as  
to values.  
[368]  
There were no financial statements for Dunphy Leasing as at June 9, 1982 and  
no financial statements were prepared by the Receiver or other parties at or around that  
date.  
[369]  
Bowie’s assessment of the financial position of Dunphy Leasing caused him to  
conclude that its outstanding liabilities exceeded the value attributable to its assets by  
approximately $540,000 at June 9, 1982.  
[370]  
In assessing the value of the accounts receivable of Dunphy Leasing as at June  
9, 1982, Bowie reviewed accounts receivable analyses prepared by Doane Raymond and  
undertook his own detailed analysis of the receivables. That analysis included, amongst  
other things, reviews of lease ledger cards, historical payment histories and other credit  
related information. Following from his review, Bowie determined that the net realizable  
value of the accounts receivable (other than those from S&D) was approximately  
$108,000. Jarand assigned a net realizable value of approximately $88,000 to these same  
receivables. (Exhibit 637, p. 6).  
[371]  
Dunphy Leasing also had receivables due from S&D representing approximately  
two months of unpaid lease payments. in order to assess the collectability of those  
receivables, Bowie was first required to assess S&D’s financial position. If S&D did not  
have the capacity to satisfy its indebtedness to Dunphy Leasing, the receivables had no  
value to Dunphy Leasing. In order to make such an assessment, Bowie reviewed the  
financial information available to him, including S&D’s lease ledger cards, monthly  
accounts receivable listings, bank statements and cancelled cheques.  
[372]  
Bowie’s evidence relating to S&D’s assets included the following:  
1. The April 30, 1982, financial statements prepared by S&D’s book–keeper, Mrs. Virani,  
which were the most recent financial statements available, were not audited for purposes  
of assessing S&D’s financial position on or about June 9, 1982. Bowie considered them  
more informative than the audited statements reflecting S&D’s financial position at  
September 30, 4981;  
2. S&D’s April 30, 1982, financial statements indicated that its liabilities exceeded its  
assets by approximately $81,000;  
3. S&D’s principal assets were accounts receivable, receivables from and investments in  
affiliated companies and prepaid expenses;  
4. S&D had approximately $39,000 of receivables from and investments in two affiliated  
companies, British & European Coachworks and Colonial Leasing;  
5. S&D’s accounts receivable had a reported value of $164,351 at April 30, 1982, a  
significant portion of which were long outstanding. Aged receivables analyses prepared by  
S&D’s bookkeeper and presented to the Bank indicated that more than 40% of S&D’s  
receivables fell into the over 90 days category. The aging of the receivables and the  
economic times cast considerable doubt on the prospect of S&D collecting all of its  
receivables; and  
6. An analysis of S&D’s cash receipts and disbursements (as reflected in S&D’s bank  
statements and cancelled cheques) indicated a negative cash flow (excluding bank  
advances) of approximately $53,000 in the six month period between December 1981 and  
May 1982.  
[373]  
Bowie concluded that S&D was likely insolvent at June 9, 1982 and that Dunphy  
Leasing’s prospects of collecting S&D’s outstanding lease payments were remote. His  
conclusion is based on the fact that S&D was at least two months behind in its lease  
payments to Dunphy Leasing, that its liabilities exceeded its assets by approximately  
$81,000 at April 30, 1982, that its financial condition was deteriorating and that the  
prospects for achieving full realizations on many of S&D’s assets were not good.  
[374]  
The April 30, 1982 statements were proved at the trial by Mrs. Virani, the  
Bookkeeper employed by S&D. She was the person who kept the books of the company  
and she testified that she prepared the statements directly from the ledgers. In the opinion  
of the Court the April 30, 1982, financial statements prepared by Mrs. Virani are reliable.  
[375]  
The September 30, 1981, audited financial statements for S&D recorded that  
both income and shareholder’s equity of the company were then positive, although  
negligible. Its accounts receivable then stood at $170,000.  
[376]  
Bowie’s guide to determining liquidation value was the “Canadian Black Book”  
(the “Black Book”), a publication which lists the average gross proceeds received for cars  
sold by auction in the preceding two week period. The prices listed are wholesale prices  
obtained from the sale of automobiles at auto auctions conducted in three Canadian cities.  
Only automobile dealers are entitled to attend and purchase cars at wholesale auto  
auctions.  
[377]  
Bowie acknowledged in cross–examination that an involuntary receivership  
generally tends to produce distress sale prices. The vehicles valued by Bowie by his Black  
Book methodology had a value of $332,000 less than the Bank debt owing against them.  
The evidence as to the realizations effected by Dunphy Leasing’s receivers indicates that  
they were realizing more than Black Book values and more than the Bank debt owing  
against the sold vehicles.  
Fixed Assets of Dunphy Leasing  
[378]  
Dunphy Leasing’s fixed assets consisted of office furniture and equipment,  
leasehold improvements and two lease portfolios (the vehicle fleet and the mobile  
phones).  
a) The Non–Lease Portfolio:  
Bowie attributed a value of $28,000 to Dunphy Leasing’s interest in the non–lease portfolio  
fixed assets, a value equivalent to their reported net book value at March 31, 1982. Jarand  
assessed their value at $10,–000.  
b) The Vehicle Lease Portfolio:  
In order to estimate the fair market value of the vehicle lease portfolio, Bowie undertook a  
detailed analysis of the portfolio. That analysis involves an assessment of the status of  
each lease. He testified that the value of a lease (or a lease portfolio) is a function of its  
future lease payments.  
Bowie identified 618 leases in Dunphy Leasing’s vehicle lease portfolio. His analysis  
demonstrated the following:  
1) 288 of the leases were current in their lease payments at June 9, 1982;  
2) 99 of the leases were one month in arrears at June 9, 1982;  
3) 54 of the leases were two or more months in arrears at June 9, 1982 (excluding the 177  
leases in the three categories that follow);  
4) 10 vehicles under lease had been returned to Dunphy Leasing for one reason or  
another;  
5) 152 vehicles were leased to S&D, a related party that had not made its lease payments  
for approximately two months; and  
6) 15 vehicles were leased to related parties other than S&D or were otherwise not  
generating lease revenue.  
A. Approach To Valuation – Plaintiff  
[379]  
In estimating the fair market value of the lease portfolio, Bowie used a  
discounted cash flow approach for leases generating a monthly cash flow. This going  
concern approach calculates the present value (being the value at June 9, 1982) of all  
future lease payments. The future payments are discounted to reflect the fact that they will  
be realized over an extended period of time. The discount rate is reflective of the cost of  
funds (i.e. interest expense), operating and related costs associated with administering the  
leases and the general risks of default.  
[380]  
The leases not generating a cash flow (and that did not have a reasonable  
prospect of doing so at June 9, 1982) were valued on a liquidation approach. In Bowie’s  
opinion there is no other approach to value a nonperforming lease. The only value a  
nonperforming lease can have is the value of its underlying security, less any realization  
costs. In the case of Dunphy Leasing, the underlying security was a vehicle.  
(1) Valuation of Performing Leases:  
[381]  
Bowie considered that 387 of Dunphy Leasing’s leases had a reasonable  
expectation of running to their expiry dates and generating a consistent monthly cash flow.  
These were the leases noted in subparagraphs (1) and (2) above. About 85% of these  
“going concern leases” (329) were discounted to yield 24% and the balance (58) were  
discounted to yield 30%.  
[382]  
In order to select appropriate discount rates Bowie researched yield  
requirements for the auto leasing industry and considered current interest rates and  
economic and industry conditions on or about June 9, 1982. The evidence of these rates  
was appropriate for Bowie to give as is seen by the following quotation from The Law of  
Evidence in Civil Cases, Sopinka and Lederman, Butterworths, Toronto, at p. 316:  
“Although it has been asserted that the expert’s opinion must be based upon either  
personal knowledge or facts presented at trial, it cannot be completely devoid of a  
hearsay element. Since the expert by definition possesses a special skill or  
knowledge in a material area superior to that of the court his expertise is founded to a  
large extent upon hearsay data. An expert will base his opinion upon his own  
experience and upon whatever education he has received. The latter is naturally  
comprised of the study and readings of works of authorities in the field and  
information and data culled from numerous sources. Thus, an expert’s knowledge is  
made up of the distilled assertions of others not before the court. Recognition of this  
hearsay basis of expertise has been acknowledged by Canadian courts for some  
time, …”  
[383]  
Bowie’s findings were supported by the fact that Dunphy Leasing was writing  
leases with comparable (actually higher) yields in the months preceding the receivership  
(from information in Exhibit 632).  
[384]  
The Borrowers argue that Bowie’s 24% discount rate for the going concern  
leases is too high. They attempt to support this by referring to Phyper’s evidence that  
“Dunphy endeavoured to achieve a return 3% above its borrowing costs” and then attempt  
to corroborate this by referring to Dunphy Leasing’s recorded return on leases having been  
3.35% above its borrowing costs in June 1981 (Approximately 12 months earlier).  
[385]  
Dr. Prentice produced a document (Exhibit 632) setting out, among other things,  
the yield on each of Dunphy Leasing’s leases and Dunphy Leasing’s borrowing cost at the  
rate each lease was written. A review of that document indicates that Dunphy Leasing’s  
returns in March and April 1982 were not “higher–than–normal”, but rather were typical  
returns for Dunphy Leasing. Exhibit 632 indicates that 129 leases were written in the  
months of September 1981 through March 1982 inclusive, and that Dunphy Leasing’s  
average yield was consistent over the period. Detailed yield information derived from  
Exhibit 632 is summarized below:  
Average Difference between  
Month:  
#Leases:  
Lease rate and Prime rate:  
Sept. /81  
Oct. /81  
Nov. /81  
Dec. /81  
Jan. /82  
Feb. /82  
Mar. /82  
22  
24  
39  
15  
10  
13  
6
7.76%  
8.38%  
8.42%  
6.57%  
7.08%  
8.24%  
8.29%  
[386]  
Bowie’s estimated 24% yield on leases at June 9, 1982 was equivalent to prime  
plus 6.5%, consistent with yields realized by Dunphy Leasing on leases written between  
September 1981 and March 1982.  
[387]  
Bowie identified 99 leases that were one month in arrears at June 9, 1982 and  
categorized them as having either a low risk or a high risk of default. His categorization  
was based on payment histories. For the 58 leases considered in the high risk category  
Bowie present–valued future lease payments to yield 30%.  
[388]  
The remaining leases (231), which included the S&D leases and leases with  
payment arrears of two months or more, were valued on a liquidation approach. The past  
performance of these leases demonstrated that the prospects of receiving future lease  
revenues on an ongoing basis were not good.  
(2) Valuation of Nonperforming Leases:  
[389]  
The second method applied by Bowie to the valuation of Dunphy Leasing’s  
lease portfolio was described by him as the liquidation value approach, which he applied to  
a total of 231 leased vehicles, of which 152 had been leased to S&D.  
[390]  
Use of the Black Book requires classification of the subject vehicle into one of  
four classification categories. The categories are: extra clean, clean, average, and rough.  
The primary basis for categorization is mileage, which is the only recorded statistic  
available to the publisher of the Black Book for the purposes of categorization. The prices  
obtained for the different models of each vehicle are listed in the Black Book, as are the  
additional values to be attributed to optional extras, such as air conditioning and automatic  
transmission. Listed values are to be increased by 5% for Alberta valuations to  
compensate for regional price differences.  
[391]  
In arriving at a net realizable value for the nonperforming leases, Bowie  
assumed a notional (speculative) sale of the vehicles and provided for related selling  
costs.  
[392]  
Bowie’s provision for selling costs was consistent with valuation principles.  
Canada Valuation Service by Ian R. Campbell, published by Richard DeBoo Publishers,  
makes the following statement at p. 5–31:  
“To derive an approximate liquidation value, estimated costs of liquidation must be  
deducted from adjusted equity. As previously noted, liquidation costs may include:  
(a) Real estate and other commissions incurred in the liquidation of real estate and  
equipment, combined with consideration of whether or not the real estate and  
equipment values being adopted adequately consider the impact, if any, of the very  
process of liquidation;”  
[393]  
Although Dunphy Leasing had been “curbing” vehicles (selling vehicles directly  
to the public from their business premises), it is not correct to say that it had been enjoying  
success. Dunphy Leasing still had unsold vehicles which had been repossessed as far  
back as October, 1981. Dunphy Leasing had, itself, recently resorted to the wholesale auto  
auction in order to speed up its sales process.  
[394]  
With respect to selling costs, Bowie used a factor of 3.5%, except for the 54  
vehicles still in the hands of lessees that were two or more months in arrears. The 3.5%  
factor was based on actual selling costs charged by the auto auctions. The incremental  
1.5% factor used by Bowie for the vehicles potentially requiring repossession, was to cover  
the anticipated costs associated with doing so. At prices ranging from $5,000 to $10,000,  
this incremental factor equates to approximately $75 to $150 per vehicle.  
[395]  
The components of the Defendants’ $170,000 were $85,000 relating to Bowie’s  
provision of $350 per vehicle for repairs and maintenance and $85,000 relating to his  
provision for an incentive to acquire the nonperforming leases.  
[396]  
With respect to repair and maintenance or reconditioning costs, Bowie provided  
a factor of $350 per vehicle, a factor derived from the Black Book. That publication sets out  
four “steps for profit appraisal”, one being “note that all listing units have been  
reconditioned” and another being “Important – deduct your estimated costs for  
reconditioning”.  
[397]  
Bowie’s deduction of $350 per vehicle is justified on a Black Book valuation  
since the prices quoted in the Canadian Black Book relate to vehicles that have been  
reconditioned. Dunphy Leasing’s vehicles had not been reconditioned. Bowie simply  
provided for the estimated costs of doing so.  
[398]  
No evidence other than that of Phyper suggested that another method of sale  
was viable. His evidence that curbing vehicles individually was preferable has to be  
considered in light of the degree of success Dunphy Leasing and S&D had had in using  
this method. From December, 1981, when S&D first tried to reduce its fleet, to June 9,  
1982, 21 vehicles were sold out of approximately 175, leaving the company with 40  
vehicles that were not even licensed for use. This was not a viable way of selling vehicles  
with reasonable speed.  
[399]  
In arguing that Bowie’s classification of the vehicles as “clean” was  
inappropriate, the Defendants place emphasis on mileage. Phyper prepared a document  
(Exhibit 764) in which he classified the vehicles having mileage under 20,000 as extra  
clean. In cross–examination, some of these vehicles actually had a much greater mileage.  
[400]  
Evidence presented at trial indicated that many of the vehicles had windshield  
damage and were missing wheel covers. Approximately twelve (12) of the S&D vehicles  
required body work before they could be sold (Exhibit 224). Further, the majority of the  
nonperforming vehicles were from the S&D fleet. It is commonly accepted that rental  
vehicles depreciate more quickly than nonrental vehicles.  
[401]  
The evidence of Haddad and Howarth, who also had an opportunity to assess  
the vehicles, does not support Phyper’s classification of the vehicles as “extra clean”.  
Haddad testified:  
“The cars were not in good condition at all. They were not clean, they had various  
degrees of body damage, certainly not what I call ready for the road cars.”  
[402]  
Bowie’s valuation of the nonperforming leases is fair to Dunphy Leasing.  
Dunphy Leasing had large numbers of the same models of vehicles – as many as 32 of  
one model and year. The evidence was that this factor was bound to affect the  
marketability of the portfolio, in that the demand for any one model was only so great.  
Doane Raymond and Phyper made the best of this situation by selling most of the vehicles  
at a special stampede auction which drew in dealers from outside Calgary.  
[403]  
A comparison of the actual proceeds realized on the sale of 38 1981 Cougars  
(substantially all were sold in July 1982) with those forecast by Bowie and those forecast  
by Phyper (assuming “extra clean” and an add–on for air conditioning) indicates the  
following:  
Actual proceeds realized on 38 1981 Cougars, net of  
selling costs (Schedule “B” to this section)  
$210,175  
Bowie’s estimated liquidation value, net of selling  
costs and before the 5% incentive (Schedule “B” to  
this section)  
$207,100  
$262,846  
Phyper’s estimate, assuming “extra clean” and air  
conditioning (Schedule “B” to this section)  
Note:  
The source of the information for Schedule “B” is Exhibit 663, Schedule 3 and Exhibit 672.  
[404] Substantially all of the S&D vehicles were sold in July, 1982. A comparison of  
the actual proceeds realized on the sale of the S&D fleet with the value forecast by Bowie  
also illustrates the reliability of Bowie’s conclusions.  
Actual sale proceeds, net of selling costs (Schedule  
“C” to this section)  
$770,860  
$825,726  
Bowie’s estimated liquidation value, net of selling  
costs and before the 5% incentive  
(Schedule “C” to this section)  
Note:  
The source of this information for Schedule “C” is Exhibit 663, Schedule 3 and Exhibit 672.  
[405] Bowie concluded that the fair market value of Dunphy Leasing’s vehicle lease  
portfolio was $5,102,172. The components were as follows: (Exhibit 663, Table 5 opposite  
p. 28)  
Going concern leases  
S&D vehicles  
$3,589,796  
783,997  
Other nonperforming leases  
728,379  
$5,102,172  
[406]  
In contrast to Bowie’s analysis and valuation of the vehicle lease portfolio,  
Jarand simply estimated the depreciated book value of the 618 leased vehicles at June 8,  
1982, and then assumed that all but a few of the leases would continue to their expiry date  
without any interruption in the payments. (Exhibit 637, p. 8 and p. 12 and Schedule 2)  
The Mobile Phone Lease Portfolio  
[407]  
Bowie also estimated the value of Dunphy Leasing’s mobile phone lease  
portfolio and miscellaneous equipment. There was little information available regarding  
these assets. Bowie estimated the value of $81,000 for the mobile phones and $14,000 for  
the miscellaneous equipment.  
Advances To Companies Other Than S&D And 106315  
[408]  
Dunphy Leasing had various investments in and advances to affiliated  
companies, including advances to 106315 and S&D. Bowie attributed no value to Dunphy  
Leasing’s advances to these companies and estimated the value of remaining investments  
at $28,100. Jarand assigned a value of $22,698 to these assets and assumed that the  
advances to 106315 and S&D were collectible (Exhibit 637, p. 7).  
Advances To S&D  
[409]  
In its September 30, 1981 financial statements, Dunphy Leasing recorded an  
investment of $70,434 in S&D. Bowie attributed a NIL value to that investment. Jarand  
assumed that it was fully collectible.  
Advances To 106315  
[410]  
In its September 30, 1981 financial statements, Dunphy Leasing recorded an  
investment of $125,000 in 106315. Bowie attributed a NIL value to this investment. As in  
the case of S&D, Jarand assumed that this investment was fully collectible.  
[411]  
In order to assess the collectibility of the advance to 106315, Bowie was first  
required to assess the financial position of 106315. If 106315 did not have the capacity to  
satisfy its indebtedness, the advance had no value to Dunphy Leasing. In order to make  
such an assessment, Bowie reviewed the financial statements, monthly accounts  
receivable listings, bank statements and cancelled cheques of 106315.  
[412]  
Bowie’s evidence relating to 106315 included the following:  
a) The audited September 30, 1981 financial statements were the most recent financial  
statements available;  
b) At September 30, 1981, 106315 had only been in business a few months;  
c) The September 30, 1981 financial statements of 106315 indicated that liabilities  
exceeded assets by approximately $46,000;  
d) The principal assets of 106315 were its accounts receivable and inventory;  
e) The aged receivable analysis prepared by 106315 for the Bank indicated that more than  
75% of 106315’s receivables fell in the “over 60 days” category at April 30, 1982;  
f) An analysis of 106315’s cash receipts and disbursements (as reflected in 106315’s bank  
statements and cancelled cheques) indicated a negative cash flow (excluding bank  
advances)’ of approximately $23,000 in the eight month period between October, 1981  
and June, 1982.  
[413]  
Bowie concluded that 106315 was likely insolvent at June 9, 1982 and that  
Dunphy Leasing’s prospects of recovering its $125,000 advance were remote. This  
conclusion is sound having regard to the fact that liabilities exceeded assets by  
approximately $46,000 at September 30, 1981, and that 106315’s financial condition  
deteriorated rather than improved thereafter.  
Marketable Securities And Life Insurance:  
[414]  
There is little disagreement as to the values assigned to the marketable  
securities or to the life insurance policy. Bowie estimated the value of these assets at  
$34,000. Jarand estimated their value at $29,439. (Exhibit 637, p. 7)  
Prepaid Expenses:  
[415]  
Bowie attributed a value of $15,000 to insurance premiums and rent that had  
been prepaid by Dunphy Leasing at June 9, 1982. Jarand did not attribute any value to the  
prepaid expenses.  
Amounts Due From Phyper:  
[416]  
Bowie attributed no value to amounts owed to Dunphy Leasing by Phyper. He  
relied on Thorne Riddell’s assessment in 1982 that no recovery was expected on this  
receivable.  
[417]  
Phyper had been sued by Thorne Riddell on behalf of Dunphy Leasing in which  
action Thorne Riddell sought the repayment of this amount. Phyper had defended that  
action on the basis that the amount was not owed as he considered it to represent  
advances to him which were not recoverable and which should have been expenses for  
income tax purposes at the year end. This amount was never paid to Dunphy Leasing by  
Phyper.  
[418]  
This “asset” had no value. However, Jarand recognized $37,798 of value  
relative to amounts due from Phyper.  
Accounts Payable:  
Bowie estimated Dunphy Leasing’s accounts payable based on his review of  
[419]  
Thorne Riddell’s and Doane Raymond’s records. That review identified amounts owing to  
McMurchie Webber (Dunphy Leasing’s lawyers), Devonshire Smith Preston (Dunphy  
Leasing’s accountants), J.J. Taylor & Associates and Revenue Canada. The aggregate  
amount owing to these identified creditors was approximately $23,000.  
Bank Indebtedness:  
[420]  
Bowie prepared extensive calculations reconstructing Dunphy Leasing’s bank  
loan balance (Exhibit 665). His calculations indicated a loan balance of $5,595,320 as at  
June 9, 1982.  
[421]  
Dr. Prentice prepared similar calculations under a variety of assumptions.  
Jarand relied on Dr. Prentice’s calculations, selecting a loan balance calculated on the  
assumption that the effective rate of interest was the appropriate method for calculating  
interest.  
Due To Affiliated Companies:  
[422]  
Bowie’s review of the Receiver’s files identified $300,422 owing to Automated  
Land Inventory Systems Ltd. and $31,395 owing to Dunphy Ventures Ltd.  
[423]  
Jarand estimated the indebtedness to Automated Land Inventory Systems Ltd.  
at $324,000 and to Dunphy Ventures Ltd. at $25,306. Jarand’s evidence was that the  
$25,306 figure was net of certain advances Dunphy Leasing had made to other affiliated  
companies and that the actual amount owing to Dunphy Ventures Ltd. was $33,198.  
[424]  
Bowie’s assessment of Dunphy Leasing’s financial situation at June 9, 1982 was  
as follows:  
a) The value of Dunphy Leasing’s liabilities was approximately $540,000 greater than the  
value attributable to its assets; its principal assets being the lease portfolio, accounts  
receivable and advances to S&D and 106315. At June 9, 1982 the value of these assets  
had been severely impaired, in large part due to economic conditions prevalent in Alberta  
and the rest of Canada. The lease portfolio had a large nonperforming component. Many  
of Dunphy Leasing’s accounts receivable were uncollectible and both S&D and 106315  
were experiencing financial difficulties that seriously jeopardized the value of Dunphy  
Leasing’s investment in them;  
b) Dunphy Leasing was significantly in arrears on its principal and interest payments to the  
Bank. At June 9, 1982 the arrears were close to $489,000. (Exhibit 663, Table 1 opposite  
p. 13 and Schedule 1) Bowie’s evidence was that $215,193 of principal and interest  
payments were past due and that an additional $273,537 was in default (past due more  
than 30 days);  
c) Dunphy Leasing was experiencing negative cash flows each month, primarily the result  
of a large number of lessees defaulting on their payments. Bowie’s review of the leases  
indicated that only 288 of the 618 leases were current at June 9, 1982. The severity of the  
problem was illustrated by Bowie’s evidence that principal and interest payments for May  
1982 were approximately $220,000 yet monthly lease payments from lessees that were  
current at June 9, 1982 totalled only $110,000; (Exhibit 663, p. 34)  
d) Dunphy Leasing could have disposed of the S&D fleet and thereby reduced the  
magnitude of its negative cash flow. However, the estimated market value of the S&D fleet  
was not sufficient to fully satisfy the debt against it; and  
e) Dunphy Leasing had no source of funds other than collection of receivables, receipt of  
future lease payments and the sale of a few unencumbered vehicles. Accordingly, Dunphy  
Leasing did not have the financial capacity to satisfy its pressing obligations to the Bank  
(the principal and interest arrears) and prospects for reversing the monthly negative cash  
flow experienced prior to June 1982 were not good. In Exhibit 666, Bowie compares  
forecast cash flow from his first four categories of leases with related principal and interest  
requirements. That analysis indicates that, even if all of those lessees had made their  
monthly lease payments on a timely basis (including the 99 that were one month in arrears  
and the 54 that were two or more months in arrears), Dunphy Leasing would have done  
little more than break even in the months of June through August, 1982, before  
administrative expenses and before servicing loans secured by the S&D vehicles. If the  
lessees already two or more months in arrears (54) and which formed part of this forecast,  
did not start making their payments, monthly cash inflows would have been approximately  
$26,000 less per month, with no corresponding reduction in cash outflows.  
[425]  
Bowie’s evidence with respect to the insolvency of Dunphy Leasing is  
uncontroverted. No other witness gave evidence with respect to the issue of Dunphy  
Leasing’s solvency.  
2. Approach To Valuation (Defendants)  
[426]  
Jarand’s evidence was that he assumed Dunphy Leasing could have continued  
to operate after June 8, 1982 (absent the receivership). Jarand also gave evidence that he  
made no effort to offer an opinion as to Dunphy Leasing’s ability to make payments to the  
Bank at the specific times referred to in the commitment letter.  
[427]  
Jarand gave “evidence as to the loss of income suffered by Dunphy Leasing.  
Jarand’s approach to the valuation was the “orderly liquidation by existing management”  
approach, which assumed that a receiver had not been appointed and that former  
management of Dunphy Leasing would have continued to manage its business after June  
8th, liquidating the assets of that business on an orderly basis which maximized the  
proceeds. In the liquidation envisaged by Jarand, most of the non–S&D leases in the  
Dunphy Leasing portfolio would have been retained and allowed to run their courses. On  
termination or expiry of each lease, the leased asset would be sold. Other nonlease assets  
would be liquidated within three months after June 8, 1982.  
[428]  
Operating expenses would have been reduced to the minimum necessary to  
complete the wind–down and receipts from the liquidation would be applied firstly in  
payment of operating expenses and thereafter in payment of Dunphy’s principal and  
interest indebtedness. Interest continued to accrue and was paid as funds were available  
for that purpose.  
[429]  
The orderly liquidation of Dunphy Leasing was an option being considered and  
recommended by certain Bank personnel in the months prior to June 1982. The option  
was rejected by Head Office because of the perceived incompetence of Regional Office  
and Branch personnel.  
[430]  
Jarand’s evidence was that an orderly liquidation was particularly appropriate to  
Dunphy Leasing’s circumstance, since its lease portfolio had a finite life and its future  
revenues were prescribed by contract and readily quantified. The need for subjective  
judgment was thereby minimized. The orderly liquidation by management approach had  
also been used by Stork, Eckardt and Mund when each performed his assessment of the  
value of Dunphy Leasing.  
[431]  
The approach used by Jarand also allowed Dunphy Leasing the benefit of the  
fact that the majority of its leases had been written during a period of high interest rates  
and correspondingly high lease rates. As interest rates declined, Dunphy Leasing’s profit  
margin or “spread” increased since the lease rentals remained constant throughout the  
term of the lease. Bank prime interest rates peaked at 22.25% in August 1981, and  
thereafter declined to a low of 9.75% in 1986, when Jarand’s orderly liquidation was  
concluded.  
[432]  
The decline in interest rates is the most significant factor in assessing Dunphy  
Leasing’s viability in June, 1982. Dr. Prentice testified that the average spread then being  
achieved by Dunphy was 7.5%. Assuming loans of $5.5 Million, that spread would produce  
an annual gross income of $412,500, which equates to a gross monthly income of  
$34,000, without taking into consideration income from vehicles which were fully paid out.  
The existence of that monthly income is hardly consistent with Bowie’s conclusion of  
insolvency, which approach had the effect of depriving Dunphy of the benefit of declining  
interest rates.  
[433]  
The following assumptions were made by Jarand:  
a) The correct method for calculation of interest on the Dunphy Leasing debt was the  
effective rate method. Jarand further assumed that Dunphy Leasing’s debt to the Bank on  
June 8, 1982, was $5.501 Million. That balance was based upon the calculations  
performed by Dr. Prentice, utilizing the effective rate method of interest calculation and  
assuming that an additional advance of $160,000 had been made by the Bank to Dunphy  
on April 8, 1982.  
b) Jarand projected that 21 S&D vehicles would be sold during the months of July, August  
and September, with the proceeds of sale being realized during those months. The  
remaining S&D vehicles would be operated as daily rentals during the months of July,  
August and September and would thereafter be sold, with the sale proceeds being realized  
during the months of October, November and December 1982. Monthly lease payments  
for S&D were assumed to have continued in the same amounts as were payable prior to  
June 8th and expired leases were treated as if they had been extended on a month to  
month basis. The receipt of each monthly lease payment due from S&D was assumed until  
the sale of the leased vehicle, and sale proceeds were assumed to be the “buyout” value  
of each vehicle as established by Dunphy Leasing’s lease ledger sheets.  
c) In the absence of reliable information indicating a change in the amounts of Dunphy  
Leasing’s investments in and loans to the affiliates, it was assumed that those investments  
and loans were in the same amounts on June 9, 1982, as had been recorded in the  
September 30, 1981, audited financial statements and that the amounts were collected  
during the course of the orderly liquidation.  
d) Phyper identified approximately 25 “problem” leases on which delinquency had been  
experienced in the collection of lease payments. When projecting the cash flow which  
would be realized from those problem leases, Jarand assumed that zero monthly lease  
payments would be received from the lessee after June 9th and that the vehicle was sold  
with the proceeds of sale being received in July 1982. The amount of the assumed sale  
price was provided by Phyper. Some $157,000 in future lease payments were thus written  
off and Jarand considered the result consistent with Dunphy Leasing’s historical bad debt  
experience.  
e) With the exceptions of the “problem” leases, it was assumed that each lessee exercised  
the option to purchase his leased vehicle, and that monthly payments and buyout amounts  
falling due after June 9th were received when due.  
f) It was assumed that an orderly liquidation by management had been allowed by the  
Bank – i.e., that Dunphy Leasing had been allowed to wind down its business, as had  
been recommended by Eckardt, Einarson, Cumming, Berstad, Mund and Harms –rather  
than having been forced into receivership.  
g) The net amount of Dunphy Leasing’s accounts receivable existing at June 9th, 1982,  
(including receivables due from S&D) as determined by Jarand, after having been written  
down to provide for doubtful accounts, was $185,000. That sum, together with the  
proceeds of liquidation of additional Dunphy Leasing assets having a value as determined  
by Jarand of $77,000, were assumed to have been received by Dunphy Leasing in equal  
portions during the months of July, August and September 1982.  
h) Investments in and advances to Dunphy Leasing’s affiliates and to Dunphy Office  
Services, a division of Dunphy Leasing, were assumed to have been realized in 1984,  
after Dunphy’s indebtedness to the Bank had been fully retired. Dunphy Leasing’s  
indebtedness to its affiliates Automated Land Inventory Ltd. and Dunphy Ventures Ltd.  
was also retired in 1984. A previous $34,000 installment of interest was paid to Automated  
Land Inventory Ltd. in 1983.  
i) Operating expenses projected by Jarand were subjected to a Consumer Price Index  
adjustment to reflect inflation during the years 1982 to 1986, inclusive.  
[434]  
The orderly liquidation by management projected by Jarand resulted in:  
(a) payment to the Bank of a total of $6.117 Million, consisting of the principal balance  
owing on June 8, 1982, of $5.5 Million, plus interest which accrued thereon during the  
course of the liquidation totalling $615,000; plus  
(b) payment in full to Automated Land Inventory Systems Ltd. of a total of $400,000  
consisting of the principal sum of $324,000 plus accrued interest of $76,000; plus  
(c) payment in full of Dunphy Leasing’s principal indebtedness to Dunphy Ventures Ltd. of  
$25,000; plus  
(d) payment of Dunphy Leasing’s accounts payable of $15,000; plus  
(e) an additional loss of income of $655,000.  
[435]  
On the topic of valuation, Kavcar Investments Ltd. v. Aetna Financial  
Services Ltd., a 1986 decision of Hollingworth, J. (Ont. H.C.), summarized at 36  
A.C.W.S.(2d) 330 (No. 36:0652), states:  
“… first, the assets could be valued at their cost amount or realizable value,  
whichever is appropriate; second, the assets could be valued at the amount that  
would have been obtained on an orderly liquidation of the business by its owners;  
and third, the assets could be valued at the amount that would have been obtained  
on a proper and orderly liquidation of the business by a receiver.  
“The relationship of these three possibilities is that they proceed from highest  
estimation to lowest estimation. Having in mind the fact that the imposition of the  
receiver in this case was unlawful and also having in mind the fact that an involuntary  
receivership tends to produce distress prices on the sale of assets and inventory, … I  
am of the view that the third of the above possibilities is not the appropriate standard  
to be used.”  
[436]  
The valuation conclusion is that the correct approach is the “orderly liquidation of  
the business by its owners”. In the case of Dunphy Leasing, orderly liquidation by existing  
management was the approach taken by Jarand. Bowie criticized the Jarand evaluation on  
the basis that the results projected by Jarand exceeded the actual results obtained by the  
receivers. Jarand’s analysis was a projection of what could have happened in the absence  
of a receiver. The results of the receivership reflect the fact that a receivership generally  
tends to produce distress sale prices and reduces effectiveness in the collection of  
receivables.  
Underrealization  
[437]  
In Moase Produce Ltd. v. Royal Bank of Canada (1987), 66 Nfld. & P.E.I.R.  
196; 204 A.P.R. 196; 64 C.B.R. 191 (P.E.I.S.C.), Mitchell, J., in assessing damages for the  
wrongful appointment of a receiver, said at p. 194:  
“There are two basic approaches that can be taken to measure the economic loss to  
a business resulting from a wrongful receivership. One method involves determining  
the value of the business as a going concern in the absence of a receivership. The  
other is to determine the value lost on the underrealization of assets resulting from  
the receivership. A plaintiff is entitled to recover under whichever of these  
approaches yields the most.”  
[438]  
Underrealization is the appropriate measure of the compensatory damages  
sustained by Dunphy Leasing if the receiver was wrongfully appointed.  
[439]  
Dunphy Leasing is entitled to utilize whichever approach produces the highest  
valuation. Orderly liquidation by management is the correct liquidation approach to apply  
as it produces a higher valuation than does the forced liquidation approach.  
[440]  
Underrealization, in the context of the Dunphy Leasing receivership, means the  
dollar value of the difference between:  
a) the sum which could have been paid to Dunphy Leasing’s creditors, and thereafter to  
Dunphy Leasing, on the orderly liquidation by management projected by Jarand, after  
payment of:  
(i) the expenses which would have been incurred in the course of that orderly liquidation;  
and  
(ii) all principal and interest due to the Bank and paid in the course of the projected orderly  
liquidation; and  
(b) the sum actually paid to Dunphy Leasing’s creditors (including the Bank) and thereafter  
to Dunphy Leasing, through the receivership.  
(For the purposes of the above calculation, “creditors” is a reference to creditors in  
existence on June 9, 1982.)  
[441]  
The Court has decided that the Bank acted improperly in appointing a receiver,  
and therefore, it was not only Dunphy Leasing that was injured by the Bank’s actions.  
Automated Land and Dunphy Ventures were creditors of Dunphy Leasing and therefore  
Dunphy Leasing had an ongoing obligation to satisfy these claims.  
[442]  
The sum in compensatory damages to which Dunphy Leasing is entitled by  
virtue of the receivership underrealization is $1,095,456, calculated as follows:  
Paid on orderly liquidation by management (using the numbers as calculated by Jarand):  
Accounts payable – paid in year ending Dec.  
31, 1982  
$
15,000  
33,900  
324,000  
25,306  
42,400  
316,784  
252,319  
85,747  
Automated Land – interest paid in year ending  
December 31, 1983  
Automated Land – principal paid in year ending  
December 31, 1984  
Dunphy Ventures – principal paid in year  
ending December 31, 1984  
Automated Land – interest paid in year ending  
December 31, 1984  
Dunphy Leasing – interest paid in year ending  
December 31, 1984  
Dunphy Leasing – interest paid in year ending  
December 31, 1985  
Dunphy Leasing – interest paid in year ending  
December 31, 1986  
Underrealization  
$1,095,456  
[443]  
The Court has concluded that there would not have been adequate funds  
available to enable S&D and 106315 to retire their indebtedness to Dunphy Leasing. The  
funds received by S&D and 106315 would have first been used to discharge the Bank  
claim. The calculations as shown in the case of S&D at page 204 and in the case of  
106315 at page 217 indicate that there would have been insufficient funds available to  
retire the debt to Dunphy Leasing. The insufficient funds of S&D and 106315 must  
therefore be deducted from the underrealization.  
Compensatory Damages awarded to S&D:  
$109,592  
Amount of debt owing by S&D to Dunphy Leasing  
(Exhibit 637, Schedule 2):  
85,675  
$ 24,917  
$ 71,900  
Net amount awarded to S&D:  
Compensatory Damages awarded to 106315:  
Amount of debt owing by 106315 to Dunphy Leasing  
(Exhibit 637, Schedule 2):  
125,000  
$ 53,100  
Amount still owing by 106315 to Dunphy Leasing:  
[444]  
Dunphy Leasing’s claim for underrealization compensatory damages is therefore  
subject to the following adjustments:  
1. Compensatory Damages to Dunphy Leasing:  
2. Plus net amount awarded to S&D:  
$1,095,456  
24,917  
3. Deduct amount still owing by 106315 to Dunphy  
Leasing:  
(53,100)  
Net compensatory damages to Dunphy Leasing:  
$1,067,273  
Tax Gross–Up  
[445]  
In addition to being compensated for its underrealization, true compensation  
requires that Dunphy Leasing also be indemnified for the additional income tax burden  
which it will face by reason of damages being received in a lump sum and taxed in one  
year rather than over the course of the five years required for the orderly liquidation. The  
measure of that indemnity can only be taken after the underrealization and the specific  
years in which it was suffered have been determined by the Court.  
[446]  
The purpose of an award of compensatory damages in tort is to fully  
compensate the victim by restoring him, as much as money will allow, to his former  
position. In the present case, an award of damages to Dunphy Leasing in the amount of  
the underrealization will not restore Dunphy Leasing to the same financial position that it  
would have been in had there been no wrongful appointment of a receiver, since the  
impact of taxation upon a damage award is higher than the impact of taxation on the  
earnings of which Dunphy Leasing was deprived by the Bank’s actions.  
[447]  
Compensation to Dunphy Leasing requires recognition of the more onerous  
impact of taxation upon a damage award. The income tax impact and the amount of  
compensation required to compensate for the fact that damages are all received in one  
year are capable of precise ascertainment.  
[448]  
The appropriate manner of dealing with the tax gross–up is to award additional  
compensatory damages to Dunphy Leasing in that amount of the difference between:  
a) the income tax which will be payable by Dunphy Leasing as a consequence of its  
receipt in one year of the underrealization damages awarded; less  
b) the income tax which would have been paid by Dunphy Leasing on the underrealized  
taxable income, if realized as and when determined by the Court.  
[449]  
Rule 221 of the Alberta Rules of Court provides in part as follows:  
“221(1) The Court may order any question or issue arising in a proceeding whether of  
fact or law or partly fact and partly law to be tried before, at or after the trial and may  
give direction as to the manner in which the question or issue is to be stated, and  
may direct any pending application to be stayed until the question or issue has been  
determined.”  
[450]  
The determination of the tax gross–up damages to which Dunphy Leasing is  
entitled is a question of mixed fact and law and suited for determination as contemplated  
by rule 221(1). The amount of those damages is a mixed question of fact and law, and  
cannot be ascertained until the Court determines the amounts of the income losses  
sustained by Dunphy Leasing and the year in which such losses were sustained. The  
quantum of damages can be determined with accuracy by application of the relevant  
income tax law.  
[451]  
The amount of the tax gross–up should be capable of ascertainment with  
certainty by tax specialists. If the parties are unable to agree as to the amount of the tax  
gross–up, the Court will hear further evidence and submissions on the subject.  
Damages – Comments  
[452]  
The Ontario Court of Appeal held in Mr. Broadloom, supra, that Mr. Broadloom  
was entitled to damages for the forced liquidation of its inventory and sale of its assets and  
for the destruction of its business. The Court recognized that damages for the wrongful  
appointment of a receiver sound in trespass and conversion. Damages flow ing from the  
intentional tort need not be foreseeable; the victim is to be compensated provided only that  
the damages resulted from the tort.  
[453]  
For the reasons given by Hollingworth, J., in Kavcar Investments Ltd. v. Aetna  
Financial Services Ltd., supra, and adopted by the valuation text Financial Litigation –  
Quantifying Business Damages and Values, by Richard M. Wise, F.C.A., published by  
the Canadian Institute of Chartered Accountants, the correct approach to the valuation  
issue in this case is the orderly liquidation by management approach. Jarand applied the  
orderly liquidation by management approach in assessing the loss of income sustained by  
Dunphy Leasing. It was not only Dunphy Leasing which was the victim of the Bank’s  
wrongful action taken regarding the Company. There were other victims to which Dunphy  
Leasing was indebted on June 9, 1982, and which did not receive payment as a result of  
the Bank’s wrongful actions. To the extent that such other parties would have received  
payment in the absence of the Bank’s wrongful action, Dunphy Leasing is entitled to a sum  
in damages sufficient to enable it to pay the claims of those other parties.  
Damages – S&D  
[454]  
S&D and 106315 sustained damages by reason of the trespass and conversion  
of the Bank. In the case of S&D, the Bank trespassed upon the Company’s business  
premises by placing its agent’s employees in those premises both in Calgary and  
Edmonton. The Bank committed a trespass to the Company’s chattels by having its  
agent’s employees unlawfully seize the entire fleet of vehicles, as well as the Company’s  
accounts receivable and supporting records. The sale of the vehicles and appropriation of  
the accounts receivable were both conversions.  
[455]  
As a result of the Bank’s action, S&D was put out of business and was deprived  
of its business assets.  
[456]  
S&D sustained a loss of its accounts receivable and inventory. Inventory  
consisted of its fleet of rental vehicles.  
[457]  
The principles to be considered in a determination of the damages to which S&D  
is entitled include the following:  
[458]  
(1) That a foreclosing creditor owes a duty to the debtor whose asset is  
foreclosed.  
[459]  
Parker, J., said in Royal Bank of Canada v. First Pioneer Investments Ltd.  
(1980), 27 O.R.(2d) 352, stated at p. 356:  
“Clearly, therefore, the duty of a privately appointed receiver–manager is to protect  
the security. He must act in accordance with the terms of the security agreement  
under which he has been appointed. He must act without any ulterior interest, ensure  
that a fair sale is conducted and that a proper accounting is ultimately made to the  
debtor.”  
[460]  
The failure to account entitles the wronged debtor to value its foreclosed assets  
at face value in the case of the accounts receivable. Had the Bank wished to avoid such  
valuation, it could have provided an accounting.  
[461]  
(2) The second principle to be considered was recognized by the Supreme  
Court of Canada in Banque Provinciale du Canada v. Gagnon et al., [1981] 2 S.C.R. 98;  
40 N.R. 40. In that case, the bank, purporting to act under its Bank Act security, had taken  
possession of and sold its debtor’s property. The bank’s security was held by the Court to  
be invalid, and one of the questions decided was whether “following the unlawful sale of  
the property of another, there is to be any compensation other than its replacement value”  
(at. p. 100). The decision was in effect that replacement value (i.e., book value) was the  
appropriate measure, and that the onus was on the foreclosing creditor to establish that  
the value of the items wrongfully seized and sold was less than replacement value.  
[462]  
Regarding damages, Lamer, J., after having concluded that the Bank Act  
security was invalid, said at p. 112:  
“In my view it was for the Bank, once established that it had unlawfully sold the  
property of another, and not in realization of its security, to prove that the reduction in  
Air–Tech’s estate having regard to the creditors of the bankruptcy was less than in  
the amount of the value of these items; otherwise, the amount of the compensation  
should be the value of the items, …” (emphasis by Lamer, J.)  
[463]  
It is for the wrongfully–foreclosing creditor to establish that the value of the  
property which it converted by its wrongful action was less than the value of that property  
on the books of the debtor.  
[464]  
In Ronald Elwyn Lister Limited et al. v. Dayton Tire Canada Ltd. (1985), 9  
O.A.C. 39; 52 O.R.(2d) 88 (C.A.), an appeal and cross–appeal from the judgment of  
Rutherford, J., confirming a master’s assessment of damages on a reference, Morden,  
J.A., said, regarding valuation of inventory, at p. 112:  
“… The basic principle is that the plaintiff is to be compensated for its loss resulting  
from the conversion. A result that furnishes the plaintiff with the total cost to it of the  
inventory seized, in the particular circumstances of this case, comes close to  
accomplishing this result. I think that it is open to the plaintiff to say that regardless of  
the difficulties it may have had selling the inventory it is at least entitled to the cost of  
replacing what was taken.”  
[465]  
The Bank is liable for both replacement cost of inventory and face value of  
accounts receivable.  
Damages – Dunphy Leasing  
I turn now to the assessment of damages for the corporate entity Dunphy  
[466]  
Leasing and its claim, essentially a claim for damages for the trespass to and conversion  
of its principal assets. The Court has to assess the value of what Dunphy Leasing has lost,  
and that necessitates a valuation of Dunphy Leasing.  
[467]  
The Court must determine the future profitability of Dunphy Leasing. This is  
necessary because valuation on this basis is essentially the capitalization of the future  
anticipated income of the business.  
[468]  
If I decide that my assessment of the value of Dunphy Leasing as a going  
concern is nil, the matter does not end there as I must still make an assessment of the net  
asset value of Dunphy Leasing as this represents, at the very least, the value of the  
business.  
[469]  
In order to make this determination, it is necessary to determine exactly what  
assets were on hand on June 9, 1982, the date the receiver seized the business.  
[470]  
The receiver and Bank jointly liquidated the assets through a combination of  
realizing and selling the assets of Dunphy Leasing. A determination of the amounts  
received on account of these assets must be made.  
[471]  
The imposition of the receiver in this case was unlawful and the fact that an  
involuntary receivership tends to produce distress prices on the sale of assets and  
inventory must be kept in mind.  
[472]  
In this case, Dunphy Leasing was not the party which eventually purchased the  
inventory, therefore, it would be inappropriate to value the inventory for purposes of the  
assessment of damages at cost.  
[473]  
Two ineligible expenses are the receiver’s fees and legal fees. In Kavcar, supra,  
Hollingworth, J., said: (p. 33)  
“As far as the legal fees and receiver’s fees are concerned, I refer to the following  
statement made by Master McBride in his assessment of damages in the Lister case  
at p. 24:  
‘I do not think the receiver is entitled to charge his operating expenses incurred in  
the commission of an illegal act to the victim. He is undoubtedly entitled to be  
paid by his instructing tortfeasor, but there can be no recovery by the defendant  
from the plaintiff … I disallow the charges for legal fees, … and receiver’s fees …  
as charged to (the plaintiff).’ ”  
[474]  
There is also the matter of consequential loss to Dunphy Leasing. Applying the  
general rule in actions lying in tort, Dunphy Leasing is entitled to all damages reasonably  
foreseeable as a result of the tort. In this case, as a result of the unlawful seizure of the  
assets of Dunphy Leasing, the Borrowers were forced to meet not only the demands of the  
Bank but all other creditors. This necessitated the liquidation of assets of Dunphy Leasing  
and the other two companies.  
[475]  
I am satisfied that the circumstances surrounding the sale in July, 1982, were  
such that the need for quick cash resulted in a sale at less than market value.  
[476]  
I award damages accordingly in the amount of $100,000.00.  
Action On Guaranteed Indebtedness  
Of British & European  
Coach Works Ltd.  
[477]  
The Bank has in Action No. 8201–32649 brought action against S&D and its  
guarantors. By way of amendment to the Statement of Claim filed on May 3, 1985, the  
Bank added a claim against Dunphy Leasing and Phyper as guarantors of S&D for the  
amount of S&D’s indebtedness pursuant to that company’s guarantee of the indebtedness  
to the Bank.  
[478]  
The obligations of S&D to the Bank which these parties guaranteed consisted  
not only of the amount of unpaid loans made by the Bank to S&D but also of liabilities that  
S&D incurred itself as guarantor.  
[479]  
Dunphy Leasing and Phyper are resisting payment of this portion of the debt of  
S&D under their guarantees on grounds that certain of S&D’s co–guarantors of British &  
European were released “without notice to, or the concurrence of, S&D”. The Bank, by the  
terms of the guarantees, was expressly entitled to do this without affecting its rights  
against co–guarantors such as S&D. Clause 8 of each of the guarantees provides:  
“8. Without prejudice to or in any way limiting or lessening the Guarantor’s liability  
and without obtaining the consent of or giving notice to the Guarantor, the Bank …  
may grant … releases and discharges to … any other guarantor as the Bank may  
see fit …”  
[480]  
The Bank sought to prove its case against S&D as a guarantor for British &  
European by introducing into evidence a guarantee executed by S&D and the Bank’s loan  
ledger card (Exhibit 701) purporting to establish the indebtedness of British & European or  
other indicia of its alleged indebtedness.  
[481]  
The liability of S&D as guarantor for British & European should be determined in  
the British & European action at the same time as the Defence and Counterclaim of British  
& European are adjudicated upon. The Bank will then be obliged to produce evidence of  
the indebtedness of British & European and to prove by conventional methods the  
indebtedness of that company.  
[482]  
If the liability of British & European is established in that action, and if the  
defences and counterclaims of both British & European and S&D are found to be without  
merit, S&D would still be afforded the opportunity to raise the defence that the Bank, by  
releasing co–guarantors of S&D, also effected a release of that company.  
[483]  
Both British & European and S&D should . be allowed their days in Court to  
address the issues raised in the pleadings in the British & European action. The liability of  
British & European as primary debtor should be established before judgment is granted  
against its guarantor.  
[484]  
Therefore, the claims of the Bank against S&D, Dunphy Leasing and Phyper as  
guarantors for British & European should be dismissed without prejudice to the rights of  
the Bank to pursue those same claims in the British & European action.  
The Disputed Notes  
[485]  
The Bank advanced to Dunphy Leasing the sum of $2,087,641.32 on March 3,  
1981. Dunphy Leasing signed a promissory note bearing the same date by which it  
promised to pay the same principal sum to the Bank, on demand, with interest as  
specified. After the advance, it was discovered that the financing for one vehicle (Lease  
No. 576) had been advanced twice, and so on March 5, 1981, the sum of $13,264.82 was  
repaid to the Bank. At some subsequent point in time, a pencil line was drawn through the  
note by a Bank employee and a new note was prepared stating the sum of the net  
advance of $2,074,376.50. Since the name of the Branch stated on the note is the Franklin  
Branch, it is likely that the note was prepared some time after mid–April, 1981, when that  
Branch opened and the Dunphy Leasing account was transferred to it.  
[486]  
Section 143(1) of the Bills of Exchange Act provides as follows:  
“Where a Bill is intentionally cancelled by the holder or his agent, and the  
cancellation is apparent thereon, the Bill is discharged.”  
[487]  
It is acknowledged that Exhibit 11 would be a valid promissory note had it not  
been cancelled. The first promissory note in the amount of $2,087,641.82 was intentionally  
cancelled, the cancellation is apparent on the face of the note, and the note is accordingly  
discharged by the operation of s. 143.  
[488]  
The second of the disputed promissory notes is also dated March 3, 1981, and  
Phyper acknowledged that the signature on the note is his. He denies that any of the other  
writing or printing on the note is his and denies a recollection that the note was in its  
present form when executed.  
[489]  
The second note, although dated March 3, 1981, is payable to the Branch,  
which had not yet opened for business on that date and which did not open for business  
until April 15, 1981. The note is initialled only by Eckardt.  
[490]  
With respect of the second promissory note in the amount of $2,074,376.50  
which was “materially altered” within the meaning of the Bills of Exchange Act, the law is  
clear that a material alteration of a note does not affect the debt. For example, in Re  
Thompson, [1931] 4 D.L.R. 573 (Ont. C.A.), Orde, J.A., said at p. 579:  
“The law is thus stated in Byles on Bills, 19th Ed., p. 291: –– ‘An alteration by the  
drawer and payee of a bill payable to drawer’s order, or the payee of a note, though it  
avoids the instrument, does not extinguish the debt;’ and it is not necessary to refer  
to the authorities there given for the statement. The proposition is elementary.”  
[491]  
In Royal Bank of Canada v. Davidson (1972), 3 N.S.R.(2d) 540; 25 D.L.R.(3d)  
202 (C.A.), Coffin, J.A., said at pp. 206–207:  
“It is pointed out by Falconbridge on Banking and Bills of Exchange, 7th Ed.  
(1969), p. 810, and Byles on Bills of Exchange, 22nd Ed. (1965), p. 244, that an  
alteration by the drawer and payee of a bill payable to the drawer’s order, or the  
payee of a note, though it avoids the instrument, does not extinguish the debt.  
Falconbridge modifies this by adding the words ‘unless the bill or note were taken in  
satisfaction of the debt’ …  
“There is no doubt that the appellant received the benefit of the proceeds of the note.  
The respondent is not in the position of a holder in due course nor is the appellant a  
mere endorser. He is the maker of the note, the person who has received the benefit  
of the advance from the bank to himself, who has not repaid this money to the bank  
and who has, in fact, expressly stated his determination not to make such payment.”  
[492]  
What occurred in this case was the replacement of one note with another note  
after the advance –– not the “alteration” of either note. Even more fundamentally, an  
alteration to an instrument such as a promissory note does not affect the validity of the  
instrument unless it purports to make a significant difference in favour of the lender. This  
point was expressly made by Trussler, J., in Bank of Montreal v. Riley (1988), 90 A.R.  
230 (Q.B.), a case involving an alleged alteration to a promissory note. Her Ladyship  
points out at p. 232 that s. 145(1) of the Bills of Exchange Act codifies with respect to  
bills of exchange a common law rule relating to material alterations in instruments  
generally, known as the rule in Pigot’s Case ((1614), 11 Co. Rep. 266; 77 E.R. 1177).  
She then states at p. 232:  
“There has been a trend away from a rigid application of the rule, particularly with  
respect to what is a material alteration, which is evident in two cases involving  
guarantees, Canadian Imperial Bank of Commerce v. Skender, [1986] 1 W.W.R.  
284 (B.C. C.A.), [67 B.C.L.R. 126 (C.A.)] and Bank of Montreal v. Scott (1986), 76  
A.R. 19; 49 Alta. L.R.(2d) 117, [[1987] 2 W.W.R. 404 (Q.B.)], upheld on appeal 15  
April 1987, No. 18828 (Alta.). These decisions indicate that the alteration must make  
a significant difference in favour of the promisee in the fundamental character of the  
contract or in the legal operation of the document.”  
[493]  
In the present case, the second note is different from the first in that it names a  
different branch of the Bank and states a lesser principal sum. There was no attempt to  
increase the debtor’s obligations or to make them more onerous. Insofar as any of these  
differences have any significance at all, they are more favourable to Dunphy Leasing than  
to the Bank.  
[494]  
Dunphy Leasing is liable to the Bank with respect to the second note in the  
amount of $2,074,376.50.  
[495]  
In connection with the third promissory note dated December 22, 1981, in the  
amount of $236,068.00, there has been a “white out” and change made to the date on the  
note. Dunphy Leasing does not dispute the validity of the blemished December 22, 1981,  
promissory note and, in my opinion, the alteration did not make a significant difference to  
Dunphy Leasing. Therefore, the third promissory note is valid.  
Passing Of Accounts  
[496]  
The Defendants claim that both Doane Raymond and Thorne Riddell have  
disregarded provisions in the Order of Mr. Justice Prowse dated October 8, 1982 (Exhibit  
314) by failing to pass their accounts formally. The reference to the passing of accounts in  
the Order is as follows:  
“10. That the Receiver and Manager do from time to time pass its accounts for the  
period commencing with the date of this Order, as this Court or a Judge thereof may  
direct, …”  
[497]  
The Bank was in no way responsible for any acts or omissions of the Court–  
appointed receiver. Thorne Riddell was an officer of the Court and was the agent of neither  
the Bank as debenture–holder nor the company: Parsons v. Sovereign Bank of Canada,  
[1913] A.C. 160 (P.C.), at pp. 166–167. Dunphy Leasing has not alleged in its pleadings  
any impropriety or any acts or omissions of any kind on the part of Thorne Riddell, or that  
the Bank is vicariously liable for any acts or omissions of Thorne Riddell. The allegations  
that Thorne Riddell disregarded the Court Order or otherwise acted improperly in not  
passing its accounts have been raised in an inappropriate fashion. Nothing in these  
actions, in any event, turns on whether Thorne Riddell should or should not have passed  
its accounts.  
[498]  
The question of what was required to constitute a “passing of accounts” in  
accordance with the Order of October, 1982, is of no importance in addressing the real  
issues that are before this Court.  
Accounting By The Receivers  
[499]  
Dunphy Leasing alleged that neither receiver accounted properly for the monies  
that passed through their hands and that there is therefore “no means of ascertaining what  
the true gross receipts actually were”.  
[500]  
A Consent Order in the Dunphy Leasing action dated June 13, 1988, directed  
that both receivers produce their documents “for examination by the experts selected by  
each of the parties hereto”, and provide copies as requested. The Doane Raymond  
documents had already been produced in their entirety in the action and were made  
available to Touche Ross Limited. Based on the receiver’s records, Bowie was able to  
advise the Court exactly what the gross receipts from the two receiverships were. He  
summarized them in Table 6 to his report (Exhibit 663). They were $6,198,128 (to May 6,  
1988).  
[501]  
As to the role played by Phyper and Dunphy Leasing in the recordkeeping  
process under the receivers, Doane Raymond at one point proposed to take the  
company’s lease ledgers to its office but was met with resistance and these records stayed  
in the Dunphy Leasing offices. The payments from lessees were therefore kept by the  
company itself in exactly the same manner as before the receivership. This arrangement  
continued under the Thorne Riddell receivership until June 30, 1984, by which time  
substantially all the leases were at an end. The form of these records may be seen, in part,  
in Exhibits 572 and 594. They record both regular lease payments and proceeds from the  
sale of vehicles.  
[502]  
In my opinion, no further accounting is required from Thorne Riddell nor Doane  
Raymond.  
Exemplary Or Punitive Damages  
[503]  
The most recent authoritative pronouncement on the issue of punitive damages  
is the decision of the Supreme Court of Canada in Vorvis v. Insurance Corporation of  
British Columbia (1989), 94 N.R. 321; 58 D.L.R.(4th) 193 (S.C. C.), in which McIntyre, J.,  
on behalf of the majority, provides the following commentary at p. 206:  
“… Nevertheless, despite the peculiar nature of punitive damages, it is well–settled in  
law that in appropriate cases they may be awarded: see Rookes v. Barnard, [1964]  
A.C. 1129. But all authorities accept the proposition that an award of punitive  
damages should always receive the most careful consideration and the discretion to  
award them should be most cautiously exercised.  
. . . . .  
“When then can punitive damages be awarded? It must never be forgotten that when  
awarded by a judge or a jury, a punishment is imposed upon a person by a court by  
the operation of the judicial process. What is it that is punished? It surely cannot be  
merely conduct of which the court disapproves, however strongly the judge may feel.  
Punishment may not be imposed in a civilized community without a justification in  
law. The only basis for the imposition of such punishment must be a finding of the  
commission of an actionable wrong which caused the injury complained of by the  
plaintiff.”  
[504]  
He then proceeded at p. 208 to outline the nature of the elements giving rise to  
such an award of damages:  
“Moreover, punitive damages may only be awarded in respect of conduct which is of  
such nature as to be deserving of punishment because of its harsh, vindictive,  
reprehensible and malicious nature. I do not suggest that I have exhausted the  
adjectives which could describe the conduct capable of characterizing a punitive  
award, but in any case where such an award is made the conduct must be extreme  
in its nature and such that by any reasonable standard it is deserving of full  
condemnation and punishment. This view has found expression in Canadian courts:  
see Paragon Properties Ltd. v. Magna Investments Ltd., …, where Clement, J.A.,  
dissenting on the issue of whether damages should have been awarded but not on  
the principle governing the award, said at p. 167:  
‘Rookes v. Barnard cannot be said to have been adopted by Canadian  
Provinces as the common law. It is upon the common law of England prior to  
1964 that our Canadian jurisprudence in respect of exemplary damages has been  
developed, and in its decision the House of Lords has departed very materially  
from that common law. The case recognizes the principle of exemplary damages,  
but in restricting its application it, in my opinion, does injustice to the principle. The  
basis of such an award is actionable injury to the plaintiff done in such a manner  
that it offends the ordinary standards of morality or decent conduct in the  
community in such marked degree that censure by way of damages is, in the  
opinion of the Court, warranted.’”  
[505]  
The administration of the Dunphy Leasing account by the Bank was not perfect  
but its imperfections were such as to place the Bank’s security in jeopardy, not such as to  
cause the damages for which the Defendants now claim.  
[506]  
The facts of this case do not have the qualities of conduct required for the Court  
to award punitive damages.  
Allocation Issue  
As will be seen from the submission to follow, the Bank considers this issue to  
[507]  
be a nonissue. It appears to have been raised by the Borrowers to provide a platform from  
which to broadcast their views with respect to the relationship between the Bank and the  
Receivers.  
[508]  
When negotiating its commitment letter with Dunphy Leasing the Bank chose to  
limit the amount of its debenture security to $2 Million, notwithstanding the fact that it had  
undertaken to make available to Dunphy Leasing a line of credit of $5 Million. It was  
intended that the debenture provide general security over those assets of Dunphy Leasing  
not covered by specific security in the form of chattel mortgages.  
[509]  
During the period of the Doane Raymond receivership a record was kept  
(Exhibit 738) in which the receipt of funds in relation to each lease was recorded. As each  
lease was covered by a corresponding chattel mortgage, it was possible at any given time  
to determine which of the total funds received by Doane Raymond were to be allocated to  
fixed charges (chattel mortgages) and which to the floating charge (the debenture).  
[510]  
By the end of the Doane Raymond receivership the matter of the allocation of  
funds had not become an issue as the total funds recovered by that time did not exceed $2  
Million (Exhibit 323).  
[511]  
At a meeting held on December 23, 1982, and attended by Phyper and his  
solicitor, Thorne Riddell reported receipt of an additional $487,689.70 during the period  
October 15 to December 17, 1982 (Exhibits 348 and 353).  
[512]  
By end of December, 1982, Thorne Riddell reported gross receipts of  
$544,676.59 for the period October 15 to December 31, 1982, and net receipts of  
$487,832.64 (Exhibit 359, p. 120). These net receipts, when added to those realized by  
Doane Raymond and paid to the Bank, produced an aggregate realization as at December  
31, 1982, in excess of $2 Million. These receipts were not, at that time, allocated by  
Thorne Riddell to fixed or floating security.  
[513]  
On March 10, 1983, Phyper’s solicitor wrote to Thorne Riddell acknowledging  
receipt of Thorne Riddell’s Preliminary Report (Exhibit 379). In that letter, he also  
acknowledged having reviewed the Report in detail with Phyper. He added:  
“Mr. Duncan Phyper has asked me to write to you to convey to you on his behalf and  
on behalf of Dunphy Leasing Enterprises Ltd., their agreement to your immediately  
paying out all funds which you are holding in regard to Dunphy Leasing Enterprises  
Ltd. immediately to the Bank of Nova Scotia to be applied directly against the  
principal outstanding on the loans of Dunphy Leasing Enterprises Ltd. This letter is  
your full authority to so pay over these funds.  
“In addition, this letter is your authority to continue to pay such funds over to the Bank  
of Nova Scotia to be applied against the principal of the outstanding loans of Dunphy  
Leasing Enterprises Ltd. on a weekly basis until such time as you may be otherwise  
advised by us in writing.”  
[514]  
There is no evidence of any communication withdrawing that authorization ever  
having been issued by Dunphy Leasing, Phyper or his solicitor.  
[515]  
Shortly after Phyper’s solicitor’s letter to Thorne Riddell, a dispute arose  
between the Bank and Thorne Riddell regarding the allocation of receipts between those  
arising from realizations in relation to fixed security and those arising in relation to floating  
security (Exhibit 414, p. 2). The Bank’s concern is expressed in a memorandum from  
Regional Office to Head Office dated June 10, 1983 (Exhibit 417):  
“Our concern as expressed in the letter was that the Receiver had indicated to us he  
regards all funds collected (approximately $1,500,000) to be pursuant to the  
debenture rather than the hard security of the Bank. The problem here being that if in  
fact monies are being collected pursuant to the debenture, once $2,000,000 has  
been received, the Receiver may be discharged.”  
[516]  
As it was entitled to do, Thorne Riddell went for direction to the Court which had  
appointed it and whose officer it was.  
[517]  
In a Notice of Motion filed August 25, 1983, (directed to the Burnet, Duckworth &  
Palmer firm of which Phyper’s solicitor was a member), Thorne Riddell sought an Order of  
the Court “approving the payment to the Bank of Nova Scotia in the amount of  
$1,942,417.70” (Exhibit 450).  
[518]  
In support of Thorne Riddell’s application, two affidavits of a Mr. Wispinski  
(“Wispinski”), (the Thorne Riddell employee who took over the administration of Dunphy  
Leasing in November, 1982; now deceased, Mr. Wispinski did not give evidence at trial). In  
his first affidavit dated August 29, 1983 (Exhibit 449), Wispinski expressed to the Court his  
opinion that the Bank’s offer in relation to completing the realization was the most cost–  
effective way of bringing the matters to an end. That was, of course, consistent with the  
view expressed in Thorne Riddell’s Preliminary Report (Exhibit 359, p. 7). Wispinski also  
dealt with the proposed payment to the Bank in these terms:  
“That I have paid to the Bank of Nova Scotia the sum of $1,942,417.70 pursuant to  
the consent of the Defendant company herein, and it is my opinion that the funds  
were properly payable to the said Bank of Nova Scotia by virtue of the priority they  
have under their various security documents.”  
[519]  
In a supplemental affidavit dated October 26, 1983 (Exhibit 470), Wispinski  
again addressed the proposed payment to the Bank, this time in the following terms:  
“That I have now paid to the Bank of Nova Scotia the sum of $2,092,417.70 pursuant  
to the consent of the Defendant company herein. That attached hereto and marked  
as Exhibit ‘A’ to this my Affidavit is a schedule prepared by me which outlines the  
manner in which I believe the receipts for operations and sale of assets should be  
allocated among the various security documents held by the Plaintiff;”  
[520]  
A review of Exhibit “A” shows that allocations were made to “fixed charges”  
(chattel mortgages) and “floating charges” (the debenture).  
[521]  
In response to the Application, Dixon, J., gave an Order (Exhibit 473) containing  
the following provision:  
“That manner of payment by the Receiver, to the Bank of Nova Scotia, of the sum of  
$2,092,417.70, is hereby approved and the Receiver is hereby specifically authorized  
to continue making payments from time to time in like manner.”  
[522]  
[523]  
Phyper’s solicitor approved as to form and content the Order granted.  
The allocation issue was before the Court and was the subject of specific  
adjudication by the Court. Thorne Riddell sought the Court’s advice and directions  
regarding the manner of payment as outlined in Wispinski’s Exhibit “A” and obtained the  
Court’s direction that its present practices should continue.  
[524]  
[525]  
That allocation is, by virtue of the Order of Dixon, J., res judicata.  
The nature of the doctrine res judicata and its necessary constituents are  
outlined in Spencer–Bower and Turner, The Doctrine of Res Judicata (2nd Ed.), as  
follows, at p. 1:  
“In English jurisprudence a res judicata, that is to say a final judicial decision  
pronounced by a judicial tribunal having competent jurisdiction over the cause or  
matter in litigation, and over the parties thereto, disposes once and for all of the  
matters decided, so that they cannot afterwards be raised for re–litigation between  
the same parties or their privies.”  
Compensatory Damages – S&D  
[526]  
The question in any case where the Court finds a wrongful conversion is: what is  
the true value of the assets that were wrongfully converted?  
[527] The monthly records prepared in the normal course of the company’s business  
by the person whose job it was to prepare such records, Mrs. Virani, showed that as at  
May 31, 1982, the accounts receivable totalled $117,620 (Exhibit 641). In my opinion, this  
is the most accurate and correct amount of the accounts receivable of S&D.  
[528]  
Historically, on the sale of its leased vehicles, S&D had realized average sale  
proceeds sufficient to pay all lease arrears owing to Dunphy Leasing and the Bank debt  
owing against the vehicles, leaving a surplus.  
[529]  
Utilizing $450 per car as the average surplus per S&D vehicle, the loss to S&D  
for the 155 vehicles wrongfully seized from it was $69,750.  
[530]  
In addition to losing its accounts receivable and inventory of vehicles as a result  
of the actions by the Bank and Doane Raymond and the resultant closure of its business,  
S&D also lost the following assets:  
Value  
April 30, 1982  
Cash  
$ 12,669  
6,835  
Due from affiliated company (Colonial)  
Due from British & European Coach Works  
(receivable)  
16,802  
20,721  
Prepaid expenses  
Due from British & European Coach Works (loans &  
investment)  
15,050  
6,466  
Furniture, equipment, leaseholds (net)  
Incorporation costs  
Total:  
1,213  
$ 79,756  
[531]  
Deducting cash on hand, incorporation costs and the debt due and loan and  
investments from British & European Coach Works (which, in the opinion of the Court, are  
uncollectible) from the above total, the value of additional assets is $34,022.  
[532]  
The total value of the assets of which S&D was deprived by the Bank’s actions  
is $221,392, calculated as follows:  
Accounts receivable  
$117,620  
Vehicle fleet (loss on 155 vehicles wrongfully seized  
at $450/vehicle)  
69,750  
34,022  
Additional assets  
Gross Compensatory Damage Claim:  
$221,392  
[533]  
The conduct of the Bank and Doane Raymond constituted trespass and  
conversion. As a result of the commission of those torts, the business of S&D was  
destroyed and the company lost assets having a face value of $221,392. The Bank is  
liable for that loss to be reduced only by the amount of the indebtedness owing to it.  
[534]  
The loan balance owing by S&D to the Bank as at June 11, 1982, was as  
follows:  
Revolving loan (Exhibit 577):  
Nonrevolving loan (Exhibit 562):  
Total:  
$100,000  
11,800  
$111,800  
Gross Compensatory damage claim:  
Less: total balance owing to the Bank:  
Net compensatory damages awarded to S&D:  
$221,392  
(111,800)  
$109,592  
Note: It is necessary to calculate interest on both above amounts from June 11, 1982, to  
the date of judgment.  
[535]  
Exhibit 577 establishes that the Bank loaned S&D $100,000 as of February 24,  
1982. Interest has been calculated by the nominal rate method and should have been  
done by the effective rate method. The result is that the Bank has failed to prove its  
entitlement to interest calculated by the method which is correct on a proper interpretation  
of the contracts. The Bank has proven a principal indebtedness of $100,000 and $11,800  
with respect to a nonrevolving loan.  
[536]  
Interest on the debt of $111,800 has been calculated by the Bank by the  
nominal rate method and the correct calculation should be on the effective rate method  
from June 11, 1982. The principal and interest due to the Bank should be set off from the  
lost assets. Interest on the damage claim should accrue to S&D at the rate of 12% per  
annum from June 11, 1982.  
Compensatory Damages – 106315  
[537]  
106315 was incorporated as a wholly–owned subsidiary of Dunphy Leasing in  
order to sell radio telephones and two–way radios on a wholesale and retail basis.  
Effective June 1, 1981, it entered into a distribution agreement with Canada West  
Communications Corporation, giving it certain rights and obligations with respect to  
distribution of that company’s products. The agreement indicates that 106315 initially used  
the trade names “Canada West Group”, “Canada West Mobile Telephone” and “Canada  
West Communications”.  
[538]  
In or about September 1981, Phyper closed the Edmonton office of 106315 and  
took steps to reduce inventory. He dismissed the manager and salesmen other than Mr.  
Firoz Kassam “for incompetence” and in place of the manager, he hired his son Bruce  
Phyper as administrative manager.  
[539]  
106315 had substantial funding from Dunphy Leasing and the Bank which  
enabled it to carry on business. The money from Dunphy Leasing amounted to $125,000  
by way of shareholders’ loans. Contrary to the original expectation of both the company  
and the Bank, the $200,000 revolving credit never revolved. The Bank supplied substantial  
overdraft support to the company when needed. From November 2, 1981, this overdraft  
was continuous. All cheques written by the company on the account increased the  
overdraft; deposits would reduce it. The overdraft served as an extension of the company’s  
revolving line of credit. There was no revolvement within the $200,000 limit – all  
revolvement took place within the account overdraft.  
[540]  
As at June 1, 1982, the loan from Dunphy Leasing, on which the company was  
not paying interest, still stood at $125,000. The operating credit from the Bank was still  
$200,000 and the overdraft stood at $48,072.85.  
[541]  
On June 2, 1982, the Bank returned eight cheques on the overdrawn account  
totalling $6,455.90. One of these was the cheque for the monthly rental of the company’s  
premises. The landlord responded by locking the company out of its premises until an  
arrangement was made whereby the landlord was given two radio–phones in lieu of rent.  
[542]  
In Thermo King Corp. v. Provincial Bank of Canada (1981), 34 O.R.(2d) 369  
(C.A.), Wilson, J.A., held that the party to whom overdraft privileges had been extended  
was not the Bank’s borrower but was a guarantor of the borrower’s debts to the bank.  
Under the terms of the guarantee, no liability arose until a demand had been made. This  
was the reason that the court found that notice was required before overdraft privileges  
could be withdrawn. This point was expressly made in Barclay Construction  
Corporation v. Bank of Montreal (1988), 28 B.C.L.R. (2d) 376 (B.C.S.C.), where the  
plaintiff argued that the bank could not refuse to honour outstanding cheques and could  
not realize on its assignment of book accounts until it had made a demand for payment  
and had allowed the customer a reasonable time to pay. The court pointed out (at p. 381)  
that no demand is necessary before an action may be commenced on a demand note or  
for money loaned. The court stated at pp. 382–383:  
“Much was made by counsel for the plaintiff of the judgment of Wilson, J.A. (as she  
then was), in Thermo King Corp. v. Prov. Bank of Can. …  
“In considering the Thermo King case, one must remember the essential facts:  
1. The bank had been accommodating Hamilton with small overdrafts and the  
drawing of the requested draft to the plaintiff of U.S. $100,000 would have meant that  
Hamilton was overdrawn a mere $13,000 which was not unusual.  
2. The bank’s other rights against Hamilton arose on a guarantee given by Hamilton  
of Southern’s debts. The guarantee was in such terms that no cause of action could  
arise on it until demand was made. See p. 266 where Wilson, J.A., quotes from the  
guarantee:  
‘… and the liability of the undersigned is to arise first when notice in writing is  
given to the undersigned requiring payment.’  
“The court held, first, that before withdrawing the accommodation of an overdraft, the  
defendant had to give some notice and, secondly, that no right arose under the  
guarantee until demand was made under it. Therefore, it concluded the defendant  
could not resort to the assignment of book accounts which was security for both the  
overdraft and the guarantee at the time which it did.  
“But in the course of her judgment, Wilson, J.A., said this (pp. 268–269):  
‘I have no doubt that in circumstances where no notice or demand with respect to  
the primary debt is required, immediate recourse may be had to the collateral  
security. But where as in this case such notice or demand is required, then I  
believe it follows that the assignment of book debts cannot be resorted to until  
that has been done.’  
“As, in my view, in the case before me, no notice or demand with regard to the  
primary debt arising on the operating line of credit was required and one was  
required on the note or notes held by the bank, the bank was entitled to resort to the  
collateral security without giving reasonable time for payment.  
“Because, as I have said, Mr. Davis [plaintiff’s counsel], as I understood him,  
conceded that if I were against him on this point, the plaintiff failed, I need not  
address the question of whether a bank which has allowed overdraft privileges  
commits a breach of contract when it dishonours cheques outstanding at the time of  
termination of overdraft privileges where, as here, the amount of those cheques was  
well within the amount of previous overdrafts. No similar issue arises on the  
termination of the line of credit. See Intercity Express Ltd. v. T.D. Bank, [B.C.]  
Court of Appeal No. 325/76, 26th January 1977 (unreported).”  
[543]  
In the Intercity Express case, the British Columbia Court of Appeal held that a  
bank is under no obligation to give notice of its intention to terminate a line of credit and  
dishonour cheques.  
[544]  
The evidence indicates that 106315 had no prospects of recovery and that  
Phyper had faced this reality and decided to close the business down.  
[545]  
As at June 2, 1982, 106315 had the following debts:  
Bank operating credit:  
Bank overdraft:  
$200,000  
48,000  
plus interes from May 26/82  
Loan from Dunphy Leasing:  
Total:  
125,000  
$373,072  
[546]  
The Defendants argue that the Bank or Doane Raymond wrongfully seized and  
sold the inventory of 106315.  
[547]  
The Bank admits that the security was not valid to secure the $200,000 which  
remained outstanding in June, 1982, for the reason that this sum had been advanced prior  
to the security document (Exhibit 54) which is dated August 17, 1981. This is because of s.  
180(1) of the Bank Act which prevents the acquisition of s. 178 security to secure the  
payment of any loan unless the loan is made:  
(a) at the time of the acquisition of the security by the Bank, or  
(b) on a written promise to give security, in which case the loan may be made before or at  
or after the time the security is acquired.  
[548]  
A promise to give security was given (Exhibit 53) but it was after the advance of  
the $200,000.  
[549]  
The s. 178 security did not become valid security for any portion of the $200,000  
revolving credit for the reason that the credit, contrary to the expectation of both parties,  
did not revolve within the $200,000 limit after the security was given. The overdraft was  
paid down to nil several times and stood at $48,072.85 at June 2, 1982. Each cheque  
drawn against the account represented a new advance. Advances were made within the  
time frame required; they were made by way of a revolving credit and they were made  
outside the $200,000 limit instead of within it. The s. 178 security did not validly secure the  
$200,000 credit but it was valid to secure the company’s overdraft balance. The Bank’s  
entitlement to recover the underlying debt remained unimpaired.  
[550]  
As to the alleged seizure of the inventory of 106315, Bruce Phyper voluntarily  
delivered dominion and control over the goods to Doane Raymond. There was no seizure.  
Doane Raymond agreed to 106315’s proposal that the inventory be moved to storage, to  
have an employee conduct an inventory (which had been a condition of its agreement),  
and to accept from Bruce Phyper the keys and the rights of access later in July, 1982.  
There was nothing forcible that was done. 106315 initiated the entire process.  
[551]  
An August 20, 1982, Bank communication authored by Hendricks states:  
“The inventory of 106315 Canada Inc. is under the control of Doane Raymond  
Limited. Enquiries have been made by Mr. Phyper to other dealers as to their interest  
in purchasing the radio phones and parts. There is a Vancouver firm who expressed  
some interest in purchasing some of this inventory and should this materialize it is  
expected that deal would be completed within the next 2–3 weeks …”  
Nothing came of these efforts and, on October 22, 1982, Doane Raymond reported to the  
Bank that these assets were still under its control.  
[552]  
Section 178(4) of the Bank Act requires sale by public auction with notice and  
publication as specified, “unless that person [i.e., the grantor of the s. 178 security] has  
agreed to the sale otherwise than as herein provided”. This proviso makes all the  
difference to a proper understanding of the subsection. It has been held that by agreement  
the sale may be conducted in another manner than required by the subsection if entered  
into at the time of the original loan: Canadian Imperial Bank of Commerce v. Heppner  
(1965), 51 D.L.R.(2d) 254 (Sask. Q.B.).  
[553]  
106315 voluntarily delivered the goods into the possession of Doane Raymond  
and participated in unsuccessful attempts to sell them during the summer of 1982. On  
August 17, 1981, 106315 signed a document entitled “Agreement as to Loans and  
Advances and Security Therefor, Section 178 or 186 of the Bank Act” (Exhibit 51). Clause  
6 of that agreement provides in part:  
“… and the Bank is hereby authorized from time to time to sell at public or private  
sale or otherwise realize upon the security or any part thereof in a timely and  
appropriate manner and all or any of the property whenever and whatever and for  
such price in money or other consideration and such terms and conditions as the  
Bank deems best, upon 15 days notice to the Customer and to anyone else entitled  
to notice by law (provided that if the property is perishable, notice is not required),  
and to deal with the proceeds as in this Agreement or otherwise provided, without  
prejudice to its claim for any deficiency and free from any right of redemption on the  
part of the Customer which is hereby waived and released, the Customer expressly  
waiving all and every formality prescribed by custom or by law in relation to any such  
sale or other realization.”  
This was an agreement of exactly the same nature as was discussed in the Heppner  
case, supra. This was an agreement falling within the proviso in subsection (4).  
Accounts Receivable Of 106315  
[554]  
As at June 30, 1982, Bruce Phyper prepared a summary of 106315’s accounts  
receivable (Exhibit 259) which shows the aging as follows:  
Wholesale  
––  
Retail  
––  
21  
Total  
––  
Current  
Over 30 days  
Over 60 days  
Over 90 days  
Over 120 days  
Total:  
3,415  
12,819  
––  
3,436  
2,317  
954  
15,136  
954  
69,127  
$85,361  
16,031  
$19,323  
85,158  
$104,684  
[555]  
106315’s receivables were very old and were of extremely low quality. This was  
apparent before June of 1982. 106315 itself had failed to collect these accounts and most  
of them had already been referred to litigation.  
[556]  
The Bank spent a good deal of money in attempting to realize some money on  
the receivables before realizing that they were worthless. It did not have an obligation to  
send good money after bad in pursuing all these cases to trial. It is not the case that the  
failure to realize very much money from the receivables resulted from the negligence of  
the Bank or of its solicitors.  
[557]  
The accounts receivable of 106315 had been validly assigned to the Bank.  
Whether the Bank realized all that they were worth is an entirely different issue. The Bank  
was unquestionably not a converter of the receivables.  
[558]  
In setting out their damages calculation, the Borrowers have used the book  
values of the accounts receivable and the inventory as at April 30, 1982, as shown in  
Exhibit 185. The assets in both categories had been reduced by the time the Bank took  
any steps in relation to them.  
[559]  
In the case of the accounts receivable, the Bank sent out its notices to the  
parties listed by 106315 as its debtors on July 6, 1982. The accounts receivable statement  
had been prepared by Bruce Phyper as at June 30, 1982 (Exhibit 259). It shows accounts  
receivable having a book value of $104,684, of which almost all were at least 60 days due  
and 85% were over 120 days due.  
[560]  
In the case of the inventory, the Defendants have chosen the book value as at  
April 30, 1982, as proven by the Bank’s summary at that date. The book value was then  
$150,049 (Exhibit 185). As at June 30, 1982, the very day it was moved to storage, it was  
$98,633.  
[561]  
The proper value of these assets in both categories should be the June 30,  
1982, date when the Bank took steps in relation to them.  
[562]  
In the case of the accounts receivable, Bruce Phyper recorded these as at June  
30, 1982, as having a value of $104,684. In considering what was collectible from this  
total, the following evidence is considered:  
a) 85% of these receivables were over 120 days due.  
b) Accounts totalling $69,563, or two–thirds of them, had been referred by the company to  
its solicitors for collection (Exhibit 259).  
c) The nature of some of the problems that the company had encountered are adverted to  
in Exhibit 149, written by Bruce Phyper. One of those had been created by invoicing on the  
wrong stationery.  
d) Many of these accounts date from the days of the staff whom Phyper had “fired … for  
incompetence”.  
e) Only five accounts, totalling $3,436, were less than 60 days due. These varied in size  
from $21 to $2,085 (in the case of Cartel Electronics – Exhibit 259). This might have  
seemed the most promising of all the receivables until Cartel replied to Hendricks’ demand  
denying it owed this money. Demands for payment met with similar results from almost all  
the receivables.  
f) Whoever was attempting to realize on these accounts had to do so in the difficult  
economic conditions of 1982 and following.  
g) The bulk of the contested accounts were in British Columbia, making it more expensive  
to try to effect any realization than if they had been local.  
h) The Bank spent more money in fruitless efforts to make recovery on these receivables  
than it received from them. In retrospect, it would have been better off taking no steps after  
the initial demand.  
[563]  
In the case of the inventory, the following evidence shows that the value of the  
inventory was not what was shown on the company’s books:  
a) The Bank only realized a total of $4,810 (Exhibit 463) when it sold the inventory. This  
was over a year later and, as Phyper testified, the equipment was subject to rapid  
obsolescence. It is important, however, to consider that the company had been trying to  
reduce its inventory since at least January of 1982. The company became stuck with aging  
inventory that became increasingly difficult to sell. The inventory was already becoming  
obsolescent before June.  
b) The foregoing is consistent with the Proposal (Exhibit 253) which acknowledges with  
some degree of candour the severity of this company’s problems. If the inventory had  
been readily saleable, the company would not have been facing those problems, nor  
would it have been trying to reduce the inventory.  
c) Phyper testified that, “The market was limited to the dealers that we had and to certain  
retail buyers”.  
[564]  
The steps taken by the Bank to realize on the inventory of 106315 demonstrates  
inordinate delay and questionable procedures in the disposal of the inventory by the Bank.  
The Bank did not deprive 106315 of these assets but the Bank acted in an unreasonable  
manner in disposing of the inventory.  
[565]  
The damages that should be awarded are based on the value lost on the  
underrealization of the value of the inventory. The damages are assessed based on two–  
thirds of the value of the inventory at cost ($98,633) which results in an award of $65,755.  
These damages should be set off against the debt of 106315 to the Bank.  
[566]  
The Court accepts the accounts receivable and inventory at cost calculations as  
set out in the statement prepared by Bruce Phyper as of June 30, 1982.  
[567]  
The claim of 106315 for compensatory damages, calculated to June 30, 1982, is  
determined as follows:  
1. Inventory at cost: ($98,633)  
2/3 of value of inventory  
awarded by way of damages:  
$ 65,755  
104,684  
2. Accounts receivable at face value:  
Compensatory damages:  
$170,439  
$170,439  
3. Balance owing to Bank:  
Revolving credit (Ex. 578)  
Principal – $200,000  
Interest – 4,186  
204,186  
Overdraft (Exhibit 579)  
Principal – $ 37,941  
Interest – 212  
38,153  
242,339  
242,339  
($ 71,900)  
[568]  
Interest on the revolving credit and overdraft owing to the Bank should be  
calculated on the effective rate method of interest calculation. This should result in the  
balance owing by 106315 to the Bank being reduced.  
[569]  
The interest should accrue to the Bank from June 30,” 1982 (on the effective  
rate method of interest calculation) to the date of judgment. Interest on the compensatory  
damages of 106315 should accrue at the rate of 12% per annum from June 30, 1982.  
Summary  
A. Dunphy Leasing  
1. The claim of the Bank is hereby dismissed against Dunphy Leasing.  
2. Judgment for underrealization compensatory damages in the sum of $1,095,456.  
3. Judgment for the trespass to and conversion of its principal assets by the Bank,  
damages are awarded in the amount of $100,000.00 with no interest to accrue on this  
amount before judgment.  
4. An award of additional compensatory damages in the amount of the tax gross–up  
required to compensate Dunphy Leasing for the additional income tax burden which it will  
bear by reason of receiving its damages award in a lump sum in one year, rather than  
receiving the income over the course of the five years 1982 to 1986 inclusive. This  
calculation should include the amounts awarded in Paragraphs 2 and 3.  
5. An order directing that Thorne Riddell be discharged as receiver for Dunphy Leasing  
and that all books of account and records and remaining assets shall be delivered up to  
Dunphy Leasing within 30 days of this judgment.  
Interest to Dunphy Leasing should accrue on those damages at the rate of 12% per  
annum on each year from 1982 to 1986:  
From December 31, 1982, on  
From December 31, 1983, on  
From December 31, 1984, on  
From December 31, 1985, on  
From December 31, 1986, on  
$ 15,000  
33,900  
708,490  
252,319  
85,747  
$1,095,456  
Interest on underrealized funds to be calculated from December 31st of the year in which  
the funds should have been realized, as set forth above.  
B. S&D  
1. The dismissal of the Bank’s action against S&D.  
2. Judgment for underrealization compensatory damages in the sum of $24,917.  
3. Interest on the sum of $24,917, calculated at the rate of the Bank Prime Rate plus 1%  
per annum from June 30, 1982 until such date as payment is actually made.  
C. 106315  
1. The dismissal of the claim of the Bank against 106315.  
2. No compensatory damages are awarded to 106315 as there remains a debt owing by  
106315 to Dunphy Leasing in the amount of $53,100.  
D. Phyper  
1. The dismissal of the claim of the Bank against Phyper.  
[570]  
The four Defendants, namely Dunphy Leasing, S&D, 106315 and Phyper, are  
each entitled to costs and they may be spoken to by Counsel.  
[571]  
I would like to acknowledge the tremendous amount of time and effort  
contributed by each Counsel in this trial. The thoroughly researched material and well–  
written submissions made the responsibility of the Court that much easier.  
Judgment accordingly.  


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