337965 B.C. Ltd. v. Tackama Forest Products Ltd.

Date of Release: June 10, 1991

No. C874899

Vancouver Registry

IN THE SUPREME COURT OF BRITISH COLUMBIA

)

BETWEEN:

)

337965 B.C. LTD. et al.

)

Plaintiffs )

)

AND:

)

REASONS FOR JUDGMENT

OF THE HONOURABLE

MR. JUSTICE HOOD

TACKAMA FOREST PRODUCTS LTD.

et al.

)

Defendants )

AND:

No. A872608

)

BETWEEN:

)

KEITH BENSON et al.

)

Plaintiffs )

)

AND:

)

TACKAMA FOREST PRODUCTS LTD.

et al.

)

Defendants )

)

R. Sewell and E. J. Adair

for the plaintiffs

for the defendants

D. Lunny, A. P. Schuck and R. Enns

Dates of Hearing:

Weeks commencing January 15/22/29, 1990

February 5/19/26, 1990

" March 5-8, 12-15, 27-30 incl.

"

Week

"

April 2 and 9,23,24,25

Weeks

" May 14-17, 22-25, 28-31 incl.

June 1, 1990

- 2 -

Vancouver, BC.

INTRODUCTION

I will deal with the situation as it stood at the commencement

of the action, and I will ignore events which occurred subsequent

thereto. The plaintiffs are current limited partners in Alfor II

Forest Products Limited Partnership (Alfor), a limited partnership

registered under the provisions of the Partnership Act S.B.C. 1979,

c. 312. Collectively they own 93 out of the 106 units contained in

the partnership. The balance of the units are owned by five of the

defendants. All unit owners who are partners therefore are before

the court, either as a plaintiff or a defendant.

The defendants Tackama Forest Products Ltd. (Tackama) and

Tackama Plywood Corporation (Plywood) are the general partners in

Alfor, and Tackama is its managing general partner. Both companies

were incorporated in the 1970s by Curt Garland and Bob Lunde, who

are their directors and principals.

However, Plywood had very

little to do with the management of the affairs of Alfor and I do

not propose to refer to it further. Its liability probably tracks

that of Tackama who was the active general and managing partner of

Alfor at all material times.

The plaintiffs advance four claims against Tackama, together

with or in addition to necessary declaratory relief. The first and

third claims are based on a fiduciary relationship between the

plaintiffs and Tackama, which is expressly set out in the

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Partnership Agreement made between the parties. The second and

fourth claims are contractual claims, which depend mainly upon the

interpretation to be given to provisions in the Partnership

Agreement or in a Supply Agreement made between Alfor and Tackama

as of December 1, 1982.

The first claim is for $4,727,997, being the cash flow and

reserves which the plaintiffs say Tackama failed to distribute to

them as limited partners, pursuant to the Partnership Agreement,

and which constitute profits or benefits obtained by Tackama from,

or by virtue of, its fiduciary position, and the exercise of its

fiduciary powers.

The plaintiffs say that Tackama, their

fiduciary, must account for these profits or benefits.

The second claim is for $6,616,470, being the balance of the

proper option price which the plaintiffs say Tackama should have

paid for the assets of Alfor, on Tackama exercising its option to

purchase the assets on March 1, 1988. This claim is based on an

option price formula contained in para. 3.31 of the Partnership

Agreement, which takes into consideration the average amount of

cash distributable to the plaintiffs in the three fiscal years

1985, 1986 and 1987.

An alternative claim is advanced in the

amount of $3,465,102, based on the average amount of cash

distributable to the plaintiffs in four fiscal years, 1984, 1985,

1986 and 1987.

The third claim is for $907,000, which the plaintiffs say is

a net benefit which was obtained by Tackama from, or by virtue of,

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its fiduciary position and the exercise of its fiduciary powers,

when Tackama accelerated the payment of Alfor's long-term debt

without the informed consent of the plaintiffs. The plaintiffs say

that Tackama, their fiduciary, must account for this benefit.

In the fourth claim, which is tied to the first claim, the

plaintiffs claim to recover various amounts which they say were

wrongfully added or charged to the veneer transfer price under the

Supply Agreement. I am told that once I have adjudicated upon the

various issues under the Agreement, the parties should be in a

position to work out the amount of each claim. All of the amounts,

once adjusted, are taken into account in the calculation of the

first claim, that is the $4,727,997.

Having set out the claims, as I understand them to be

advanced, I must say that it may be that some of the figures I use

in this judgment are not entirely accurate. However, I am more

concerned with the finding of facts which will enable counsel to

calculate the claims than with the figures themselves. Further,

given the complexity and length of the facts, it may be that I will

overlook a matter in the preparation of these reasons. If that is

the case, then I grant counsel leave to speak to it on short notice

to me. While I do not invite counsel to re-argue the issue or

matter generally, if there is a specific matter which counsel

require me to resolve or determine in order to complete the case at

this level, then I am prepared to hear counsel.

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THE FACTS

Tackama was incorporated in 1973 and thereafter operated a

modern forest products manufacturing complex, which included a

sawmill and a veneer plant, at Fort Nelson, British Columbia. Its

principal market for the veneer produced at its plant was Cantree

Plywood Corporation (Cantree) a company which it owned and which

operated a softwood plywood plant on Annacis Island in Delta,

British Columbia. By 1982 Tackama was in dire financial straits.

The market for its veneer, lumber and wood chips had declined

dramatically, prices were extremely low and Tackama was

substantially indebted to the Royal Bank of Canada.

In 1981 Tackama suffered a loss of $292,000 and for the year

ending September 30, 1982 it suffered a further loss of $1.9

million. In 1982 Tackama was not able to repay the Royal Bank for

its previous years logging financing, and it required a further $4

million in order to harvest logs for the ensuing year.

The

harvesting had to take place during the freeze-up period, from late

December to March of each year, a period of approximately 100 days.

In 1982 Tackama's principals concluded that the only way it

could survive was to build a plywood plant adjacent to its existing

plant in Fort Nelson. They had ascertained that the construction

of such a plant would result in cost savings of $3 million per

year, which would permit Takama to operate profitably even though

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the economy and the forest industry were in a severe recession.

However, Tackama did not have the financial resources or means to

construct the required plant. In fact, it was unable to service

its existing debt obligation to the Royal Bank of Canada. The bank

had placed Tackama's loans, which were in arrears, in and they were

being administered by, the "Special Loans Department". In fact, it

was highly doubtful that the bank would agree to a further $4

million loan for the 1982/1983 logging season, for which the

harvesting had to commence in December of 1982, and which might

enable Tackama to survive for at least that season.

The accounting firm of Laventhol & Horwath had a long

relationship with Tackama prior to 1982. The firm had done the tax

and accounting work for Tackama, and were its auditors, since

Tackama was incorporated. The senior tax partner who looked after

Tackama's tax matters was W. Barclay, who gave evidence at trial.

Two other partners, Adams and Lazzari, also provided tax related

services to Tackama. Another senior partner, L. R. Bolton, who

also gave evidence, provided a wide variety of services to Tackama

over the years, including some tax related services.

He was

Tackama's general consultant and adviser on a day-to-day basis. He

had had a wide and varied experience in the forest industry in both

British Columbia and Alberta. He was involved in almost all of

Tackama's affairs from accounting systems to expansion, acquisition

and financing, including the planning for, construction and

operation of, the Fort Nelson plywood plant. Laventhol & Horwath's

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policy was to establish a very close working relationship with its

clients. It knew their problems intimately and was involved in

assisting them in the resolution of their problems. In the case of

Tackama, Bolton was their man.

In 1982 Laventhol & Horwath also had a fairly close

relationship with Mr. Frank Sojonky and his company, Jefferson

Syndication Limited, through which Sojonky carried on a syndication

business. Broadly speaking this involved the packaging, marketing

and selling of a project to the public.

In addition to this

syndication business Sojonky carried on business as an owner in the

real estate development and ski businesses. I would describe him

at the time as an astute businessman, with emphasis on the

structuring, financing and marketing of real estate projects.

By early 1982 Laventhol & Horwath had participated in, or

worked on, the syndication of two or three real estate projects

with Sojonky. These projects involved the sale of condominiums or

apartment buildings. They were "real estate projects" and were

somewhat different from the one in the case at bar. Both Sojonky

and Laventhol & Horwath had clients who were interested in

investing in these projects, the main feature of them being that

they were tax shelters.

As in the case at bar, the roles of

Jefferson (Sojonky) on the one hand and Laventhol & Horwath (mainly

Bolton and Barclay) on the other hand, in the structuring,

financing and eventual sale of the projects, overlapped and

- 8 -

intermingled to a degree, although each had his expertise and in

that area to some extent led "the team".

In the spring of 1982 Bolton was meeting with Lunde to discuss

Tackama's problems, including its continuing losses and declining

equity base.

At that time Sojonky was renting an office in

He had been asked to attend a

Laventhol & Horwath's offices.

meeting of the partners of Laventhol & Horwath to discuss, among

other things, tax benefits which their respective clients were

receiving, and the tax opportunities for syndication of projects

for 1982. During this meeting it was suggested that they might be

able to "marry the financial problems of Tackama with the tax

benefits available for syndication projects" although neither

Laventhol & Horwath nor Sojonky had attempted this type of

syndication before.

Bolton then arranged for a meeting between Lunde and Sojonky

at which the possibility of financing and constructing a plywood

plant was discussed. It was agreed that Sojonky and Bolton would

work together on the project, and that they should put together

some business plans or proposals. They were told to proceed with

the project.

I will here deal briefly with the roles of Bolton and Sojonky

in the project, although I will refer to them later as well.

Notwithstanding the "labels" attributed to each of them from time-

- 9 -

to-time, it is clear that in the main most of their efforts were

joint efforts or, at least, involved input from both of them. It

is equally clear that their efforts were all on behalf of Tackama

who, of course, was the promoter of the project. Most of their

efforts were focused and expended on obtaining equity and debt

financing for the project, which would enable the project to

proceed and thus allow Tackama to survive. They were part of a

team.

Sojonky's primary task was to raise equity financing in the

amount of $2.65 million, by selling units in the partnership to his

clients and those of Laventhol & Horwath.

assist in obtaining the debt financing.

Another task was to

Initially he was

unsuccessful in this regard, and in the end the Royal Bank, to whom

Tackama was heavily indebted, was Tackama's only hope.

Negotiations with the bank were conducted principally by Lunde and

Bolton, and Sojonky provided some assistance. He described his

duties in 1983 with regard to the debt financing as "advising,

assisting and consulting".

Sojonky subsequently entered into an Agency Agreement dated

December 1, 1982 with Alfor, whereby he agreed to sell the 106

partnership units on the terms and conditions contained in the

agreement. He also entered into a second agreement dated December

1, 1982 with Alfor, to provide consulting or syndication services

with respect to the raising of the equity capital. He had a third

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agreement with Tackama, which may not have been in writing, whereby

he agreed to provide consulting for the debt financing.

Notwithstanding the preciseness of the agreements, or of the

descriptions of his tasks, as I say, they were varied, and like

those of Bolton, and other team members, were directed to the

obtaining of the necessary financing for the project.

The terms of Laventhol & Horwath's retainer are set out in the

firm's letter dated August 12, 1982 to Garland and Lunde. However,

the description of the services to be provided is not exhaustive of

those which were actually provided. Bolton was very familiar with

Tackama's business and he was much closer to the Tackama people

than Sojonky. He was Tackama's main consultant and advisor. He

and Lunde were the main negotiators with the Royal Bank after

Sojonky's initial inability to raise long-term debt financing. He

negotiated a loan with the Economic Development Board (EDB) and he

was involved with all of the financial institutions dealt with.

Generally speaking Bolton kept Sojonky advised of developments

at his end and Sojonky did the same thing. Work done by one of

them, such as a letter to the limited partners, would be reviewed

by the other. Similarly, letters sent out under Lunde's name would

be compiled and reviewed by both of them. Lunde and Garland spent

most of their time in Fort Nelson, while Bolton and Sojonky were in

Vancouver.

While I am satisfied that Lunde made the necessary

decisions, after consulting with Bolton or Sojonky, or both of

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them, there is no doubt that he did leave some matters to the team

in Vancouver, particularly Bolton.

Nothing else mattered if

Tackama was not able to raise the necessary financing for the

plant. In performing his tasks, Bolton represented and was, in

fact, Tackama.

His sole purpose was to obtain financing for

Tackama, who was not only the general partner but was also the

promoter of the project. Similarly, notwithstanding the fact that

in the end at least two of his employment agreements were with

Alfor, Sojonky was really performing his services for Tackama.

Between May and the end of July, 1982 Bolton and Sojonky

worked on the project. A business plan was prepared and extended

as matters developed.

Tax calculations or projections were

prepared in detail, and Sojonky made some initial, but

unsuccessful, attempts to obtain long-term debt financing. Sojonky

prepared a document entitled "Jefferson Plywood Plant Syndication"

containing his, and probably some of Bolton's, preliminary or

initial thoughts and concepts. By June 14 Sojonky had prepared a

summary of a plywood plant feasibility study. On June 30, 1982 he

sent a progress report to Lunde together with a plywood plant

financing plan to obtain equity and debt financing.

The plan

suggests a debt financing term of five to ten years with a twenty

year amortization. The plan envisaged profits from the plant being

shared between Tackama and the limited partners, and perhaps the

institution providing the long-term debt, and Tackama having an

option to purchase the plant. While some of the work was done on

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an individual basis most of it appears to reflect some input by

both Sojonky and Bolton.

It was decided fairly early on, that the vehicle to be used to

complete the project would be a limited partnership. By using a

limited partnership, in addition to enjoying the benefits of

ownership of the plant, equity funds could be raised and

substantial tax advantages accrue to the partners, without any

corresponding liability on their part for the debts or obligations

of the partnership. At that time the syndicator could file certain

documents pursuant to then s. 55 of the Securities Act and obtain

an exemption from filing a prospectus. Units in the partnership

could then be sold through an Offering Memorandum rather than a

prospectus.

At the time the government of Canada had undertaken a program

to assist underdeveloped or economically distressed areas, by

adopting a policy of increasing the investment tax credit for new

industries. Because of the conditions in the Fort Nelson area,

special tax incentives and investment tax credits, were available

to an owner, or investor who became an owner, of a manufacturing

business in the Fort Nelson area. The tax credits were deductible

from the federal portion of the income tax payable by an investor-

owner. In addition, the manufacturing industry at that time had

the benefit of what was called accelerated depreciation, so that on

the cost of a new plant depreciation could be deducted on an

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accelerated basis of 25 percent the first year, 50 percent the

second year and 25 percent the third year.

Both factors were

important in reducing the risks to an investor-owner in a project

such as the one in question.

In addition, the federal government had a program which

awarded grants to industries being developed in depressed areas

such as Fort Nelson. The obtaining of such a grant was important

to the project because the long-term debt lenders considered or

viewed such grants as equity. In the case at bar an application

was made to the federal government for a "DREE grant", and it was

granted in the amount of $1,065,640 on February 2, 1983.

During the time the initial unsuccessful attempts were made to

obtain long-term financing, it was learned that it was highly

unlikely that a financial institution would loan monies to Alfor

(Tackama) unless loan insurance (a guarantee of at least a portion

of the loan to be obtained from the private lender) could be

obtained. It was also learned that private institutions were not

interested in guaranteeing any portion of the loan. In August of

1982 Bolton prepared and submitted an application to the EDB for a

90 percent loan guarantee. Eventually a 50 percent guarantee was

granted on December 10, 1982, although the terms of that guarantee

were not made known by the EDB until it sent its letter dated

January 5, 1983, containing the terms, to Alfor.

Prior to the

grant being made Bolton and Sojonky had met with the Royal Bank and

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officials of the EDB on September 23, 1982.

At that time,

according to Bolton's evidence, the amortization period proposed

for Alfor's long-term debt was changed from 20 to 25 years.

At this time the team was working towards two deadlines. The

first deadline was imposed by the Securities Commission which

required the submission of all agreements to them for approval by

November 15, 1982.

The second deadline was that the limited

partners had to be registered in Victoria by the end of 1982, in

order to receive tax benefits from the project for expenditures

incurred to December 31 of that year. There was, in fact, a third

deadline which the team had set for the financing, and that was

December 1, because details of the financing had to be incorporated

into the documentation to be submitted to potential limited

partners.

I should say here that the partnership was actually formed and

registered on July 29, 1982 by the firm of Bull, Housser & Tupper,

who were then solicitors for Sojonky. It was important, of course,

to future limited partners, that the partnership be formed as soon

as possible in order to obtain the deductibility of certain start-

up costs, and the ability to claim depreciation, in 1982. Bull,

Housser & Tupper was also instructed to prepare all of the project-

related documents on behalf of Alfor on the instructions of

Sojonky, except apparently where instructions were received from

Tackama to the contrary. In a memo from Bull, Housser & Tupper

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dated September 27, 1982 to Sojonky, they state that in the event

of a conflict between the general partner and the limited partners,

Bull, Housser & Tupper would act for the general partner; that in

the event of a conflict between Jefferson Syndications Inc. or

Sojonky, and any other party, Bull, Housser & Tupper would act for

Jefferson. They also make it clear that Tackama was responsible

and liable for all fees and disbursements incurred by Bull, Housser

& Tupper on behalf of Alfor and the general partner.

It became evident fairly early on that if debt financing was

to be obtained, it would have to be obtained from the Royal Bank.

Hence, Tackama kept the Royal Bank informed of progress as it

negotiated with the EDB, with the view to making a formal loan

application to the Royal Bank in due course. At the same time,

that is, in the fall of 1982, Tackama was negotiating with the

Royal Bank with regard to the needed current logging loan.

The evidence is that normally in such a project the long-term

debt financing is obtained first, and the equity financing is then

raised. Thus potential limited partners receive full particulars

of the terms of long-term financing, before deciding whether or not

to participate in the project.

However, as I have already

indicated, initially Sojonky was unable to raise the long-term

financing since there were problems in the industry, and the

financial condition of the general partner, Tackama, was of much

concern. It therefore was felt that if equity financing could be

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raised first, the team would then be able to approach long-term

lenders more easily. This apparently turned out to be the case as

regards the Royal Bank.

In late September or early October of 1982, Bull, Housser &

Tupper were in the process of preparing the necessary documents in

order to raise the equity funds prior to December 31, 1982. The

documents included the Offering Memorandum containing the offer to

the limited partners (exempted from the provisions of the

Securities Act by virtue of a S.55 order) and related documents,

and a Partnership Agreement between the limited partners and

Tackama as managing partner. These documents originally had been

drafted for the usual type of transaction where the long-term debt

financing has been obtained first and the promoter is then seeking

equity financing from potential limited partners. Because of the

fact that long-term debt financing was not committed in the fall of

1982, the documents had to be changed to reflect that fact.

By October 18, 1982 some of the documents were still in

draft form some of the terms of the agreements had not been

resolved. Bolton had departed for Hong Kong, taking the documents

with him for his review. Sojonky was left to decide or determine

with Lunde some outstanding agreement issues, such as profit

sharing, and to see to other matters, including the initial

drafting of the Offering Memorandum, during Bolton's absence.

According to his file memo dated October 21, 1982 Sojonky was then

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considering various concepts including the use of a reserve in some

fashion in the event of extraordinary profits being generated.

The second or final Offering Memorandum dated December 7, 1982

then reflected the fact that the limited partnership units were

being sold on the basis that long-term debt financing had not been

obtained. It is expressly stated in para. 5 therein that Alfor did

not have a commitment from a bank for a term bank loan, nor for the

EDB guarantee or the DREE grant. It is also stated:

The managing general partner will actively

pursue the grant, the guarantee, the letter of

credit and the term bank loan with a view to

having firm commitments before April 15, 1983,

but intends to spend funds and incur

liabilities

on

behalf

of

the

limited

partnership before having such commitments.

*

I note here that by November 15, 1982 the Royal Bank was definitely

interested in making the long-term loan provided the DREE grant was

approved and the EDB guarantee obtained.

However, further

information was required and issues to be addressed before a formal

commitment could be given. Clearly, Tackama was of the view by

that time that long-term financing from the Royal Bank was almost

a certainty. Lunde gave evidence to that effect.

I point out also, that since the long-term financing had not

been committed, the subscribing limited partners were not being

irrevocably committed to the Partnership Agreement at the time of

their subscription. By the terms of the offering contained in the

Offering Memorandum, the subscribing limited partner was only

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required to pay $4,000, of his total subscription price of $25,000,

on subscribing to the partnership.

$13,000 was to be paid on

December 15, 1983, and the balance of $8,000 on December 15, 1984,

and both sums were to be evidenced by a promissory note.

In the event that on or before April 15, 1983, the managing

general partner did not deliver a statutory declaration "to the

effect that the limited partnership has firm commitments for the

financing required for the construction of the plywood plant, at an

interest cost which is substantially the same as that set forth in

the projected income and cash flow statements delivered with this

Offering Memorandum", the general partner was obligated, pursuant

to the Partnership Agreement, to purchase the units of the limited

partners for $1.00 on May 17, 1983, and to return their promissory

notes.

The managing partner also agreed to indemnify and save

harmless those limited partners requiring the mandatory purchase

against any claims against them in connection with liabilities or

commitments of the limited partnership prior to the transfer.

While the buy out was mandatory from Tackama's point of view, the

limited partners had an option and, as a group, thus controlled the

future of the project. They could elect not to proceed and thus

end the project, or they could elect to give Tackama more time to

commit the financing, which they eventually did.

The provisions of the Partnership Agreement which correspond

to the mandatory purchase or buy-out provisions contained in the

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Offering Memorandum, are contained in clause 3.33 of the

Partnership Agreement. By this clause, if the managing general

partner has not delivered the statutory declaration provided for in

clause 3.32 on or before April 15, 1983, then the general partner

will purchase, and the selling limited partner will sell, his unit

or units. Thus the limited partners' liability or obligation was

limited to the $4,000.00 paid, and they were not obligated to

proceed further, in the event that Alfor had not received a firm

commitment from a financial institution to provide the long-term

loan by the deadline.

By December 7, 1982 the appropriate documents had been

prepared, with input from Bolton, Sojonky and Lunde, but mainly

Bolton, and syndication of the units in Alfor commenced.

Each

potential partner was given a package of documents which consisted

of:

(1) A Summary of Salient Data;

(2) Laventhol & Horwath's tax opinion

letter dated November 29, 1982 and

tax schedules thereto;

(3) A ten year financial projection (for

the period July 1, 1983 to December

31, 1992), prepared by Laventhol &

Horwath;

(4) The Offering Memorandum effective

December 7, 1982; and

(5) The Partnership Agreement dated July

29, 1982.

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All units were subscribed, mainly if not in all cases by clients of

either Sojonky or Laventhol & Horwath, prior to the deadline of

December 30, 1982.

I will refer to some of the terms of these documents at this

time, although perhaps not exhaustively. The Summary of Salient

Data is stated under the heading 'Preamble' to be a brief review of

relevant criteria for investing in tax sheltered investments.

Reference is then made to certain provisions of the Offering

Memorandum, including its summary on page 1 - 6. There, on page 3,

it is noted that part of the cost of the plywood plant is expected

to be financed by a term bank loan of $4,928,000 and "the term bank

loan has not being committed ..."

I will refer to other

information contained in pages 1 - 6 of the Memorandum in a moment.

The reader is then referred to both the tax benefit and the

investment aspect of the project.

The former is related to

Laventhol & Horwath's tax opinion letter and the latter to

Laventhol & Horwath's ten-year financial projection, both of which

I will refer to in a moment. All of the proposed financing for the

project is lumped under the heading 'Long-term Financing'. It is

noted that financing is to be arranged by April 15, 1983 in

accordance with the plan described in the Offering Memorandum.

Under the heading 'Liquidity', it is noted that a partnership

unit can be resold and that there is a mandatory repurchase of

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units for $1.00, and the return of the limited partner's promissory

note, if the financing is not finalized. The reference, of course,

is to the deadline of April 15, 1983 to which I have referred. It

was, of course, of the utmost importance that Tackama obtain the

financing by that date, unless Tackama could obtain from the

limited partners some accommodation, or an extension of the date,

which would preserve the continuation of the partnership and

facilitate the obtaining of the term financing, the building of the

plant and the saving of Tackama.

Under the heading 'Risk Factors' reference is made to the

summary of such factors on pages 4, 5, 23 and 24 of the Offering

Memorandum. In addition to the commercial risks referred to, it is

pointed out (page 4) that the limited partnership intends to spend

the funds raised from the limited partners and incur liabilities,

before it has firm commitments for the financing, and that it may

not be able to arrange the necessary financing. It is also pointed

out (page 5) that the partnership is dependant upon supply and

sales contracts with, and the management of, one of the general

partners, "who may have a conflict of interest". I will refer to

the conflict of interest provisions when dealing directly with the

provisions of the Offering Memorandum.

The balance of the summary of salient data is not very

informative.

Little information is given with regard to the

Partnership Agreement. Potential purchasers wishing an independent

- 22 -

opinion on the merits of the investment are urged to seek

"independent accounting and tax advice".

Procedures for

subscription for units are set out including the payment of a

certified cheque for $4,000 and the completion of the promissory

note.

The tax opinion letter dated November 29, 1982 commences "We

are ready to provide our commentary as to the income tax

consequences arising for an investor in the Alfor II Forest

Products Limited partnership..." The letter, of course, focuses on

the tax aspect. However, it also refer to the distribution of cash

flow to the limited partners (described as their share of "the

profits") and some of the schedules attached to the letter show

cash distributions being made to the limited partner in the years

1983 to 1987. The schedules are said to demonstrate the potential

results that an investor might achieve. The apportionment of the

profits or distributions of cash flow is set out in para. 2 and 3

under the heading 'Facts and Assumptions'. The general partners

are to participate "as to .01 percent in the profits and capital of

the partnership" and the limited partners are to participate "in

the aggregate as to 99.98 percent of the profits and capital of the

partnership".

Paragraph 11 under the heading 'Facts and Assumptions'

provides in part as follows:

In preparing the attached schedules we made

certain other assumptions to assist us in

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demonstrating in an understandable way the

impact to an investor, namely ...

(b) the full amount of the cash flow

available for distribution to the limited

partners is distributed without any

reserves which may be withheld according

to

the

partnership

agreement

(Schedule 1).

(my emphasis)

I do not propose to deal with the schedules attached to the letter

other than to note that they show cash distribution (cash flow or

profit) to the limited partners during the period 1982 through

1987.

I turn now to the ten-year financial projection.

It is a

projection of the cash flow and distribution to the limited

partners for the period July 1, 1983 to December 31, 1992. It is

stated to be based upon "information, estimates and assumptions

submitted by the management of Tackama Forest Products Ltd..." and

that "the significant estimates and submissions are described in

the accompanying summary of significant assumptions". Laventhol

& Horwath specifically state that they do not express an opinion as

to whether the actual results for the projected period will

approximate those projected "because projections are based on

estimates and assumptions which are inherently subject to

uncertainty and variation depending upon future events".

projections show or envisage distributions to the limited partners

throughout the period mentioned. By 1986 and thereafter, the

yearly distributions projected exceed $1 million.

The

- 24 -

Included in the ten year financial projection is a statement

entitled 'Summary of Significant Assumptions'. I will refer to

only two of the nine para.s contained therein.

follows:

Para. 1 is as

GENERAL:

The statement of cash flow and

distribution to limited partner projection

concerning future events and circumstances are

based on the assumptions of the management of

Tackama Forest Products Ltd. The assumptions

and other related information disclosed below

form an integral part of this financial

projection and are those which management

believes to be significant to the projection,

or are key factors upon which the financial

results of the limited partnership depend.

Some assumptions, although reasonable at this

time, inevitably may not materialize and

unanticipated events and circumstances may

occur. Therefore, the actual results achieved

during the projected period will probably vary

from the projections and the difference may be

material.

(my emphasis)

Para. 9 is as follows:

The EDP guaranteed chartered bank term loan is

assumed to be repayable over a twenty-five

year term at $762,000 per annum, principal and

interest.

The loan is assumed to bear

interest at an average rate of 15 percent.

(my emphasis)

The importance of the two assumptions to which I have referred

and quoted, that is, that the amortization period will be twenty-

five years and that contained in para. 11(b) of the November 29,

1982 letter, that the full amount of the cash flow available for

distribution to the limited partners would be distributed without

any reserves, will become more evident as the narrative continues.

At this stage I simply point out that twenty-five year term is

- 25 -

stated to be a reasonable assumed period. It is not said that the

term is being negotiated, or that it is doubtful. It is simply

said that it is reasonable to assume. Similarly, with regard to

reserves, it is not stated, for example, that reserves will be

fixed and that Tackama simply does not know the amount or amounts.

It simply says in effect that it is assumed that there will not be

any reserves.

I turn to the Offering Memorandum which has with it a

subscription form and power of attorney and an initial promissory

note for execution by subscribers.

The subscription price is

stated to be $25,000 payable in a manner which I have already

outlined. The project is to be partly financed by a term bank loan

of $4,928,000 which "has not been committed".

Tax aspects are

touched upon, as are commercial risk factors, to which I have

already referred. Under the heading 'Option' it is noted that the

managing general partner will have an option to acquire the assets

or all of the units of the partnership in March 1988 and thereafter

at a formula price: Also that the limited partners will have the

right to require the general partner to acquire the units for $1.00

each, and to return their promissory notes, and to indemnify them

against any liability beyond their initial $4,000 payment, if the

project is not fully financed on or before April 15, 1983.

Under the heading 'Business' it is said that the project

schedule calls for the plywood plant to attain commercial

- 26 -

production levels within six months after the financing is in place

and work commences. It is also stated:

The plywood plant will receive its supply

of veneer under the Supply Agreement from the

adjacent veneer plant owned by the managing

general partner.

Under that Agreement the

Managing General Partner has agreed to the

delivery of sufficient veneer for a two-shift

operation and certain other required materials

at cost (as defined by the Supply Agreement)

plus an additional cost of up to $750,000 per

year.

It is also stated under this heading:

Projected income and cash flow statements have

been prepared for a ten-year period of

operating the plywood plant and will be

delivered with this Offering Memorandum. THESE

STATEMENTS ARE BASED ON ASSUMPTIONS CONSIDERED

REASONABLE BY THE MANAGING GENERAL PARTNER BUT

WHICH

ARE

SUBJECT

TO

UNCERTAINTY

AND

VARIATIONS DEPENDANT ON MARKET CONDITIONS,

MATERIAL COSTS AND OTHER VARIABLE AND EVENTS.

THE

MANAGING

GENERAL

OR

PARTNER

WARRANTY

MAKES

THAT

NO

THE

REPRESENTATION

PROJECTIONS WILL BE REALIZED.

Under the heading 'Project Costs and Financing' it is noted

that the managing general partner has a fixed price contract with

its general contractor which is firm to April 15, 1983. Again,

debt financing refers only to a term loan from a Canadian bank in

the amount of $4,928,000. It is reiterated that at the effective

date of the Offering Memorandum, the limited partnership did not

have a commitment from the bank for the term bank loan, for a

guarantee from the EDB or for a DREE grant; that while the managing

general partner would actively pursue the term bank loan, guarantee

and grant with a view to meeting the April 15, 1983 deadline, it

- 27 -

intended to spend funds and occur liabilities on behalf of the

limited partnership before having such commitment.

The tax aspects of the investment are reviewed in some detail.

Under the heading 'Allocation of Income or Loss to Limited

Partners', it is stated:

Each limited partner must include in his

income for a taxation year for purposes of the

Income Tax Act (Canada) (the 'Tax Act') his

respective share of the partnership's net

income, whether distributed or retained by the

partnership, for the fiscal period of the

partnership ending in his taxation year.

Under the heading 'Profit Share and Cash Distribution to

Limited Partners', it is stated:

The partnership agreement provides that there

will be an annual distribution to the limited

partners of 99.98 percent of the net cash flow

of the Partnership after the payment of the

debt service and expenses of the Partnership

including the cost of materials purchased from

the

Managing

General

Partner

and

the

management fees to the Managing General

Partner and after the provision of appropriate

reserves.

(my emphasis)

Particulars of the option granted to the managing general

partner are contained in para. 10. The provisions relating to the

March 1, 1988 option date are that if the general partner chooses

to purchase the units of the limited partner then, the price per

unit will be the greater of (i) $56,500 or (ii) eight times the

average amount per unit distributable in the fiscal years 1984,

- 28 -

1985, 1986 and 1987. If the managing general partner chooses to

purchase all the assets instead, then the price for the assets will

be the greater of (i) $6,239,000 plus the assumption of all of the

debts of the partnership or (ii) eight times the average amount

distributable to the limited partners in the fiscal years 1984,

1985, 1986 and 1987 plus $250,000 and the assumption of all the

debts of the partnership.

Tackama eventually did exercise the

option and it was the second of the two alternatives which was

chosen.

Under the heading 'Management of the Partnership' it is noted

that the partnership has entered into a management agreement with

the managing general partner:

... To manage the business of the partnership

and to carry out substantially all the duties

of the general partners which however does not

relieve the general partners from their

fiduciary obligations to act in the best

interests of the partnership and to carry out

such duties.

(My emphasis)

Particulars of the management fee to be paid to the managing

general partner out of the "net cash flow of the partnership" are

set out and it is noted that the balance of the cash flow "will be

available for payment out to the limited partners every year."

Under the heading 'Operating Arrangements with the Managing

General Partner and its Subsidiary' some particulars of the veneer

supply agreement are given. It is stated:

- 29 -

The price of such materials to be paid by the

partnership to Tackama will be at cost of its

operations at Fort Nelson and Tackama will,

except to the extent of approximately 25

percent of its veneer production which it may

sell for its own account, give up all rights

to profit on its present operation at Fort

Nelson in consideration of the partnership

paying to the Canadian Charter Bank on behalf

of Tackama an amount not exceeding $750,000 a

year prior to any distribution of any cash

flow to the limited partners. If the market

for veneer is better than the market for

plywood, then Tackama must continue to deliver

veneer to the partnership for resale under the

sales agreement.

Tackama has dedicated its

timber supply to the extent necessary to

supply the plywood plant with sufficient

veneer.

(my emphasis)

The statement that Tackama will give up all rights to profit on its

present operation is not accurate. It will be seen that Tackama

did in fact receive its share, a substantial share, of the profits,

which were included in the management fee which it received.

Finally, under the heading 'Conflict of Interest' it is noted

that the partnership does not have management that is independent

of the general partner and must rely on the general partner for the

conduct of its operations. It is there provided:

To minimize the conflict of interest

between the Managing General Partner and the

partnership, all the profits from the present

operation of the managing general partner at

Fort

Nelson

(except

with

respect

to

approximately 25 percent of the veneer

production of the managing general partner or

of product produced from residual logs) shall

accrue in the partnership.

Restrictions on

- 30 -

the rights and powers of the general partner

and the managing general partner have been

provided for in the supply agreement, the

management agreement and the partnership

agreement.

However, it must be recognized

that the managing general partner can, within

limits of what it believes in good faith to be

in the best interests of the partnership,

amend these agreements in certain respects on

behalf of the partnership or exercise a

discretion on behalf of the partnership and

that a conflict of interest may generally

arise with respect to the production by the

managing general partner of veneer for its own

account.

Certain of these amendments will

require the favourable opinion of counsel for

the limited partners.

(my emphasis)

These provisions refer to conflicts of interest between the

interests of Alfor on the one hand and Tackama on the other. They

deal with specific conflicts and conflicts generally, and in this

regard I note the reference to the restrictions on the rights and

powers of the managing general partner in the Partnership

Agreement.

I will here refer briefly to the provisions of the Partnership

Agreement as well, although I will return to them when I address

specific issues relating to it.

It is of course, the prime

document. While I have referred to other documents, such as the

Offering Memorandum, which may have some relevance, for example, as

regards disclosure or an informed consent, they must stand aside if

they are in conflict with any provision in the Partnership

Agreement.

The relationship between the parties is stated in

Article Two of the Agreement to be that of a limited partnership

under the Partnership Act. Each limited partner is not to take

- 31 -

part in the management of the business of the partnership or

exercise any power in connection therewith, except to the extent

permitted by law.

In this regard a partner's liability is not

limited should he take part in the management of the business of

the limited partnership.

The option in favour of the managing general partner to

acquire the interest of the partners is contained in article three.

As I have already indicated, para. 3.31(d) contains the option

which Tackama actually exercised on March 1, 1988. I have already

referred generally to the option when dealing with the Offering

Memorandum, wherein the option is referred to in general terms. I

will return to the Option Agreement when dealing with the option

price issue.

Article Four of the Partnership Agreement provides for the

parties 'Participation in Profits and Losses' and the setting aside

of reserves. By para. 4.01 at the end of each fiscal year the

managing general partner must allocate the net income or net loss.

The limited partners' share thereof is 99.98 percent. Para. 4.02

relates to 'Reserves and Distribution of Cash Flow' and is as

follows:

4.02 Reserves and Distribution of Cash Flow

Apart from reserves which may have been taken

into account in the determination of Net

Income, the General Partners may set aside

such additional reserves as they may in their

reasonable opinion deem desirable to meet the

obligations of the Partnership and to operate

- 32 -

the business in a prudent fashion .

The

General Partners will distribute the Cash Flow

(after taking into account the foregoing

additional reserves) to each Partner to the

extent permitted by law, according to the

allocations set out in para. 4.01.

For

greater certainty, it is provided that the

General

Partners

may

in

addition

to

distribution arising from profits earned by

the partnership in the ordinary course of

business

of

the

partnership,

and

in

appropriate circumstances, make a distribution

of net insurance proceeds, proceeds from

mortgage financing and refinancing or sale of

interests in or sale of any property of the

partnership.

(my emphasis)

NetIncomeandCash Flow are defined terms.

The net income is

allocated to the partners for tax purposes. They must pay tax on

it regardless of whether any cash is actually distributed to them.

Cash flow is what is distributed to them. It is net income plus

depreciation deducted, less the amount of principal payments paid

on the partnership debts, as defined.

The words "additional reserves" are not defined but they are

to be desirable to meet the obligations of the Partnership and to

operate the business in a prudent manner in the reasonable opinion

of the general partners. As I read para. 4.02 then, the cash flow

is the limited partners share of the profits. However, before it

is distributed to them, any reserves, deemed by the general

partners to be desirable to meet the obligations of the partnership

and to operate the business in a prudent fashion, must be deducted

therefrom and set aside.

- 33 -

Article Five deals with the 'Powers, Duties and Obligations of

General Partner'. Para. 5.01 provides that the general partners

have:

... (b)

Subject to para. 5.09 the full and exclusive

right, power and authority to manage, control,

administer, operate and represent the business

and affairs and to make decisions regarding

the

undertaking

and

business

of

the

partnership.

Para. 5.03 refers to 'Specific Powers and Duties' of the

managing general partner. It provides:

Notwithstanding the general powers of the

general partners set out in para. 5.01, the

managing general partner will; ...

(d) Borrow money in such manner and amount, from

such sources and on such terms and conditions

as the managing general partner thinks fit for

the purposes of constructing and operating the

plant....

In my opinion, the most important provision in the Partnership

Agreement is that contained in para. 5.02, which covers the

'Exercise of Powers and Discharge of Duties'. It provides:

The General Partner and the Managing General

Partners will act in a fiduciary capacity

towards the Limited Partners and will exercise

their powers and discharge their duties under

this Agreement honestly, in good faith and in

the best interest of the Limited Partners and

in connection therewith shall exercise the

degree of care, diligence and skill that a

reasonably

prudent

person

with

similar

experience and expertise in the forest

products industry would exercise in comparable

circumstances and in particular, without

restricting the generality of the foregoing,

will so perform those obligations and duties

- 34 -

set out in any management agreement which the

partnership and the Managing General Partner

may enter into.

(my emphasis)

By para. 5.02, Tackama declares itself to be the limited partners'

fiduciary and declares its duty to be that of acting honestly, in

good faith and in the best interests of the limited partners in

(when) exercising its powers and discharging its duties under the

agreement. These, what I will call, "fiduciary declarations" in my

opinion are somewhat unique, and distinguish the case at bar from

most other cases involving fiduciary relationships, where the main

issue is whether or not such a relationship exists, and the

secondary issue is as to its extent. Here, the relationship and

the scope of the duty are spelled out. In exercising its powers

and discharging its duties under the Partnership Agreement, Tackama

will be acting in its fiduciary capacity as regards the limited

partners, and will do so honestly, in good faith and in their best

interests.

I turn now to matters which occurred in 1983, commencing in

January.

By letter dated January 5, 1983 to Alfor, care of

Laventhol & Horwath and to the attention of Bolton, the EDB offered

loan insurance to Alfor. The offer was to guarantee 50 percent of

a loan in the amount of $4,163,360, repayable over a period of not

less than six and not more than eight years. The offer provided,

among other things, that the partnership could not, without the

prior written consent of the private lender and the board, permit

- 35 -

the working capital ratio to fall below 1.1 to 1, or permit the

working capital level to fall below $500,000.

Bolton testified that on receiving the letter he knew that it

was no longer reasonable to assume a twenty-five year amortization

term for the bank term loan, or to assume that there would be no

reserves required. In fact he testified that he was shocked and

concerned when he learned of these conditions. It is important to

note exactly what Bolton's concerns were at this time.

I am

satisfied from the evidence, and in particular Bolton's testimony,

that at the time he was not concerned about the impact of these EDB

terms of financing on Tackama's position, or on the limited

partners' position. His only concern relating to the reduced six

to eight-year amortization term, was whether Alfor would be able to

make the substantial payments which the term produced.

evidence in this regard was:

His

We were concerned that they had moved from a

six to eight year term when we thought we had

some agreement with them that it would be on

the basis of 25-year amortization.

That

provided concern because the project would

have to do well in order to meet the capital

repayment terms. We knew that we would then

have to convince the bank that the project

could sustain those repayment terms, and the

finance proposals made throughout the balance

of the year emphasized that point.

With regard to the working capital conditions, again, Bolton's

concern did not relate to their impact on Tackama or on the limited

partners. His concern was due to the fact that Tackama did not

- 36 -

have the monies available to set up the substantial reserve

required to meet the working capital conditions. His evidence in

this regard was:

The working capital requirements were of

concern because the $500,000 minimum was not

part of our business plan and we were

concerned about being in technical default at

the time the plant commenced production. That

was one of the major items that we had on our

agenda for discussion with the EDB board at a

future date.

At this point I will refer generally to the impact of the EDB

terms of financing, particularly the shortened amortization period

and the working capital requirements, on the positions of both

Tackama and the limited partners, since it is of much importance in

this case.

The effect of the requirement of a working capital

ratio of 1.1 to 1 and a working capital minimum of $500,000, was

that Alfor was going to have to set up a working capital reserve of

$1,311,453. This reserve, according to Tackama's position, would

have to come out of the cash flow which would otherwise have been

distributed to the limited partners.

As far as the limited

partners were concerned, those monies were lost forever because

Tackama took the position (according to it, from the very

beginning) that if and when it exercised the option, all reserves

would belong to it. A further impact of the setting aside of such

a reserve flowed from the fact that Tackama also took the position

that reserves could not be taken into consideration when

calculating the option price.

Hence, according to Tackama's

interpretation of the agreement, the more reserves set aside out of

- 37 -

the limited partners monies (and which would become Tackama's on

the exercise of the option) the less Tackama had to pay to purchase

the Alfor units or its assets.

The impact of the substantially reduced amortization term was

also a substantial one. Eventually it was reduced further to five

years, that is, to one-fifth of the original reasonable assumption

of twenty-five years. As a result of the substantial reduction in

the term, Tackama paid the debt down much faster. The substantial

increase in the yearly payments came out of the limited partners

cash flow, which would otherwise have been distributed to the

limited partners. Also, at the end of the day when the option was

exercised, Alfor's debts which were assumed by Tackama, were

substantially less.

Thus the conditions stipulated by the EDB

resulted in substantial benefits to Tackama and, in addition, were

all at the expense of the limited partners. I pause here to add

that the evidence is that early in 1983 Tackama could have worked

out and projected the impact of these EDB terms of financing on

Tackama, and on the limited partners, had Bolton or some other

representative of Tackama focused on them and chose to do so.

I return to the narrative. On January 7, 1983 the Royal Bank

offered financing to Tackama to enable it to commence winter

logging operations in 1983. The offer contained what were thought

to be rather harsh conditions and terms.

It was accepted by

- 38 -

Tackama subject to concerns raised by Bolton in a letter dated

January 14, 1983 to the bank.

On February 2, 1983 an offer of a DREE grant in the amount of

$1,065,000 was made to Tackama. The offer was accepted on February

8, 1983 by Tackama and Alfor.

On February 14, 1983 Bolton wrote to the EDB regarding the

terms in the guarantee offer of January 5, 1983. He pointed out an

earlier agreement, or his understanding of one, that the terms of

the loan guarantee offer were to be negotiated and that he would

like to meet with Mr. Brown of the EDB for that purpose. He then

outlined his concerns and possible solutions. He referred to the

term that the partnership shall not permit the working capital

ratio to fall below 1.1 to 1 nor permit the working capital level

to fall below $500,000 as an "inoperable requirement". The terms

were never changed.

On February 23, 1983 Sojonky, Bolton and Doug MacPhail,

another Tackama employee, presented an Alfor loan application for

financing to Murray Robbins of the Royal Bank. The application was

prepared by Bolton with some input from Sojonky. It is stated in

the application documents that the EDB guaranteed chartered bank

term loan is assumed to be repayable over an eight-year term. It

is also stated that the repayment terms of the long-term debt

financing sought would be "equal monthly principal instalments over

- 39 -

eight years commencing January 15, 1984." The eight-year term then

had been accepted by Tackama in place of the twenty-five year term

initially assumed to be reasonable.

The loan application documents also contained a statement that

April 15, 1983 was a critical path date because loan disbursements

had to commence on that date and, as well, Tackama had to deliver

the statutory declaration to the effect that Alfor had firm

commitments for the financing required for the construction of the

plywood plant. In this regard Bolton wrote to Robbins at the Royal

Bank on February 24, 1983 confirming some advice he had given them

during a meeting the day before. He said:

As we pointed out in our submission, there are

two critical deadlines: the first is March 9,

1983 when the EDB offer must be accepted, and

April 15, 1983 when the statutory declarations

must be filed.

Failure to meet either of these deadlines will

result in the project aborting.

(My emphasis)

On March 15, 1983 the Royal Bank advised Tackama that it was

not prepared to provide financing for the Alfor project. In the

circumstances this advice must have been discouraging to say the

least. The deadline of April 15, 1983, by which the financing had

to be committed, was then becoming very critical.

On March 22, 1983 the audited financial statements of Alfor

for the year ending December 31, 1982 were prepared by Laventhol &

- 40 -

Horwath. They were then sent to the limited partners together with

some tax information schedules, and instructions or advice with

regard to the filing of 1982 personal tax returns. The statements

included 'Notes to Financial Statement' which contained a brief

history of the partnership and various agreements that had been

entered into, as well as the financing.

Under the heading 'Financing' in para. 11(b) reference is made

to Alfor's application for debt financing "with a Canadian

chartered bank for $4,163,360."

Particulars of the offer are not

given. In particular, it is not pointed out that the application

is for an eight-year, rather than a twenty-five year, amortization

term. In subpara. (c) reference is made to the EDB offer to insure

in the amount of 50 percent. Again, no particulars of the offer,

such as its six to eight-year term, and the working capital

requirements, are given. The notes to financial statement conclude

with the following:

The ability to complete the arrangements for

the above financing is critical to the

completion of the project and its continued

operation. If by April 15, 1983 the general

partner

does

not

deliver

a

statutory

declaration to the effect that the limited

partnership has firm commitments for the

financing required and that an interest cost

which is substantially the same as that set

forth in the projected income and cash flow

statements in the Offering Memorandum, the

general partner will be obligated to purchase

all partnership units at $1.00 per unit and,

if this purchase occurs, all obligations of

the

limited

partners

to

the

limited

partnership will be cancelled.

- 41 -

On March 24, 1983 Lunde wrote to John G. McPherson, senior

vice president and general manager for British Columbia of the

Royal Bank of Canada, complaining about the bank's withdrawal of

support for Alfor and asking that the bank reconsider.

Bolton

apparently assisted in drafting the letter. In it Lunde points out

that the plant will reduce Tackama's operating costs by some $3

million per year, and will add a potential 50,000 cunits of annual

allowable cut to Tackama's timber license. He concluded his letter

by referring to the April 15, 1988 deadline "which must be met or

the project will collapse."

On April 1, 1983, after a telephone call with McPherson, Lunde

again wrote to him requesting that the Royal Bank reconsider its

position, emphasising the many advantages of the project to both

Tackama and the Royal Bank. He includes therein the accumulative

payment of up to $750,000 per year towards Cantree's obligations to

the Royal Bank, and Tackama's management fee which, after Alfor's

payment to Cantree, "will be approximately 62 percent of Alfor's

earnings."

On March 31, 1983, British Columbia Development Corporation

approved Alfor's request for financing under their low interest

funding program, in the amount of $1 million.

On April 8, 1983 a meeting was held at Bull, Housser &

Tupper's offices to discuss the obtaining of an extension of the

- 42 -

April 15, 1983 deadline to August 31, 1983, in order to give

Tackama more time "to fulfil their obligations and obtain

acceptable bank financing for the Alfor II plywood plant project".

The meeting was attended by Bolton, Barclay, Sojonky, Lunde,

McFetridge and another lawyer from Bull, Housser & Tupper. The

purpose of the meeting was to determine what should be done to gain

the extension. The situation was discussed and it was decided

that a report would go out to the limited partners advising them,

inter alia, of the financial commitments to date, that negotiations

were continuing with the Royal Bank, that Tackama was reasonably

confident that a firm commitment for the balance of the term

financing would be in hand by August 31, 1983, and requesting an

extension to that date. Sojonky and Bolton were charged with the

task of making the required communication to the limited partners

on behalf of Tackama.

On April 11, 1983 a letter or report along the lines outlined

was sent out to the limited partners by Tackama. Sojonky signed

Lunde's name to the letter as president of Tackama. Bolton drafted

the letter and telexed it to Lunde for his approval prior to its

release. The letter, as often was the case, was more concerned

with results than with details. It reports a DREE grant commitment

in the amount of $1,065,640, an EDB commitment to provide a loan

guarantee of 50 percent of a proposed term bank loan of $4,163,360,

a firm commitment from BCDC for a term loan in the amount of $1

million, and an application to the Royal Bank of Canada for the

- 43 -

balance of the long-term financing in the amount of $4,163,360.

However, the letter does not contain particulars of the committed

or proposed financing. For example, neither the six to eight year

term nor the stringent working capital requirement of the EDB

guarantee are referred to. Again, the eight-year term proposed in

the Alfor loan application to the Royal Bank for financing is not

referred to.

Under the heading 'Extension Arrangement' it is stated:

It is proposed to give the general partners

more time to August 30, 1983 to fulfil their

obligations

and

obtain

acceptable

bank

financing for the Alfor II plywood plant

project. The implication for the limited

partners is that the income consequences for

1983 and thereafter will remain substantially

the same, provided the construction of the

plywood plant commences not later than

September of 1983.

The obligations of and risks to a limited

partner are the same as outlined in the

original

Offering

Memorandum.

Your

partnership rights as set out in clause 10A,

(page 18 of the Offering Memorandum, mandatory

purchase by general partners) remain the same,

except the April 15, 1983 date would be

changed to August 30, 1983 provided this

extension is approved.

The statement focuses on tax consequences and the mandatory

purchase provisions of the Offering Memorandum.

Narrowly

interpreted it may be argued that the statement is accurate, at

least as far as it goes, since it does not refer to the other

benefits or profits the limited partners were to receive under the

Partnership Agreement.

However, the wording does suggest that

nothing really has changed, when in fact such was not the case.

- 44 -

Substantial changes resulting in great benefits to Tackama, and at

the Limited Partners expense, were then certain. Eventually the

limited partners agreed to give Tackama time, and to extend the

Partnership Agreement and the date by which Tackama's statutory

declaration was to be delivered, to August 31, 1983.

During this period of time Lunde continued to keep in contact

with senior executives of the Royal Bank, to persuade the bank to

finance the project.

In doing so, of course, Lunde, like the

members of the team, was focusing on one thing, and that was the

obtaining of the lifesaving financing which would enable Tackama to

build the plant and survive. In my opinion, he was not considering

the best interests of Alfor, nor was he considering the best

interests of the limited partners.

On June 2, 1983 Lunde again wrote to McPherson to advise him

of "additional positive economic components" which were then

available to Alfor since his letter of April 1, 1983. He referred

to a $700,000 reduction in construction costs as the result of the

availability of two used dryers, increased plywood prices

reflecting a $1 million per annum increase, and better operating

circumstances reflecting a position approximately $1.7 million

better than "our annual financial plan'. He enclosed a pro forma

which showed that after servicing the annual debt and interest

charges of Tackama and Cantree,"Alfor II will have $7,200,000 of

earnings available to satisfy its 1984 financial obligations of

- 45 -

$1,600,000". He also reiterated his earlier advice that Alfor II

"will improve Tackama's earnings by approximately $3,000,000 per

year". 1984, according to Lunde, was going to be an exceptional

year.

The June 2 letter and a 'Revised Financial Plan' dated June 1,

1983 was given to MacPherson on the following day at a meeting in

his offices at which Lunde, Bolton and Sojonky attended.

The

business plan was reviewed with MacPherson by Bolton, who had

prepared it. The plan contained particulars of the application to

the bank for the term loan, including the eight-year term.

On June 16, 1983, the Prince George manager of the Royal Bank,

M. C. Robbins, wrote to Lunde advising that the bank was prepared

to review the June 1, 1983 revised financial plan, and seeking

answers to a number of specific questions. On June 20, 1983, a

June 10, 1983 financial plan (the June 1, 1983 plan with some minor

alterations) was sent to Robbins together with two letters from

Lunde, both dated June 20, 1983. The longer letter of the two

responded to Robbins' questions contained in his June 16, 1983

letter. In it Lunde stated:

This project was formulated in a manner which

would enable Tackama to operate profitably in

very depressed markets. However, in the event

another depression occurs, the managing

partner is obligated to cease operations of

Alfor II whenever monthly operating losses

exceed shutdown losses.

In respect to

agreements with the Royal Bank, it should be

noted that the Limited Partnership was

consummated on December 1, 1982, or before the

- 46 -

current arrangements with the Royal Bank. In

respect to operating losses, the general

partner is prepared to recommend to the

limited partnership that a $1,000,000 shutdown

cash reserve be funded over a period of time

from the limited partners' share of income.

(my emphasis)

Lunde concluded his shorter letter with the following:

In conclusion and after careful analysis of

your letter, wherein you detailed the bank's

concerns,

we

have

concluded

that

the

establishment of a new $1 million cash

shutdown fund might be helpful. These funds

would be held on term deposit for shutdown

costs in the

unlikely event Alfor II was

forced to temporarily cease operations due to

market conditions.

(my emphasis)

It is interesting to note that at this stage Lunde was apparently

of the opinion that the cash flow was the limited partners' share

of the income, and that their concurrence in the setting aside of

the $1,000,000 reserve from those monies was necessary. This view

is contrary to Tackama's position as repeatedly expressed by

Bolton. Lunde's view of the likelihood of Alfor being forced to

temporarily cease operation, a view which was proven to be correct

from day one, is also interesting. In the end the reserve, which

was a comfort to the bank, was never at risk.

Copies of the June 1 and June 10, 1983 revised financial plans

were never given to the limited partners. The way in which each

party's "share of the profits" is referred to in these documents

may be of some interest. With regard to the management fees it is

stated:

Calculation of management fees payable by

Alfor II to the managing general partner: the

- 47 -

partnership operation will be managed by the

managing general partner under a management

agreement in consideration of a sliding scale

fee that depends solely on cash flow

performance.

Cash flow is defined in the

limited partnership agreement as net income,

excluding

repayments on the partnership debt.

depreciation,

less

principal

It is

important to realize these management fees

represent payment for supplying veneer to

Alfor II at cost in addition to the usual type

of management services provided.

Thus, one

may consider the management fee as including

Tackama's profits for lumber, chips and any

by-products it has sold in the markets and its

profits on the sale of veneer to Alfor II.

(my emphasis)

The plan then deals with the determination of the management fee.

It is noted that the fee is paid "out of the annual net cash flow

of the partnership" and that "the balance of such cash flow will be

available for payment out to the limited partners in every year".

The plan then concludes on this point:

In summary, the priority of payments from net

cash flow is:

I.

II.

Interest on debt of Alfor II

Principal repayments on debt of Alfor II

A maximum cumulative fee of $750,000 to

Tackama for servicing debt of Cantree Plywood

Corporation

III.

IV.

Share of balance as

per profit distribution

described above paid to Tackama as management fee,

and to Alfor II partners, as distributions.

(my emphasis)

The plan then refers briefly to the benefits to Alfor and to

Tackama. In the following 'Summary of Significant Assumptions' it

is stated that the chartered bank term loan is repayable over an

eight year term. There is nothing in these documents, other than

the reference to the eight-year term, suggesting any change in the

- 48 -

situation, any increased benefits to Tackama or losses, such as

loss of cash flow, to the limited partners.

These revised financial plans, as I said, were never given to

the limited partners. They were prepared by Bolton and used by

Tackama internally and for submission to lending institutions and

the like. For example, on September 1, 1983 Bolton wrote to Coe

Manufacturing Ltd. enclosing "a copy of our June 10 submission to

various banks for financing" referring to the June 10 plan. He

concluded his letter with the following:

In the meantime we would ask that you use your

discretion in the use of this material as it

is somewhat sensitive and confidential in

nature with respect to the operations of

Alfor II, and should not be spread indisc-

riminately around the financial community.

There is some dispute as to who first raised the question of

a $1 million reserve.

Sojonky testified that it "came out of

discussions" which he had with Bolton in the summer of l983; that

it was their suggestion that it might assist in the financing. He

said that the question of where it was to come from, its ownership

and when it was to be repaid, was not discussed at the time.

Bolton testified that it was Sojonky who suggested that they

propose an establishment of a $1 million interest reserve, to

provide for interest payments on the debt should the forest

industry again suffer a recession.

- 49 -

I do not think that it matters who first raised the

possibility of providing the bank with the $1 million reserve.

Sojonky had certainly considered the use of a reserve in some

context earlier. Again, it was certainly raised and discussed at

a meeting with the bank on June 29 or 30, 1983 at Prince George.

The meeting was well attended by Lunde, Ure, Garland and Bolton,

but not Sojonky, on the Tackama side, and by Robbins and Walter

Murray, the manager of the Special Loans Group for the Royal Bank

in Montreal, on the bank's side.

According to Bolton's note

pertaining to the meeting the bank had five concerns, the first of

which was "1. Market turns down - close operation" and the noted

solution was "cash reserve". It was also noted that the reserve

would be structured or accumulated over a three-year period.

On July 19, 1983 the Royal Bank made a written offer of

financing to Alfor II. Its more significant terms were that the

loan was to be repayable over five years, rather than six to eight

years as provided for in the EDB loan guarantee. The EDB guarantee

had to be 75 percent rather than 50 percent of the loan, a working

ratio of at least 1:1 had to be maintained, and a $1 million

interest reserve had to be established. The latter condition was

contained in the following passage:

- cash distribution to the limited partners to

be restricted until

a

cash reserve of

$1,000,000 has been established and maintained

on an ongoing basis to meet any interest

payment shortfalls on all bank loan segments,

the BCDC. loan and the capital lease

obligation. Any draws on the reserve to be on

a pari-passu basis amongst all lenders with

- 50 -

the reserve account to be maintained with the

Royal Bank of Canada.

The offer basically incorporated the EDB terms of offer to

guarantee, but with these and some other changes.

Bolton says that he received a copy of the offer within a few

days of July 19, and that he discussed it with Lunde and with

Sojonky.

He could not recall giving a copy of the offer to

Sojonky. Sojonky said that he had not been negotiating with the

bank, and he could not recall having discussions with them with

regard to the terms. He says he was advised of the offer by Bolton

and Lunde. Sojonky's files contained a number of copies of the

offer. He could not recall being aware of all of the terms, for

example, a five-year term, in July. He may have received a copy of

the offer. He recalled seeing a summary of the various types of

financing, that had been prepared by Bolton in July or August.

There is an apparent conflict in the evidence of Bolton and Sojonky

with regard to Sojonky's knowledge of the terms of the Royal Bank

offer at the time. Bolton said that Sojonky knew of the terms

because he discussed them with him. Sojonky's evidence was to the

effect that he was not sure of the state of his knowledge of all of

the terms at that time. I am satisfied that it is more likely than

not that Sojonky was aware of the main terms of the Royal Bank

offer, probably by August of 1983.

On August 11, 1983 Sojonky, Bolton and Barclay called

McFetridge on

a

conference call concerning the statutory

- 51 -

declaration deadline of August 31, 1983, and the form and content

of the required declaration. McFetridge advised them that Bull,

Housser & Tupper could not advise Tackama on the form and content

of the statutory declaration, except to say that it must be

acceptable to them as the escrow agent, because they were acting

for the partnership.

They also discussed with McFetridge his

requirements as regards the statutory declaration, as escrow

holder, and the obtaining of a further extension of the deadline

for the delivery of the declaration, since the conditions contained

in the Royal Bank's offer could not be satisfied by August

31, 1983.

On August 22, 1983 Tackama (Lunde) wrote to the limited

partners "to report that the following elements of the financing

have been offered to the partnership;" and requesting a further

extension of the time for the delivery of the statutory declaration

to October 31, 1983. Tackama also asked the limited partners to

agree to amend the Partnership Agreement so that the limited

partners would be required to put up their letters of credit,

securing the balance of their initial capital contribution, at that

time. Attached to the letter was a document containing background

information with regard to the limited partner's two promissory

notes and letter of credit, a revised statutory declaration

executed by Lunde, an amendment to the limited Partnership

Agreement, and a special resolution to the limited partners and

Schedule 1 to Laventhol & Horwath's tax letter dated November 29,

- 52 -

1982, which was a part of the "package" initially given to

potential partners. The schedule is referred to in the background

document in relation to benefits of ownership of a $25,000 Alfor

unit.

The schedule, of course, still shows distributions to

limited partners based on December 1982 projections. The limited

partners agreed to extend the deadline to October 31, 1983.

No disclosure was made in the August 22, 1983 letter of the

terms of the Royal Bank offer, such as the term of five years and

the restriction on the ability of Alfor to make distributions to

limited partners until a cash reserve of $1 million was established

and maintained. No disclosure was made in the letter of the terms

of

the

EDB

guarantee,

particularly

the

working

capital

requirements.

It follows that the impact of the terms of

financing, all of which were then known to Tackama, and which would

greatly benefit Tackama and injure the limited partners, was not

raised or referred to. The letter ends with advice that the partner

should phone one of a number of persons named "if you require

additional information or assistance". The letter was prepared by

Bolton with input from Lunde and perhaps Sojonky.

The limited

partners eventually agreed to amend the Partnership Agreement to

extend the date to October 31, 1983 and to change the form of

statutory declaration required.

On August 25, 1983 British Columbia Development Corporation

wrote to the Royal Bank of Canada confirming that it was prepared

- 53 -

to consider refinancing the balloon payment due at the end of

thirty-six months under its original loan offer. The confirmation

was one of the conditions precedent to the Royal Bank advancing

funds under its offer of July 19, 1983. On August 31, 1983 the EDB

wrote to Bolton making a revised offer of guarantee replacing that

contained in their offer dated January 5, 1983.

The offer was

still to insure only 50 percent of any loss, but the term was

changed to not less than five years nor more than eight years, thus

bringing the offer more in line with the Royal Bank offer.

However, the offer remained inconsistent with that of the Royal

Bank in that the latter was insisting on a 75 percent guarantee.

Bolton, Lunde and Sojonky discussed the problem and various

attempts were made to resolve it, including Bolton writing to a

Member of Parliament requesting assistance and advising him, among

other things:

In addition, the partners have established a

$1 million reserve to be funded with future

profits.

This reserve will be available to

fund interest and capital payments during

future economic recession.

The problem was eventually resolved by BCDC agreeing to guarantee

the additional 25 percent of the Royal Bank term loan.

Laventhol & Horwath then prepared a further revised financial

status (plan) dated September 2, 1983 which is basically the same

as the June 10 revised financial plan. In fact, the chartered bank

term is still stated therein (wrongly) to be eight years.

The

document does not explain or reflect any impact of the terms of

- 54 -

financing then known and the acceptance of which was a mere

technicality.

It does confirm that the new deadline for the

commitment for financing was October 31, 1983, and that full

operations were to commence at the plant on January 1, 1984. The

document obviously was another internal document and it was not

given to the limited partners.

On September 30, 1983 Tackama conveyed to the Royal Bank

Alfor's acceptance of the Royal Bank's July 19, 1983 offer of

financing for Alfor. However, problems still remained because of

inconsistencies between the terms and conditions of the loan

agreement and those of other commitments, particularly the EDB

offer, a number of which were not acceptable to the Royal Bank.

One of them was the EDB's insistence on guarantees and supporting

security from related companies of Tackama. The problems referred

to are well documented in letters flowing between the bank and

Tackama. These problems were of some importance to the bank who,

on receiving the acceptance, immediately took the position that

Alfor was in default of the bank's offer and remained in default

until they were corrected. It would be a long time before all of

the problems were worked out and Alfor and the Royal Bank would

execute the formal loan documents.

On October 11, 1983 Tackama wrote to the limited partners

advising them that the conditions contained in the total financing

package for Alfor had been met or removed, completion of the

- 55 -

construction of the plant was scheduled for the Spring of 1984, and

that their equity had to be fully paid up by cash or letters of

credit by October 17. The letter opens with the statement "We are

pleased to advise you that the subject conditions contained in the

total financing package for Alfor II have now been met and/or

removed". Other than referring to the fact that BCDC had taken up

the outstanding 25 percent of the Loan Guarantee there is no other

reference to financing, and no particulars or analysis, of course,

are given. The letter was prepared by Frank Sojonky, with input

from Bolton, and was signed "Bob Lunde per FS".

On October 20, 1983 Sojonky wrote to Lunde reporting that he

was waiting for payment or letters of credit from eleven limited

partners.

He also provided a written undertaking on behalf of

Jefferson Syndication Inc. to assume the obligations of all limited

partners who had not provided cash or letters of credit as of

October 28, 1983. Lunde had specifically requested that Sojonky's

undertaking be given.

On October 13, 1983 Bolton wrote to Lunde reporting on the

resolution of outstanding issues between the Royal Bank and the

EDB. He concluded his report by stating that it was his view that

Lunde was then in a position to finalize the statutory declaration

relating to the financing of the Alfor project. Notwithstanding a

further report dated November 5, 1983 from Bolton, Lunde apparently

was not convinced that the financing was in place. He then asked

- 56 -

for Laventhol & Horwath's undertaking that such was the case. By

letter dated November 18, 1983 from Laventhol & Horwath to Lunde

the undertaking requested was given. The statutory declaration,

which Lunde had sworn on October 20, 1983, was delivered to Bull,

Housser & Tupper on November 18, 1983.

On October 28, 1983, three days before the deadline, Sojonky

sent a telex under Lunde's name to R. Dobson, executive director of

the EDB, suggesting in effect that the EDB's demand for guarantees

and additional security, from companies affiliated with Tackama, be

replaced by the $1 million reserve, which had already been

established for the Royal Bank loan. He also indicated the urgency

of the matter, suggesting that the equity of the limited partners

would be returned to them on October 31, 1983. His description of

the reserve, which is almost identical to that contained in the

Royal Bank loan, was as follows:

Cash distribution to limited partners to be

restricted until cash reserve of $1,000,000.00

is established and to be maintained on an

ongoing basis to meet any interest payment

shortfall. Any draws or reserves to be on a

pari-passu basis amongst all lenders with the

reserve account to be maintained with Royal

Bank of Canada.

On the same date Dobson replied by telex that EDB was prepared to

analyze the proposal but that the decision could not be made before

the October 31, 1983 deadline.

Sojonky then sent a follow-up

letter to Dobson offering to increase the $1 million reserve to

$1.5 million. The letter is on Tackama letterhead and is signed

Bob Lunde per Frank Sojonky.

- 57 -

On October 31, 1983 Sojonky also drafted a letter to the

limited partners to be signed by Lunde, in order to obtain a

further extension of the date for the delivery of the statutory

declaration to November 25, 1983.

In it Sojonky advises the

limited partners that unless the extension is granted Tackama will

be obligated to repurchase their units for $1.00. It appears that

the letter, which was perused and commented on by McFetridge, was

not sent out. A shorter version of the letter was sent out to the

limited partners on November 22, 1983 on Tackama's letterhead and

signed Bob Lunde per FJ. In the letter the limited partners are

advised that the final statutory declaration has been delivered.

They are requested to grant a further extension and the necessary

documents are enclosed.

The letter does not contain any information or explanation

with respect to the actual terms of financing or of their impact on

Tackama's position or that of the limited partners. Sojonky

testified that he was not certain as to the state of his knowledge

of the financing terms and condition at that time. He had been

kept informed of the negotiations by Bolton and Lunde. He knew at

the least that the amortization period being negotiated was eight

years, that it was no longer twenty-five years. He knew about the

proposal of a $1 million interest reserve. He testified that he

believed that the $1 million belonged to the limited partners and

that it would eventually be returned to them. He said that he was

subsequently told that this was the case by representatives of

- 58 -

Tackama. He also knew about the working capital requirements of

the EDB, but he believes that at the time he had been told by

Bolton that the bank would provide loans for the working capital.

I am satisfied that at the time he probably had knowledge of most

of the terms that would form part of financing, although his

understanding of them apparently differed from that of Tackama.

Sojonky was asked on cross examination why he did not inform

the limited partners of the terms of financing in Tackama's letter

of November 22. He testified that while it was the general partner

who had the responsibility with regard to disclosure, he did not

think that it was necessary to provide the limited partners with

details of the financing at the time. He did not believe that the

limited partners' position would be lessened by extending the

deadline. He said that he relied on the fact that a statutory

declaration had to be provided, and that that was the procedure

that had been set out. The details of the financing had been left

to the general partner and did not require approval by the limited

partners.

Bolton testified that prior to November 1983 he knew that

there was going to be a large working capital deficit, which would

have a negative effect on Alfor's ability to make distributions to

the limited partners, and he also knew that there would be a

further negative impact as a result of the funding of the $1

million out of the limited partners' cash flow. He knew by then

- 59 -

that it was probable that some $2.5 million in cash flow would have

to be reserved, before Alfor would be in a position to make any

distributions to the limited partners.

He also knew that the

substantial yearly payments required as a result of the shortened

amortization term would be paid out of the cash flow which

ordinarily would have been paid to the limited partners.

Bolton also testified that at the time it was his and

Tackama's position (they were really one and the same) that on the

exercise of the option any reserves would belong to Tackama; also

that the reserves would substantially reduce the purchase price.

While his testimony in this area is not entirely clear, it suggests

that at the time he was well aware of the impact of the terms of

financing on both Tackama and the limited partners. However, I am

not satisfied that Bolton was aware of the impact of the terms of

financing on Tackama and the limited partners, or at least that he

gave any consideration to it, in 1983.

I will review Bolton's evidence in this are in more detail in

a moment. I simply say here that given his view that there was no

duty on Tackama to disclose the terms of financing to the partners,

that it was not important that the limited partners be told of the

terms of financing, and that the transaction was simply a tax

shelter scheme, it is unlikely that he would have been concerned

about the impact on Tackama or the limited partners at the time.

There is no evidence before me that he discussed the impact of the

- 60 -

financing on Tackama or the limited partners with anyone, other

than the reduced amortization term, and I will refer to that in a

moment. Again, documents prepared by him at the time and later on

do not disclose any such knowledge or awareness. It seems to me

that he either was aware of the impact of the financing, and

ignored it because for the reasons given by him he did not believe

it necessary to disclose the terms to the limited partners, or he

did not in fact really consider the impact until some time later.

While it is not necessary for me to decide, I favour the view that

Bolton did not really consider and appreciate the impact of the

terms of financing on Tackama, and on the limited partners, until

well after 1983.

Bolton was asked on cross-examination why the limited partners

were not given particulars of the terms of financing, and their

impact, in November of 1983. The gist of his evidence, which was

more argument justifying his own actions than anything, was that in

his opinion the limited partners were really only interested in

what was going to happen to them in their tax position ("the deal

was a tax deal") and that it was not important that they be told.

He did not consider the terms of the financing to be important.

Again, there was no obligation on Tackama to inform the limited

partners of the terms of financing.

Bolton gave different reasons on different occasions, as to

why he did not inform the limited partners of the terms of

- 61 -

financing and their impact.

The exact state of his knowledge

and of his reasoning is not clear.

On one occasion, he

testified at some length that he did not consider it necessary to

make full disclosure to the limited partners because of a number of

"checks and balances" which he had built into the system. I will

deal further with his balance theory in a moment.

At another

point, when pressed on the subject, Bolton said that he had three

reasons why the information did not have to be disclosed to the

limited partners. First, that the only requirement for disclosure

to the limited partners pursuant to the Partnership Agreement was

that the financing had to be at an interest cost equal to that in

the initial projections. There was no obligation on Tackama to

inform the partners of anything else such as the terms of

financing. Second, although the limited partners had a restriction

on the cash to be distributed to them as a result of reserves, they

would also pay less tax on the option when it was exercised.

Third, he pointed to the then indication of an increased cash flow

as revealed by the financial summaries he was preparing.

While giving his evidence as to why he did not tell the

limited partners about the terms of financing, I concluded that

Bolton was giving evidence of what he thought he would have known,

thought and done, rather than what he actually recalled thinking

and doing. Further, I concluded that his reasoning, referred to

above, was developed long after 1983, and that none of the

explanations or reasons given by Bolton has any validity, nor is it

- 62 -

a defence for a fiduciary to a claim based on failure to disclose

or to obtain an informed consent. His evidence generally, like that

of Sojonky to some degree, disclosed, if anything, a lack of

understanding of the terms of the Partnership Agreement, and, more

importantly, a failure to recognize the duties owed by Tackama to

the limited partners.

In direct examination, Barclay testified that he had attended

the December 21, 1983 meeting of the partners; that he prepared

some of the handouts which were distributed at the meeting which

related to tax credit matters.

He was asked whether anyone at

Laventhol & Horwath had done any calculations or revisions of

earlier schedules or projections, to incorporate the impact of

terms of financing such as the amortization term and reserve

requirements. He said that this had not been done. When asked

why, he said:

The only explanation I can come up with as to

why it was not done was that the focus at the

time was entirely on obtaining financing of

any kind. And having achieved that, the

investors were going to receive the tax

credits which had been outlined for them in

the original information in November of 1982.

And having achieved that, there was no

importance given, I guess, to the impact of

the financing changes on the operations.

(My emphasis)

While it may be said that the witness was speculating in part, I am

of the opinion on the whole of the evidence that the answer may

well be an accurate description of what actually occurred.

- 63 -

On December 8, 1983 Laventhol & Horwath revised the financing

plan (the revised financial status) for Alfor and for the first

time the Royal Bank loan is shown as being repayable over five

years although no reserves are shown.

This plan is otherwise

basically the same as the earlier ones and again was not given to

the limited partners.

On December 21, 1983 the first meeting of the limited partners

of Alfor was held.

Lunde, Bolton, Sojonky, Barclay, Garland,

McFetridge and David Ure, an employee of Tackama who was then

becoming actively involved in Alfor, were in attendance. At this

meeting the limited partners were given fairly detailed reports of

developments, the difficulties encountered and the reasons for the

delay in the obtaining of the financing and the commencement of

construction. They were not told of the terms of financing such as

the amortization period, the $1 million reserve and the working

capital requirements and reserves. The evidence is that as regards

the position of the limited partners the focus was on the tax

benefits they were to receive.

On January 18, 1984 Lunde wrote to Sojonky complaining about

the fact that Sojonky had distributed Tackama's "break even costs"

and "the loan structure for the project" to the limited partners,

i.e., "to the world", during the December 21, 1983 meeting of the

limited partners. He concluded his letter by saying:

In future any information regarding this

project or for that matter any business that

- 64 -

Curt and I are involved in will be approved

for release by ourselves or we will not

participate.

Sojonky testified that he found that as a matter of style Lunde was

most secretive, that he did not want to have any meetings or

communications with the limited partners, and did not want to give

them any information.

He said that while it was always his

practice to review matters with Lunde, the letter simply escalated

what he called Lunde's "muzzling". Lunde testified that Sojonky

was just too enthusiastic in releasing anticipated production costs

and some details about the structure of the project financing when

he chaired the meeting.

He was concerned that his competitors

would learn about the production costs and that B.C. Railway might

increase their rates if it appeared that Alfor was profitable. He

was also concerned that competitors might seek out government

participation in their financing.

His interpretation of his

complaint and of his future requirements, as set out in the letter,

was much more narrow than that of Sojonky.

Construction on the new plant did not commence until February

of 1984.

In the meantime, negotiations on the financing terms

continued between the Royal Bank and Tackama and on March 9, 1984

an amended offer of financing was issued by the Royal Bank,

cancelling and replacing the offer of financing of July 19, 1983.

The material terms of financing with which we are concerned were

not changed.

- 65 -

On March 27, 1984 Tackama wrote to the limited partners

enclosing audited statements for Alfor for the year ending December

31, 1983, which had been prepared by Laventhol & Horwath.

letter is on Tackama's letterhead and is signed by David Ure on

behalf of Tackama. The entire letter is taken up with tax

The

deductions and credit matters and tax information schedules are

enclosed with the December 31, 1983 statement.

In the 'Notes to Financial Statement' in the audited statement

under the heading 'Financing' the term loan with Royal Bank is

described as:

Term loan at prime plus 1-1/2 percent per

annum, repayable in 60 monthly instalments of

$63,820, plus interest.

No disclosure is made with respect to the working capital

restrictions and reserves required or the $1 million interest

reserve. This is the first time that there was any communication

to the limited partners about amounts payable on account of the

financing in any given year.

Bolton justified the exclusion of the information from the

statement, saying that it is not normal practice to put working

capital restrictions in the notes to financial statements, and that

the reserve of $1 million would normally appear at the time that a

particular asset was restricted. He said:

In this case in 1986 when the million dollar

cash reserve was put up, you end up with a

note stating it's restricted. And that is the

time that you would normally make notes to the

- 66 -

financial statements on the restrictions and

of cash balances of the partnership.

Whatever the practice may be, and while it may even be some

explanation as to why the information was not given to the limited

partners, such is not a defence to a fiduciary charged with failing

to disclose or to obtain an informed consent.

Again, it would appear that the audited financial statements

for the project for the year ending December 31, 1986, which

Tackama sent to the limited partners on April 29, 1987, do not

support Bolton's explanation. The only reference to the $1 million

reserve is contained in note 4 as follows:

4.

Term deposits: Statement pursuant to a

loan agreement, term deposits totalling

$1,000,000 are held to make interest payments

on long-term debt.

Neither the word 'reserve' nor the word 'restricted' appears in the

statement which, I may add, provides a minimum of information. It

will be seen that in fact the partners did not learn of the

existence of the $1 million reserve until November of 1986; that

they were not told about the working capital restrictions or the

restrictions on distributions until April of 1987.

In the month of May of 1984 most of the inter-lender

problems relating to the financing of the project were resolved.

On May 15, 1984 the EDB cancelled and replaced its earlier amended

offer of insurance dated December 14, 1983. For our purposes the

final agreement is the same as the earlier one in that it contains

- 67 -

the same terms of financing. On May 14, 1984 BCDC amended its

accepted offer of a chartered bank indemnity dated December 31,

1983, bringing its agreement more in line with those of the other

institutions. Finally, on May 18, 1984, an inter-lender agreement

was entered into between the Royal Bank, BCDC, and Northland Bank,

Plywood, Tackama, and related companies of Tackama.

The original project plan called for two used dryers to be

purchased and installed in the plant. It was subsequently decided

in May of 1984 that new dryers, instead of second hand dryers,

should be purchased. On May 25, 1984 Ure wrote to the Royal Bank

in this regard. As I understand it, sufficient project funds were

available to purchase one dryer but not the other. Ure proposed

that one be purchased "within current financing agreements" and

that the second one be purchased through a chattel mortgage with

the manufacturer of the dryer, that is, through long-term debt.

The bank's consent was needed to enter into the latter transaction.

On June 17, 1984 Robbins and Murray of the Royal Bank of

Canada met with Ure and Lunde to discuss financing for the purchase

of the new dryers for Alfor. It was decided, at the suggestion of

Murray, that the increased costs of the new dryers should be paid

by Alfor deferring payments to Tackama for veneer until the cost of

new dryers was met. What was discussed and resolved at the meeting

is set out in Robbins' memo dated June 20, 1984, which is

consistent with Ure's evidence. The project contract budget was

- 68 -

then increased by $660,760 due to the acquisition of the new veneer

dryers and on August 13, 1984 a purchase order was issued for the

new dryers for a price of $1,224,000.

I will refer to the new dryers' transaction later on when the

specific heading is discussed. Here I simply note that the effect

of the transaction was that the increased project cost of $660,760

came out of the limited partners' cash flow. The start-up of the

plant was also delayed as a result of the dryers situation, and the

completion date had to be extended.

Bolton testified that at the first meeting of the limited

partners on December 21, 1983 the partners expressed concern about

the delay in the commencement of production from the plant, from

what had been anticipated would be the start-up of production in

June of 1983. The start-up was going to be somewhat later than had

originally been projected due to delays. Had production commenced

on July 1, 1983, they would have participated in the cash flow or

profits for five, or at least for four years and a portion of the

fifth year.

If construction did not commence until 1985, the

partners would only participate in the cash flow for a three-year

period. In addition, the buy-out period would only be three years.

Hence, the partners suggested that adjustments be made to the

agreements to reflect the changed circumstances arising out of the

delays. They wanted to participate in the cash flow or profits for

a period of five years, and they wanted the buy-out period to be

- 69 -

five years as well, and they would thus avoid losses due to the

delays.

Bolton's testimony in this regard was in part:

Q: Now, does not the fact, Mr. Bolton, that

concern was expressed at the meeting in

December of 1983 about not being able to

participate in...you used the word profits, I

will use the word cash flow, it doesn't

matter...does that not indicate to you that

the limited partners who were at that meeting

wanted to participate in the profits and the

cash flow?

A:

I don't know what their motivation was

other than they were concerned about the delay

and requested a change in the agreement.

Q:

They certainly expressed a desire to

participate in the profits for a five-year

period, did they not?

A: They expressed their desire to extend the

time period in the agreements for a five-year

period for the option buy-out and for the

participation in the cash flow.

Q: Now, of course, Mr. Bolton, the length of

the

time

that

they

were

entitled

to

participate in cash flow or profits, would

have nothing to do with the tax benefits they

realized from building the plant, is that not

the case?

A: That is correct.

Q:

Nevertheless, they were expressing a

desire to ensure that they participated in the

profits or cash flow for the five year period?

A: Yes...

(my emphasis)

On October 11, 1984 Bolton wrote to Ure reminding him that at

the partner meeting in December 1983:

- 70 -

There was general agreement, I believe, that

the buy-out would be extended to approximately

five years from commencement of operations.

As you know, the original deal had specific

dates in it, wherein the company had a buy-out

option in 1987. This would cover only a three

year period and would not allow the unit

holders to share in profits for a five year

period if that date was not changed.

Perhaps you could refresh your memories and

come to a decision on whether or not there

will be changes made to the partnership

agreement for the purposes of the buy-out

option.

(my emphasis)

The wording used by Bolton suggests almost an agreement with

regard to the request of the limited partners. That request came

about as a result of the delay in construction of the plant and

what was perceived to be the affect on the limited partners' share

of the profits or cash flow, and on the option price they would

receive if the option was exercised. The letter indicates that

Lunde, Sojonky and Barclay were all copied. However, nothing seems

to have been done in response to it.

I will return to these

matters when dealing with the plaintiffs' specific claim. However,

I will note here that Bolton's testimony, and the contents of his

letter, would appear to refute any suggestion that the limited

partners simply looked on the partnership as a tax shelter scheme,

and were not interested in the profits which by agreement were

theirs. At the very first meeting of the partners, which probably

was their first opportunity, they disclosed that it was not simply

a tax shelter scheme as far as they were concerned, and that they

were interested in recovering their cash flow or profits.

- 71 -

On October 11, 1984 the date for completion of the

construction of the plywood plant was extended to December 30,

1984. The partners were not informed of the new completion date.

On November 29, 1984 Tackama reported to the limited partners

on the progress of Alfor. It is emphasized in the report that the

levels of investment tax credit and income tax recoveries from

deductible losses were expected to exceed considerably the amounts

originally estimated in the December 1982 projections. It is also

pointed out that due to unforeseen delays in completing the

project, the projected distributable cash for operations to

December 31, 1984, in the sum of $9,782, had not been realized. The

report concluded that in order to assist Alfor in its additional

period of operations, and to secure financing by the partnership

for additional costs of approximately $400,000, resulting

principally from the purchase of new dryers rather than used

dryers, the general partner intended to ask the limited partners

for some financial assistance.

In his memo dated December 10, 1984 Barclay says that the

November 29, 1984 letter was sent to update the partners with

respect to the anticipated financial and income tax results for the

1984 fiscal year. It was Tackama's desire and intention that the

matter of the additional costs incurred for the dryers be brought

to the attention of the limited partners, and that an indication of

- 72 -

Tackama's intention to seek their financial assistance be made.

Barclay aptly described the letter as "a trial balloon that Tackama

wanted to try".

On January 22, 1985 a Loan Agreement was executed between the

Royal Bank and Tackama with respect to Tackama's own financing.

The agreement is expressly dated for reference September 19, 1983.

The agreement contained an option in favour of the bank to purchase

ten percent of the aggregate of the outstanding shares of Tackama

at $1.00 per optioned share.

I will jump ahead here as this

According to the Loan

evidence relates to a specific issue.

Agreement the consideration for the option was the bank's

rescheduling payments of principal and interest due to the bank

from Tackama. The agreement refers to matters which occurred, and

an agreement which was concluded, in 1983.

In late 1982 or early 1983 Tackama was negotiating with the

bank with regard to its then financial situation and loans required

for the future. On January 7, 1983 the bank wrote to Tackama with

regard to their "recent discussions on your ongoing financing

requirements...".

At the time Tackama was in deep trouble

financially and it is clear that negotiations related to Tackama's

then indebtedness had occurred with regard to the bank's financing

of that indebtedness, as well as the 1982 - 1983 winter logging

operations. The option is set out under the heading 'Structuring

- 73 -

Fees/Considerations' together with particulars of a $300,000

borrowing fee to be paid by Tackama.

Ure testified that he prepared the application to the Royal

Bank for the logging loan in September of 1982. The application

was for $4 million. Approval of the loan was delayed until the

bank delivered its letter of January 7, 1983.

Ure said that

Tackama was virtually held to ransom with the huge negotiation fee

"and a gift of ten percent of the company".

Both Bolton and Ure testified that in December of 1983 they

realized that the option provisions of the bank's January 7, 1983

commitment letter were in conflict with the EDB's offer to Alfor,

which provided that Tackama could not redeem capital stock. They

testified that as a result they had a conference call with Royal

Bank representatives, both in Montreal and in Prince George, during

which the bank agreed that the option would be converted to a

special fee. Ure confirmed the agreement by letter dated January

9, 1984 to Robbins in which he confirms the following changes:

The option to acquire 10% of the common stock

of Tackama Forest Products Ltd. for $1.00 and

the repurchase of these shares will be

replaced by a structuring fee to be calculated

on the same terms and conditions as outlined

in the same section of the letter.

I have not compared the provisions of the letter to those in the

agreement in any detail but note that the agreement provides that

the option may be exercised at any time up to September 30, 1987

and sets out the method of calculating the values of the shares.

- 74 -

There is little evidence before me as to why the Loan

Agreement made on January 22, 1985, between Tackama and the bank,

still referred to the Option Agreement rather than the Fee

Agreement agreed to in December of 1983, and confirmed in Ure'

letter dated January 9, 1984. Ure said it was simply a mistake

that he had overlooked. There is no evidence before me, other than

the agreement referred to, that the December 1983 agreement change

from option to fee was ever changed back to an option by the

parties. There is evidence that after December of 1983 the bank

and Tackama continued to refer to the Option rather than the Fee

Agreement.

On November 28, 1986 Bolton wrote to the Royal Bank referring

to the bank's rights as a "share option buy-out". There is in

evidence as well, some correspondence, particularly that of the

bank, wherein an option to buy shares, as opposed to a fee

arrangement, is referred to. In his letter dated June 24, 1986 to

the bank Lunde also referred to the bank's interest as an option on

shares. In cross-examination Bolton testified that in December of

1983 or January of 1984 the bank agreed to convert the option to a

commitment fee; that he had to refer to the bank's right as an

option because the bank would not have known what he was talking

about. When Ure's January 9, 1984 letter confirming the December 5,

1983 oral agreement was put to Robbins in cross-examination, he

acknowledged that Ure had confirmed the agreement made during the

conference call, and he did not challenge it in any way. It seems

- 75 -

to me that the concluded agreement was with respect to a fee rather

than an option to purchase; also that while the parties hotly

disputed the label to be attached to the transaction, it would not

appear to be relevant.

I return to the narrative. On January 30, 1985 Tackama sent

a letter to the Royal Bank, the Northern Bank and BCDC requesting

a delay in the date to commence principal repayments under the

various loan facilities. The reason given for the request was that

due to delays in equipment deliveries the plant would not be

complete until mid-February. The Royal Bank and Northern Bank both

deferred the date of the commencement of repayment of principal to

June 1, 1985 and BCDC deferred its payment of principal to June 15,

1985.

I find that the initial start-up of the plant occurred in

January of 1985, and some plywood was actually produced in that

month. However, commercial production of plywood did not commence

until February, and even then the plant was still undergoing start-

up problems.

In February of 1985 Tackama's general contractors and its

subcontractors filed liens against the plant in the amount of

approximately $3.2 million. Tackama took the position that the

liens were without merit, although it apparently held back

- 76 -

substantial funds. The financial statements of Alfor do not make

any provision for payment of the liens. Actions were subsequently

- 77 -

commenced and scheduled to go to trial in September of 1990. The

lien claims were subsequently settled for $1,293,000. The source

of funds is not clear, although there is evidence that some monies

were held back on the job.

On March 17, 1985, Alfor's financial statements for the year

ending December 31, 1984 were sent to the partners with notice of

a meeting to be held on April 9, 1985. The 'Notes to the Financial

Statement' contain some details of the long-term debt including the

amount of the loans, the period of time over which they are

repayable and the interest rates payable in respect of each loan.

They do not contain or disclose any information with respect to

restrictions on the distributions of profits or cash flow to the

limited partners, working capital requirements or reserves or the

$1 million interest reserve.

At the partner's meeting of April 9, 1985, documents including

one entitled "New Dryers Financing" were handed out to the limited

partners and they were requested to assist in the financing of the

new dryers. In the hand-out it is stated "adjustments to buy back

provision will be made by the general partner." Other documents

indicate that Tackama was probably prepared to make a necessary

adjustment by either changing the commencement date or changing the

period to the years 1986, 1987, 1988 and 1989.

- 78 -

The topic of the limited partners providing financial

assistance to buy the new dryer was discussed at some length, and

at the end of the meeting the limited partners passed a unanimous

resolution that Tackama make a specific request to them, with

respect to the provisions of additional financial assistance to

Alfor. Apparently the request was never made. In any event in the

end, as I have already stated, the extra cost of the dryers which

needed to be financed came out of the limited partners' cash flow.

At this meeting the partners again raised the question of the buy

back period being adjusted to reflect the delay in the completion

of the plant. Apparently at the meeting it was agreed that the

intent of the provision was five years of operation rather than

five years from the date specified in the Agreement. Ure promised

to discuss the matter with his principals. Lunde was not prepared

to negotiate or adjust the agreement.

On July 23, 1985 a meeting was held between Robbins of the

Royal Bank and David Ure, during which Alfor's cash flow priorities

and other matters were discussed. Alfor was then in a positive

cash flow and profitable position.

At this meeting Robbins

attempted to impose cash flow priorities on Alfor by having the

management fee paid only after the reserve of $1,000,000 was in

place. He was not successful. This was just one of a number of

matters which were being continually discussed between the bank and

Tackama. Another was whether the current portion of long-term debt

should be included in current liability as insisted by the bank.

- 79 -

Another was with regard to Tackama meeting the working capital

requirement under the Loan Agreement. In November of 1985 the bank

and the other lenders agreed to extend the time by which Alfor was

to meet the working capital requirements to June 30, 1986. Tackama

committed itself to that date.

In the year ending December 31, 1985 Alfor suffered a loss,

with the result that it was unable to make its payments on the

long-term debt. In order to make the payment Alfor deferred its

payments to Tackama for the veneer being supplied to it.

In

addition, Tackama did not receive its management fee. However, the

limited partners were able to write off Alfor's loss against their

income for the 1985 year and by the end of that year the limited

partners had received what I would describe as substantial tax

benefits.

In early 1986, when the financial statements for the year

ending December 31, 1985 were being prepared, what has been

described in these proceedings as the "depreciation issue" first

arose. When the definition of the words "supplier's costs" in the

Supply Agreement was applied to the 1985 figures an accounting loss

occurred. Lunde was adamant that Tackama's balance sheet should

not show an accounting loss, and that depreciation would have to be

taken into account, notwithstanding the clear wording to the

contrary contained in the Supply Agreement.

Bolton sought an

- 80 -

opinion from Bull, Housser & Tupper. Their opinion, given on April

6, 1986, was:

...the proper interpretation of the agreement

is that the price of the Material is to be

determined by the definition of 'suppliers

cost' which clearly excludes an allowance for

depreciation and substitutes a formula for

calculating the amount of the reserve.

Lunde continued to insist that an allowance be made for

depreciation. On March 19, 1987 Bolton wrote to Lunde with regard

to the transfer price of the veneer and the depreciation problems

saying:

At the present time, given the legal opinion

from Bull, Housser, the fact that the

management fee paid back to Tackama is on a

cash flow basis and not a net income which

would include deducting a depreciation; and

Tackama received a substantial management fee

under the present interpretation of the

Agreement; the calculation of the transfer

price after excluding depreciation is the

correct interpretation.

Consequently, I am unable to clear through my

office audited financial statements prepared

on the basis accommodating the interpretation

of the agreement which takes depreciation into

account in the calculation of the transfer

price.

(My emphasis)

Bolton apparently was able to persuade Lunde that depreciation

should not be taken into account in the year ending December 31,

1985. However, Lunde eventually was able to persuade Bolton to

change his views, and from 1986 on depreciation was taken into

consideration.

- 81 -

Apparently because of the depreciation problem, Lunde was

reluctant to release the financial statements for the year ending

December 31, 1985 to the limited partners, although he had received

them from Laventhol & Horwath. The last day for delivery to the

limited partners of the tax information by Alfor, pursuant to the

Partnership Agreement, was March 31, 1986. On April 11, 1986 Ure

sent a telex to Bolton with regard to Alfor stating:

Bob Lunde has agreed to permit the release of

the tax schedules only to the partners of the

above.

A.

In the expectation that some means of

correcting the continued loss shown on Tackama

Forest Products due to depreciation will be

found and

B.

On condition that the release of those

schedules will not impair our ability to deal

with the depreciation.

The actual audited financial statements will

not be released at this time.

On the same day, the tax schedules were sent to the limited

partners by Laventhol & Horwath. The partners were told that the

audited financial statements would be sent to them once they were

approved by Tackama.

Apparently Tackama did not send the

statements to the limited partners notwithstanding Bolton's advice

that Tackama, as the general partner, was obligated to do so.

On May 16, 1986 Tackama wrote to the limited partners

enclosing extracts from the audited financial statements for the

year ending December 31, 1985. The partners were told that those

who wished to review additional information from the audited

- 82 -

financial statements could do so at the offices of Tackama in

Prince George or the offices of Laventhol & Horwath in Vancouver.

Neither the May 16 letter nor any of its enclosures provided any

information with regard to the terms of the financing.

In the meantime the Royal Bank was pressing Tackama again,

this time with respect to the establishment of the $1 million

interest reserve. The bank was insisting that $333,000 be put in

the reserve account by March 1985 and that a similar sum be placed

therein by March of 1986 and 1987. Apparently the bank was also

maintaining its position that the $1 million reserve should be set

aside before Tackama should receive any management fees. On May 5,

1986 Ure wrote to the bank with regard to these matters stating:

After carefully reviewing the documents

leading to the deal and the resulting loan

agreement, I have concluded that the interest

reserve of $1,000,000.00 is meant to be

created from funds which otherwise would be

paid to limited partners. Lorne Bolton, who

was one of the architects of the plan and who

helped Tackama and the Royal finalize their

loan agreement, confirms to me that this

interest reserve was to be held back from the

limited partners' share of profits.

Therefore, since the management fee is payable

to Tackama Forest before any distribution to

limited partners, and the interest reserve is

payable from the limited partners' share of

profits, then the fee must come before the

interest reserve.

(my emphasis)

The running battle between the bank and Tackama with regard to the

setting aside of the $1 million interest reserve fund, and Tackama

meeting the working capital requirements of the Loan Agreement,

- 83 -

continued.

Eventually the $1 million interest reserve and the

working capital reserves of $1,311,453 were in place.

On September 25, 1986, Tackama wrote to BCDC applying for a

$25 million loan, including $4 million said to be required to

purchase the limited partners' units, and $5 million for the

reconstruction of the sawmill. Ure testified that his principals,

Ure and Garland, had no intention of buying out the partnership

units at that time; that he included the $4 million in the

application simply to bring the amount applied for up to the $25

million amount.

On October 5, 1986 the partners of another limited

partnership, Alfor IV, held a meeting.

Many of the Alfor IV

partners were also partners in Alfor II and they held a short

meeting after the Alfor IV partnership meeting. During the Alfor

II partnership meeting a short report was given to them by Sojonky.

The contents of the report are contained in a letter dated December

12, 1986 from Jefferson Capital Corporation (Sojonky) to the Alfor

limited partners.

At the meeting the partners were told for the first time that

a $1 million cash reserve for interest and debt repayment had been

set up "from cash generated to date from operations as per the

agreement with the Royal Bank". While the $1 million reserve had

been established, the working capital requirements of the Loan

- 84 -

Agreements had not yet been established. No reference was made to

the working capital requirements or reserves in that regard. This

was the first time that the limited partners learned of the

existence of the $1 million reserve.

I turn now to matters which occurred in 1987. On December 31,

1986 Alfor completed its first full year of operation and it was a

most profitable year.

Its net income according to the audited

statements was $2,939,324 and the cash flow was $2,311,453. Alfor

paid Tackama for the veneer supplied in 1985, and for some other

accounts which had been owing for the construction of the plant.

Alfor also paid Tackama's management fee for 1985 in the amount of

$4,911,324 and established the $1 million reserve. However, it did

not meet the working capital requirements required under the Loan

Agreements. The results of the year were disastrous to the limited

partners, because of the fact that they were required to pay tax on

income allotted to them ($30,657 per unit) while no distribution of

cash flow was made to them.

Both Barclay and Ure testified that in early 1987 they

realized that there was going to be a substantial income allocation

to the limited partners for the year ending December 31, 1986,

without any distribution being made to the partners, because the

working capital requirement of the bank had not been met.

Ure

testified that at the time he knew that the bank would agree to

distributions being made to the limited partners; also that the

- 85 -

bank was considering releasing the EDB insurance or guarantee.

Documents in evidence support the proposition that the bank

probably would have agreed to distributions being made to the

limited partners. However, according to Ure, there would have been

no distribution even if the bank had agreed to it, because his

principals, Lunde and Garland, were adamant that there would be no

distribution under any circumstances.

On March 31, 1987 Tackama (Ure) wrote to the limited partners

enclosing schedules and information required for their 1986 income

tax reporting. The partners were informed, in effect, that Alfor

had had an exceptional year; that financial statements would be

available for inspection on April 30, 1987. They were then told:

However, while the plant and the limited

partners shall show a profit, the audited

financial statements as of December 31, 1986

will disclose that there is not available

sufficient funds to enable cash distribution

to the limited partners.

You will remember

that the Alfor II loan agreements contained

very specific conditions concerning protective

reserves, working capital levels and working

capital ratios, which must be met prior to any

cash distribution. Limited partners will be

pleased to learn that those conditions are

rapidly being fulfilled.

(My emphasis)

The partners were also told that Tackama was requesting independent

arbitration of clauses in the agreements "which are uncertain in

interpretation and application." The reference is to the

depreciation problem.

- 86 -

The passage set out above is less than accurate, given the

complete lack of information made available to the limited partners

as to the conditions of the Loan Agreements, that is, the terms of

financing.

In any event, it is clear that Tackama was quite

concerned at this time with regard to the reactions they expected

from the limited partners once they were told that, notwithstanding

the fact that Alfor had earned $3 million in 1986, there was no

cash available for distribution. These concerns were discussed,

and at Ure's request Barclay drafted a summary of what he thought

were typical questions, which might come from the limited partners

after receiving the 1986 tax information and Tackama's March 31,

1987 letter and enclosed information. I will refer to only two of

the eight questions listed in Barclay's suggested list dated April

3, 1987:

2.

If the project made so much money why

can't at least some money be distributed

before April 30 to help us pay our tax? Don't

understand

how

a

project

which

earns

$3,000,000.00 can have no cash available.

3. What are the specific banking or other

lender

restrictions

which

prevent

a

distribution at this time? I can't find any

details on this in any of the information

which

I

received in the past on this

investment.

(my emphasis)

Some of the questions in the list are telling, particularly

question 3 which clearly shows that Barclay knew that the limited

partners had never been given any information with regard to the

terms and conditions of financing; that at least he understood that

the partners would be very concerned, to put it perhaps mildly,

- 87 -

once they learned of the terms of financing. This turned out to be

the case.

On April 8, 1987 Tackama (Ure) again wrote to the limited

partners. He advised them that $30,657 of income per unit would be

allocated to each of the limited partners for the year ended

December 31, 1986, which would be taxable, and that there would be

no cash distribution to the limited partners with respect to that

income. He stated:

During 1986, the project was profitable. The

cash which was generated as a result has been

used to meet the long-term debt obligations,

to build the $1 million cash reserve required

by the project's bankers, and to build the

working capital to the level required by the

lending agreements.

Under the financial

arrangements in place, the partnership has not

yet met the working capital ratios which are

called for. As a consequence, it is not able

to make a cash distribution at this time

without being in breach of its agreements.

Ure also advised the partners that Tackama did not intend to

make a distribution even if the requirements of the lending

agreements were met, in the following terms:

The general partner has a further duty to

Alfor II, in addition to the technical

requirements under the lending agreements, to

manage the project in a prudent fashion and

this may involve withholding cash from

distribution even if the lender's guidelines

would otherwise permit him to do so. In this

industry, events such as strikes, government

action or inaction, fluctuating foreign

exchange rates, and numerous other risks have

to be constantly anticipated. Most recently,

a precipitous fall in selling prices and 15

percent export duty came as surprises.

- 88 -

Lunde's policy then was a no-win policy for the limited partners,

and effectively destroyed their right to receive their cash flow or

profits. The policy was in bad time, reserves are needed and there

will be no distribution.

In good time there will be no

distribution as well because bad times may return.

Lunde testified that because of such matters he would not

agree to a distribution in any circumstances. Ure testified that

Lunde wanted the limited partners to know that he would set aside

more reserves for such uncertainties. I quote some of his evidence

in this regard:

Q:

Well, in fact, Mr. Lunde was never in

favour of making any distribution...

A: That's right.

Q: ...at anytime, is that right?

A: That's right.

Q: And isn't it -- one of the reasons that he

expressed to you for his view on this was

because he felt the limited partners had

already done well out of Alfor as a result of

their tax benefits.

A: Yes, that was part of it.

Q:

And if they had a tax problem in 1987

because of Alfor's operations in 1986, then it

wasn't his problem, and what they should have

done is save some of their tax credits.

Remember him expressing that view to you?

A: It sounds like, like Lunde, yes.

(My emphasis)

When Ure gave this and other evidence on the subject I took him to

be saying that Lunde was not prepared to make a distribution in any

- 89 -

circumstances whatsoever.

A consideration of the whole of the

evidence, including Lunde's protestations to the contrary, has led

me to conclude that such was probably the case; that is, that Lunde

was not prepared to make a distribution to the limited partners in

any event.

To him the limited partners were investors or

shareholders, and nothing more. Alfor was simply a tax shelter, a

very successful one for the limited partners. Alfor's cash flow or

profit really belonged to Tackama, and if necessary he would look

for any reason to justify distributions not being made.

In his letter Ure also raised the possibility of the limited

partners issuing letters of credit in exchange for the $1 million

cash reserve fund. The proposal was made because Lunde was adamant

that there would be no distribution.

In the end they did not

follow through with the letters of credit proposal.

On April 6, 1987 one of the limited partners, Keith R. Benson,

wrote to Lunde with regard to Tackama's letter dated March 31, 1987

requesting information and stating:

We find the contents of para. 3 of that letter

disturbing.

We do not remember that 'the

Alfor II loan agreements contain very specific

conditions concerning protective reserves,

working capital levels and working capital

ratios, which must be met prior to any cash

distribution'.

On April 20, 1987 Lunde sent a memo to Ure setting out the

conditions under which he would permit Benson to review the Loan

- 90 -

Agreements. He refers to Benson as a shareholder. On April 21,

1987 Ure wrote to Benson explaining why no distribution would be

made. He also acknowledged that the terms of financing had not

previously been disclosed to the limited partners.

On April 29, 1987 Tackama wrote to the limited partners

enclosing the audited financial statements for the year ending

December 31, 1986, and giving notice of a limited partners' meeting

to be held May 29, 1987.

The third and final meeting of the

partners was held on that date. The evidence is that the minutes

of the meeting, which are in evidence, fairly accurately describe

what occurred at the meeting. Lunde said that the meeting was a

disaster, that the limited partners were after his blood.

The meeting was chaired by Tackama's solicitor. Apparently

he ran the meeting according to a script which he and Tackama

personnel had prepared, in anticipation of the questions the

limited partners would ask, and problems Tackama would face, at the

meeting of the limited partners. Lunde gave the general partners'

report ending with a warning that a new 15 percent export tax might

have a significant impact on Alfor's earning in 1987 and in

subsequent years.

Bolton then spoke on the depreciation issue

recommending arbitration. The partners agreed to meet later to

discuss the latter question.

- 91 -

Ure then presented a status report on negotiations with the

bank with regard to some form of assistance to the limited partners

with their income tax payments. This review of matters to date was

not very encouraging. Questions were then raised from the floor.

One question was:

When would the $1 million term deposit be

released? The question suggests that the speaker assumed that the

$1 million still belonged to the limited partners. There is no

evidence before me that the limited partners were ever told

otherwise. Another question was: Why was there no cash available

for distribution?

In response Bolton distributed a document

entitled 'Summary of Distribution of Cash Flow', the contents of

which I set out here:

ALFOR I FOREST PRODUCTS LIMITED PARTNERSHIP

DECEMBER 31, 10986

SUMMARY OF DISTRIBUTION OF CASH FLOW

Per financial statements

Add bank depreciation

$7,851,000

596,000

8,447,000

4,911,000

3,536,000

1,224,000

1,000,000

714,000

Paid to General Partner

Paid on capital payments on long-term debt - 1986

Interest reserve

Capital payments for 1985

New dryers v. old dryers

598,000

3,536,000

$

NIL

- 92 -

The meeting was told that the $714,000 for 1985 long-term debt had

been paid out of working capital advanced by Tackama, and therefore

had to be recovered from the limited partners; that the additional

costs of new dryers in the approximate sum of $598,000 was also

financed from working capital advanced from Tackama, and must also

be recovered from the limited partners.

Another question raised from the floor was why the principal

repayments were so accelerated because in the Offering Memorandum

it was indicated that approximately $234,000 was to be repaid in

1986. I note here that the actual amount repaid was $1,224,000.

Lunde attempted to answer the question but apparently did not.

In response to a question raised regarding the transfer price,

Bolton said the following, according to the minutes:

Lorne

Bolton

explained

Tackama

that

under

the

arrangement,

Forest

Products

essentially transfers all its profits to Alfor

II and takes it back in the form of a

management fee.

The management fee, he

explained, is therefore composed of three

elements: Tackama's profit transferred to

Alfor II, the general partners' share of the

true economic profits of Alfor II (if any),

and an administration fee.

Questions were also asked about the buy-out formula, for

example, whether or not the reserves were included in the cash

distributable. Tackama's position was stated by the Chairman to be

that there was no vagueness in the agreement with respect to cash

distributable.

- 93 -

It was pointed out by one limited partner that if the option

was not exercised for several years, and matters continued the way

they were, the limited partners would end up paying tax on income

for two or three years, and Tackama could then exercise its option

at the fixed minimum price of $56,500 and effectively buy an

operation earning about $3 million a year and pay only $6 million

for it. Another observation made was that because of Tackama's

interpretation of the buy-out formula, Tackama was essentially

using the limited partners' share of the cash distributable to buy

the limited partners out. According to the minutes:

Bob Lunde expressed his sympathy with the

limited partners' position.

However, he

emphasized that it is the banks which are

prohibiting any distribution to the limited

partners.

He indicated that up until last

month, Tackama Forest Products was handled

through the Royal Bank, Special Accounts

Branch, which monitors financial cripples.

It seems that by this time everyone was in favour of a

distribution to the limited partners, save Lunde. He continued to

maintain that it was the banks, as opposed to Tackama, which

prohibited any distribution to them. I am not satisfied that at

any given time some accommodation could not have been made with the

banks for the distribution of funds to the limited partners. As

will be seen, even after the banks' restrictions or conditions were

met, and there was an excess of $860,000 of cash flow or profits

available

for

distribution,

Lunde

would

not

permit

any

distribution.

- 94 -

It seems to me that Tackama (Lunde) simply made the best of

the banks' terms restricting distribution in order to avoid

distribution, and to retain the reserves in due course on the

option being exercised. In my opinion, those reserves belonged to

the limited partners and should have been returned to them in due

course once their purposes had been met, assuming of course that

the bank had not been required to use them. It is more likely than

not that it was Lunde's position that no cash flow would be

distributed to the limited partners, and that the reserves were

Tackama's on the exercise of the option, which in the end prevented

any distribution to the limited partners.

Another partner pointed out that the crux of the problem was

that the whole deal was upset by the change in the banking

arrangements from those projected in the Offering Memorandum. He

emphasized the fact that the limited partners were not consulted on

these major changes and that therefore the agreement should be

amended. Another partner asked whether Tackama was prepared to

renegotiate the buy-out calculation, and the cash distributable, in

view of the fact that circumstances were quite different from those

projected at the time the partnership was formed. Lunde is said to

have replied that he was not prepared "to negotiate the whole

agreement again." The question of the affect of the delay on the

start-up in 1985 rather than 1983 was again raised.

- 95 -

At the meeting Tackama also made it clear that matters for the

year ending December 31, 1987 probably would be no better. It was

anticipated or projected that substantial profits would again be

made in 1987. The partners were told that the projected taxable

income for the 1987 year was $32,000 per unit. They were also told

that they should not expect any distribution for that year. The

limited partners were therefore in a very precarious position. As

long as Alfor made a profit and no distribution was made, they

would be required to pay tax on the income allotted to them. In a

short period of time the tax benefits which they had initially

gained would be wiped out and they would be in a negative position.

Additionally, Tackama's position with regard to reserves made it

clear that the option price would always be the minimum price of

$56,000 per unit.

On June 1, 1987 Barclay wrote a letter to the limited partners

and to Lunde expressing his views concerning the May 29 meeting and

the situation in general. I find the following observation made by

him most interesting:

Many of the people who purchased units in this

project were and remain clients of our office,

and they have enjoyed tax savings and

deferrals of a substantial magnitude.

However, the nature of this project as a tax

shelter changed (rather dramatically) in the

latter part of 1986, as a result of the much

higher than anticipated earnings of the

partnership, at a time when the deductible

costs and capital cost allowance had been

substantially used up.

The project is no

longer simply a tax shelter; it is an

investment which produces taxable income. As

- 96 -

a result, there has been a change in the way

in which it is viewed by its investors. The

unexpected requirements to find cash for

income taxes on very short notice was a rude

shock, and Tackama (I believe) now understands

the full extent of that problem.

(my emphasis)

A similar statement apparently was made at the May 29 meeting

by the chairman:

A major unexpected development is that the

plywood plant has made a profit and this has

certain short-term consequences for the

limited partners.

(my emphasis)

A similar statement was also made by Lunde in a lengthy letter

dated June 25, 1987 to the limited partners wherein he says:

In 1986, a dramatic and unexpected event

occurred - Alfor II made a substantial profit.

Whereas the original projections called for

losses for income tax purposes in the second

year of operation, Alfor II made a large

taxable profit due to three factors:...

Further:

Profit was allocated to the limited partners

with the result that each partner had tax

payable on that income. The difficulty that

arose was that while income was allocated to

each partner, no cash was available for

distribution in order that these limited

partners might pay their income tax.

The

reason that no money was available is

attributable to the banking arrangements

concluded requiring large capital repayment on

the long-term debt and

a

$1,000,000.00

interest reserve fund.

Precise figures are

contained in schedule A attached hereto. The

particular problem we experienced in 1986 is

probably going to be repeated in 1987.

(my emphasis)

- 97 -

I do not accept these various post-event statements. They are

not accurate descriptions of the situation, of events which

occurred, or of the agreement made by the parties. They simply

ignore the fact that the project was not simply a tax shelter; that

the limited partners were in fact entitled to have distributed to

them each year, all the cash flow or profit remaining after

Tackama's management fee was paid, subject only to legitimate

reserves being set aside out of their monies.

The initial

projections of cash flow and distribution given to the then

potential limited partners in November of 1982, clearly envisage

yearly distribution to the limited partners. What they did not

envisage was the large capital repayments on the long-term debt,

and the substantial reserve requirements of the banks and of Lunde.

Alfor was built to be a profitable plant to enable Tackama to

survive. If it can reasonably be said that it was a surprise or

unexpected event that Alfor made a profit, or even a substantial

profit, and I believe that it can not, given Tackama's goals and

projections of profit, the surprise was solely Tackama's, not the

limited partners'.

These statements simply disclose and underscore the views and

attitudes of Lunde, Bolton and other team members, and which may

perhaps in part explain their acts and omissions since the

inception of the project. I refer in particular to their failure

to inform the limited partners of the terms of financing in 1983,

and the taking of the substantial benefits by Tackama not only

- 98 -

without regard to the limited partners' interests, but at their

expense. I say may, because of the fact that I have been troubled

about the complete lack of care or regard, on the part of Lunde,

Bolton, Sojonky and the other participants, for the interests of

the limited partners, given the agreements made between the

parties.

later.

I no doubt will return to and discuss these concerns

It may well be that Tackama and its advisors did not

anticipate that such substantial profits would be immediately

generated when the plant went into production.

They may have

thought that they were not giving anything away when they told the

potential limited partners that at the end of the day the cash flow

and profits remaining would be theirs, and when they prepared and

had the limited partners execute the agreement which expressly

provides for that happening.

Be that as it may, the agreement

introduced by Tackama and accepted by the limited partners, clearly

provides for their participation in the profits generated by the

plant in addition to their tax shelter benefits.

In his letter of June 25, 1987 Lunde continues his theme of

change saying:

The nature of the Alfor II project as a tax

driven investment changed in 1986 as a result

of much higher than anticipated earnings. The

project is no longer simply a tax shelter or

even a tax driven investment.

It is an

investment which produces taxable income and

is presently in that transition stage from a

- 99 -

tax driven investment to simply a pure

investment.

further:

Because the nature of the project has changed,

there has also been a change in the way it is

viewed by the limited partners.

There has

been considerable concern expressed as regards

the interpretation of the agreement as it

applies to the option clause. The simple fact

is that under the terms of the partnership

agreement, the option price has decreased

because of the rapid pay-down of capital debt

and the reserve funds required by the bank.

This danger was recognized at the very

beginning even before the drawing of the

partnership agreement and hence the reason

that a minimum price of $56,500.00 was

inserted in the agreement to protect the

limited partners.

(My emphasis)

I do not accept Lunde's evidence that the nature of the

project changed from a tax shelter to a pure investment, either as

a result of higher than anticipated earnings or at all, or that the

option price necessarily decreased because of the requirements of

the bank. I have already touched on these matters. The making of

the profit by Tackama, as projected, did not change the transaction

between the parties. What did change, to the knowledge of Tackama,

but not the limited partners, in 1983 and before the partnership

agreement was finally binding on the limited partners, were the

terms of financing and, perhaps as well, the emergence of Lunde's

policy (for obvious reasons) that no distributions would be made to

the limited partners in any circumstances.

I also reject Lunde's further statement that:

This danger was recognized at the very

beginning even before the drawing of the

- 100 -

Partnership Agreement, and hence the reason

that a minimum price of $56,500 was inserted

in the agreement to protect the limited

partners.

(My emphasis)

The statement that the "danger" was recognized is inconsistent with

Tackama's position that the original projections called for losses

for income tax purposes, and that the profit was "a major

unexpected development."

In any event, this seems to be the

balanced theory, at least in part, which was advanced by Bolton and

I will deal with it further when dealing with his evidence. If

what happened was actually foreseen, it should have been brought

out and explained in the Offering Memorandum and appropriate

changes made in the Partnership Agreement. Again, since that which

was foreseen actually occurred in 1983, and at least before the

last two extensions were sought, and before the Partnership

Agreement was concluded, clearly the rapid pay-down and reserve

fund requirements should have been disclosed to the limited

partners. Further, the recognition of this danger would include an

acknowledgment that there never would be any distribution to the

limited partners, because their funds would be used to accommodate

the rapid pay-down and reserve fund requirements, and a recognition

that in the end Tackama alone would reap the benefits of these

requirements, and that the maximum price which Tackama would ever

pay would be $56,500 per unit.

This of course, is completely

inconsistent with the actual provisions of the Partnership

Agreement. The ramifications of this theory are endless, and I

simply do not believe that the danger was recognized.

- 101 -

In about May of 1987 the Royal Bank took Tackama's accounts

out of the Special Loans Department and let it be known to Tackama

that it had "an appetite" for loans.

In May and June Ure had

discussions with the Royal Bank with regard to the bank financing

in part, Tackama's buy-out of the limited partners. The purchase

price of approximately $6 million would be raised by a $5 million

loan from the Royal Bank and Tackama using the $1 million interest

reserve. Obviously, given the financial position of Tackama, the

bank was not too concerned with the $1 million interest reserve

being maintained.

Ure testified that at the time his principals were split,

Garland wanted to make an offer to buy the limited partners out

while Lunde did not want to make the offer. Apparently Ure was

thinking in terms of buying out the limited partners as early as

September 25, 1986.

On that date he wrote to British Columbia

Development Corporation seeking a $25 million loan, which included

therein the sum of $4 million for the "redemption of the limited

partners interest in Alfor II Forest Products limited partnership."

The $25 million proposed loan also included the sum of $5 million

for the reconstruction of Tackama's sawmill.

letter, the reconstruction of the sawmill by then was "fully

engineered and poised to proceed immediately." Ure had also

According to the

written to the Royal Bank on September 8, 1986 advising of

Tackama's plan to rebuild the sawmill, and noting that one of the

sources of its financing was the $1 million interest reserve.

- 102 -

In July of 1987 Tackama rebuilt and modernized its sawmill

operation, without obtaining the written approval of Alfor as

required by the Supply Agreement. Tackama's position is that the

modernization was necessary, and was a direct benefit to Alfor in

that as a result of the modernization the transfer price for the

veneer was reduced.

examination that the effect on the limited partners was a negative

one, assuming Tackama made no distributions to them. When the

However, Ure gave evidence in cross-

transfer price is lowered, Tackama's management fee is increased.

While the cash flow is also increased, no benefit is received by

the limited partners unless a distribution is made. However, their

taxable income is increased.

I will deal further with the

modernization of the sawmill as it relates to a specific claim.

On September 17, 1987 Tackama wrote to the limited partners

offering to buy their units for $56,500 per unit. On September 28,

1987 the petition in action numbered A872608, which deals with the

depreciation issue, was issued.

On October 2 the writ and

statement of claim in the present action numbered C874899 were

issued and filed. On October 8, 1987 Tackama withdrew its offer to

purchase the limited partnership units. The reason given was the

introduction of a new stumpage system by the provincial government

which Tackama described as "a material change in the affairs of

Alfor II". It was also stated in the notice of termination that

even if the stumpage increases had not occurred, it was quite

- 103 -

possible that Tackama would find it most difficult to proceed with

the offer in light of this action having been commenced.

In early January 1988 Alfor's financial statements for the

year ending December 31, 1987 were prepared by Laventhol & Horwath.

The statements disclosed another profitable year for Alfor. Net

income was $2,102,474 and the cash flow or cash available for

distribution was $862,098. All of the requirements of the banks

with respect to the interest ($1 million) and working capital

($1,311,453) reserves had been met by December 31, 1987.

The

statements also disclosed that there would be an allocation of

income to the limited partners in the order of $30,000 to $32,000

per unit.

On January 7 or 9, 1988, Tackama decided to exercise its

option and on January 12, 1988, Tackama gave notice to the limited

partners that it was exercising its option under the Partnership

Agreement to purchase the assets and undertakings of Alfor

effective March 1, 1988. On that date Tackama purchased the assets

of Alfor for $6,239,000 and assumed all of Alfor's liabilities.

The amount paid per limited partner unit was $58,858.

The package of documents sent to the limited partners with

Tackama's notice of election to purchase the assets and undertaking

of the Partnership Agreement included a document entitled

'Calculation of Purchase Price of Assets'. The document disclosed

- 104 -

that at that time there was "distributable cash" in the amount of

$862,098. There was a note to the calculation which read in part

"assumes no reserves will be established by the managing general

partner and in that regard no decision has been made." Ure gave

evidence that Lunde's position that there should be no distribution

to the partners never changed and that he subsequently reserved the

$862,098. All the cash flow then which otherwise would have been

distributed to the limited partners was reserved by Tackama.

This completes the narrative. The trial lasted in excess of

fifty days. There was little agreement or common ground between

the parties. No stone was left unturned, no possible argument left

unargued. The submissions of counsel, both oral and written, were

quite lengthy. In the event that I do not specifically refer to

any argument in these reasons, it should not be concluded that it

has been overlooked, for I have carefully considered every argument

advanced by counsel, no matter how seemingly remote it may have

appeared to be.

In advancing the plaintiffs' case counsel for the plaintiffs

urged me to admit a substantial body of evidence as to what the

parties thought, did and discussed prior to the execution of the

various agreements. The evidence was tendered on the basis that it

was relevant to an issue of non-disclosure of a material fact, but

not to the interpretation to be given to the various agreements.

I admitted the evidence over defence counsel's objection, reserving

- 105 -

my decision on admissibility until the trial was completed. When

putting in his case, defence counsel followed the precedent which

had been set. He tendered evidence similar to that tendered by

counsel for the plaintiffs, and it was admitted on the same basis.

I have found that most of the evidence so tendered by both

counsel really reflected on the interpretation to be given to the

various agreements; that it really had little to do, if anything,

with the question of disclosure. Generally speaking it was of no

assistance to me, and simply delayed and disrupted the trial

procedure. While not dealing with the evidence in any specific

areas, I have concluded that most of it was inadmissible and

irrelevant as well, and I have not taken it into consideration in

deciding any of the issues.

I turn now to the issues stated and arguments advanced by

counsel, and to which I will attempt to confine my reasons.

However, before doing so, I wish to refer briefly to the

relationship between the parties (their Agreement), and the context

in which it arose, and to set out my initial observations thereon.

In most cases the issue before the court is whether or not the

relationship between the parties was fiduciary in nature. In the

case at bar the relationship and the duty owed are clearly spelled

out, and I have already referred to them as the "fiduciary

declarations". It will be seen that the main issues stated in

argument are whether Tackama had the informed consent of the

- 106 -

limited partners for the conduct about which they now complain, and

what was the scope of Tackama's fiduciary duties.

It is clear to me from the evidence, including the relevant

terms of the important agreements, that from its inception the

parties envisaged the project being controlled and run by the

general managing partner. The limited partners, by virtue of the

terms of the Partnership Agreement and in law, if they wished to

avail themselves of the tax benefits, could not participate in the

management of the business of the partnership. They had to rely on

the general managing partner to protect their interests, and were

at Tackama's mercy.

It seems equally clear that from the inception Tackama, the

drawer of the documents, recognized that it was placing itself in

a situation where its own interests, and those of the limited

partners, could come into conflict, although the full extent of the

potential conflicts probably were not appreciated by Tackama and

its advisors until much later. I will have more to say about this

in a moment.

There were two main areas of potential conflict.

First, those which flowed from the fact that Tackama was going to

manage the business and affairs of the partnership, and at the same

time supply the partnership with all necessary material for the

production and sale of plywood. Second, those which might flow

from the fact that Tackama had an irrevocable option to purchase

the units of the partners, or the assets and undertaking of the

- 107 -

partnership, with a first date of exercise of March 1, 1988. For

example, it would be in Tackama's interests, but contrary to those

of the limited partners, to see that as many reserves as possible

were set aside out of the cash flow, which ordinarily would have

been distributed to the limited partners. The benefits to Tackama

as a result of doing so would be substantial, and they would all be

at the limited partners' expense. As a result, and in an attempt

to deal with these possible conflicts, all of Tackama's profit from

its operations was funnelled through Alfor, and Tackama's powers

under the Partnership Agreement were restricted.

It was in these circumstances, and in this context, that

Tackama declared in para. 5.02 that it would act in a fiduciary

capacity toward the limited partners (not the partnership and at

times there is a difference) and that it would exercise its powers

and discharge its duties under the Partnership Agreement honestly,

in good faith and in the best interest of the limited partners. In

doing so Tackama imposed upon itself the strict duties of the

fiduciary in all situations of conflict between duty and interest.

In such a contest duty must succeed.

I refer specifically to

Tackama exercising its powers and discharging its duties in

borrowing money for the purpose of constructing and operating the

plant, and in establishing additional reserve under para. 4.02. of

the Partnership.

- 108 -

In my opinion para. 5.02 cannot be interpreted otherwise,

either by watering down or limiting the fiduciary duties through a

narrow interpretation of the latter part of its provisions, or at

all. What a reasonably prudent person may do may be the test to be

applied to Tackama in conducting the day-to-day operations of the

partnership as its general managing partner. However, it cannot be

the test to be applied to Tackama as a fiduciary, in a conflict

situation, for it in no way deals with the problem then at hand,

the conflict between interest and duty. Clear and explicit wording

would be necessary in order to reduce the fiduciary duty to one of

reasonableness, if that is possible. It seems to me that to state

that the relationship is a fiduciary one is to end the argument.

Again, the authorities have said repeatedly that to attempt to go

behind the conflict and weigh the evidence, as to reasonableness or

otherwise, is a task which no court is equal to, and that it has

never been done. I do not propose to do it here.

When dealing with the submissions of counsel for the

plaintiffs, I will follow his chronology including his headings.

I will do the same when dealing with the submissions of counsel for

Tackama, that is, I will use his headings, although they are not

the same as those used by counsel for the plaintiffs. I would have

preferred to have been able to deal with both counsels' submissions

on each issue or subissue at the same time. However, I have found

it difficult to do so because of a number of things, including the

use of different headings, the intermingling of issues, and the

- 109 -

repetiveness of the arguments. I have therefore, as I say, simply

followed counsels' outlines, although I have dealt with both

counsels' arguments on a particular issue when I was able to do so.

THE LEGAL RELATIONSHIP

After setting out the basic elements of the plaintiffs'

claims, counsel for the plaintiffs commenced his submissions with

a discussion of the legal relationship between Tackama and the

limited partners.

I agree that the key document in that

relationship is the Partnership Agreement; also that the central

feature of that document is para. 5.02 which contains what I have

called "the fiduciary declarations".

I also agree that the

relationship is in fact one of partnership, although it is a

limited one and technically does not have all the features of a

"standard" partnership. In my opinion this deficiency, if it may

be called that, is of no importance to this case, given the terms

of the partnership agreement and, in particular, the fiduciary

declarations.

Bolton suggested in his evidence that the relationship between

the parties was not really that of partnership, that it was simply

a tax shelter project, and even went so far as to express the

opinion that such partnership matters as the terms of financing

were of no importance or interest to the limited partners. I do

not accept or agree with Bolton's views in this regard, and I have

already dealt with them to some extent and with evidence to the

- 110 -

contrary. It is true that the limited partners were to receive

substantial tax benefits from the projects. However, as emphasized

by counsel, it is equally true that they were also to share in the

profits flowing from the project annually. The whole of the cash

flow belonged to them, subject only to Tackama's discretion to set

aside additional reserves out of their cash flow.

emphasis on the tax aspect of the project apparently was typical of

the thinking of all of the team members, including Lunde. It

Bolton's

probably coloured their thinking and, at the least, contributed to

their failure to appreciate the extent of the fiduciary duties owed

by Tackama, and perhaps to overlook the effect of their acts and

omissions on those duties.

Counsel argued that in exercising the powers under para. 4.02

of the Partnership Agreement the general partners were required to

act in a fiduciary capacity; that was the only basis on which the

general partners could establish reserves for the partnership. I

agree. In my opinion, in exercising any of its powers under the

Partnership Agreement and the Management Agreement in conflict

areas, Tackama was bound to act as the limited partners' fiduciary

and in their best interest.

THE NATURE OF THE PLAINTIFFS' CLAIM

Counsel commenced by emphasizing what the plaintiffs' claim

was not about. It is not a claim in which the plaintiffs seek to

be compensated or indemnified for losses. It is not a claim for

- 111 -

damages for negligent misstatement, or one analogous thereto, where

proof of a special relationship, and reasonable reliance on the

statement by its recipient, is an essential element of the claim.

It is simply a claim to have a fiduciary, Tackama, disgorge profits

or benefits which Tackama obtained from the use of its fiduciary

powers and its fiduciary position, without first obtaining the

express and informed consent of the limited partners.

Counsel

relies on the principles which are set out in such leading

authorities as Regal (Hastings) v. Gulliver [1942] 1 All E.R. 278

(H.L.); Phipps v. Boardman [1964] 2 All E.R. 187; aff'd [1965] 1

All E.R. 849 (C.A.); aff'd [1967] 2 A.C. 46 (H.L.);

Keech v.

Sandford (1726) Sel. Cas. Ch. 61, 25 E.R. 223, ex parte James

(1803) 8 Ves. 337, 32 E.R. 385; McMillan Bloedel v. Binstead (1983)

22 B.C.L.R. 255 (B.C.S.C.) and others.

The plaintiffs' claim is for an accounting of the benefits or

profits Tackama made or obtained from the use of its fiduciary

powers and position, as a result of the financing package which it

negotiated with the financial institutions on behalf of the

partnership. Those benefits or profits were obtained without the

express and informed consent of the limited partners.

therefore must account for them.

Tackama

It is important to remember that in this type of case

disclosure is only relevant to the issue of informed consent on the

part of the limited partners. It is not relevant to the issue of

- 112 -

causation, because whether loss or damage has been caused to a

limited partner is irrelevant. Also irrelevant is the issue of

whether Tackama was dishonest or guilty of bad faith. Again, the

expectations of the limited partners, which are emphasized by

Tackama, are not relevant short of express knowledge and informed

assent to Tackama's actions. The only issue is did Tackama, the

fiduciary, benefit or profit as a result of the exercise of its

fiduciary powers and position, without the informed consent of the

limited partners?

Tackama could benefit from its position as managing general

partner of Alfor only if it was permitted to do so by the terms of

the agreements governing the operations of the partnership, and it

made full disclosure of those benefits to the limited partners and

obtained their express consent to retain them for itself. By way

of example, Tackama was entitled to pay itself a management fee

pursuant to the provisions of the Management Agreement, and to sell

veneer to Alfor pursuant to the terms of the Supply Agreement. The

extent to which Tackama was entitled to benefit in both instances

was disclosed in the agreements, and in the Offering Memorandum.

In 1983, when the terms of financing for the partnership were

known by Tackama, it was incumbent on Tackama to tell the limited

partners of the financial arrangements that had been made, and of

the benefits which Tackama would obtain from those arrangements,

and to obtain the limited partners' consent to Tackama recovering

- 113 -

those benefits. This is particularly so, in my view, in light of

the interpretation placed by Tackama on the Partnership Agreement

at trial, and of the fact that those benefits were going to be

recovered at the expense of the limited partners.

The benefits arose because if the operations of the

partnership were profitable and if Tackama exercised its option in

1988, most if not all of the profits would go to Tackama while none

would go to the limited partners. Again, Tackama could buy-out the

limited partners at the minimum option price and without regard to

the extent to which the operations were in fact profitable. Those

benefits then which Tackama clearly stood to gain gave rise to the

duty of disclosure.

Tackama then, if it wished to keep all of Alfor's profits for

itself, must prove the widest possible disclosure to the limited

partners, of the best and most accurate information about what

exactly Tackama's position was going to be, and how Tackama stood

to benefit itself from the exercise of its powers to arrange the

financing for the partnership and to establish reserves.

For

example, the information would have to make it clear that it was

Tackama's position that on the exercise of the option the reserves

would belong to it and that because of the rapid pay-down of the

long-term debt and the reserves, the option price would be

decreased or kept at the minimum price of $56,500 per unit.

- 114 -

The plaintiffs' case will fail only if Tackama was permitted

to obtain the profits pursuant to the Partnership Agreement and

related agreements, in that they constitute the partners' consent,

and if Tackama has made full and complete disclosure of all

material facts and circumstances necessary for the giving of the

consent, or perhaps for making it operative. There are therefore

two issues for determination by the court.

Did the benefits

obtained by Tackama arise out of the exercise of its fiduciary

power? If so, did Tackama obtain a valid consent from the limited

partners to the retention of those benefits?

I agree generally with the above submissions of counsel as

paraphrased, and expanded upon, by me.

BASIC LEGAL PRINCIPLES

The basic legal principles with regard to the duty of a

fiduciary to account are contained in two leading English

authorities: Regal (Hastings) Ltd. v. Gulliver et al. [1942] 1 All

E. R., 378 (HL) and Phipps v. Boardman [1967] 2 A.C. 46 (HL). In

Regal (Hastings) the defendants were the directors of the plaintiff

company. They planned to sell the company as a going concern and

to that end had incorporated a subsidiary company for the purpose

of taking a lease on two cinemas. It was their intention that the

plaintiff company should hold all of the shares in the subsidiary

company.

- 115 -

The landlord of the cinemas required a guarantee of the rent

by the directors, unless the paid up capital of the subsidiary

company was £5,000. The directors were unwilling to give their

personal guarantees and the plaintiff company was unable to raise

the capital. Hence, each of the directorssubscribed for shares in

the subsidiary company with the result that its paid up capital was

£5,000. The subsidiary company took the leases and was profitable,

and within a short period of time the defendant directors were able

to sell their shares at a profit. The plaintiff company sued the

directors alleging that they had used their position as directors

to acquire the profit from the shares for themselves.

At trial and in the Court of Appeal the defendants

successfully argued that they acted honestly and in good faith in

taking the shares and that they were therefore not liable. The

House of Lords did not agree. At p. 381 Viscount Sankey quotes the

following passage from the judgment of Lord Greene, M.R., in the

Court of Appeal:

If the directors in coming to the conclusion

that they could not put up more than 2,000

pounds of the company's money had been acting

in bad faith, and if that restriction of the

company's investment had been done for the

dishonest purpose of securing for themselves

profit which not only could but which ought to

have been procured for their company, I

apprehend that not only could they not hold

that profit for themselves if the contemplated

transaction had been carried out, but they

could not have held that profit for themselves

even if that transaction was abandoned and

another profitable transaction was carried

through in which they did in fact realize a

profit through the shares...but once they have

- 116 -

admittedly bonafide come to the decision to

which they came in this case, it seems to me

that

their

obligation

to

refrain

from

In

acquiring these shares came to an end.

fact looking at it as a matter of business, if

that was the conclusion they came to, a

conclusion which, in my judgment, was aptly

justified by the evidence from a business

point of view, then there was only one way

left of raising the money, and that was

putting it up themselves.... That being so,

the only way in which these directors could

secure that benefit for the company was by

putting up the money themselves.

Once that

decision is held to be a bonafide one and

fraud drops out of the case, it seems to me

there is only one conclusion, namely, that the

appeal should be dismissed with costs.

(My emphasis)

Viscount Sankey then went on to say, contrary to the decision

of Lord Greene, M. R., still at p. 381:

As to the duties and liabilities of those

occupying such a fiduciary position, a number

of cases were cited to us which were not

brought to the attention of the trial judge.

In my view, the respondents were in a

fiduciary position and their liability to

account does not depend upon proof of mala

fides. The general rule of equity is that no

one who has duties of a fiduciary nature to

perform is allowed to enter into engagements

in which he has or can have a personal

interest conflicting with the interest of

those whom he is bound to protect

.

If he

holds any property so acquired as trustee, he

is bound to account for it to his cestui que

trust. The earlier cases are concerned with

trusts of specific property:

Sandford (1) for Lord King, L.C.

Keech v.

The rule

however, applies to agents, as, for example,

solicitors and directors, when acting in a

fiduciary capacity. The headnote to Ex parte

James (2): reads as follows:

Purchase of a bankrupt's estate by the

solicitor to the commission set aside.

The Lord Chancellor would not permit him

to bid upon the resale, discharging

- 117 -

the

himself

from

character

of

a

solicitor, without the previous consent

of the persons interested, freely given,

upon full information.

In that case Lord Eldon, L.C., said: at

p. 345:

The doctrine as to purchase by

trustees, assignees and persons

having a confidential character,

stands much more upon general

principle

than

upon

the

circumstances of any individual

case. It rests upon this; that the

purchase is not permitted in any

case,

however

honest

the

circumstances; the general interest

of justice requiring it to be

destroyed in every instance; as no

court is equal to the examination

and ascertainment of the truth in

much a greater number of cases.

(My emphasis)

In Regal (Hastings) Lord Russell of Killowen commenced on the

argument, which was accepted in the Court of Appeal, that it was a

good defence to the claim for profits to show bona fides or that

the defendant's actions were beneficial to the plaintiff company.

At p. 386 he stated:

My lords, with all respect I think there is a

misapprehension here.

The rule of equity

which insists on those, who by use of a

fiduciary position make a profit, being liable

to account for that profit, in no way depends

on fraud, or absence of bonafides; or upon

such questions or considerations as whether

the profit would or should otherwise have gone

to the plaintiff, or whether the profiteer was

under a duty to obtain the source of the

profit for the plaintiff, or whether he took a

risk or acted as he did for the benefit of the

plaintiff, or whether the plaintiff has in

fact been damaged or benefited by his action.

- 118 -

The liability arises from the mere fact of a

profit having, in the stated circumstances,

been made. The profiteer, however honest and

well intentioned, cannot escape the risk of

being called upon to account.

At p. 388 Lord Russell points out that it is beyond doubt that

these equitable principles apply to directors of a company and

refers to two of the judgments cited in Parker v. McKenna (1874) 10

Ch.App. 96 which emphasize that the rule is strict and inflexible.

He quotes the following passage from the decision of Lord Cairns:

The court will not inquire and is not in a

position to ascertain, whether the bank has or

has not lost by the acts of the directors.

All the court has to do is to examine whether

a profit has been made by an agent, without

the knowledge of his principal, in the course

and execution of his agency , and the court

finds, in my opinion, that these agents in the

course of their agency have made a profit, and

for that profit they must, in my opinion,

account to their principal.

And the following passage from the decision of James L.J.:

...it appears to me very important that we

should concur in laying down again and again

the general principle that in this court no

agent in the course of his agency, in the

matter of his agency, can be allowed to make

any profit without the knowledge of his

principal; that the rule is an inflexible

rule, and must be applied inexorably by this

court, which is not entitled, in my judgment,

to receive evidence, or suggestion, or

argument, as to whether the principal did or

did not suffer any injury in fact by reason of

the dealing of the agent; for the safety of

mankind requires that no agent shall be able

to put his principal to the danger of such an

inquiry as that.

(My emphasis)

- 119 -

In Regal (Hastings) Lord McMillan discusses the rule and the

narrow issue of fact which it creates at p. 391:

The issue, as it was formulated before Your

Lordships, was not whether the directors of

Regal (Hastings) Ltd. had acted in bad faith.

Their bona fides was not questioned. Nor was

it whether they had acted in breach of their

duty.

They were not said to have done

anything wrong. The sole ground on which it

was sought to render them accountable was

that, being directors of the plaintiff company

and therefore in a fiduciary relation to it,

they entered in the course of their management

into a transaction in which they utilized the

position and knowledge possessed by them in

virtue of their office as directors and that

the transaction resulted in a profit to

themselves.

The point was not whether the

directors had a duty to acquire the shares in

question for the company and failed in that

duty. They had no such duty. We must take it

that they entered into the transaction

lawfully, in good faith, and indeed avowedly

in the interest of the company. However, that

does not absolve them from accountability for

any profit which they made, if it was by

reason and virtue of their fiduciary office as

directors

that

they

entered

into

that

transaction.

The equitable doctrine invoked is one of the

most deeply rooted in our law. It is amply

illustrated in the authorative decisions which

my noble and learned friend Lord Russell of

Killowen as cited. I should like only to add

a passage from Principles of Equity by Lord

Kames, which puts the whole matter in a

sentence (3rd edn. 1778, Vol.2, p. 87):

'Equity', he says, 'prohibits a

trustee from making any profit by

his

management,

directly

or

indirectly.

The issue thus becomes one of fact.

The

plaintiff company has to establish two things:

(I) That what the directors did was so related

to the affairs of the company that it can

properly be said to have been done in the

- 120 -

course of their management and in utilization

of their opportunities and special knowledge

as directors; and (II) That what they did

resulted in a profit to themselves.

(My emphasis)

Lord Wright had this to say at p. 392 in Regal (Hastings):

The question can be briefly stated to be

whether an agent, a director, a trustee or

other person in an analogous fiduciary

position, when a demand is made upon him by

the person to whom he stands in the fiduciary

relationship to account for profits acquired

by him by reason of his fiduciary position,

and by reason of the opportunity and the

knowledge, or either, resulting from it, is

entitled to defeat the claim upon any grounds

save that he made profits with the knowledge

and assent of the other person.

usual and typical case of this nature is that

of principal and agent. The rule in such

The most

cases is compendiously expressed to be that an

agent must account for net profits secretly

(that is, without the knowledge of his

principal) acquired by him in the course of

his agency. The authorities show how manifold

and various are the applications of the rule.

It does not depend on fraud or corruption.

(my emphasis)

And

With the question so stated, it was said that

any other decision than that of the courts

below would involve

a

dog-in-the-manger

policy.

What the respondents did, it was

said, caused no damage to the appellant and

involved no neglect of the appellant's

interest or similar breach of duty. However,

I think the answer to this reasoning is that,

both in law and equity, it has been held that

if a person in a fiduciary relationship makes

a secret profit out of the relationship, the

court will not inquire whether the other

person is damnified or has lost a profit which

otherwise he would have got. The fact is in

itself a fundamental breach of the fiduciary

relationship.

Nor can the court adequately

- 121 -

investigate the matter in most cases .

The

facts are generally difficult to ascertain or

are solely in the knowledge of the person who

is being charged.

They are matters of

surmise; they are hypothetical because the

inquiry is as to what would have been the

position if that party had not acted as he

did, or what he might have done if there had

not been the temptation to seek his own

advantage, if, in short, interest had not

conflicted with duty.

And at p. 394:

The Court of Appeal held that, in the absence

of any dishonest intention or negligence, or

breach of a specific duty to acquire the

shares

respondents as directors were entitled to buy

the shares themselves. Once, it was said,

for

the

appellant

company,

the

they came to a bonafide decision that the

appellant company could not provide the money

to take up the shares, their obligation to

refrain from acquiring those shares for

themselves came to an end. With the greatest

respect, I feel bound to regard such a

conclusion as dead in the teeth of the wise

and salutary rule so stringently enforced in

the authorities.

It is suggested that it

would have been mere quixotic folly for the

four respondents to let such an occasion pass

when the appellant company could not avail

itself of it; but Lord King, L.C.. faced that

very position when he accepted that the person

in the fiduciary position might be the only

person in the world who could not avail

himself of the opportunity. It is, however,

not true that such a person is absolutely

barred, because he could by obtaining the

assent of the shareholders have secured his

freedom to make the profit for himself.

Failing that, the only course open is to let

the opportunity pass.

(My emphasis)

- 122 -

Finally, in Regal (Hastings) Lord Porter had this to say about

the fact that the plaintiff company shareholder would benefit as a

result of their judgment at p. 394:

This, it seems, may be an unexpected windfall,

but whether it be so or not, the principle

that

a

person

occupying

a

fiduciary

relationship shall not make a profit by reason

thereof is of such vital importance that the

possible consequence in the present case is in

fact

as

it

is

in

law

an

immaterial

consideration.

And at p. 395 he had this to say in response to the decision

of Lord Greene M.R., whose judgment Viscount Sankey had already

commented on in his judgment:

To treat the problem this way is, in my view,

to look at it as involving a claim for

negligence or misfeasance and to neglect the

wider aspect.

Directors, no doubt, are not

trustees, but they occupy a fiduciary position

towards the company whose board they form.

Their liability in this respect does not

depend upon breach of duty but upon the

proposition that a director must not make a

profit out of property acquired by reason of

his relationship to the company of which he is

the director.

Counsel draws an analogy between the profit which the

directors in Regal (Hastings) treated as their own, and which ought

to have been treated as belonging to the company, and the limited

partners' cash flow out of which Alfor's reserves were established

in the case at bar. He points out that in the case at bar, while

dealing with the Royal Bank, Tackama was prepared to acknowledge

that the cash flow out of which Alfor's reserves were established

- 123 -

belonged to the limited partners. However, when dealing with the

partners Tackama then took the position that all of Alfor's cash

flow became the property of Tackama on the exercising of the

option.

In May of 1986 when the bank was insisting that reserves

should be set up before Tackama took its management fee (which

contained Tackama's share of Alfor's profits) Ure wrote to the bank

setting out Tackama's position and clearly illustrated the conflict

of interest position which Tackama was in. In that letter dated

May 5, 1986 Ure said:

After carefully reviewing documents leading to

the deal and the resulting loan agreement, I

have concluded that the interest reserve of

$1,000,000 is meant to be created from funds

which otherwise would be paid to limited

partners. Lorne Bolton, who was one of the

architects of the plan and who helped Tackama

and the Royal finalize their loan agreement,

confirms to me that this interest reserve was

to be held back from the limited partners'

share of profits.

(my emphasis)

Lunde made similar statements in letters to which I have already

referred.

Tackama, as a fiduciary, made it clear to the bank that the $1

million reserve was to be funded from the limited partners' money.

When the option was exercised Tackama then said that the reserve

belonged to it because of the terms of the option. That reserve

would not have been there in the first place but for Tackama's

power as a managing partner, a fiduciary, to set it aside. The $1

- 124 -

million reserve was a benefit acquired by Tackama only by reason of

opportunities given to Tackama to establish the reserve in the

first place.

Tackama benefitted by acquiring the $1 million

reserve whether or not those monies still belonged to the limited

partners.

I turn now to

Phipps.

There the actions taken by the

defendants resulted in a substantial profit to a trust of which the

plaintiff was a beneficiary. The defendants acted in good faith

and the amounts for which they were called upon to account were in

no way obtained at the expense of the beneficiaries. Nevertheless

the defendants were required to account for those profits because

they made some use of their position as representatives of the

trust in the course of obtaining those profits and did not have the

full informed consent of the beneficiaries to the obtaining of

those profits.

In Phipps Lord Guest held that the defendants had placed

themselves in a special position, which was of a fiduciary

character, in relation to negotiations with the directors of a

company relating to trust shares. Out of the special position, and

in the course of such negotiations on behalf of the trustees of an

estate, they obtained the opportunity to make a profit out of the

shares as well as the knowledge that the profit was there to be

made. They bought the shares and made a profit as did the estate.

They were found to be accountable for the profit.

- 125 -

In Phipps the defendants decided to purchase the shares on

their own behalf only after the trustees of the estate decided not

to purchase them. The defendants then obtained the consent of the

beneficiaries to the trust, including the plaintiff, and the

trustees, save for one trustee who was senile.

The plaintiff

eventually commenced the action for an account of their profits on

the sale of the shares purchased by them. The consent was found at

trial not to be effective because proper disclosure had not been

made.

At trial it was argued that the purchase was made with the

knowledge and consent of the plaintiff and that the defendants were

acting personally in the purchase of the shares. In this regard

the trial judge, Wilberforce J., later Lord Wilberforce, stated at

p. 201:

One must not forget that Mr. Boardman, who

throughout was the initiator of action, was

the solicitor to the trust, the person to whom

the trustees would look and did look for

advice and for protection of their interest.

Before a person in his position could cease to

be an agent and become a self-regarding

principal, the clearest possible decision

based on the clearest understanding of the

position would be necessary.

(my emphasis)

At p. 202, Wilberforce J. referred to the principle which

governs the liability to account in the following passage:

This is a broad principle of equity developed

by this court in order to ensure that trustees

or agents shall not retain a profit made in

- 126 -

the course of or by means of their office.

The clearest modern statement is that of the

House of Lords in Regal (Hastings) Ltd. v.

Gulliver (11) where directors were held

accountable for profits made

By reason, and only by reason

of

the fact that they were directors of

Regal, and in the course of their

execution of their office.

That was said by Lord Russell of Killowen

(12). I quote again:

In the course of their management

and

in

utilization

of

their

opportunities and special knowledge

as directors.

That was said by Lord MacMillan (13). I quote

again:

By reason of his fiduciary position

and by reason of the opportunity and

the knowledge, or either, resulting

from it.

That was said by Lord Wright.

At p. 205 Wilberforce J. dealt with the inadequacy of the

disclosures made to the beneficiaries and the impression left with

them by the partial information. He concludes:

I

acquit Mr. Boardman entirely of any

intention to deceive or suppress material

information; but I think, having lived with

this situation for 18 months or so and become

soaked in its details, he failed to appreciate

the degree of explanation and the quantity of

supporting documents which would be needed to

enable someone coming fresh to it (as did Mr.

Anthony Phipps) to appraise it, or even to see

that this was a matter which required careful

consideration and expert advice.

(My emphasis)

Finally, Wilberforce J. states at p. 208:

One argument put forward was that the profit

in question could never have been made by the

trust, since there was no power to purchase

- 127 -

shares in Lester and Harris Ltd.. That this

is no answer to a claim such as is made here

is clear both from Keech v. Sandford (22) and

from Regal (Hastings) Ltd. v. Gulliver (24).

Secondly, a variant of this last argument was

that Mr. Phipps could not have obtained a

share in the profits, since Mr. Boardman and

Mr. Tom Phipps would not have agreed to his

participation in any event.

The only

alternatives were either that the transaction

should go on as it did or that it should go

off. The answer to this is the same as the

last one; and, further, it cannot be assumed

that if full disclosure had been made and Mr.

Anthony Phipps had been able to get advice,

some mutually acceptable arrangement would not

have been reached.

(my emphasis)

In the Court of Appeal Pearson L. J. described the plaintiff's

case as follows at p. 858:

That throughout the long period of maneuvers

and negotiations between the defendants and

the directors of the company, extending from

December 1956 to some time in the year 1959,

the defendants were acting as agent for the

trustees of the family trust...

After reviewing the evidence relating to arrangements made with the

defendants and the trustee, involving disclosure and consent,

Pearson L.J. expressed the opinion that the arrangements were not

such as to free the defendants from accountability. In this regard

he stated at p. 863:

Even if it should be held there was in January

1957 an arrangement or a consent or approval

of the trustees, allowing the defendants to

buy the shares on their own behalf without

being accountable to the trustees, it would be

very doubtful whether such arrangement or

consent or approval could without renewal or

- 128 -

confirmation or extension be held to apply to

the eventual purchases of the shares more than

2 years later in 1959.

During the long

interval the defendants had been skilfully and

persistently, with the help of their strong

position as representing the trustees who held

8,000 shares, extracting more and more

information about the assets and reserves of

the company and its subsidiaries and the

prospect of 'hiving off' by favourable sales

one or more of the factories....The situation

in 1959 was very different from the situation

in January 1957. By 1959 the defendants were

well informed and knew that they had a good

prospect (although of course no certainty, of

making very large profits. They had reached

this favourable position, not only by their

own efforts, but also by virtue of the power

which they had as representing the trust. It

would not follow from the supposed arrangement

of January 1957 that they should in the

changed situation of 1959 be allowed to retain

for themselves the whole of the very large

profits realized.

There should have been a

new arrangement in 1959 entered into by the

beneficiaries with full knowledge of the

material facts and it might well have been a

different

arrangement

involving

some

participation by the beneficiaries in the

defendant's 'excess profits' i.e. their

profits in excess of some figure taken to

represent normal profits of a successful

takeover. An arrangement on those lines would

have been fair to both sides.

(My emphasis)

This passage has particular application in the case at bar to the

defendants' argument that the financial package negotiated was the

only one available if the project was to go ahead.

I am not

satisfied that that is the case. However, and in any event, I am

satisfied that, on full disclosure being made to the limited

partners in 1983 when the extensions were being sought, some

mutually acceptable arrangements probably could have been made with

the limited partners.

- 129 -

In the case at bar Tackama had the express power to set aside

additional reserves, and to borrow money on such terms and

conditions as it saw fit, for the purposes of constructing and

operating the plant. It may therefore be argued that Tackama had

the partnership's prior consent to do what it wanted as regards

reserves and terms of financing. In my opinion this is not the

case.

The powers referred to were limited by the fiduciary

declarations contained in para. 5.02. I am also of the opinion

that even if it can be said that Tackama had such prior consent, it

was no longer informed and no longer valid, when Tackama sought the

limited partners' further consent on the three occasions in 1983,

to extend the time for the delivery of the statutory declaration,

so as to enable Tackama to complete the financial commitments, the

terms of which were already known.

In Phipps the House of Lords majority, consisting of Lord

Cohen, Lord Hodson and Lord Guest, found that the defendants had

placed themselves in a special position, which was of a fiduciary

character, in relation to the negotiations with the directors of

the company and that out of such special position, and in the

course of such negotiations, the defendants obtained the

opportunity to make a profit out of the shares, and knowledge that

the profit was there to be made. They were of the opinion that the

only way the defendants could defeat the claim against them would

be to establish that the profits were made with the knowledge and

assent of the trustees. Passages from the decisions of the various

- 130 -

law lords in Regal (Hastings) were cited with approval and of

course that case was followed.

I am satisfied that the principles set out in Regal (Hastings)

and Phipps are, indeed, applicable to the case at bar. The

benefits, to which I will refer in more detail in a moment, were

obtained by Tackama solely as a result of its fiduciary position in

the setting of the reserves and in the negotiation of the terms of

financing with the financial institutions.

The only way the

defendants in the case at bar can defeat the plaintiffs' claim is

to establish that the profits or benefits obtained by Tackama were

obtained with the knowledge and consent of the plaintiffs.

THE BENEFITS

The evidence is that Tackama benefited from the exercise of

its powers in two respects: Firstly, the reserves which Tackama

established, and which enhanced the value of Alfor's assets by

approximately $3,326,941, and which Tackama claims were passed on

to it on the exercise of the option and, secondly, the repayment of

the bulk of Alfor's indebtedness over a short period of time, i.e.,

five years, rather than the initial twenty-five year period,

reduced the debt which Tackama was to assume on the exercise of its

option by some $3 million. It is the plaintiffs' position that if

Tackama wished to retain these benefits for itself it must

establish that the plaintiffs consented to Tackama keeping the

- 131 -

benefits after being fully informed of all material facts. This

position is in accordance with the law.

Counsel for the plaintiffs points out that while he uses the

word "reserves" in his argument, a large percentage of the benefits

obtained by Tackama cannot properly be said to be reserves. They

are in fact nothing more than the cash flow, which the limited

partners were entitled to have distributed to them, which could not

be distributed because of the restrictions on distribution agreed

to by Tackama, on behalf of the limited partners, in the Loan

Agreements made with the various financial institutions. Counsel

says:

The cash flow which was not distributed as a

result of the terms of the loan agreements was

not in any real sense additional reserves set

up by the general partners under the

provisions of para. 4.02 of the partnership

agreement; rather, this cash flow was simply

cash profits which could not be distributed

because to do so would offend the provisions

of the loan agreements.

I agree. The reason the cash flow could not be distributed

had nothing to do with any decision made by Tackama pursuant to its

powers contained in para. 4.02 of the Partnership Agreement. It

was not distributed because of Tackama's exercise of another power

under para. 5.03, one which permitted Tackama to agree to financing

on behalf of Alfor.

The opinion of the general partners with

respect to the desirability of distributing the cash flow was not

relevant to the question of whether it could be distributed.

- 132 -

Another irrelevant consideration to the question of cash flow

distribution was whether it was necessary to reserve it to meet the

obligations of the partnership or to operate the business of the

partnership in a prudent manner. The issue was simply that the

profits belonging to the limited partners could not be paid.

What seems to flow from this is that the reserves set aside as

a result of the banking agreements at all times belonged to the

limited partners, and should have been paid to them once the

purpose for their reservation was met.

They did not become

Tackama's on the exercise of the option. However, the plaintiffs

need not rely on the ownership of the monies in order to succeed.

They need only establish that the money did not belong to Tackama

-that Tackama got the benefits and must account for that reason.

It seems to me that of the $3,326,941 said to be reserved by

Tackama, only the $862,098 which Tackama refused to distribute in

1987 can possibly be said to be a reserve under clause 4.02.

Neither the $1 million interest reserve nor the $1,311,453 working

capital reserve can be said to be a reserve under clause 4.02

which, of course, is the only clause under which Tackama was

entitled to set aside reserves to meet the obligations of the

partnership, and to operate the business in a prudent fashion.

Counsel says that the distinction between the reserves set

aside as a result of the banking agreements, and those set aside

- 133 -

pursuant to para. 4.02 of the Partnership Agreement, is important

because it illustrates the fact that a large portion of the cash

flow which was not distributed, and which found its way into the

hands of Tackama once the option was exercised, cannot have been

contemplated by the limited partners at any time prior to the terms

of the Loan Agreements being known.

The restrictions on

distribution to the limited partners, which resulted from the terms

and consequences of the banking agreements, were unknown to the

limited partners and resulted in direct benefits to Tackama. They

were the direct result of the agreements which Tackama made on

behalf of the limited partnership in the course of carrying on its

duties under the Partnership Agreement. There is no suggestion in

any of the original documents, including the Offering Memorandum

and the Partnership Agreement, that Tackama would enter into any

arrangements with third parties which would restrict the ability of

Alfor to distribute the profits of the limited partners to them and

would result in those profits going to Tackama. The partners did

not consent to these arrangements and, in particular, to their

profit becoming Tackama's profit.

Counsel argued, and I am inclined to agree, that because of

the nature of the benefits in the case at bar the facts are

stronger than those in Regal (Hastings) and Phipps.

Here the

reserves obtained by Tackama were set up entirely out of the

limited partners' share of the profits of the partnership. They

were established as a result of decisions made and actions taken by

- 134 -

Tackama in the course of the exercise of its fiduciary powers and

duties.

corresponding deprivation of the beneficiaries equal in amount to

the benefit which the fiduciary has obtained. In the cases

In contrast to the above two cases, there has been a

referred to, the profits were earned from the fiduciary's own

money, and as a result of his labour, yet the money was nonetheless

held to be the property of the beneficiaries because the fiduciary

had not obtained the beneficiaries' consent to his obtaining the

profits.

DOES TACKAMA HAVE A VALID CONSENT?

It seems to be common ground that if Tackama has a valid

consent to the obtaining of the benefits, it must be contained

within the four corners of the Partnership Agreement.

The

plaintiffs' position is first that the Partnership Agreement does

not contain an express or inferred consent for Tackama to take the

benefit, the reserves and the reduced liabilities. Alternatively,

if the Partnership Agreement does contain the necessary consent it

is not a fully informed one and is therefore ineffective, because

Tackama failed to make proper disclosures to the limited partners

of material facts when the limited partners were called upon in

1983, on the three occasions, to extend the date for the filing of

the statutory declaration and, therefore, the original consent.

- 135 -

I am satisfied that the agreement does not contain the

necessary consent, and that any suggestion that it does is met by

the fact that it could not be a fully informed consent, given the

complete lack of disclosure on the part of Tackama. The duty to

disclose was a continuing one and the original consent would only

continue provided up-to-date information on the financing package

was disclosed to the limited partners. This is particularly so

when the material facts were known to Tackama prior to the

Partnership Agreement being finally concluded.

(a) The Partnership Agreement

In most of the cases involving fiduciary relationships the

court was concerned, at least in the first instance, with

ascertaining whether or not the parties were in a fiduciary

relationship, although in some of them the court had to go on to

decide the scope and extent of that relationship. Herein the case

is unique in that the drawer of the document, Tackama, placed

itself in the obvious position where its interests would conflict

with its duties, and then specifically declared itself to be the

limited partners' fiduciary and that it would exercise its powers

and discharge its duties in good faith and in the best interests of

the limited partners.

In my opinion, these provisions of the

Partnership Agreement are paramount and in a conflict situation the

other terms of the agreement must be read in light of them. Where

duty and interest conflict, Tackama has promised that duty would

come first. If this is not so, and the duty owed by Tackama is the

- 136 -

lesser duty of simply being required to act reasonably in the

circumstances, then the expressed declaration by Tackama that it is

a fiduciary, and the statement as to the duty owed, are

meaningless.

Counsel for the plaintiff argues that to interpret the

Partnership Agreement properly one must have regard to the general

law of the fiduciaries since it is expressly incorporated into it

and that such law restricts the right of Tackama as a fiduciary to

benefit from the exercise of its powers. I agree. In my opinion,

the declaratory provisions of para. 5.02 clearly do so, subject of

course to any express provision permitting Tackama to benefit.

The Partnership Agreement, the Management Agreement and the

Supply Agreement when read together authorize Tackama to obtain

certain benefits from the exercise of its fiduciary powers. Those

benefits are the management fee (described by Bolton and Lunde as

including Tackama's substantial share of the profits), the transfer

price and the option to acquire the assets of or units in the

partnership. The agreements do not expressly permit Tackama to

obtain any other benefits from the partnership or from its

fiduciary position or from the exercise of its fiduciary powers.

Very clear language would be required to permit other benefits, and

no such language is present in the agreements.

- 137 -

Under para. 4.02 (Article 4 is entitled 'Participation in

Profits and Losses) Tackama has the right to set aside reserves

that it may deem desirable to meet the obligations of the

partnership and to operate the business in a prudent fashion.

Under para. 5.02 Tackama agrees to act as the limited partners'

fiduciary and to exercise those powers and discharges of those

duties honestly, in good faith and in the best interests of the

limited partners. Para. 5.03(d) empowers Tackama to borrow money

on such terms and conditions as it thinks fit for the purpose of

constructing and operating the plant.

Tackama argues that it could set aside reserves (para. 4.02)

and borrow money at any terms (para. 5.03) without regard to the

interests of the limited partners as long as it did so reasonably

in the operation of the business of the partnership in a prudent

fashion. If it profited in doing so the limited partners could not

complain, even if those profits came out of funds which ordinarily

would have been distributed to the limited partners. The terms of

the Loan Agreements, negotiated by Tackama on behalf of Alfor,

required that certain reserves be established and Tackama was

empowered to establish reserves pursuant to para. 4.02.

Those

reserves became the property of Tackama on the exercise of the

option. The Loan Agreements negotiated also contained provision

for a short-term amortization. The benefits flowing from the short

term belong to Tackama.

- 138 -

In my opinion Tackama's interpretation of the partnership and

related agreements cannot stand. It is contrary to both the law

and the clear terms of the agreements between the parties. Those

provisions cannot be interpreted as imposing on Tackama only a duty

to act reasonably. The duty owed by a fiduciary is absolute and is

a much higher one.

The agreements do not permit Tackama to

unilaterally expropriate all of the limited partners' share of the

profit, and to thereby benefit, without the informed consent of the

limited partners. Clear and explicit wording would be required to

grant Tackama the right to such benefit given its declarations that

it would be the limited partners' fiduciary and would exercise its

powers and discharge its duties honestly, in good faith and in the

best interests of the limited partners. In fact, given these

declarations I cannot envisage any wording which could grant the

right to such profits to Tackama without destroying Tackama's

fiduciary declarations.

Such a situation was considered and rejected by Dawson J. in

Hospital Products Ltd. v. United States Surgical Corporation et al.

(1984) 55 A.L.R. 417 (H.C. of A.) at p. 419:

Nor is the problem to be solved by saying that

there was a limited fiduciary relationship

with respect to the reputation of USSC

products which was of a different kind from

that

normally

encountered

in

that

it

recognized the possibility of conflict between

the interests of Blackman and those of USSC

which was not to be resolved in favour or

USSC. That is the antithesis of a fiduciary

relationship which demands that in any

situation of conflict between duty and

- 139 -

interest, duty must come first. See Furs Ltd.

v. Tomkies (54 C.L.R.) at pp. 590, 592, 600.

As Lord Hodson said in

Phipps v. Boardman

[1967] 2 A.C. at p. 111:

Nevertheless,

even if the

possibility of conflict is present

between personal interest and the

fiduciary position the rule of

equity must be applied.

See

Gulliver....

the whole purpose served by the

also...Regal

(Hastings)

Ltd.

v.

recognition

of

a

fiduciary

relationship would otherwise be

thwarted, for the court would be

required

to

examine

individual

transactions in order to determine

whether the interests of the person

to whom the fiduciary duty was owed

had

been

sacrificed

manner

in

as,

some

for

impermissible

example, where the person owing the

duty had not acted reasonably in the

circumstances. That may well be a

task which 'no court is equal to'

and certainly is a task which has

never been undertaken. SeeEx Parte

James (1803) 8 Ves. June, 337 at

345; 32 E.R. 385 at 388.

(my emphasis)

Tackama was expressly declared to be the limited partners'

fiduciary, not a limited or a partial fiduciary. The rules

applicable in such a case are inflexible and must be applied

inexorably by the court as stated by James L.J. in

Parker v.

McKenna (1874) 10 Ch.App. at p. 124:

... that the rule is an inflexible rule, and

must be applied inexorably by this court,

which is not entitled, in my judgment, to

receive evidence, or suggestion, or argument

as to whether the principal did or did not

suffer any injury in fact by reason of the

dealing of the agent;

for the safety of

mankind requires that no agent shall be able

- 140 -

to put his principal to the danger of such an

inquiry as that.

(my emphasis)

In the case at bar I need not embark upon the task, impossible

in most cases, of trying to ascertain whether the fiduciary,

Tackama, acted reasonably.

However, I will note that in the

circumstances of this case I would have found it most difficult, if

not impossible, to conclude that such was the case. See also the

decision of the Master of the Rolls, Lord Greene, in

Beaman v.

A.R.T.S. Ltd. [1949] 1 A.E.R. 465 at p. 469 where he refers to the

readiness with which people deceive themselves when their own

interests are involved.

Counsel

for

the

plaintiffs

argues

that

Tackama's

interpretation of the agreement results in the limited partners

being entitled to receive not one cent of the profits, while

Tackama is entitled to keep them all. This interpretation not only

gives Tackama the power to determine whether or not the limited

partners are entitled to participate in any of the profits of the

partnership, but also empowers Tackama to determine the option

price subject only to the minimum price. Counsel suggests that if

that was Tackama's intention they could have spelled this out in

the Partnership Agreement, and given notice of it in the Offering

Memorandum.

He suggests, for example, that Tackama could have

excepted para. 4.02 from para. 5.02 and added a phrase to the

former to the effect that all reserves would pass to Tackama on the

- 141 -

option being exercised. Counsel says that in the absence of such

clear provision the court should not interpret the agreement so as

to permit the fiduciary, Tackama, to receive the benefits of the

profits of the limited partners, the beneficiaries.

I am not satisfied that it would have been an easy task for

Tackama to "spell out" such absolute powers that it could decide

whether or not the limited partners should share in any of the

profit, what the option price should be and that all profits gained

by Tackama in negotiating the financial packages would be kept by

Tackama, and at the same time persuade the limited partners to

participate in the project.

However, I am satisfied that the

agreements cannot and should not be interpreted in such a way as to

permit Tackama to keep the benefits which are the subject matter of

this lawsuit.

(b) Disclosure Required for a Valid Consent

Counsel for the plaintiff argues that even if the provisions

of the Partnership Agreement can be construed as a consent by the

limited partners to Tackama expropriating their profit, (and I say

they cannot be so construed) such consent was not a fully informed

one in that insufficient information was disclosed to the

plaintiffs, and therefore the consent is not effective.

Put

another way, if the wording was intended to be a consent, it was

based on insufficient information. Initially, Tackama had until

- 142 -

April 15, 1983 to obtain the financing package. However, it went

back to the limited partners on three occasions to extend the time

for the filing of the statutory declaration, to keep the agreement

alive and to enable Tackama to obtain the bank's financing

commitment. In my opinion, if the provisions of the Partnership

Agreement are to be construed as constituting a consent, that

consent became ineffective when Tackama sought the further consent

of the limited partners and did not disclose the further

information it had obtained in the interim and, in particular, the

details of the financing package. The consent was not an informed

one, or no longer was an informed one if it had been so earlier.

I am here dealing with the question of disclosure only insofar

as it relates to an informed consent. However, it seems to me that

Tackama was duty bound per se to disclose to the limited partners

the material terms of the financing package known to it on each of

the three occasions, but particularly the last one, when Tackama

approached the limited partners and obtained their consent to the

extension of the time for the filing of the statutory declaration,

and the obtaining of the financing, which resulted in the

continuation of the agreement.

In Ocean City Realty Ltd. v. A & M Holdings Ltd. (1987), 36

D.L.R. (4th) 94 (B.C.C.A.) Mr. Justice Wallace, for the Court,

makes clear that the duty of disclosure is strict and very wide.

The fiduciary must disclose to his principal everything known to

- 143 -

him respecting the subject matter of the contract which would be

likely to influence the conduct of his principal. It is clear also

that it is not for the fiduciary to decide whether or not certain

information may be important to his principal or might influence

his conduct.

In this regard, Justice Wallace states at p. 99:

I would emphasize that the agent cannot

arbitrarily decide what would likely influence

the conduct of his principal and thus avoid

consequence

of

nondisclosure.

If

the

information pertains to the transaction with

respect to which the agent is engaged, any

concern or doubt that the agent may have can

be readily resolved by disclosure of all of

the facts to his principal. In the instant

case the very withholding from the principal

of the information concerning the payments to

the purchaser of a portion of the commission

could be evidence from which one might

properly infer that the agent was aware that

such circumstances would be a matter of

concern to the principal.

(my emphasis)

In the case at bar I have been greatly concerned as to why

Lunde, Bolton and perhaps Sojonky, did not inform the limited

partners, at the least, of the details of the financing

arrangements on the three occasions, and more particularly the last

one. I say at the least because I am not satisfied that simply

advising the limited partners of the terms at that time would have

sufficiently discharged Tackama's duty so as to enable the limited

partners to give a fully informed consent. It is likely that some

of the limited partners probably would not have appreciated the

information he was receiving or its impact on Tackama's interests.

- 144 -

The duty to disclose goes farther than simply passing on the

details without reference to, or explanation of, their impact.

My concerns, which I have already referred to and no doubt

will refer to again, arose because the financial arrangements which

Tackama was making with the financial institutions, and had for all

intents and purposes concluded before November of 1983, would

substantially benefit Tackama, and would at the same time

effectively eliminate the limited partners contractual right to

share in the profits of the partnership. It seems to me, as was

said in Ocean City Realty, that the very withholding of the

information pertaining to the financial details "could be evidence

from which one might properly infer" that Tackama, and its

representatives, were aware that such circumstances would be a

matter of concern to the limited partners. However, it would seem

to follow from such a finding that Tackama and its representatives

deliberately withheld the information, but such a position is not

taken by the plaintiffs. Fraud, misrepresentation, negligence or

bad faith on the part of Tackama are not part of the plaintiffs'

case.

The only position taken in this regard is that Tackama

ceased to act in good faith in 1987, when Lunde made it clear that

there would be no distributions to the limited partners in either

1987 or 1988, giving as one of his reasons the fact that the

limited partners had already done quite well on tax benefits

recovered from Alfor.

- 145 -

After much consideration, and particularly in light of the

fact that bad faith or other misconduct by Tackama are not part of

the plaintiffs' case, I have concluded on the whole of the evidence

that none of the participants, Lunde or his partner, Bolton or his

partners or associates, or Sojonky, fully appreciated the impact of

the terms of financing on the interests of Tackama, and those of

the limited partners, until long after December of 1983, and

probably not until this action got under way.

At the material

time, being most of 1983, Tackama, the promoter of the whole

project, was desperate to obtain financing for the project in order

to survive. It probably would have accepted any financing which it

could service. Throughout this period Tackama and its then two

active representatives, Bolton and Sojonky, were concentrating on

getting the project underway, and the key to that was the

financing. Apparently it was not thought at that time that the

partnership was going to make substantial profits in the early

years, although I do not understand the basis for this conclusion.

If there was any thought given to the limited partners'

interests at all at this time, it was most likely focused on their

tax benefits, which appeared from day one to be substantial. The

focus for Bolton and Sojonky, and Lunde laterally when negotiations

were conducted with the Royal Bank, was on the obtaining of the

financing. I find it more likely than not that at the material

time neither Bolton nor Sojonky appreciated either the disastrous

- 146 -

effect that the financing arrangement would have on the interests

of the limited partners, or of the windfall effect they would have

on those of Tackama. I have concluded as well that at that time,

and for a long time thereafter, the two men, but particularly

Bolton, looked upon the project as being primarily a tax shelter

project, which would have contributed to their giving little

thought to the profit sharing aspects of the partnership, or other

non-tax matters that might affect the limited partners' interests.

Further, I am satisfied at this time that neither Bolton nor

Sojonky, and probably Lunde as well, ever really appreciated the

nature and extent of the fiduciary duties owed by Tackama to the

limited partners, particularly when negotiating the terms of

financing.

In Ocean City Realty Ltd. Wallace J.A. also had this to say at

p. 100:

The agent could have disclosed the proposed

arrangements to the vendor and advised him of

her concern that unless she reduced her

commission there would be no sale. The vendor

then would have a number of choices: He might

not proceed with the sale; he might reduce the

purchase price and pay a reduced commission;

or he might approve the arrangement disclosed

by the agent. Her non-disclosure denied her

principal the option of acting in accord with

one of these choices.

In the case at bar, I have little doubt that had the limited

partners been informed that Tackama was going to benefit personally

tremendously as a result of the financial arrangements, and that

- 147 -

they were going to lose their share of the profits, they would have

had a meeting with Tackama and at a minimum negotiated a more

equitable arrangement between them.

What the limited partners would or would not have done, of

course, is irrelevant.

Disclosure in the case at bar is only

relevant to the question of whether or not the limited partners

gave an informed consent, assuming a consent was given. However,

it is interesting to note that in Ocean City Realty, after finding

that the fiduciary had not satisfied the onus upon her to justify

her failure to fully disclose the arrangement, Mr. Justice Wallace

found that the vendors were not required, in the circumstances of

the case, to give evidence at the trial of the effect that such

non-disclosure might have upon them.

In Phipps Mr. Justice Wilberforce considered the question of

what constitutes adequate disclosure at some length. At p. 205 he

stated:

I

acquit Mr. Boardman entirely of any

intention to deceive or suppress material

information; but I think having himself lived

with this situation for eighteen months or so

and become soaked in the details, he failed to

appreciate the degree of explanation and the

quantity of supporting documents which would

be needed to enable someone coming fresh to

it, as did Mr. Anthony Phipps, to appraise it,

or even to see that this was a matter which

required careful consideration and expert

advice.

(My emphasis)

- 148 -

His Lordship's observation would seem to be applicable to the terms

of financing in the case at bar.

And at p. 207 His Lordship continued:

That being so I think that Mr. Anthony Phipps

was fully justified in thinking that he had

been told only half the truth .

He put it

simply and well in the witness box. At the

meeting he did not consider he was giving

anything away; he thought that the proposition

was to reorganize the company and sell the

Australian business and by better management

to turn the company into a profitable running

concern. On the information that Mr. Boardman

had, the proposition was quite different; it

was a 'jolly good thing' or 'a little gold

mine'. It in fact turned out to be profitable

in quite a different way from that which was

represented to him. He should have been told

this and had the opportunity of getting his

expert to look into it for him. What he would

have done in the circumstances he could not

say, but he ought to have had the opportunity.

And at p. 208:

There are some other points, with which I

should deal shortly, with reference to the

defendant's liability to account.

One

argument put forward was that the profit in

question could never have been made by the

trust, since there was no power to purchase

shares in Lester & Harris Ltd. That this is

no answer to a claim such as is made here is

clear both from Keech v. Sandford (23) and

from Regal (Hastings) Ltd. v. Gulliver (24).

Secondly, a variant of this last argument was

that Mr. Phipps could not have obtained a

share in the profits, since Mr. Boardman and

Mr. Tom Phipps would not have agreed to his

participation in any event.

The only

alternatives were either that the transaction

should go on as it did or that it should go

off. The answer to this is the same as the

last one; and, further, it cannot be assumed

that if full disclosure had been made and Mr.

Anthony Phipps had been able to get advice,

- 149 -

some mutually acceptable arrangement would not

have been reached.

(my emphasis)

Again these observations are clearly applicable to the facts of the

case at bar. I need not conjecture what would have happened, not

only as between the parties but as between them and the bank, had

full disclosure been made. However, like Wilberforce J., I am not

prepared to assume that some mutually acceptable arrangement, all

around, could not have been reached.

It seems clear to me that the limited partners were in much

the same situation as was Mr. Phipps. In December of 1982 no one

knew what kind of financing was available or that there would be

any restrictions on the ability of Alfor to distribute its cash

flow.

The limited partners were not told anything as to what

reserves might be necessary or, more importantly, the source of

those reserves. The information provided to them was based on the

assumption that the full amount of cash flow available for

distribution to the limited partners would be distributed without

reserves. Although this was an expressly stated assumption, and

subject to a disclaimer, the information said that it was thought

reasonable and this was all that was available to the limited

partners at that time. Again, there was no hint in the Offering

Memorandum or other documents that if any reserves were fixed they

would come out of their pockets and go to or profit Tackama.

- 150 -

I turn now to the material facts which were not known by the

limited partners when they were asked to give their consent to the

amendments to the Partnership Agreement on the last two occasions.

These facts permitted Tackama to enter into the financial

commitments upon which it now relies, in part, to justify keeping

the benefits and depriving the limited partners of their profits.

The first is that the annual principal payments on account of long-

term debt, based on the financing offered, was substantially more

than had been reasonably predicted in the 1982 projections. The

comparison of the payments actually made, pursuant to the financing

arrangements, to the December, 1982 projections is as follows:

Date

1983

1984

1985

1986

1987

TOTAL:

1983 Financial Offers

-

December 1982 Projections

$156,000.00

$1,224,000.00

1,224,000.00

1,774,000.00

1,074,000.00

$5,296,000.00

187,000.00

211,000.00

238,000.00

268,000.00

$1,060,000.00

By or before November of 1983 Tackama knew the true facts, that is,

that the payments would be those under the 1983 offers column.

These payments exceeded those projected by over four and one-

quarter million dollars.

- 151 -

The first obvious result of the increased payments of course

was to substantially reduce the profits which ordinarily would have

been available for distribution to the limited partners.

The

second result was that the actual payments substantially reduced

the amount of Alfor's indebtedness which Tackama would assume on

the exercise of the option.

The second material fact was that the banking arrangements

prevented distribution of cash flow to the limited partners,

without reference to para. 4.02 under which Tackama was required to

distribute the cash flow, subject only to the additional reserves

which Tackama deemed desirable to meet the obligations of the

partnership and to operate the business in a prudent fashion.

The third material fact was that a $1 million interest reserve

was to be established out of the limited partners' cash flow; and

that it was Tackama's view that the $1 million interest reserve

would become Tackama's property on the exercise of the option.

The fourth material fact was that the term of the EDB insured

loan could not exceed eight years and there were specific working

capital ratio (1.1. to 1) and minimum working capital requirements

($500,000) in the offer, both of which became a component of the

Royal Bank offer. These terms required Tackama to set up a second

reserve of approximately $1,311,453 which would also come out of,

and reduce, the cash flow which would otherwise have been available

- 152 -

for distribution to the limited partners. It was also Tackama's

view that the $1,311,453 reserve would become Tackama's property on

the exercise of the option.

The fifth material fact was that while the operating results

for the partnership were projected to substantially improve the

cash flow available for distribution to the limited partners, after

taking into account the increased debt repayments and deductions of

reserves the cash flow was substantially reduced.

The sixth material fact was that as a combined result of the

increased payments on account of long-term debt, and the known

reserve requirements, the cash flow position of a limited partner

was substantially reduced.

According to the evidence of G.K.

McDonnell of K.P.M.G. Peat Marwick Thorne, an expert called on

behalf of the plaintiffs, the cash flow position of each partner

was reduced by $26,901.

The seventh material fact was that the management fees which

it was projected Tackama would receive were greatly increased over

the original December 1982 financial projections prepared for

distribution with the Offering Memorandum. Tackama's management

fee went from a December l982 projection of $9 million (for the

period up to December 31, 1987) to a December 1983 projection of

$15 million, an increase in $6 million.

- 153 -

The eighth material fact was that the proposed development

would result in some $3 million a year in financial savings to

Tackama in its operations at Fort Nelson.

It is Tackama's position that the proper interpretation of the

Partnership Agreement and option is that the establishment of the

reserves by Tackama reduced the cash flow to the limited partners,

enhanced the value of what passed to Tackama on the exercise of the

option, and reduced the amount of cash flow which was to be taken

into account in determining the option prices. Counsel says that

if these positions are sound, then it cannot be said that the

aforesaid matters, which were known to Tackama in 1983, and not

disclosed to the limited partners, can be anything other than

material. I agree. I agree as well that Tackama's interpretation

of the Partnership Agreement is not correct, and that it must

account to the limited partners for the cash flow which it

appropriated to itself, and must as well pay an increased price to

the limited partners for the acquiring of Alfor's assets pursuant

to the option. If the documents contained any sort of consent, and

I am satisfied that they do not, the failure to disclose this

material information negated the consent for it could hardly be

called an informed one.

In United Dominions Corporation Limited v. Brian Property Ltd.

(1985) 59 A.L.J.R. 676, at p. 677 Chief Justice Gibbs of the High

Court of Australia quotes with approval a passage from Directors Et

- 154 -

Cetera of Central Railway Company of Venezuela v. Kisch (1897) L.R.

2 H.L. 99 with respect to the duties of a promoter of a project as

follows:

It cannot be too frequently or too strongly

impressed upon those who, having projected any

undertaking, are desirous of obtaining the

cooperation of persons who have no other

information on the subject than that which

they choose to convey, that the utmost candour

and honesty ought to characterize their

published statements.

(my emphasis)

In my opinion these observations were as applicable on the

three occasions when Tackama sought the consent of the limited

partners to extend the time for the filing of the statutory

declaration, as they clearly were when the package was initially

presented

to

the

potential

limited

partners

for

their

consideration, and to persuade them to participate.

At trial

Bolton testified that at least by November of 1983 he knew that due

to the terms of financing in excess of $2.5 million would have to

be reserved in Alfor before Alfor would be in a position to make

any distributions to the limited partners. He testified further

that he knew then that the December 1982 projections were "obsolete

and inaccurate and inoperative". The material information by then,

and which was not disclosed to the limited partners, was in fact,

as described by counsel, "contractual certainties".

In this regard it is interesting to note that on cross-

examination Bolton acknowledged that if Tackama had been aware of

- 155 -

the terms of financing in December of 1982, they would have been

contained in or formed a part of the December 1982 projections;

that the only reason that they didn't form a part of those

projections was that they did not know about them at the time.

There is no doubt that such information would have formed a part of

their projections initially. There is equally no doubt in my mind

that the information should have been disclosed on the three

occasions when the extension applications were made to the limited

partners, but particularly the third and last one in November of

1983. This is particularly so if Tackama intended to obtain from

the limited partners their necessary informed consent.

I have already dealt in some detail with the contents of

Tackama's letters dated respectively April 11, August 22 and

November 22, 1983, and the documents which Tackama sent to the

limited partners when it sought their consent to amend the

Partnership Agreement. In my opinion, the information delivered to

them would not suggest that there had been any material changes

since the 1982 projections, which is the only information they had

received.

It would more likely focus them on the issue of

extension and the preservation of their buy-back rights. During

the period that Tackama was negotiating for the financing, that is,

from December of 1982 to when the financing was finally in place,

Tackama was negotiating and acting on behalf of Alfor and was

squarely within the four corners of its fiduciary relationship with

the limited partners. They were entitled to place their confidence

- 156 -

and trust in their fiduciary to look after their interests and not

obtain for itself advantages and profits without their knowledge

and informed consent.

The fact that it may have been possible for some of the

limited partners, such as Sojonky, McKercher, and one or two of the

lawyers at Bull, Housser & Tupper, to have discovered the material

matters or information, and perhaps to have realized that Tackama

was profiting at their expenses through some sort of intensive

investigation "is not to the point". See the decision of Chief

Justice Gibbs at p. 678 in United Dominions Corporation as well as

the decision of Mason, Brennan and Deane JJ. generally and

particularly at p. 680.

Counsel for the plaintiffs cross-examined Bolton in some

detail on the question of disclosure, and the information which the

limited partners had over and above that contained in the December

1982 documents. Bolton repeatedly pointed out that the individuals

referred to, particularly Sojonky, did have access to the

subsequent information such as the shortened amortization period,

the working capital ratio and minimum, and the $1 million interest

reserve, as if there was some comfort or defence to Tackama in

these facts. In my opinion, such access to the information is no

answer for Tackama, nor does it prevent recovery in this action by

these particular plaintiffs referred to. I have already touched on

this. I adopt the reasoning of Chief Justice Gibbs to which I have

- 157 -

just referred, and add that in my opinion Bolton was the most

knowledgeable representative of Tackama in the financial field as

regard what impact the various terms of financing might have on the

limited partners' interests. There is no clear evidence before me

that prior to December 31st, 1983 Bolton sat down and calculated or

analyzed the impact of the terms, although he may have had some

general impression of impact resulting from his expertise. There

is no evidence that he discussed the impact with the individuals

referred to or anyone during the material time.

There is in evidence a handwritten note made by Sojonky, which

is undated, entitled "Changes" and apparently refers to five

changes between the proposed and the actual financing at the time.

For example, Item A is "debt of $4,000,000 now $3,000,000 - amort

was twenty-five years, now eight years". The final subject matter

of the note is "impact". It is followed by a number and then the

words "per unit per year in cash flow to L.P.", then follows " -

five years - three more years - nine and ten years".

Bolton testified that the note is in Sojonky's handwriting

and:

Yes, it was prepared during a meeting that I

had with Mr. Sojonky and my tax partners

approximately May 30th. And it relates to a

discussion we held with respect to the impact

of the financing .

And the calculation was

done for the purpose of estimating the impact

on the cash flow per unit per year to the

limited partners as a result of the change in

financing proposals we received to date.

(My emphasis)

- 158 -

With regard to the date, it would seem to have taken place prior to

the discussion about the $1 million interest reserve and the

receipt of the Royal Bank's offer containing the restrictions on

distribution, probably in May of 1983.

Bolton's evidence on direct examination on this subject was

very brief. When asked whether the impact on the listed changes

was discussed he said:

A:

The impact was a number that we

discussed with Mr. Sojonky at the

meeting and the number changed which

is why it is almost indecipherable

and it is either $4,700 or $6,700".

Q:

A:

And that number relates to what, the

47 or 60?

It relates to the impact on each

unit of the limited partnership with

respect to cash flow per year to the

L.P.

In cross-examination Bolton had portions of his discovery

evidence on the subject put to him. The evidence revealed that at

discovery he had little knowledge of the document or of its

contents; that he was not present when the note was made and that

he could not say what Sojonky had considered, for example, whether

he had considered the working capital requirement of the EDB loan.

At the time Bolton did not think that the working capital

requirements were a significant change in the deal.

portions of his discovery evidence here:

I quote

Q:

Did anyone sit down and analyze the

impact they had on cash flow?

- 159 -

A:

Q:

I believe Mr. Sojonky did, yes.

All right. So Mr. Sojonky analyzed

it?

A:

Q:

Yes.

What did Mr. Sojonky tell you about

what he did?

A:

I don't know what he told me, but I

found in my files documents which

indicate that he had done some

calculations.

Q:

A:

All right.

And did he give you

those documents at the time?

I presume so. They were in the file

in approximately that location.

(my emphasis)

And when asked how Sojonky's handwritten notes came to be in his

file:

A:

I presume Mr. Sojonky was working

with one of our staff who would be

doing computer projections on the

impact of various items that were

known at the time that may change

the...the terms of the finance

period.

Q:

A:

All right.

And am I correct in

saying that this is a review of the

impact of the accelerated repayment

of long term debt from the projected

25 years to the 8 years?

I don't know what he is doing other

than he was considering the impact

of changes.

Q:

A:

All right.

I do not recall discussing that

information with him.

Q:

O.K. Do you know who in your office

Mr. Sojonky was meeting with when

this document was prepared?

- 160 -

A:

Mr. Sojonky met extensively with one

of our junior staff, a Mr. Peter

Steiger, who was doing the computer

calculations for him.

(my emphasis)

.....

Q:

A:

Now, looking at this document it

does not appear to take into account

the working capital impact...sorry,

the impact of these matters on the

working capital ratios on the

partnership, does it?

I don't think the working capital

ratios were a significant change in

the

deal.

Working

capital

requirements are required by banks,

various forms and with various

conditions to them and the impact of

the working capital requirements

were

not

considered

to

be

significant.

Q:

A:

So do you agree with me that it does

not take into account the impact?

I don't know whether he took it into

account or not.

And

Q:

Do you know what function Mr.

Steiger was fulfilling in these

meetings he was having with Mr.

Sojonky?

A:

Q:

I believe he would be providing the

function of a computer operator and

vetting

the

tax

impact

with

assistance from other people in my

office.

Is it fair to say that Mr. Sojonky

would be asking the questions and

giving information to Mr. Steiger

and then Mr. Steiger would be doing

the calculations?

Mr. Gill:

If you know, if you were

present.

- 161 -

And then you said:

The witness:

I

wasn't present at these

things.

Sojonky

I would assume Mr.

would

be

looking

for..for...

Mr. Gill:

Don't assume. How do you know

if you weren't there?

The witness:

I don't know -- I don't know.

And with regard to the numbers in Sojonky's

note:

Q:

Are you able to decipher for me what

the number is?

It says "impact".

And there is a number, I can't make

it out. Can you?

A:

No, it means nothing to me either.

(My emphasis)

Bolton testified that his answers at discovery were true "to

the extent of my knowledge at that time". He then testified that

since giving the evidence at discovery he had "reconstructed the

documents and the comments" and that he then recalled the meeting

distinctly. He said that he had the meeting with Sojonky and that

they had discussed the impact of the financing on the limited

partners as a result of the EDB offer, and as a result he had

revised the projections that were embodied in the June 1, 1983

financial status report to the company. I have already reviewed

that report which was one of the financial status reports which

were not given to the limited partners. The report does not seem

to reflect the impact of the financing as suggested.

- 162 -

I do not propose to deal further with the conflict between

Bolton's discovery evidence and trial evidence with regard to the

Sojonky note, and his participation in whatever was discussed at

the meeting with Sojonky. Bolton probably has convinced himself

after his discovery that his present recollection is correct, and

is to be preferred over that which he gave at discovery. However,

it seemed to me as he gave his trial evidence that Bolton was

simply reconstructing what he thought the document meant and what

he and Sojonky had probably done. I therefore prefer his discovery

evidence over his trial evidence on the subject.

I say this not only because of the conflict referred to but

also in part from my observation of Mr. Bolton in the witness

stand. On numerous occasions throughout the trial I observed him

to be giving evidence apparently from memory, his actual

recollection of events, conversations, et cetera.

However, on

almost all occasions it was demonstrated during cross-examination,

and sometimes during direct examination, that he was not giving

evidence from memory, but was simply reiterating what was contained

in various documents and memos.

He displayed very little

independent memory or recollection over and above what was in the

documents. This is understandable given the amount of time which

has passed since the events took place. However, I concluded that

it would not be safe to accept Mr. Bolton's evidence on an

important matter, based solely on his recollection, if not

- 163 -

supported by a document or other evidence, particularly when it

conflicted with earlier evidence given by him.

On cross-examination, Sojonky was asked whether on learning of

the actual terms of financing he did "certain comparisons of the

effect of those terms compared to the original projection?" He

answered, "Yes, I recall one instance of handwriting a document

about the impact of EDB change in amortization". He identified the

document entitled "Changes" as being in his handwriting and he was

then taken through it by counsel.

He was asked to interpret the latter part of the document

after the word "impact". His evidence was:

A:

It is..it's a 6 overlaid by some

other writing, and then a 700 behind

it 'per unit per year in cash flow

to L.B.'. Below that it's '5 years,

3 more years and 9 and 10 years.

And later:

A:

Q:

A:

I'm not sure how you want me to

answer it. Maybe a deduction, so I

don't want to...I can say that if

you add 5 and 3 together you get 8

years, and 9 and 10 years is the

balance of a 10-year projection.

In any event, Mr. Sojonky, this

document, tab 84, is your effort, is

it not, to work out the impact to

the

limited

partners

of

the

financing at this date which you

expected might be put in place?

It was the changes which based on

the information that was available

to me at the time, that I wrote

down, yes, that's correct. I don't

- 164 -

know what date it is, but it is my

document.

He was not asked whether the calculations were made in the presence

of, or were discussed with, Bolton, or to elaborate on the figures

or his conclusions, if any. The evidence was left in a rather

unclear state.

This was the only evidence before me of any attempt to analyze

the impact of any of the terms of financing. It appears to have

been limited to the impact of the eight-year amortization period on

the cash flow distributable to the limited partners. It did not

include consideration of the impact of other matters such as the

working capital requirements of the EDB guarantee offer, which

Bolton did not consider to be a "significant change in the deal"

both at discovery and at trial.

Again, it did not include a

consideration of the impact of any of the terms on Tackama's

position.

Consequently, there is some evidence that Sojonky did give

some consideration to the impact of the reduced amortization period

in May of 1983. However, there is no evidence before me that he or

Bolton or anyone else ever sat down, say in November of 1983, and

carefully analyzed the effect or impact of the terms of financing

on the position of Tackama or that of the limited partners.

On the evidence I am not prepared to find that Sojonky had

sufficient information and knowledge, and saw or appreciated the

- 165 -

impact of the terms of financing on the positions of Tackama and

the limited partners, particularly by November of 1983 when all the

terms were known. Further, I cannot conclude that he simply said

or did nothing either because of the commissions he would earn on

the financing being committed, if at all, or that the level of his

appreciation was such as to constitute his informed consent to

Tackama obtaining the benefits.

There is no evidence that Sojonky's level of appreciation was

ever as high as that of the man who would have more readily

appreciated the impact of the terms of financing, namely Bolton.

I am satisfied, after some consideration, that Bolton was not

really cognizant of the effect of the terms of financing on

Tackama's interests and those of the limited partners at the

material time, particularly when he was focusing on the obtaining

of any financing which Alfor could service. At the time he was the

chief financial advisor to Tackama and most knowledgeable of the

team as regards Tackama's business and the effect of the financing

terms, yet he did not appreciate the real impact. His attitude

that it was "simply a tax deal" and that there were safety factors

built into the transaction which protected the limited partners.

His singular desire to obtain any financing which Tackama could

service, and his reports to Tackama at the time, all strongly

suggest that his attention was focused far away from the question

of the impact of the terms of financing.

- 166 -

It is true that when he was informed of the amortization

period, and of the working capital requirements, he was shocked and

quite concerned. However, on the evidence it is clear that his

shock and concern related to the ability of Alfor to service these

obligations, and to carry on its business, not to the effect on the

positions of Tackama and the limited partners. At times Bolton's

evidence in this area is confusing as to exactly what he concluded

when he considered the impact of the terms of financing to the

extent that he did in 1983. However, as I have already stated, I

have concluded that he never did consider or appreciate the real

nature and extent of the impact in 1983.

With regard to the other individuals whom Bolton kept pointing

out had "full knowledge" of the terms of financing: McKercher and

the other lawyers, there is no evidence that any of them had all of

the information and were perceptive enough to analyze the impact of

it during the material times, and then simply said nothing for one

reason or another.

There is no evidence that their level of

appreciation was such as to constitute an informed consent to

Tackama obtaining the benefits. Again, the fact that they might

have been able to discover the impact, had they carefully

investigated and considered the available information, should not

defeat their claims.

Tackama has always maintained a strong position with regard to

the reserves. The funding of all reserves was the responsibility

- 167 -

of the limited partners, and thus had to come out of their profits.

Any reserves established could not be taken into account in

calculating the option price insofar as the price is based on the

eight times formula contained in the Partnership Agreement. Any

reserves established reverted to Tackama on the exercise of the

option.

Notwithstanding the positions referred to, which apparently

Tackama has always maintained, Tackama says it had no obligation to

disclose the terms of financing to the limited partners on the

three occasions when it sought their further consent. On those

occasions the limited partners had a choice of giving Tackama more

time to commit the financing, of seeking an appropriate

modification of the agreement, or withdrawing from the partnership

and effectively determining the demise of Tackama. In my opinion,

Tackama was duty-bound not only to make full and frank disclosure

of all of the terms of financing, but also to explain the impact of

those terms of financing, viz. that Tackama would obtain

substantial benefits, all of which would be at the limited

partners' expense.

Without such full and frank disclosure and

explanation, Tackama could not obtain the informed consent of the

limited partners.

It is no answer for Tackama to say that the impact of the

terms of financing would not have been apparent to the limited

partners, or perhaps even to some of the experts who were advising

- 168 -

them, and that the knowledge of the terms of financing would not

have affected the conduct of the plaintiffs. If that is so, rather

than excusing nondisclosure, the standard of disclosure must be

even higher. In this regard, it is clear from Bolton's evidence,

including his report, that he probably did not really start to

appreciate the impact of the terms of financing until some time in

1987. Again, Bolton's report, and the various revised financial

status documents he prepared in the Fall of 1983, strongly support

my finding that he did not appreciate the impact of the terms of

the financing in the Fall of 1983. Further, it was not for any of

them to decide what were material matters to be disclosed, and that

the matters under discussion were material cannot be questioned.

But the duty of full disclosure and explanation of the impact was

on Tackama, and in order for it to keep the benefits it obtained,

it must establish the consent of the limited partners, which could

only have come after such full disclosure and explanation.

Further, it is no defence for Tackama to indicate that some

"bits and pieces" of information were in fact given to some of the

limited partners in the fall of 1983, or later, including the fact

that a twenty-five year amortization was no longer attainable. The

consent of the limited partners had to be an informed one. They

should have been given information which would have revealed the

real nature of the situation, that (as was pointed out by some of

the limited partners in the May 29, 1987 partnership meeting) there

had been a substantial change in the deal. For example, the faster

- 169 -

the long-term debt was paid off and the more reserves were set

(which would become Tackama's on the exercise of the option) the

worse the limited partners' position would be, while at the same

time all benefits would end up on Tackama's doorstep. The fact

that the windfall profits obtained by Tackama would be obtained at

the limited partners' expense was certainly an added reason, if one

was necessary, for full disclosure. While negotiating the terms of

financing, and as well, when seeking the limited partners' consent

to the extensions in April, August and November of 1983, Tackama

was acting as the limited partners' fiduciary and was expressly

bound to look after the best interests of the limited partners. It

did not do so, but permitted its interests to overcome its duty.

In summary, while Tackama may have had the power to borrow

money on such terms and conditions as it saw fit for the purposes

of constructing and operating the plant (para. 5.03(d)) and was

required to exercise the degree of care, diligence and skill that

a reasonable prudent person with similar experience and expertise

in the forest products industry of British Columbia would exercise

in comparable circumstances (para. 5.02) the power was not

absolute.

It was subject to Tackama's special position as

fiduciary to the limited partners, and to its duties to them to act

honestly, in good faith and in their best interests when

negotiating the finances needed for the project.

- 170 -

The provisions of the Partnership Agreement do not constitute

the limited partners' consent to Tackama obtaining the benefits

which it is now asked to disgorge.

Further, Tackama has not

discharged the duty on it of establishing the limited partners'

fully informed consent to the benefits.

In summary, with regard to the $1 million interest reserve, I

find that in August and November of 1983 Tackama was duty-bound, as

the limited partners' fiduciary, to advise them that the reserve

was required, that it would be established out of their cash flow,

that it would represent income on which they would be taxed but not

receive any distribution, that it was not to be taken into account

in the calculation of the option price, and that it would go to

Tackama on Tackama exercising its option. Tackama did not make

full disclosure, and it did not have the limited partners informed

consent to obtain the benefit. It therefore must account.

I am of the same opinion with regard to the working capital

ratio and minimum working capital requirements of the Loan

Agreements.

While their impact was less obvious, it was much

They too caused the establishment of reserves which

greater.

benefited Tackama on the exercise of the option.

The limited

partners were entitled to be told of their existence and to receive

a full explanation of their impact if Tackama wished to obtain

their informed consent to receiving the benefits created by them.

- 171 -

Finally, what I have said applies equally to the benefits

obtained by Tackama as a result of the shorter amortization period

for the repayment of the long-term debt. As already noted there

was a substantial increase in the yearly payments when compared to

the projected payments contained in the December 1982 offering

documents. It is common ground that the affect of the increased

yearly payments was that each dollar of long-term debt which was

paid increased the taxable income to the limited partners, but at

the same time decreased the cash flow which otherwise would have

been available for distribution to them.

Further, the increased payments of principal paid on account

of long-term debt reduced the amount of debt which Tackama was

required to assume on the exercise of the option to purchase the

assets. By decreasing the cash flow, the increased payments on

account of long-term debt also decreased the option price insofar

as it was based on the eight times formula. Because the option

formula is based on cash flow, if the cash flow was reduced the

amount of monies to be recovered by the limited partners was

reduced.

This is a another result of the operation of the

Partnership Agreement which was not readily apparent.

I pause here to say that in argument defence counsel suggested

that there was some doubt whether or not Tackama would exercise the

option and that this played a material part in Bolton's evidence.

I view the situation as one in which there could be little doubt

- 172 -

that Tackama would exercise the option. The plant was a success

and Tackama's larger goals were being met.

In my opinion, the

option would not have been exercised only in the circumstances

where the project was a failure and Tackama's only hope of survival

failed with it.

In December of 1982, Tackama's position was that it was

reasonable to assume that the long-term debt would be repayable

over twenty-five years. On that basis, on the original projections

there was little if any difference between taxable income and cash

flow.

While there was no guarantee that the twenty-five year

amortization period could be achieved, the potential partner would

be entitled to reasonably assume at the least that it could be

attained.

By April of 1983 it was clear not only that the

assumption was not reasonable, but that the term would be

substantially less, now eight years. By August of 1983 Tackama's

knowledge was that the term would be even shorter, that is, five

years.

The shortened period would have a dramatic and direct

impact on Tackama, and, of course, the limited partners.

It was Tackama's long-standing business philosophy to pay off

long-term debt as quickly as one's operations would permit. In

this regard, one of the main reasons for the preparation of the

September 2 and December 8, 1983 financial plans and projections

was to ascertain whether or not Alfor's profitability would be

sufficient to permit the payment on the account of long-term debt

- 173 -

pursuant to the banks' offers, that is, over a five-year period.

The substantially shortened period was much to the benefit of

Tackama and at the expense of the limited partners. In my opinion,

Tackama was duty-bound to disclose to the limited partners the

substantially reduced period and its substantial impact on

Tackama's position, as well as their own, in order to obtain the

necessary informed consent when the extensions were sought. This

would be so even if no projections had been given.

Throughout these reasons I have referred to the fact that

Tackama's benefits were at the expense of the limited partners.

While this is a relevant factor, I am far more concerned with gain,

that is, with the benefits received by Tackama, than with any

actual loss suffered by the limited partners.

I have had some

concern with the assessment of the net gain or benefit recovered by

Tackama as a result of the substantially shortened amortization

period, since even with full disclosure Tackama may have ended up

with a shortened amortization period, although not necessarily five

years. However, I have concluded that such arguments are really to

the effect that the limited partners' loss, and therefore Tackama's

gain, was to some extent inevitable. I do not believe that such

arguments are open to Tackama given the nature of the claims

against it.

In any event, the plaintiffs are content to have Tackama place

them in the same position they would have been in had Tackama been

- 174 -

able to arrange financing consistent with that set out in the

December 1982 offering documents.

I find the position to be

reasonable in the circumstances. I therefore agree that the

plaintiffs are entitled to recover that net benefit which has been

calculated by Mr. McDonnell at $907,449. This is the difference

between what would have been the cash flow, i.e., $4,081,000, and

what in fact was the cash flow, i.e., $3,173,551.

I turn now to the new dryers' issue which counsel includes

under this heading. Counsel points out that because of the working

capital requirement and the large amounts payable on long-term

debt, it was inevitable that on the opening day of business Alfor

would have a very large negative working capital position of

$1,224,000. As a result, the limited partners would be unable to

participate in Alfor's profit from day one.

He says also that

Alfor's working capital situation was further impaired by cost

overruns encountered by Tackama in its construction of the plant.

Under clause 3.32 of the Partnership Agreement Tackama was

obligated to deliver a statutory declaration to its partners

certifying that it had arranged sufficient financing to construct

a fully operational plywood plant before it could require them to

put up the balance of their capital. It is common ground that

Alfor did not arrange sufficient long-term financing to construct

the plywood plant that was in fact constructed. The plaintiffs say

that the reason for the cost overruns were excessive soft costs

- 175 -

which were incurred by Tackama as a result of the construction

taking one year rather than the scheduled six months. Tackama says

that the cost overruns were attributed to the decision to purchase

new dryers in place of the old ones. In my opinion, the reason for

the purchase of the new dryers is not important.

What is

important, according to the plaintiffs, is that the cost of the new

dryers was paid for out of the limited partners' cash flow which

resulted in a benefit to Tackama either in money or monies-worth.

The benefits obtained by Tackama, for which the informed consent of

the limited partners was not obtained, was in the amount of

$660,000 and a more valuable plant.

(c) Conflict of Interest

There is no doubt that in setting the contractual relationship

between the parties, Tackama placed itself in a position of

potential conflict of interest mainly as a result of the option.

This is particularly so given Tackama's interpretation of the terms

of the agreement, viz., that on the exercise of the option the

reserves belonged to it and that the establishment of the reserve

decreased the option price. Clearly, Tackama's interests would

best be served by maximizing the assets, including reserves, which

it would acquire, and by minimizing the amount of the liabilities

it would acquire, and the amount it would have to pay for the

assets, on exercising the option. Tackama did not have to take the

benefits. However, in order to take the benefits arising from the

position of conflict, Tackama had to make full disclosure of the

- 176 -

benefits it was to receive, as well as the conflict situation

itself, in order to obtain an informed consent.

The situation of potential conflict existed from day one. The

law applicable to such a situation is referred to in almost every

case involving a fiduciary relationship. A good example is the

following passage from the decision of Viscount Sankey in

Regal

(Hastings) at p. 381:

The general rule of equity is that no one who

has duties of a fiduciary nature to perform

is allowed to enter into engagements in which

he has or can have a personal interest

conflicting with the interests of those whom

he is bound to protect.

(my emphasis)

Tackama was bound to protect the interests of the limited partners

and was not allowed to enter into the financing engagement, or at

least to obtain the benefits therefrom, without their informed

consent.

(d) The "Balance" Theory

This was a theory propounded by Bolton at trial to justify the

failure to disclose the terms of financing to the limited partners.

I do not propose to deal with it at any length for in my opinion it

is no answer to the plaintiffs' claims.

Again, I do not accept

it as having any validity. Bolton's evidence on cross-examination

demonstrated that such was not the case. It seems to me to be no

more than an after thought, an attempt to justify why the limited

partners were not told of the terms of financing by reference to

- 177 -

happenstance. The theory assumes that what actually happened was

contemplated from the outset and that factors were built into the

system (the agreements) to meet the problems.

evidence.

I reject such

The theory is that the system was set up such that while the

limited partners might lose in one area, they would recover their

loss in part in another. At one time the theory seemed to relate

solely to tax matters, but at another it seemed to relate to the

distribution of cash flow to the limited partners as well. The

main example given by Bolton is that while the partners had to pay

taxes on income attributed, but not distributed, to them, as a

result of the reserves, they would benefit on a reduced capital

gain on the option being exercised. In my opinion, that result

just happened, it did not occur by design as a result of Tackama

contemplating the situation which arose.

The theory has no

application to the negative impact on the option price calculation

which Tackama has always maintained results from the fixing of the

reserves.

Another example given by Bolton was that the minimum option

price of $56,500 was a "compensating factor" which would

"counteract a number of the things that would happen during the

financing, such as an interest reserve or change in amortization of

the long-term debt." However, at the time that the minimum price

was fixed Bolton did not know that a $1 million reserve was

- 178 -

required, or that the amortization term would be less than twenty-

five years. Hence, the gist of his evidence was that he simply

tried to guess what might happen, and then fixed (another guess) a

minimum option price which would counteract the anticipated events.

As I have already said, I reject this evidence.

I am satisfied, as I have already stated, that at the material

time no one, particularly Bolton, appreciated the impact of the

terms of financing on Tackama or the limited partners. There is

not a hint in any of the documents, including the expert report

Bolton prepared for trial, and the September and December 1983

revised status reports he submitted to Tackama, that he appreciated

or considered the impact of the terms of financing or that he

considered the theory which he now propounds.

In my opinion,

Bolton never saw the problems. He, and the others, were too busy

with other matters, initially trying to obtain the financing and

then seeing whether Alfor could carry it once it was obtained. It

is more likely than not that they didn't really appreciate the

impact of the terms of financing until Mr. McDonnell's report was

made available to them.

(e) The Statutory Declaration and Para. 3.32 of the

Partnership Agreement

Under para. 3.32 of the Partnership Agreement, if Tackama

delivered the Statutory Declaration on or before April 15, 1983,

each partner was required to deliver, within 21 days of the

delivery of the Statutory Declaration, an unconditional letter of

- 179 -

credit securing his promissory note. Tackama takes the position

that its duty to disclose information to the limited partners was

exhausted once it met the requirement of para. 3.32. They also

argue that the only information it was required to disclose was the

fact that Tackama had received a firm commitment from a financial

institution (3.32(a)) and that the overall interest expense on the

partnership debt would be substantially the same as set out in the

projected income and cash flow statements delivered with the

Offering Memorandum (3.32(b)). I do not agree.

Bolton gave the following evidence on cross-examination as to

why he did not inform the limited partners of the terms of

financing, and his view of Tackama's rights under para. 3.32:

Q:

And the partnership in turn owned

the plywood plant?

A:

Q:

Yes.

You are telling me that you didn't

think that the owners of the

business were entitled to be told

the matters we have just referred

to?

A

At that time I considered the checks

and balances that had been built

into the various tax provisions

adequate to protect the limited

partners.

Q:

So your answer is no, you didn't

think they were entitled to be told

the matters we've referred to?

A:

Q:

I didn't say they were not entitled

to. I said that is what happened.

And what was it that happened? They

were not told these things?

- 180 -

A:

Q:

They were not told those things.

Don't you think they should have

been?

A:

The project had not changed, except

for the financing. The balance --

checks and balances had been built

into

the

project,

and

the

requirements, as I understood them,

were that the general partner had

been given the authority to arrange

the financing to his acceptable

standards, so long as the interest

cost did not exceed that in the

December projections, December 1982

projections.

Q:

A:

Mr. Bolton, that wasn't an answer to

my question. My question is: Don't

you think that the limited partners

should have been told these matters,

yes or no?

Well, I told you what I thought in

1983, Mr. Sewell, and that was that

because of these various factors I

did not consider it necessary to

tell the limited partners any

additional information.

Q:

A:

And therefore you did not tell the

new

partners

any

additional

information?

No I didn't.

(My emphasis)

Bolton then testified that in 1983 he did not disclose the

terms of financing to the limited partners because he considered

that the checks and balances built into the various tax provisions

were adequate to protect them.

His reliance, of course, was a

general one because he did not analyze the impact of the terms of

- 181 -

financing on Tackama or the limited partners from the tax or any

point of view.

I reject his suggestion that Tackama could arrange for any

financing as long as the interest cost did not exceed that in the

December projection. In my opinion the provisions of para. 3.32

must be read in light of, and subject to, Tackama's fiduciary

duties and obligations under para. 5.02.

Para. 3.32 simply

triggered the delivery of the limited partners' irrevocable

conditional letter of credit once firm commitment for the term loan

was made. In my opinion, para. 3.32 does not in any way affect

Tackama's general duty of disclosure of the terms of financing to

the limited partners.

Tackama's obligation to obtain the informed consent of the limited

partners. Clear wording would be required to establish the

More importantly, it in no way affected

abrogation of these obligations on the part of Tackama and such

wording is not contained in para. 3.32 or elsewhere in the

Partnership Agreement.

(f) The position of Mr. Sojonky

Under this heading, and four subheadings, counsel for the

plaintiff deals with the position of Sojonky as a limited partner

and his credibility, the position of Bolton as a lay and as an

expert witness, and his credibility. I have already dealt with

some of these matters, at least in part. However, I will follow

counsel's outline, but as briefly as possible.

- 182 -

I will assume for my purposes that Sojonky owned, directly or

indirectly, or controlled, a number of the original partnership

units which are now held by the plaintiff No. 90 Sale View

Ventures. Tackama argues that because of his detailed knowledge of

the terms of financing in the Fall of 1983, the holder of the units

should not be entitled to recover in this action.

I have already dealt with the conflict of the evidence of

Sojonky and that of Bolton with respect to the extent of Sojonky's

knowledge of the terms of financing at the material time. In my

opinion the degree of knowledge attributable to Sojonky at the

material time is irrelevant unless it clearly establishes an

informed consent on his part, and in my opinion the evidence falls

far short of doing so. I am not satisfied that Sojonky was as

knowledgeable as Bolton in the Fall of 1983 as regards the terms of

financing. However, assuming that Sojonky's knowledge at that time

was equivalent to that of Bolton, it is my opinion that his

informed consent to Tackama obtaining the benefits has not been

made out. Knowledge of the terms of financing would not be enough.

An understanding of Tackama's position with regard to them, and of

their impact on Tackama and on the limited partners, would have to

be established.

(i) Mr. Sojonky's Evidence

Counsel for the plaintiffs submits that in 1983 Sojonky did

not know the actual terms of financing concluded with the Royal

- 183 -

Bank. The evidence in this area certainly is not clear. However,

it is clear on his own evidence that he did have knowledge of what

I will call the probable terms in that year.

He knew from

discussions with Bolton, if not from reading the EDB guarantee

offer of January 5, 1983 shortly after it was received, that the

guarantee called for a term of not less than six, and no more than

eight years, and required a working capital ratio of 1.1 to 1 and

a working capital level of $500,000. While Bolton told him that

these terms would be negotiated, he acknowledged that he knew that

Tackama was looking at an eight-year term. While he didn't focus

on the working capital requirements at the time, he knew of their

proposal and he also knew that a $1 million interest reserve was

probably "in the package". However, the evidence goes no higher

than that of substantial knowledge.

It does not disclose an

understanding of Tackama's position and of the impact of the terms

of financing on Tackama and on the limited partners such as to

support a finding of informed consent on his part.

(ii) Mr. Bolton's Evidence

Bolton testified that after receiving the July 19, 1983 offer

from the Royal Bank he discussed its contents with Sojonky on a

number of occasions. He also testified that he discussed the terms

with both Lunde and Barclay. Sojonky testified that he did not

believe that he knew about the five-year terms until some time

after 1983, although he did know about the restrictions on cash

distribution to the limited partners as a result of the reserve of

- 184 -

$1 million. He acknowledged that he may have received a copy of

the Royal Bank's offer. He does not believe that Bolton discussed

the terms with him because "I don't think I would have forgotten

that".

Barclay testified that he was not aware of the specific terms

of the Royal Bank loan in 1983, for example, the $1 million reserve

requirement. He was surprised to learn of them, or at least their

effect, in 1987. Lunde testified that he would have received a

copy of the July 19, 1983 offer and that he "would have reviewed it

very briefly". He could not recall whether or not he was aware at

the time that the offer included a five-year term.

Counsel for the plaintiff argues that Bolton is not a reliable

witness and that his evidence that he discussed the terms of the

Royal Bank offer with Sojonky should be rejected. It seems to me

that I need not decide whether or not Bolton did discuss the terms

of financing with Sojonky in 1983. In my view, the question is

academic although it does relate to Bolton's credibility generally

and I now turn (again) to that subject matter.

Counsel for the plaintiff had this to say about Bolton as a

witness:

He

surprisingly, given his and his firm's

relationship with many of the limited

was

argumentative,

adversarial

and,

partners, very partisan in the box. This is

despite the fact that he was being tendered by

the defendants' as an expert, from whom the

- 185 -

court is entitled to expect some objectivity

and independence. (Vancouver Community College

v. Phillips Barratt (1988) 26 B.C.L.R. (2d)

296 per Finch J. at p.305).

There are

numerous examples of this, some of which

should be pointed out expressly.

I agree generally with counsel's description. There is no

question that while giving his evidence Bolton favoured Tackama,

and for obvious reasons. As counsel points out, Bolton chose sides

at a very early stage, he "quarterbacked" Tackama's dealings with

the limited partners and showed his partiality in doing so. I do

not find this surprising, although it does reflect on the weight to

be given to his evidence.

It seems to me that Bolton, of all

people, was the one person who could be expected to have

appreciated the impact of the terms of financing on the limited

partners as well as on Tackama.

Much of Tackama's actions or

inaction complained of in this lawsuit were acts or omissions of

Bolton. Hence, from almost day one he was put into a position of

trying to justify what he did and did not do; for example, why

disclosure was not made to the limited partners on the three

occasions when the extensions were sought.

The situation did not improve from Bolton's point of view when

he was tendered as an expert witness.

He was, at best, in a

conflict situation between his interests as a lay witness (and as

Tackama) on the one hand, and his duty as an expert witness on the

other. In effect, he was called upon as an expert witness to pass

- 186 -

upon his own acts and omissions and quite naturally his opinions

supported what was done or not done by him and therefore Tackama.

His evidence cannot be looked upon as the unbiased and independent

evidence of an expert.

On the contrary, his evidence is the

evidence of Tackama. His opinions are those of Tackama.

In argument counsel for the plaintiff gave a number of

examples of areas in which he said Bolton's evidence clearly lacked

credibility and should not be accepted. He referred to his trial

evidence with regard to the "changes" document, which contains a

comparison between some projected terms and some anticipated terms.

This is evidence which I have already reviewed, and found that I

could not accept. Time and again I would observe him seemingly

giving evidence in a straightforward manner from memory, only to

observe shortly thereafter that, in fact, he was simply

reconstructing his evidence from documents he had reviewed, and

often had before him.

He really had little independent

recollection of the conversations and events as to which he was

testifying.

I do not propose to deal with the other examples raised in

argument by counsel for the plaintiffs. As I have already stated,

I am satisfied that it would not be safe to accept Mr. Bolton's

evidence in areas where he relies solely on his memory,

particularly where there is other evidence to the contrary. Again,

I cannot accept his opinions as an expert in the circumstances,

- 187 -

particularly where they are in conflict with the testimony and

opinions of Mr. McDonnell who was indeed, and impressed me as, an

independent expert witness.

In making these observations I should add that I do not

question Mr. Bolton's honesty. Honest men can be mistaken. They

can also give less than credible evidence in their own cause,

believing that it is probably true and trustworthy when, in fact,

other evidence and the skills of counsel on cross-examination,

clearly demonstrate that it is not.

I repeat, notwithstanding

counsel for the plaintiffs' submissions on the evidence of Bolton

and counsel for Tackama's submissions on the evidence of Sojonky,

I decline to make any finding of dishonesty on the part of either

man. It is not necessary that I sully their reputations in the

community, nor reflect on their integrity, other than where

necessary in the process of finding which evidence is to be

preferred.

(iii) Mr. Bolton's Obvious Bias

I have already dealt with this matter.

(iv) Summary

The evidence before me does not establish an informed consent

on the part of Sojonky when he consented to the extensions. There

is simply no evidence before me that Sojonky ever appreciated the

impact of the terms of financing on Tackama or the limited partners

- 188 -

until long after 1983, even if he had full knowledge of the terms

of financing in 1983.

(g) Nothing more was required because this was a tax shelter

Tackama argues that the Partnership Agreement was really a tax

shelter scheme and that the plaintiffs would have consented to

whatever was necessary for the transaction to proceed. They would

have proceeded even if they had been fully informed as to the

consequences or impact of the terms of financing on them as well as

on Tackama.

This argument ignores the clear terms of the Partnership

Agreement under which the partners were to recover all of Alfor's

profits at the end of the day. Under the original projections the

cumulative cash flow of a limited partner to the end of 1987 was

projected to be approximately $44,000,

a

most attractive

investment. It also ignores the evidence of what happened when the

partners first found out about the terms of financing. Further,

the only issue is whether or not Tackama had the informed consent

of the limited partners to take the benefits it received. Tackama

could have and should have sought the informed consent of the

limited partners.

Both Tackama and the limited partners were

motivated to see the project proceed, and it is more likely than

not that some kind of an accommodation could have been worked out.

- 189 -

In any event, it was not for Tackama to decide whether or not

the terms of financing should have been disclosed.

Nor is it

relevant what the plaintiffs might have done had full disclosure

been made. It is only irrelevant speculation. See

Regal

(Hastings), Gray and Ocean City Realty.

(h) This was the only financing available

The fact that the financing obtained was the only financing

available, if that is the case, is irrelevant. It is no answer to

the plaintiffs' claims, and the cases make that clear. Again, and

I repeat, had full disclosure been made it is more likely than not

that a mutually agreeable arrangement would have been concluded

between the limited partners and Tackama.

To paraphrase Lord

Hodson in Phipps at p. 108, nothing short of fully informed consent

would enable Tackama, a fiduciary who acquired benefits as a result

of its fiduciary position, to keep the benefits for itself.

BAD FAITH

The rule of equity that a fiduciary must account for profits

or benefits obtained through his fiduciary position does not depend

on proof of fraud, dishonesty or lack of good faith on the part of

the fiduciary.

account arises immediately if it is shown that the fiduciary

benefited personally from his fiduciary position. He can only

defeat the claim to account if he can establish that the benefits

Such matters are irrelevant.

The liability to

- 190 -

were obtained with the knowledge and assent of his beneficiaries.

Nothing short of fully informed consent will suffice.

I have

already set out the principles as stated by Lord Eldon in Ex parte

James at p. 388, and Lord Justice James in Parker at p. 124.

In Bray v. Ford, [1896] A.C. 44 at p. 51, Lord Herschell

stated the principle as follows:

It is an inflexible rule of a court of equity

that a person in a fiduciary position, such as

the respondents, is not, unless otherwise

expressly provided, entitled to make a profit;

he is not allowed to put himself in a position

where his interests and duty conflict.

It

does not appear to me that this rule is, as

has been said, founded upon principles of

morality. I regard it rather as based on the

consideration that human nature being what it

is, there is danger, in such circumstances, of

the person holding a fiduciary position being

swayed by interest rather than by duty, and

thus prejudicing those whom he was bound to

protect.

It has, therefore, been deemed

expedient to lay down this positive rule.

(My emphasis)

The principle is probably best set out in terms applicable to

the present case in the judgment of the Lord President in

Huntington Copper Company v. Henderson, which is quoted by Lord

Russell of Killowen in Regal at p. 389 as follows:

Whenever it can be shown that the trustee has so

arranged matters as to obtain an advantage whether

in money or money's-worth to himself personally

through the execution of his trust, he will not be

permitted to retain, but be compelled to make it

over to his constituent.

(My emphasis)

- 191 -

The case law is clear that the presence of good faith on the

part of Tackama is not a relevant consideration. However, since

both counsel dealt with the matter of good faith at some length,

and the duty expressly declared in para. 5.02 included the duty to

act "in good faith and in the best interests of the limited

partners", I will add my observation that if good faith was in

issue I would come down heavily against Tackama on it.

I am satisfied on the whole of the evidence that in

negotiating the terms of financing, particularly the term loan with

the Royal Bank of Canada, and in its subsequent conduct and

positioning, Tackama never gave any thought to the interests, best

or otherwise, of the limited partners. Who was looking after the

interests of the limited partners? The answer is no one. Whose

task was it to look after the interests of the limited partners?

The answer is Tackama. All of the courses adopted by Tackama were

those which benefited Tackama the most and the limited partners the

least. In fact, most benefits were at the expense of the limited

partners.

In my opinion, Tackama abrogated its fiduciary

relationship with the limited partners on a continual basis from

day one.

I do not propose to deal further with the evidence of Bolton

and Sojonky in this area. As I have already said, it is clear to

me that in promoting the project, including the obtaining of the

financing, the two men were acting for Tackama and solely in

- 192 -

Tackama's best interests. With regard to Lunde, in my opinion, he

did not make one decision with the interests of the limited

partners, best or otherwise, in mind. In his mind, the limited

partners were simply shareholders rather than partners, and on his

own evidence he proceeded, and made his decisions on the basis that

whatever was good for Tackama was good for Alfor, and therefore the

limited partners. Of course, such was simply not the case. In

fact, when he received, considered and signed, the Royal Bank's

term loan offer dated July 19, 1983, his only concern was whether

the project could carry the financing costs and the debt load. He

was not concerned with the short amortization period or its impact

on the limited partners. In fact, the short amortization period

was in keeping with his personal philosophy that all debts should

be paid down as quickly as possible.

I agree with the application of the inflexible rule. Tackama

should not be able to put the limited partners to the dangers of an

inquiry, for no court is equal to the examination and ascertainment

of the truth in such cases. However, I am satisfied on the whole

of the evidence that Tackama did not consider the best interests of

the limited partners when dealing with matters which clearly

affected their interests. I had some difficulty accepting Lunde's

evidence in areas such as why all of the reserves were fixed and

continued and why distributions were not made to the limited

partners. Self-interest on his part, and the actual results of all

of his decisions, i.e., Tackama obtained substantial benefits, all

- 193 -

at the expense of the limited partners, in my opinion, lead to only

one conclusion, that Tackama was looking after its own interests

and had little, if any, regard for those of the limited partners.

Further, I have concluded on the whole of the evidence,

particularly that of Lunde and Ure, that Lunde was of the view that

the limited partners had already benefited substantially tax-wise,

and that he was not prepared to distribute any monies to the

limited partners under any circumstances.

The remarks of the Master of the Rolls, Lord Greene, in Beaman

v. A.R.T.S. Ltd. [1949] 1 All Eng. R. 465 at 469, which is cited

with approval by Wallace J.A. in Ocean City Realty Limited at p.

100, are appropriate:

Denning, J., appears to have underestimated

the readiness with which people deceive

themselves into thinking their actions are

honest, especially when their own interests

are involved.

He does not refer to the

important commercial interest which the

defendants had in acting as they did, and that

appears to me to have misled him into

accepting the protestations of the defendant's

witnesses at their face value. The action of

the

defendants

was

initiated

by

a

consideration of their own interest.

(My emphasis)

In the case at bar I have little doubt, notwithstanding

Lunde's protestations, that Tackama's conduct throughout the whole

of this matter was driven solely by its own interests, and without

regard to the interests of the limited partners. Tackama was in

the untenable position described by Lord Herschell in Bray, when

- 194 -

commenting on the reason for the inflexible rule of equity. He

stated at p. 51:

I

regard

it

rather

as

based

on

the

consideration that human nature being what it

is, there is danger, in such circumstances, of

the person holding a fiduciary position being

swayed by interests rather than by duty, and

thus prejudicing those whom he was bound to

protect.

(My emphasis)

Tackama was in that position, and it strains credulity to suggest

that Tackama acted in good faith when making decisions, one after

another, which benefited it at the expense of the limited partners.

If there was any doubt about Tackama's lack of good faith,

that doubt would be eliminated by Tackama's conduct in 1988 after

it gave notice of its intention to exercise the option. In my

opinion, there was no legitimate business reason for fixing a

further reserve and for not making a distribution to the limited

partners. However, Tackama did both notwithstanding the fact that

the reasons given earlier for not distributing, i.e., restrictions

in the Royal Bank Loan Agreement and lack of funds, no longer

existed, and despite the urging of Tackama's advisors, Bolton and

Sojonky, that a distribution should be made. Further, it was clear

by then that the interest and working capital reserves were not at

risk. They never were. In fact the bank was eager to lend more

money to Tackama, and Tackama was considering rebuilding the

sawmill and using as part of the financing, the $1 million reserve.

Self-interest dictated Tackama's conduct.

- 195 -

I turn now to the arguments of counsel for Tackama. As I have

already indicated, I will follow his outline and headings, although

I have covered many of his arguments in the course of reviewing the

plaintiffs' arguments.

INTRODUCTION

Counsel for Tackama submits that the principles set out in

Regal (Hastings) and Phipps are not applicable to the case at bar.

He argues that this case must be decided on the basis of principles

applicable to directors and others acting within the scope of

authority granted to them. He says:

We say, instead, that the case must be decided

on the principles applicable to directors and

others acting within the scope of authority

granted to them. The distinction is vital for

in the latter case the plaintiff must show

that the acts of the management which are

criticized were not in the best interests of

the company or partnership whether or not the

manager obtained a benefit. These points will

be developed further but it is imperative that

the court not lose sight of the fact that this

was a commercial business enterprise and

relationship from which Tackama was entitled

and, indeed, from the very beginning intended,

to benefit in such amounts as flowed from the

terms of the agreements which were entered

into. To suggest that any person was under

any illusion that Tackama entered into this

arrangement other than to further its own

interest, is to completely ignore the facts

and the expectations of all the parties to

these agreements.

2.

Alfor II was a commercial arrangement

among experienced, sophisticated businessmen

wherein both parties fully intended to profit

and benefit according to the terms of the

- 196 -

agreements between them.

Alfor II and its

managing general partner must be judged not

according to the standard of a fiduciary

acting for a minor, or a trustee acting for an

estate, but within the framework of

a

commercial relationship and the agreements

which define that relationship. The Court is

being asked to apply an inappropriate standard

to a commercial relationship and to ignore the

reasonable expectations of the parties when

they went into the venture.

3.

The issue in this case is not whether

Tackama Forest Products Ltd. acting in its

capacity as the managing general partner of

Alfor II Forest Products Limited partnership

was in a conflict of interest position or

whether it received any benefits as a result

of that position. Alfor II was a commercial

relationship between sophisticated investors

and an entrepreneur. All parties before they

entered into this commercial relationship and

by the terms of the agreements between them

acknowledge that Tackama was in a conflict of

interest position from the very beginning of

the relationship and that Tackama would

benefit from exercising its powers in this

relationship. This fact alone puts this case

in a completely different position than those

traditional cases dealing with trustees.

4.

The issue in this case is not whether

Tackama received any benefits but whether

Tackama received any benefits not allowed to

it under the terms of the agreements between

the parties.

5.

Tackama Forest Products is a fiduciary is of

itself of little value. It is but the

To state simply in general terms that

starting point for determining the real issues

between the parties, that is, what is the

scope and extent of that duty.

I do not agree with counsel's argument, as I understand it,

and his subsequent arguments to which I will refer in a moment,

have not caused me to change my opinion.

I do not agree with

counsel's characterization of the issues, that is, that the case

- 197 -

must be decided on the principles applicable to directors and

others acting within the scope of authority granted to them.

I

find that most of defence counsel's arguments completely ignore a

factor which is present in the case at bar, but not in the cases on

which he relies.

Tackama drafted the documents which were

presented to the proposed partners for signature and were executed

by them. The Partnership Agreement expressly declared that Tackama

was the limimited partners' fiduciary and that Tackama would

exercise its powers and discharge its duties "honestly, in good

faith and in the best interests of the limited partners". In my

opinion these fiduciary declarations are totally clear.

It is true that after setting out the declarations, para. 5.02

continued as follows:

And in connection therewith shall exercise the

degree of care, diligence and skill that a

reasonable

prudent

person

with

similar

experience and expertise in the forest

products industry in British Columbia would

exercise in comparable circumstances and in

particular, without restricting the generality

of the foregoing, will so perform those

obligations and duties set out in any

management agreement which the partnership and

the managing general partner may enter into.

I have already dealt with these provisions in some detail.

Whatever meaning is to be given to them, they cannot be interpreted

as taking away from, or eliminating, the earlier fiduciary

declarations.

To do so would be to render the declarations

meaningless. Again, clear and explicit wording would have to be

used and such wording is not contained in para. 5.02 or elsewhere

- 198 -

in the Partnership Agreement. While carrying on the business of

the Partnership, Tackama was required to exercise the reasonable

care, diligence and skill of a reasonable prudent person in the

industry.

However, it was also required to act as the limited

partners' fiduciary in any conflict situation. In my opinion all

other provisions of the Partnership Agreement must be read in light

of the early provisions of para. 5.02, save for perhaps the option

provisions of the Agreement.

At the time that the offering documents of December 1982 were

presented to the potential partners Tackama was in dire straits.

It was of the utmost importance that the partnership obtain

financing, any financing which the partnership could service. If

such financing was not obtained Tackama would not survive. This is

common ground.

The Partnership Agreement entered into by the parties was not

the usual type of commercial enterprise. The "big picture" for

Tackama did not include the intention to make substantial profits

in the early period of the plant's operation. It was to construct

a successful plant, buy-out the limited partners, and then continue

on with its business life. Those were its goals when it entered

into the partnership and other agreements. In that sense, but only

in that sense, Tackama entered into the arrangements in order to

further its own interest.

- 199 -

Tackama did not enter into the agreements to obtain benefits,

other than those specifically provided for or set out in the

Partnership Agreement or the related agreements. Those agreements

spell out only one benefit, other than the option, and that is the

substantial profits contained in the management fees. The limited

partners, on the other hand, were to receive the profit generated

by the plant, in addition to the tax benefits. The documents do

not contain the slightest hint that it was ever intended that

Tackama should recover benefits over and above those contained in

the management fees, or that it would obtain for itself the profit

(cash flow) belonging to the limited partners. Not only do the

documents not disclose any suggestion that Tackama was to be

entitled to obtain or recover any "extra benefits", but para. 5.02

expressly makes it clear that such is not the case.

It is a

fundamental and inflexible principal of the fiduciary relationship

and duties so declared, that Tackama could not obtain a profit,

advantage or benefit for itself by reason of that relationship,

unless it had the informed consent and agreement of the limited

partners to do so.

It is true that under para. 5.03 Tackama had the power to

borrow money, on such terms and conditions as it saw fit, for the

purpose of constructing and operating the plant. However, in my

opinion that power was also subject to Tackama's fiduciary duty to

the limited partners.

It did not enable Tackama to commit to

financing which benefitted Tackama personally, by virtue of the

- 200 -

option or otherwise.

It could not place its personal interest

before its duty to the limited partners unless it was clearly

authorized to do so, which would require the fully informed consent

and agreement of the limited partners.

It may have been a bit cumbersome to obtain the informed

consent of the limited partners at any given time.

However,

Tackama placed itself in the very position in which it found

itself, that is, negotiating for financing which it was desperate

to obtain when its interests were in conflict with its duty to the

limited partners, because of the option and its interpretation of

the Partnership Agreement. If in these circumstances Tackama could

commit to financing without regard to the duty owed to the limited

partners, then the clear declarations of the fiduciary relationship

and the duty owed would be meaningless.

Indeed, Tackama must be judged according to the standards of

a fiduciary. It is of little consequence that the relationship was

a

commercial one between sophisticated investors and an

entrepreneur. I do not accept the argument that all parties

acknowledged that Tackama was in a conflict of interest position

from the very beginning of the relationship and that Tackama would

benefit from exercising its powers in this relationship. The fact

that there was a potential conflict of interest position does not

entitle Tackama to benefit from that position. The very purpose of

the fiduciary declarations was to assure the limited partners that

- 201 -

in such a position Tackama's duty to them would have priority over

Tackama's personal interests.

Again, the only benefit which

Tackama was to receive from the relationship was the management

fee.

If the issue is whether Tackama received any benefits not

allowed to it under the terms of the agreement between the parties,

the plaintiffs must succeed. If it is what is the scope and extent

of that duty, again, the plaintiffs must succeed. The scope and

the extent of the duty was that, in the exercise of its powers and

discharges of its duties, one of which was to negotiate the

financing, Tackama would exercise those powers and discharge those

duties honestly, in good faith and in the best interests of the

limited partners.

Counsel argues that the case is unique. He says:

The uniqueness of this case lies in the stark

fact that for the first time the manager is

called to account as a result of a transaction

entered into by the company he managed, and

manifestly

in

its

best

interest,

in

furtherance of his management duties - a

transaction which he did not enter - solely on

the basis that he is alleged to have derived a

benefit therefrom.

I do not agree with counsel's description of the situation. First,

the transaction was not manifestly in Alfor's best interest. It

was in its interest in the sense that a loan, any loan, would

probably produce tax benefits to the partnership. However, at the

same time it completely destroyed the limited partners' right to

- 202 -

share in the profits and placed those profits in Tackama's pockets.

The transaction was in fact manifestly in the best interest of

Tackama. It matters not that the manager did not enter into the

transaction itself and I will deal with that in a moment. Tackama

was authorized to enter into a financing transaction but not to

thereby personally benefit.

Counsel's argument is based on a number of assumptions which

cannot be supported factually or in law. He argues that a limited

partnership is not any different from a corporation, i.e., the

limited partners are just like shareholders (to whom no fiduciary

duty is owed) and para. 5.02 of the Partnership Agreement does not

mean what it says, because Tackama owed a duty to the partnership

(the corporation) but not to the limited partners. Clearly these

assumptions cannot stand.

Counsel emphasizes that in all of the authorities relied on by

the plaintiffs, for example, Kisch, Regal (Hastings), and Phipps,

the fiduciary entered into the transaction on his own and reaped a

benefit from his fiduciary relationship. In such cases the consent

of the principal is required before the agent can enter into the

transaction or retain the benefit. Herein, says counsel, it was

the principal, Alfor, who entered into the transaction in

accordance with the terms of a Partnership Agreement "whereunder

such a transaction was consented to and fully authorized". I do

not appreciate counsel's distinction.

- 203 -

It seems to me that it is not important whether or not the

fiduciary entered into the transaction in its own right.

The

transaction is simply the vehicle or the manner in which the

fiduciary gained the benefit. What does matter is that the manager

cannot obtain a benefit for himself, which arises out of the

transaction or negotiations which he conducted on behalf of his

principal, and in the scope of his fiduciary duties.

It is not accurate to say that a manager (Tackama) must seek

the approval and consent of the shareholders (or limited partners)

to every transaction of the principal, unless he wishes to expose

himself to a lawsuit arising from the results or even the possible

results of the transaction.

Approval or consent would not be

necessary for most of the business decisions in the ordinary course

of business. It would only be needed in the case at bar where

Tackama was in a conflict situation.

In law a fiduciary

negotiating, or entering into a transaction, on behalf of his

principal, cannot obtain a personal benefit thereby unless he has

the principal's informed consent and agreement to do so. Tackama

had authority to enter into acceptable financing arangements and to

set aside additional reserves. There was flexibility but it had to

protect the limited partners. If it wished to benefit from the

exercise of its powers, it had to obtain their informed consent to

that benefit.

- 204 -

Ordinarily, the financing commitments would have been obtained

prior to the potential partners being approached. They would then

have full knowledge of the terms of financing, and would have the

opportunity to negotiate the impact of those terms on their rights

under the Partnership Agreement.

Herein, because Tackama, as

promoter, wanted to have the limited partners recover 1982 tax

benefits, it was decided to proceed without first having the long-

term financial commitment. Thus, the only information the limited

partners had in December of 1982 was that which was contained in

the December 1982 offering documents.

This information was based on two major assumptions, that a

twenty-five year amortization period could be obtained, and that

reserves would not be necessary. However, by the time the three

extensions were sought and, in particular, at the time of the last

one, the December 1982 information which had been given to the

limited partners was history. The terms of financing were known to

Tackama. They would have a windfall effect on the interests of

Tackama but a devastating effect on the interests of the limited

partners.

Tackama's benefits would come out of the limited

The term of financing should have been

partners' pockets.

disclosed to the limited partners, just as they would have had to

have been disclosed to them initially, had the transaction been a

normal one.

- 205 -

The benefits obtained by Tackama can hardly be described as

benefits incidental to a transaction, which a manager had the

partnership enter in its best interests. Counsel argues:

We say that no action lies against a manager

with respect to a transaction which he had the

company or partnership enter into, if it is

shown to be in its best interest and motivated

by such interests, and within the scope of his

management

powers.

entitled

He

to

is

in

such

any

circumstances

retain

incidental benefit obtained by him, even if he

is a pure trustee.

I have already commented on this submission in part. Assuming for

the moment that the financing was in the best interests of Alfor

and was motivated by such interests, which I do not accept, the

argument completely ignores the express fiduciary duty owed to the

limited partners, and by analogy owed to the shareholders of the

company.

Counsel also argued that all of the benefits obtained by

Tackama flowed "only from the exercise of the option which, it is

conceded, was to be exercised in his own interest, with the

entitlement to benefit thereby known and consented to". I will

return to this point when counsel argues it more fully. I will

simply say here that I do not agree with counsel's statement. The

benefits obtained by Tackama flowed directly from the financing

terms negotiated by Tackama on behalf of Alfor, and fell squarely

within the scope of its fiduciary duties to the limited partners.

The option at best was the vehicle by which Tackama perfected those

benefits.

- 206 -

Counsel for Tackama argues that the principles set in such

cases as Kisch, Regal (Hastings), and Phipps are not applicable to

the case at bar. The case is simply one of internal management and

that in order to succeed the plaintiffs must show that Tackama's

actions as manager "were not in the best interests of the

partnership whether or not the manager obtained a benefit". He

relies on such cases as Mills and others v. Mills et al. [1937-

1938] 60 C.L.R. 150, a decision of the High Court of Australia,

Automatic Self-Cleansing Filter Syndicate Company v. Cuningham

(1906) 75 Ch. D. 437, a decision of the Court of Appeal and Teck

Corporation Ltd. v. Millar et al . (1972) 33 D.L.R. (3d) 288, a

decision of Berger J. then of this court. In my opinion, these

cases are clearly distinguishable from the case at bar, both in

fact and in law. They deal with the internal powers of directors

to manage the affairs of a company, their duties and matters of

motivation and good faith. They do not deal with a situation where

the fiduciary has obtained benefits from its fiduciary position,

and in the exercise of its fiduciary power.

None of the cases referred to by Tackama's counsel dealt with

a factual situation where a beneficiary called upon its fiduciary

to account. In them, the defendant directors of the company, owed

no fiduciary duty to the plaintiff shareholders, but only to the

company itself. Thus it was an answer for the directors to say

that they acted in the best interests of the company. However, if

the company had called on the directors to account, it would not

- 207 -

have been an answer for them to say that they acted in good faith

or in the best interests of the company. In attempting to apply

the cases, counsel is really saying that Tackama's duty was to the

business or partnership, but not to the limited partners.

Counsel's application of those cases ignores completely the express

fiduciary declarations in relation to the limited partners in the

case at bar.

Counsel argued that every act of Tackama was within the ambit

of the fiduciary powers and duties granted to Tackama. Therefore

it is not a question of whether that power was consented to or

authorized by the limited partners with full disclosure.

In

internal management cases, as in the case at bar, the inquiry is

only as to whether the power has been abused. Proof of abuse is

necessary and has nothing to do with whether in the exercise of the

power the fiduciary obtained a benefit. The only issue here is

whether the power was exercised for the purpose it was granted, and

in the best interest of the partnership.

plaintiff to establish that it was not.

The onus is on the

Counsel's argument seems to be that in negotiating the

financial arrangements Tackama was acting within the scope of its

powers and that it could do whatever it wanted. It is irrelevant

if Tackama obtained a benefit while exercising or acting within its

management powers. Regal (Hastings) and similar cases would only

apply if Tackama acted outside of its powers. If it stayed within

- 208 -

its powers then the only way the plaintiffs can succeed is to show

that Tackama abused those powers. The argument ignores or

overlooks two facts; Tackama was not empowered to reap personal

benefits, and secondly, the express fiduciary declarations

contained in para. 5.02 of the partnership.

Counsel for Tackama described the partnership as a "tax

shelter limited partnership between sophisticated investors and a

profit-motivated entrepreneur" and said that these facts should be

the starting point to an inquiry into the scope and extent of the

duty owed. The argument ignores the fact that as well as receiving

tax benefits the limited partners were to receive a share of the

partnership profit, in fact, all of the profit once the managing

fees were deducted therefrom.

Counsel refers to Hospital Products Ltd. v. the United States

Surgical Corporation (1984) 55 A.L.R. 417, a decision of the

Australia High Court, for the proposition that the agreements

between the parties govern and mould the nature of the fiduciary

duty, not the other way around.

Hospital Products is

distinguishable on its facts. It involved a distributorship rather

than a partnership, and the main issue before the court was whether

or not the terms of the contract between the parties constituted a

fiduciary relationship.

However, the case does have some

interesting and perhaps informative views on the law as regards

fiduciary relationships.

- 209 -

Counsel quoted a passage from the judgment of Mason J. at pp.

454-455 where he said:

The fiduciary relationship, if it is to exist

at all, must accommodate itself to the terms

of the contract so that it is consistent with,

and conforms to, them.

The fiduciary

relationship cannot be superimposed upon the

contract in such a way as to alter the

operation which the contract was intended to

have according to its true construction.

(My emphasis)

It must be remembered that those observations were made in a case

where the court was asked to conclude that there was a fiduciary

relationship in existence between the parties. There is no doubt

that if such a relationship was found it would have to accommodate

itself to the terms of the contract. However, I doubt that such

reasoning would apply where, as in the case at bar, one of the

parties is expressly stated to be a fiduciary and the duty owed is

stated as well. It seems that in such a case the other terms of

the contract would then have to accommodate themselves to the

fiduciary relationship terms. In any event, the other terms of the

contract could not be interpreted so as to lessen or reduce the

duties owed by the fiduciary, unless clear and unequivocal wording

was used. As I have already stated, such wording is not contained

in any of the agreements with which we are concerned.

Counsel also quoted the further following passage from the

judgment of Mason J. in Hospital Products at p. 455:

My conclusions that HPI was at liberty to make

some business decisions by reference to its

own interests, subject to the obligations

- 210 -

arising under the best efforts, promise and

the other terms of the contract express and

implied, presents an overwhelming obstacle to

the existence of the comprehensive fiduciary

relationship found by the Court of Appeal.

This is because HPI's capacity to make

decisions and take action in some matters by

reference to its own interests is inconsistent

with the exercise of a general fiduciary

relationship.

However, it does not exclude

the existence of a more limited fiduciary

relationship for it is well settled that a

person may be a fiduciary in some activities

but not in others (Kuys [1973] 1 W.R. 1126 at

1130; Birtchnell v. Equity Trustees, Executors

and Agency Company Ltd. (1929) 42 C.L.R. 384

at 408; Phipps [1967] 2 A.C. at 127.

(My emphasis)

Counsel then argued:

We say that this statement of the law is the

basis for the distinction, so vital to this

case, between an inquiry into the conduct of a

manager

entering

into

an

unauthorized

transaction on his own behalf, on the one hand

(and not this case) and the conduct of a

manager in having the company enter into

certain transactions in accordance with his

managerial authority and in its best interests

on the other (which is this case).

It bears repeating that in Hospital Products Mason J. was

dealing with the question of whether there was a fiduciary

relationship between the parties.

He found that there was no

fiduciary relationship, because by virtue of the Distributorship

Agreement the defendant was entitled to make decisions and take

action in some matters having reference only to its own interests.

That capacity, of course, was inconsistent with the existence of a

general fiduciary relationship.

Herein, the agreements do not

authorize Tackama to take actions in any matters in its own

- 211 -

interests, to the exclusion of the limited partners. Tackama was

their fiduciary, and the very basis of that relationship was that

in any dispute between Tackama's interests and its duties to the

limited partners, the latter should succeed.

Counsel also referred to Molchn v. Omega Oil and Gas Ltd. et

al. [1988] 3 W.W.R. 1 (S.C.C.) with regard to the importance of the

terms of the Partnership Agreement. Counsel said thatMolchn is so

close to the case at bar that one simply need only change the names

of the parties and that to hold against Tackama in the case at bar

would be in effect to overrule Molchn.

In Molchn after the partnership had exhausted all available

sources

of

capital

it

discontinued

drilling,

apparently

permanently.

The general partner, through its parent company,

offered to purchase the units held by the limited partners in the

partnership. The offer was accepted by all of the limited partners

except the plaintiff. The general partners subsequently sold all

the partnership's non-producing lands to its parent company. The

partnership was in strained financial circumstances, encumbrances

on the lands made a sale to third parties difficult and there was

no evidence that the consideration was inadequate. In the Supreme

Court of Canada Estey J., speaking for the majority, found that

although the general partner owed a fiduciary duty to the

plaintiff, in the exceptional circumstances of the case the duty

was not breached by the sale of the non-producing lands.

- 212 -

In Molchn the Partnership Agreement contained what Estey J.

described as "special if not unusual provisions" which recognized

that the general partner could carry on transactions with the

partnership or otherwise, which might be in conflict with the

interests of the partnership and the limited partners.

The

agreement expressly provided that such transactions were deemed not

to be a conflict of interest with respect to the limited

partnership or its operations or its limited partners. In other

words, the general partner was authorized to be in conflict of

interest vis-à-vis the partnership and the limited partners in

conducting its own business.

In these rather extraordinary circumstances, Estey J. was of

the opinion that the general Partnership Agreement gave

extraordinary powers to the general partner, which were of such a

nature as to put the case on the footing of one where a specific

consent had been given by the cestui que trust to the sale. In

dissent, Wilson J. agreed that the Partnership Agreement gave the

general partner the power to acquire and dispose of partnership

land, and that it contemplated and authorized the general partner

to be in a conflict of interest position vis-à-vis the partnership

in conducting its own business. However, she was of the opinion

that it did not go so far as to permit the sale of partnership

assets by the general partner to itself. Wilson J. expressed the

opinion that it would take the clearest of language in the

- 213 -

constitutive documents of the partnership to permit such a sale and

that no such language was present.

In my opinion Molchn is clearly distinguishable from the case

at bar. As pointed out by counsel for the plaintiff it is a case

in which the breach alleged is self-dealing and the remedy sought

was the setting aside of the sale by the fiduciary to itself. In

such cases the courts can, in unusual circumstances, sanction the

transaction even after it has occurred.

In Molchn the general partner was expressly authorized to

carry on its own business, and to be in a conflict of interest

position vis-à-vis the partnership and the limited partners. Such

conflict of interest situations were expressly deemed not to be a

conflict of interest with respect to the limited partnership, its

operations or the limited partners. The court found that in effect

the fiduciary had a specific consent to the sale.

In the case at bar the Partnership and related Agreements do

not authorize Tackama to enter into transactions with, or for, the

Partnership, and to be in a conflict of interest position with the

interests of the Partnership, or of those of the limited partners,

and to serve its own business or interest.

They do not give

Tackama such extraordinary powers which would put the case on the

footing of one where a specific consent has been given to Tackama

to obtain the benefits. The provisions are to the contrary. While

- 214 -

Tackama is not to be liable to the partnership or to the limited

partners in certain events, liability for breach of its duties "set

out in para. 5.02, 2.01 or elsewhere in this Agreement" are

expressly reserved in para. 5.07 which is entitled 'Limitation of

Liability'. Again, Tackama is expressly declared to be the limited

partners' fiduciary in the exercise of its powers and carrying out

of its duties.

Counsel next argued that with respect to the exercise of the

option, Tackama had no fiduciary responsibilities whatsoever "in

the sense that it was clearly intended and entitled to act in its

own interest". As I understand it, the plaintiffs do not quarrel

with the proposition that Tackama was entitled to exercise the

option in its own interests. However, the Partnership and related

Agreements do not give Tackama any extraordinary powers, which

would put this case on the footing of one where a specific consent

has been given to Tackama's conduct. The focus of the plaintiffs'

complaint is not on the time period associated with the option, but

on what occurred before, when Tackama exercised its power to

arrange financing and to establish reserves.

The benefits to

Tackama flowed from the exercise of such powers and not from the

exercise of the option. In my opinion, the option was simply the

vehicle or the manner in which Tackama gathered in the benefits,

just as the sale in Regal (Hastings) brought home the benefits to

the defendant directors. As I said earlier, the manner in which

the benefits are brought home is not important. What is important

- 215 -

is that the benefits were obtained by the fiduciary, as a result of

its position and the exercise of its fiduciary powers.

I turn now to counsel's next submission which is based on the

reasonable expectation of the parties. Counsel argued that all

that was done by Tackama (and which is alleged to be a breach of

its fiduciary duties) in fact complied with the reasonable

expectations of the parties, and was in accord with the terms of

the agreement entered into. He says:

Of course there was an open conflict of

interest. Tackama was given absolute powers

of management and financing, was at liberty to

sell to the partnership and to buy from the

partnership

all

of

its

assets

and

undertakings; subject only to the protections

built into the agreements eg. transfer price,

only 'reasonable' and 'prudent' 'reserves',

and the minimal option price formula. It is

inherent from the nature of the arrangement

that a conflict of interest arose at every

step of the way and was consented to by all by

virtue of the agreements entered into.

It seems to me that in most cases, particularly in daily

operations, there would be few conflicts of interest, if any. The

only conflicts would arise in situations where Tackama's interests

conflicted with its duties to the limited partners, and in such

instances the latter had to prevail, absent the informed consent of

the limited partners.

I agree in part with defence counsel's argument. Tackama's

powers were not absolute. They were subject to restrictions or

protections contained in the agreements.

However, he fails to

- 216 -

refer to the most important protection to the limited

partners,

and that was the fiduciary declarations. I do not agree that a

conflict of interest arose at every step of the way, nor do I agree

that any provisions of the agreements consented to those conflicts.

The very existence of the fiduciary declarations and the fact that

no consent was given to any benefits obtained by Tackama provides

evidence to the contrary.

I return to counsel's submission with regard to the reasonable

expectations of the parties, and his references to the decision of

La Forest J. in Lac Minerals Ltd. v. International Corona Resources

Ltd. (1989) 61 D.L.R. (4th) 14 (S.C.C.). I need not refer to the

facts in Lac Minerals, other than to say that the issue before the

court was whether the relationship between the parties was a

fiduciary one.

Counsel cites the following passage from the decision of

La Forest J. at p. 35:

The relationship of trust and confidence that

developed between Corona and Lac is a factor

worthy of significant weight in determining if

a fiduciary obligation existed between the

parties. The existence of such a bond plays

an important role in determining whether one

party could reasonably expect the other to act

or refrain from acting in the interest of the

former.

In other words, in deciding whether or not a fiduciary obligation

exists the court may consider whether one party could reasonably

- 217 -

expect the other to act or refrain from acting against his

interests.

La Forest J. contianues at p. 40:

As I indicated above, the issue should be whether

having regard to all the facts and circumstances,

one party stands in relation to another such that

it could reasonably be expected that that other

would act or refrain from acting in a way contrary

to the interests of that other.

I see no reason to consider what the reasonable expectations

of the parties were, even if I am capable of doing so, on the

evidence.

In the case at bar, there is no need to determine

That

whether or not there was a fiduciary relationship.

relationship and the scope of the duties entailed, are expressly

set out in para. 5.02 of the Partnership Agreement. I agree with

the description of the fiduciary responsiblity of Tackama, as

outlined by counsel of the plaintiffs, to be "the primary

protection for the plaintiffs in light of the sweeping powers

delegated to the general partners in the Partnership Agreement".

Further, if Tackama's fiduciary duties did not apply while it was

exercising its powers in negotiating the financial terms and in

setting reserves, then the fiduciary declarations are meaningless.

Finally, I do not accept counsel's argument that everything

done by Tackama complied with the reasonable expectations of the

parties.

It cannot seriously be argued that the parties,

particularly the limited partners, contemplated, reasonably or at

all, that Tackama would negotiate and agree to terms which greatly

- 218 -

inflated the assets (reserves) that it would receive on the

exercise of the option. Nor can it be suggested that the limited

partners contemplated that Tackama would substantially reduce the

liability it would assume on the exercise of the option, or that it

would substantially reduce the purchase price on the exercise of

the option. Such expectations are inconsistent with the provisions

of the Partnership Agreement and with common sense. Again, they

are entirely inconsistent with what actually happened, when the

limited partners began to learn the true facts in the Spring of

1987.

At the limited partners' meeting on May 29, 1987 they

angrily attempted to have the deal renegotiated in light of their

new knowledge. In their view the deal had drastically changed as

a result of the information known to Tackama in late 1983, prior to

the last two extensions.

In my opinion the reasonable expectations of the limited

partners are not relevant. Upon the limited partners establishing

that their fiduciary, Tackama, obtained benefits as a result of its

position, and in the exercise of its fiduciary powers, the case is

over unless Tackama can discharge the onus upon it of establishing

the fully informed consent of the limited partners to Tackama

obtaining such benefits.

Each time that Tackama sought an

extension from the limited partners its mandate to negotiate the

terms of financing on their behalf was expiring. It then had to

seek a new mandate to negotiate on their behalf. At that point a

duty arose to make full disclosure of what Tackama knew would be

- 219 -

the terms of financing. It is to be remembered that by granting

the extensions to Tackama in good faith, and with confidence that

Tackama would look after their interests, the limited partners then

enabled Tackama to do what it eventually did, that is, to take for

itself the whole of the profit which would have been ordinarily

distributed to the limited partners.

I turn now to counsel's argument that under and by virtue of

the provisions of the Partnership Act, 1979, B.C.S. Ch. 312,

particularly ss. 31 and 58, the limited partners enjoyed only

restricted rights of disclosure. I quote from counsel's argument:

Section 31 is applicable to partners in the

general sense:

31. Partners are bound to render true

accounts and full information of all

things affecting the Partnership to any

partner or his legal representative.

Section 58 limits those general rights in the

case of limited partners:

58(1)

Subject to s-s.(2) a limited

partner has the same right as a general

partner

(a) to inspect and make copies of,

or take extracts from, the Limited

Partnership books;

(b) to be given, on demand, true and

full information of all things

affecting the Limited Partnership,

and to be given a formal account of

partnership

affairs

whenever

circumstances render it just and

reasonable; and

(c) to obtain dissolution and

winding

up

of

the

Limited

Partnership by court order.

- 220 -

(2) The superintendent may, in whole or

in part, exempt a limited partnership

from the rights granted under s-ss.

(1)(a) or (b), or both, where he

considers that it is in the public

interest to do so.

Partnership Act 1979 R.S. Ch. 312 ss. 31

and 58.

Counsel says that the limited partnership is a creature of

statute, and that s. 58 of the Partnership Act covers the

relationship of the parties.

There is no duty on Tackama to

The duty is on the

disclose anything to the limited partners.

limited partners to demand information. In this regard limited

partners are like corporate shareholders, they have a lower status

than normal partners. The statute takes the parties in the case at

bar outside the law of disclosure applicable to partnerships in

general. Disclosure, therefore, is a red herring, and para. 5.02

is redundant. He relies on the decision of Gibbs J., as he then

was, in Bank of Montreal v. Aitken (1988) 28 B.C.L.R. 136 at

p. 144. In my view the observations of Gibbs J., in context, do

not support the propositions advanced by counsel and, in any event,

are not applicable in the case at bar, given the provisions of the

Partnership Agreement made by the parties.

I am not in agreement with counsel's submissions either with

regard to the application of the Partnership Act generally, or with

regard to its application to the case at bar. It seems to me that

the limited partners' rights under the act are minimal, and that

- 221 -

the act cannot take away or reduce other rights which the limited

partners otherwise enjoy by virtue of the terms of their

Partnership Agreement.

In the present case the fiduciary duty owed by Tackama to the

limited partners is clearly spelled out. It includes a duty of

full disclosure on the part of Tackama if it relies on the defence

of informed consent on the part of the limited partners. The onus

is on Tackama to establish the informed consent.

This leads me to counsel's argument that the fiduciary duty

owed by Tackama is defined, but limited by, the terms of the

Partnership Agreement. Cited as the authority for this proposition

is the decision of the Alberta Queen's Bench in Aydelotte et al v.

Security Pacific National Bank [1988], 1 W.W.R. 142 at pp. 152-153.

In Aydelotte it was conceded that the general partner owed a

fiduciary duty to the limited partners although the duty was not

expressly set out in the Agreement. The court stated the general

proposition that the fiduciary duty owed by a general partner to

the limited partners is defined and limited by the terms of the

Partnership Agreement.

In Aydelotte the issue was whether the general partner, who

had sold all of its own Canadian assets to a third party, had a

specific duty to obtain an equivalent opportunity for the limited

partners. The Partnership Agreement was silent as to the existence

- 222 -

of such a fiduciary duty, nor could it be said that the sale of the

fiduciary's Canadian assets was in any way an exercise of any

management power granted to the general partner by the limited

partners. In other words, it was not a partnership transaction.

It is interesting to note that the trial judge reviewed the

evidence of various limited partners concerning their expectations

about whether or not there was such a duty.

Again, this is

consistent with the decision of La Forest in Lac Mineral where the

issue before the court was whether or not the fiduciary duty

existed. In the case at bar, the relationship and the duty are

clearly spelled out in the agreement, and are in no way limited.

Aydelotte is clearly distinguishable, both on its facts and on the

applicable law.

In the case at bar the existence of the fiduciary duty, and

its scope are clearly set out in para. 5.02. It cannot be said

that the fiduciary duty is limited by any of the terms of the

Partnership or related Agreements. It is a fundamental principle

of that relationship that Tackama cannot benefit or profit from its

fiduciary position, without the informed consent of the limited

partners. In order to discharge the onus upon it in this regard,

Tackama must establish that it made full disclosure of the material

facts of the terms of financing when the extensions were sought

and, in particular, on the last occasion. While it may be said

that full disclosure was made in the December offering documents,

- 223 -

the same thing cannot be said when the extensions were sought and

the terms of financing were known to Tackama.

Finally, under this heading, counsel for the defendant says:

In summary, this is not an unauthorized

transaction case entered into by the errant or

unwary manager on his own behalf and for his

own benefit. It is, rather, a simple case of

internal management, involving no external

transactions to which the fiduciary is party.

Wholly different rules apply to measuring the

conduct of a manager, such as Tackama, in

carrying out its management mandate. Thus the

cases

of

Regal

(Hastings)...have

those of Mills

no

v.

application

while

Mills...must govern.

Counsel adds that for the plaintiffs to succeed they must establish

an improper motive on the part of Tackama, and that Tackama did not

act in the best interests of the partnership.

The reasonable

expectations of the limited partners must be looked at either as a

group or individually.

To summarize, the vehicle by which Tackama obtained the

benefits is not an important consideration. In my opinion, Tackama

did not act in the best interests of the partnership, but acted

solely in its own interest. It is relevant that Tackama obtained

benefits as a result of its fiduciary position while discharging

its fiduciary duties. Unless Tackama can discharge the onus upon

it to establish full disclosure, and therefore a fully informed

consent, the plaintiffs must succeed and there is no necessity for

- 224 -

or for me to consider, their

them to give evidence of,

expectations.

BACKGROUND OVERVIEW

Most of the matter under this heading have already been

discussed. Counsel argues that Tackama had no previous experience

of engaging in business associations with others.

In order to

ensure that its interests were advanced and protected Tackama

engaged a compliment of professional experts, comprised of

accountants, an experienced syndicator and commercial lawyers. He

says that Tackama relied heavily on these advisors. I observe that

most clients do. Even assuming such reliance, it is no defence to

the claims brought against Tackama.

Counsel was very critical of the role of Sojonky.

already addressed this issue. He said:

I

have

This is the gentleman who, as the general

partner of No. 90 Sale View Ventures, we may

regard as the chief principal of the chief

plaintiff, whose main charge against Tackama

appears to be placing themselves in a position

of conflict of interest without consent.

He is also critical of the law firm of Bull, Housser & Tupper, whom

he says (wrongly) was retained by Sojonky to give him "advice with

respect to appropriate disclosure." I am satisfied on the evidence

that the solicitors involved in this matter were not retained to

give advice on the subject of disclosure generally, but were hired

to give advice on the issue of disclosure only with respect to the

- 225 -

completion and delivery of the Statutory Declaration. Counsel said

that the role of Bull, Housser & Tupper, vis-à-vis Tackama, cannot

be distinguished from that of the defendant Bryant in International

Submarine Engineering Ltd. and James Ross McFarlane v. Geoffrey G.

Bryant, No. CA54268, June 23, 1988, a decision of Legg J., as he

then was, as yet unreported but upheld by the Court of Appeal. In

my opinion, there is no basis for such a statement.

Counsel also criticizes one or two of the limited partners who

are also partners in Bull, Housser & Tupper, suggesting that they

were wearing "two or more hats". He implies that they were so

knowledgable about the terms of financing that they would have

recognized any duty to disclose and that their claims should be

dismissed. I have already dealt with these matters. I am not

satisfied that these persons had sufficient knowledge and had

considered the impact on Tackama and the limited partners so as to

support the dismissal of their claim based on informed consent.

Again, as I have already indicated, it is not a defence for Tackama

to suggest that Bolton, Sojonky or Bull, Housser & Tupper should

have specifically advised it to fully disclose the terms of

financing.

THE INVESTMENT VEHICLE

The team eventually decided on the limited partnership

vehicle. Defence counsel argued again that the limited partnership

- 226 -

was an artificial relationship, that it had a lesser status than a

"normal" partnership, and that the limited partners enjoyed "a

correspondingly reduced scope and extent of fiduciary duty owed to

them". He relied on comments made by Macdonald J. in

Litwin

Construction Ltd. et al v. Kiss et al. (1986) 4 B.C.L.R. (2d) 83

(B.C.S.C.) at p. 112. InLitwin, somewhat late in the day, that is

during the trial, the defendants for the first time sought to

characterize certain contracts as giving rise to fiduciary

obligations. It was in this context that Justice Macdonald said

that the application of fiduciary principles to complex commercial

situations should be considered with caution.

application to the case at bar, particularly in light of the

fiduciary declarations. Again, it is noted that in Litwin Mr.

Litwin has no

Justice Macdonald pointed out that if there had been a fiduciary

relationship between Litwin and the investors, "the onus on Litwin

to disclose factors to the investors would be much greater in a

fiduciary situation".

Counsel again referred to Bank of Montreal wherein Gibbs J.,

as he then was, made some general observations with regard to the

rights, duties and liabilities of a limited partner.

I have

already dealt with this submission, and note again that the passage

relied upon must be read in light of its context.

In my opinion there is simply no merit in the argument that

the fiduciary duty owed by Tackama to the limited partners was

- 227 -

reduced in scope and extent in any way.

Neither case law nor

statute law provides support for this submission. In any event the

fiduciary declarations make it clear that the limited partners were

entitled to rely on Tackama to discharge its duties to them

honestly, in good faith and in their best interest.

Counsel for Tackama emphasizes the uniqueness of the Alfor

project from the point of view of an investor seeking a tax

shelter. In the end the limited partner would make no financial

contribution to the project. He could not lose. Again, if the

plant was built, he would be able to recoup large net tax benefits

in addition to obtaining ownership in the plant, which might be

purchased by Tackama for no less than an specified sum.

The

argument simply ignores the fact that the limited partners were to

receive all of the plant's profits once certain deductions were

made, including Tackama's management fees which included therein

Tackama's profits. It cannot be questioned that the investment was

an excellent one and that the limited partners have enjoyed

substantial tax benefits. However, the dispute is over the second

half of their investment, that is, their right to recover the

profits to which I have just referred.

Counsel submits again that on the basis of the Lac Minerals

case I should have regard to the reasonable expectation of the

parties, and that a view of the offering documents is most useful

in determining such expectations. I have already reviewed these

- 228 -

documents and I do not propose to deal with them again in detail.

I do not agree that the expectations of the parties are a relevant

consideration in light of the way in which the plaintiffs' have

framed their claim and, more particularly, because of the express

fiduciary declarations in the case at bar.

I proceed directly to counsel's argument on the provisions of

the Partnership Agreement.

Counsel argues that one of the

limitations of a limited partner is that he or she will not take

part in the management of the business of the partnership, or

exercise any power in connection therewith. That limitation is

contained in para. 2.06. Counsel says this includes any power of

consent.

In other words, para. 2.06 overrides para. 5.02, and

therefore Tackama did not owe any fiduciary duty to the limited

partners. I do not agree. Para. 2.06 is for the benefit of the

limited partners.

It preserves their limited liability and is

It does not give Tackama the

simply a statement of the law.

absolute power to do what it wants without regard to the duty owed

to the limited partners under para. 5.02. A similar argument was

advanced with regard to the irrevocable power of attorney granted

to Tackama in para. 2.07. The answer to that argument is the same;

the power is subject to the fiduciary duty.

Counsel referred to para. 4.02 as the crucial paragraph in the

Partnership Agreement. It appears to be common ground that what is

distributed thereunder is the cash flow, whether or not one prefers

- 229 -

to call it profit, as was done at times throughout the trial. I

have already expressed the opinion that the cash flow in 4.02

belonged to the limited partners, and was to be distributed to them

unless an additional reserve was required. If it was, it was to be

set aside out of their cash flow.

Counsel for the defendant emphasized the latter portion of

para. 5.02, whereas counsel for the plaintiffs emphasized its

earlier provisions. He argued:

The plaintiffs, during the course of their

argument, quite naturally talked a great deal

about the obligation of the defendant,

Tackama, to act in the best interests of the

limited partners, but have remained completely

silent as to the importance to be attached to

the second half of para. 5.02. In fact, the

limited partners appear to be saying that in

exercising its management skills it makes no

difference if the managing general partner

acted reasonably and prudently given his

experience and expertise in the forest

products

industry

in

Northern

British

Columbia, and that this is an irrelevant and

redundant term of the Partnership Agreement.

I do not believe that the argument of counsel for the plaintiffs'

need, or does, go that far, although it is true that he did not

deal with the latter provisions of para. 5.02. The same may be

said about counsel for Tackama not dealing with the earlier

provisions of para. 5.02, i.e., the fiduciary declarations. I have

already expressed my views on the interpretation of the whole of

para. 5.02 and I am satisfied that whatever meaning is to be given

to the words emphasized by the defendant, they cannot take away

from the previously declared fiduciary relationship and duty.

- 230 -

Again, it is not necessary that the plaintiffs be in a

position to succinctly interpret the whole of the paragraph which

was drawn by Tackama. In this regard I accept the interpretation

that in exercising its powers and discharging its duties under the

Agreement, Tackama was required to exercise a degree of care,

diligence and skill, that a reasonably prudent person, with similar

experience and expertise in the forest products industry in British

Columbia would exercise in comparable circumstances. At the same

time, in exercising those powers and discharging those duties when

in a conflict situation, Tackama was required to act in the best

interests of the limited partners as their fiduciary.

EVIDENCE OF THE LIMITED PARTNERS

I do not propose to deal with the evidence of the limited

partners given during examinations for discovery.

As I have

already said, in my opinion the reasonable expectation of the

limited partners are not relevant.

THE EVENTS OF 1983 AND THE EXTENSIONS

I have already reviewed these matters at some length, and I do

not propose to deal with counsel's review of them, other than to

perhaps comment on the submissions.

- 231 -

Counsel submitted that the major issue was not whether a high

or low fidelity duty should be imposed on Tackama. He phrased the

issue as follows:

What we are suggesting is the question is

whether Tackama acted within the scope of the

fiduciary powers and authority granted to it.

If that's how it's defined, it must be shown

that Tackama abused those powers.

Counsel said that if it was found that Tackama acted outside its

powers then Regal (Hastings) would be applicable. If it was found

that it acted within its powers then a Regal (Hastings) type of

analysis is not applicable.

The key distinction is whether

Tackama, even assuming the higher fiduciary duty posed upon it, was

acting outside its powers and authority.

I believe that this argument was advanced earlier. It is to

the effect that Tackama had the absolute power to negotiate the

financial package and to set aside reserves. Since Tackama acted

within its power Regal (Hastings) is not applicable, and Tackama is

entitled to keep the benefits which it received as a result of the

exercising of its powers. As I said earlier, I do not agree with

counsel's argument. With respect, like most of his argument, he

simply ignores the fiduciary declarations.

Para. 5.02 clearly

spells out that Tackama must exercise its powers, which would

include negotiating of the financial package and the fixing of

reserves, in good faith and in the best interests of the limited

partners as their fiduciary. It is not directly a question of the

limited partners insisting on consent. Tackama must establish an

- 232 -

informed consent in order to keep the benefits it has received, and

therefore must show proper disclosure.

Counsel argues that there can be no issue of a disclosure

requirement, when a consent to act has already been obtained.

Herein, Tackama never had the consent of the limited partners to

retain the benefits. Counsel also argues that the requests for the

three extensions did not in any way alter the plaintiffs' legal

rights, but of course I have already found that they did. I do not

agree that they are red herrings. The importance to Tackama of

obtaining the extensions is clearly evidenced by Tackama's

documents, some of which I have already reviewed.

Counsel emphasizes that the three written requests for

extensions were all vetted by Alfor's advisors - "by Laventhol &

Horwath, who were also the advisors to the limited partners and

upon whom most limited partners relied for advice, by Frank Sojonky

who acted for and also advised financially, many of the limited

partners, by Bull, Housser & Tupper and by the limited partner,

John McKercher".

He said that they were all conscious of the

The suggestion is, at

significance of the terms of financing.

least by implication, that these various persons were quite

knowledgable of the terms of financing, and appreciated their

impact, but did not tell Tackama to disclose the terms.

This

suggestion was made at various times in counsel's opening and in

argument, and I believe I have already dealt with it. Assuming

- 233 -

that counsel's description of the capacity of the various persons

is accurate, and I am not satisfied that it is, it is no defence

for Tackama to say that these persons had sufficient knowledge of

the impact of the terms of financing, but failed to advise Tackama

to disclose the terms to the limited partners.

In law, their

knowledge was Tackama's knowledge, and in any event I am satisfied

that Lunde knew as much as they did.

Further, there is no evidence that any of the team members

fully appreciated the impact of the financing on Tackama, or the

limited partners, until long after December of 1983. Again, as I

have already noted, during 1983, Bolton, Sojonky and Lunde were

focused on one thing and one thing only - the obtaining of the

financing. Throughout this period of time Bolton and Sojonky only

looked after Tackama's interests and had little regard, if any, for

those of the limited partners.

SUBSEQUENT EVENTS

As I have already reviewed the main events which occurred

between January of 1984 and the Spring of 1988, there is no need to

deal with counsel's submission on this issue.

- 234 -

CONFLICT OF INTEREST - THE OPTION

I have already dealt with this matter at some length. Counsel

says there is no question that Tackama would exercise the option

from a position of self-interest.

He says that any benefit

received by Tackama was gained purely and simply from the exercise

of the option, and not from the terms of financing or the setting

aside of reserves. The minimum option price, according to counsel:

... was a protection to the limited partners

so that there could be no cheap manipulated

buy-out, i.e., the actual conflict was again

recognized, and so that they would retain the

full benefit of their participation of a tax

viewpoint.

(My emphasis)

Tackama could reasonably expect to purchase a business which had

been properly managed and husbanded according to good forest

industry practice, rather than a corpse which had been managed to

ensure the enrichment of the limited partners.

The argument that the actual conflict was recognized at the

time that the Partnership Agreement was drafted, and was dealt with

by the use of a minimum option price, is analogous to Bolton's

balance theory.

I have rejected both.

In my opinion, to the

extent that a conflict situation was generally recognized in the

Agreement, it was decided that Tackama's powers should not be

unqualified and unfettered, but should be granted subject to an

express fiduciary relationship and duty. The test was not whether

Tackama acted in good faith and in the best interests of the

partnership, but whether in doing so it breached its fiduciary

- 235 -

duties to the limited partners. Focus is therefore not on the

triggering event, but on the fact that the fiduciary has received

the benefit from the exercise of its powers in a fiduciary

capacity. Clearly the benefits flowed from the exercise of the

powers to arrange financing and establish reserves, rather than the

simple exercise of the option. It was inevitable that the option

would be exercised if the project was successful.

As well,

everything pointed to its success, including the ability to service

the substantially increased payments resulting from the reduced

amortization period and the ability to set aside the actual

reserves.

THE DUTY OF DISCLOSURE

Counsel for Tackama says that disclosure turns on the pre-

existing necessity of consent to an act. Where there is no pre-

existing necessity there is no duty of disclosure. If there is no

duty of disclosure it follows that the issue of materiality does

not arise. He says that in the case at bar everything was done by

Tackama had the consent and authorization of the limited partners,

pursuant to the terms of the Partnership Agreement.

Counsel says that there was no duty on Tackama to disclose the

terms of financing "as the obtaining of the terms had been

consented to". He says that had it not been for the provision

relating to the statutory declaration Tackama would have enjoyed a

- 236 -

true carte blanche, and there would have been no duty to disclose.

The statutory declaration provision constituted the only code of

disclosure. The duty of disclosure was fully discharged when the

statutory declaration was delivered pursuant to the provisions of

the Partnership Agreement.

This argument was previously made. Counsel submits that since

Tackama had the absolute power to negotiate the terms of financing

and to set aside additional reserves, it therefore had the prior

consent of the limited partners to do so, and therefore had no duty

to disclose. Again, the argument completely ignores the fiduciary

declarations made in para. 5.02. It also overlooks the fact that

in the case at bar, disclosure is only relevant because Tackama

takes the position that it had the limited partners' consent to

obtain the benefits. By taking that position Tackama must prove

that the limited partners gave their informed consent. In order to

establish informed consent full disclosure, which includes

explanation, must be shown. It is in this sense that disclosure is

relevant, and it is in a different sense than it would be in the

circumstances where

a

claim was made on the basis of

As stated

misrepresentation, negligent misstatement or fraud.

earlier, I am satisfied that in the circumstances of this case

there was a duty on Tackama to disclose the terms of financing at

the time of the extensions.

However, such a finding is not

necessary for the plaintiffs to succeed, because here we are only

concerned with the question of informed consent.

- 237 -

Counsel submits that the terms of financing were not

considered to be material by the limited partners or their

professional advisors. He goes further and says that the limited

partners didn't care what the terms were, so long as the financing

enabled the plant to be built. This argument in effect suggest

that the limited partners really did not care about their right to

receive the balance of the cash flow.

It is related to the

expanded argument that the limited partners were greedy; that they

should have been content with their substantial tax benefits, what

I have called the first half of their investment.

These

submissions are contrary to the evidence and to the actual

agreement made by the parties.

Counsel distinguishes Ocean City on the basis of the facts as

there was deliberate concealment on the part of the agent. On the

facts before this court he states:

all communications relevant to disclosure were

handled and vetted by professional people

fully familiar with all aspects of compliance

of disclosure requirements and anxious to

ensure, both with respect to the limited

partners and the general partner, that

everything that should have been done was

done. A finding of a failure to disclose on

the part of the general partner cannot be

other than a finding of gross professional

negligence or breach of duty on the part of

these advisors.

(My emphasis)

I am not sure what counsel means by the phrase "fully familiar with

all aspects of compliance of disclosure requirements". It does not

appear to describe the persons involved, and seems to be

- 238 -

contradicted by the evidence. It could apply to the solicitors but

only if they had been retained to give an opinion on disclosure

requirements, and were fully informed of all material matters. As

already noted, such was not the case here. Again, of the persons

referred to, it seems that only Bolton may have been fully

informed. For example. he suggested that he knew that Tackama took

the position that any reserves would eventually belong to it on the

exercise of the option.

There appear to be two simple answers to this submission.

First, those "professional people", if they "handled and vetted"

all communications relevant to disclosure, did so on behalf of

Tackama and in doing so were, in effect, Tackama. Second, it is

clear on the evidence, and I have so found, that none of those

persons actually appreciated at the time what the impact of the

terms of financing would be on either Tackama or the limited

partners. Whether or not the failure to disclose on the part of

Tackama can be said to be a finding of gross professional

negligence, or breach of duty, on the part of Tackama's advisors,

is not a relevant consideration and in any event would provide no

defence to Tackama.

I note here that throughout argument counsel for Tackama, on

more than one occasion, suggested that Tackama was innocent of all

"fault" and that Tackama relied solely on the advice of its

professional advisors.

Counsel also seemed at times to be

- 239 -

attempting to suggest that Sojonky was the villain in this matter.

Because he had full knowledge, including the terms of financing,

and because he at times represented the limited partners, it was

argued that he should not be entitled to recover in the action. As

well, at least by implication, it was suggested that the limited

partners should not recover for the same reason since Sojonky's

knowledge was their knowledge.

If I have not already dealt with these submissions I will do

so now. I am satisfied that Sojonky, like Bolton and the others,

did not appreciate what the impact of the terms of financing would

be on Tackama, and on the limited partners. I am also satisfied

that he did not "represent" the limited partners in the manner

suggested by counsel, and that even if he did, his knowledge, what

ever it was, was not their knowledge. It is no defence for Tackama

to say that it relied solely on its professional advisors, and in

any event I am satisfied that Lunde was as informed as his top

advisor, Bolton.

Counsel next argued that the failure of the accountants

(Bolton) or Sojonky to issue new schedules and projections, or to

disclose the impact of the terms, cannot be classified as a breach

of fiduciary duty by Tackama.

He says that the only duty to

disclose is that which is in your knowledge. Tackama was "ignorant

of these aspects" and therefore cannot be guilty of a failure to

disclose them.

- 240 -

I see no merit in this argument. I am satisfied that Tackama

(Lunde) was kept fully informed of matters by "the team" and was as

knowledgeable as they were.

In reality each of the persons

involved at the time was only concerned with one thing, the

obtaining of financing, any serviceable financing, which would

enable the project to proceed.

Lunde was not directing his

attention to the interests, best or otherwise, of the limited

partners, other than what was narrowly necessary in order to obtain

their consent to the extensions. Second, in the case at bar, as

previously mentioned, the disclosure aspect is only relevant to the

issue of whether or not the limited partners gave an informed

consent to Tackama benefiting as it did.

Tackama was the limited partners' fiduciary. In negotiating

and committing itself to the terms of financing on behalf of the

limited partners, Tackama was bound to act in their best interests.

The law applies a strict and unyielding ethic to a fiduciary who

has obtained a benefit inconsistent with the best interests of his

beneficiaries. Consequently, the state of Tackama's knowledge, its

focus, its motivation or whether or not it acted in good faith,

beecome irrelevant considerations.

A fiduciary simply cannot retain a benefit made in the course

of or by means of his fiduciary relationship. In doing so the duty

is breached to protect the best interests of their beneficiary. If

a benefit is obtained the fiduciary must account for it to their

- 241 -

beneficiary.

In entering the financial arrangements Tackama's

personal interests came in conflict with those of the limited

partners, which Tackama was bound to protect. The benefit or

advantage thereby obtained by Tackama must be accounted for, unless

Tackama can establish informed consent of the limited partners,

which brings us back to the question of disclosure. The benefits

obtained by Tackama are completely inconsistent with Tackama's duty

to assure that in any conflict between its personal interest and

its duty to the limited partners, the latter had to prevail.

It matters not, as suggested by counsel, that Tackama did not

enter into a "side deal" with a third party, by use of its position

to its manifest advantage. What does matter is that Tackama, the

fiduciary, obtained a benefit or advantage from what I will call

the partnership transaction, that is, the financing arrangements

which Tackama negotiated on behalf of the partnership. Again, I do

not accept counsel's argument that the Regal (Hastings) and Phipps

line of cases are distinguishable because in the case at bar the

transaction "was wholly authorized and, it is not sought to

disaffirm it".

Tackama, indeed, was authorized to negotiate the financing but

it was not authorized to obtain a benefit for itself. This is

particularly so when that benefit came out of the limited partners'

pockets. I see no reason to require a limited partner to disaffirm

the agreement, and the tax benefits which were obtained, even if

- 242 -

this could be done. They were entitled to receive those benefits

in addition to the balance of the cash flow. They have recovered

the former. They seek to recover the latter.

Counsel argues that the non-disclosure of material facts in

late 1983 is an non-issue if the only opportunity lost was the

opportunity to renegotiate with Tackama.

He says that

renegotiations could have taken place at any time, for example, in

1984. In 1983 Tackama was desperate to obtain the financing which

would enable the plant to be built and would enable Tackama to

survive. Any financing, which could be serviced and which would

permit the plant to be built, would clearly be in the best

interests of Tackama. However, while such financing would be in

the interest of the limited partners to the extent that it would

enable them to obtain some write-offs or tax benefits, it does not

follow that such financing would be in the best interest of the

limited partners.

This is particularly so if such financing

enabled Tackama to obtain substantial benefits, and those benefits

effectively came out of the cash flow which would have been

distributed to the limited partners.

In the fall of 1983 the partners would have been in a strong

position to negotiate "the new deal", that is, one which at the

least would protect the balance of the cash flow which was theirs.

The limited partners would not have been able to negotiate with

Tackama (Lunde) with any strength after 1983, and this was clearly

- 243 -

demonstrated when the partners' meeting was held in May, 1987. By

then the limited partners had knowledge of most of the terms of

financing. They had concern, and requested that some matters be

renegotiated. It is common ground that Lunde was not prepared to

do any renegotiating.

Further, I am satisfied that once the

limited partners were fully informed of the terms of financing and

the impact, they did not sit on their rights to see which way the

wind blew (and to lead the general partner to continue) as

suggested by counsel.

Counsel argues further:

The fact that other fiduciaries to the limited

partners - Frank Sojonky, Laventhol & Horwath

and Bull, Housser

&

Tupper

-

had the

information and did not disclose totally

negates any veiled suggestion that Tackama

failed to disclose in order

to obtain a

commercial advantage or for fear that the

limited partners would not go along with it.

In simple fact, the determination as to what

should be disclosed was not

made by the

general partner at all, but by others who were

in their own right fiduciaries to the limited

partners.

(My emphasis)

Counsel argues that none of the persons referred to were servants

or agents of Tackama. In my opinion both factually and in law,

they were Tackama's agents when they were seeking the financing,

and when they were seeking the extensions from the limited

partners. Without the financing there would be no project. They

were looking after Tackama's interests, and in my view gave little

thought, if any, to those of the limited partners. Further, I am

of the opinion, and have so found, that Tackama (Lunde) was as

- 244 -

fully informed and knowledgeable as the members of the team.

Again, the evidence is that it was Lunde who insisted on reviewing,

and having the final approval of, the information that would be

disclosed to the limited partners.

I have already indicated my concern that no disclosure was

made to the limited partners, particularly in the fall of 1983.

However, I have held that Tackama's advisors simply did not focus

on, or appreciate, what the impact of the terms of financing would

be on Tackama and on the limited partners. I have also found that

more likely than not those persons did not fully appreciate the

scope and extent of the fiduciary duties owed by Tackama to the

limited partners. In any event, it is no defence for Tackama to

point the finger at individual members of the team if the purpose

is to suggest fault on their part. None of them is a party to the

action and no claims are advanced against them.

Finally, counsel for the plaintiffs has emphasized "as

strongly as possible" that the plaintiffs are not seeking

compensation or indemnification for losses, nor are they advancing

claims for damages or for negligent misstatement. The claim is to

have Tackama, the fiduciary, account for profits or benefits which

it obtained by virtue of its fiduciary position and exercise of

fiduciary powers. Thus, bad faith on the part of Tackama is not a

part of the plaintiffs' case. As well, the issue of non-disclosure

of material facts by Tackama need not be considered further.

- 245 -

Counsel argues that it would simply be unworkable if every

decision of management (Tackama) had to be brought to a meeting of

the limited partners for a vote. He says:

It is completely unworkable, for virtually

every decision of management has the capacity

to benefit the general partner and/or the

limited partners, and it cannot have been

contemplated that each must be passed before

the limited partners in general meeting, if

the general partner is to avoid the risk of a

lawsuit. This is why the rule demonstrated in

the Mills v. Mills case governs the acts of

fiduciaries in the course of management - and

not the rule in Regal (Hastings) which only

applies to extraneous transactions of the

fiduciary, not in the course of management as

such, and where stringent disclosure and

consent requirements are applicable.

I have already analyzed Mills and silimar cases and concluded that

they have no application to the case at bar which is governed by

the principles laid down in the Regal (Hastings) line of cases. It

seems to me that most management decisions, which would be

operations decisions, would not need to be considered by the

limited partners. Only decisions by which Tackama would obtain a

personal benefit or advantage would need their consent and they

would be few in number.

While it was not necessary for my

decision, I am satisfied that had Tackama made full disclosure to

its partners when it sought the extensions, a mutually agreeable

agreement could have been quickly concluded. The limited partners

also wanted the project to proceed. In any event, the bargain made

by the parties, which was put forward by Tackama, makes it clear

that Tackama was to exercise its powers in the best interests of

the limited partners.

- 246 -

Counsel argues further that Tackama was authorized to and did

obtain the best financing it possibly could. Its authority should

protect it from an action for breach of fiduciary duty as follows:

The scope and extent of the authority

conferred upon Tackama are 'the backdrop

against which Tackama's conduct in discharging

its fiduciary obligation must be measured.

They inform and confine the field of

discretion within which Tackama was free to

act' per Dickson J. in R. v. Guerin, at

pp. 343 and 344.

I am not satisfied that the above proposition, extracted from R. v.

Guerin (1984), 13 D.L.R. (4th) 321 (S.C.C.), and applied in part to

the facts in the case at bar, is valid as stated. In

Guerin,

Dickson J. was dealing with an antecedent promise and the standard

of care was expressly stated to be defined by a principle analogous

to that underlying the doctrine of promissory or equitable

estoppel.

Herein, if there is an analogy, it would be the

equivalent of an antecedent promise by Tackama to exercise its

power in the best interests of the limited partners. Further, what

confined the field of discretion in which Tackama was free to act,

was the express statement by Tackama that in exercising its power

to obtain the financing, and to set aside additional reserves, it

would act honestly, in good faith and in the best interests of the

limited partners as their fiduciary.

Counsel argues that Tackama was not exercising any discretion

when it obtained the financing. There was no other choice and it

- 247 -

is not accurate to suggest that they preferred one interest over

another. He says that the plaintiffs, if fully informed, would

have affirmed the financing, and would only have sought some

renegotiation with the general partner.

I do not propose to

conjecture as to whether or not the financial institutes would have

changed the terms of financing if pressed to do so by Tackama, or

how the limited partners would have handled the situation had they

been fully informed.

As I have already stated I am satisfied,

given the circumstances, that it was more likely than not that a

compromise would have been made which would have been satisfactory

to both the limited partners and Tackama.

Counsel says that the risks involved in proceeding without the

financing being in place "were fully understood by the prospective

limited partners before they subscribed, and no risk arose about

which they had not been warned". I do not agree that all of the

risks involved were fully understood by any party, particularly the

risk that not only would Tackama recover substantial benefits but

that those benefits would come out of monies which ordinarily would

have been distributed to the limited partners. Again, the argument

ignores the fact that by the time of the second and third

extensions the actual risks had become certainties, and were then

known by Tackama.

Counsel notes that both Sojonky and McKercher continued with

the project after they learned of the main terms of financing. He

- 248 -

points out also, that Barclay and Bolton both gave evidence that if

they had been asked by their clients, who were limited partners,

they would have certainly continued to recommend the investment.

I have already dealt with this argument, at least in part. I am

satisfied that at the material time all of the members of the team

were focused on the obtaining of financing which was so crucial to

the project, and not on the impact of the changes on Tackama or the

limited partners.

It does not matter that Barclay and Bolton, members of the

team, now say that they would have continued to recommend the

investment. First, neither of them appears to have appreciated the

impact of the financing.

Second, the limited partners were

entitled to full disclosure, and I am satisfied that Barclay and

Bolton's recommendations in that context may well have been a

modified recommendation and, as well, that the limited partners

would have insisted upon renegotiating the deal at least in part.

While it is not my task to speculate, and indeed the cases show

that it is an impossible task, I entertain doubts that at the end

of the day the limited partners would have said, OK, forget about

our share of the profits, we will just continue in order to obtain

half of what we originally contracted for, that is, the tax

benefits.

Counsel reiterated that all risks were fully explained to the

limited partners before they subscribed. There was no obligation

- 249 -

on Tackama to explain the impact of the workings of the agreement

on the limited partners as "that should be taken to have been

understood by all in December of 1982". As I have already said I

do not agree that all of the risks were explained. They were not

known, and then only by Tackama, until the time of the extensions,

particularly the last one. Again, the duty of disclosure in the

case at bar is not an isolated one. It is tied to the onus of

proof on Tackama to show the informed consent of the limited

partners to the benefits obtained by Tackama. Informed consent, as

the words imply, must go farther than merely relating the terms of

financing. In my opinion to obtain such consent Tackama should

have explained the impact of the terms of financing or at a

minimum, put the limited partners on the track to the ascertainment

of such impact.

It was argued that the effect of the debt repayment on the

limited partners was not a vital element in the commercial

relationship between the parties.

I disagree.

In the end the

increased payments resulted in Tackama receiving a benefit in

excess of $3 million at the expense of the limited partners. Both

Bolton and Sojonky were conscious of the fact that the repayment

terms would have an impact on the limited partners, but they

apparently did not take their analysis of the matter far enough.

Counsel next argued that if Tackama was to be restricted in

any way in the type of financing which it could obtain for the

- 250 -

partnership, "this could easily have been inserted into the

agreements".

In reality Tackama did in fact insert an express

restriction on the type of financing which could be obtained, that

was, the fiduciary declarations contained in para. 5.02.

Counsel argued further that the impact of the financing on the

cash distributable was known or could have been known to each

limited partner in December of 1982. Mr. McDonnell's table, which

demonstrated the impact, could have been produced in 1982 by the

limited partners and their advisors "had they decided to ascertain

how the agreements worked under different assumptions". This may

be so if accurate assumptions reflecting the actual terms of

financing subsequently obtained could have been made. However,

even if this could reasonably have been done, and I do not believe

that it could, it does not establish an informed consent or the

first step of disclosure. Again, "it is not to the point" as was

said by Chief Justice Gibbs in United Dominions Corporation at p.

678.

Counsel turned again to the reasonable expectations of the

limited partners and said that all of the terms agreed to by Alfor

were within the reasonable expectation of the limited partners.

Nearly all of them expected that there would be some working

capital requirement and that some reserves might be necessary.

This may be true, but even if they were the limited partners'

expectations, these were known facts to Tackama.

The limited

- 251 -

partners should have been informed of the known terms of financing,

if Tackama wanted to keep the benefits and advantages it would

obtain from such terms. What the limited partners did not expect

was that the working capital restrictions and reserves would be

substantial (they were shocking to Bolton when he learned of them)

and not only that they would come out of their cash flow, but that

the money would belong to Tackama on the exercise of the option.

Counsel reiterated his earlier argument that the terms of

financing were not material or of any interest to the limited

partners, who were only interested in the tax benefits they were to

receive. This argument ignores the fact that the limited partners

were to receive all of the cash flow remaining after Tackama had

received its share of the profits through the managing fees. It

also ignores the reaction of the limited partners when they were

finally told of the terms of financing, which demonstrated that the

terms were material and of interest to the limited partners.

In completing his argument on the topic of disclosure, counsel

submitted that the financial transactions negotiated by Tackama

were in the best interests of the partnership and that Tackama's

powers were exercised for the purpose for which they were granted.

It is clear to me that the transactions were in the best interests

of Tackama.

However, in my opinion they were not in the best

interests of the limited partners, nor were they in the best

interests of the partnership, notwithstanding the fact that by

- 252 -

virtue of the transaction the limited partners would probably

receive one-half of what they contracted to receive, i.e., their

tax benefits.

Finally, under this heading counsel argues that Tackama

received no benefit from the financing. Tackama's benefit occurred

solely as a result of the option which is a transaction entirely

separate from the financial transactions. I do not agree with this

rather technical argument, with has already been covered.

The

benefits were created as a result of Tackama's breaches of its

fiduciary duty to the limited partners. The fact that the receipt

of the benefits, or some of them, may not have occurred until some

time later, if this is the case, and when the option was exercised,

is irrelevant.

CHANGE IN THE DEAL

Counsel says that there was no change in the deal as a result

of the terms of financing and that this suggestion is a red

herring. He says:

The fallacy of this superficially attractive

characterization lies in the fact that both

parties entered into this arrangement knowing

that the terms of financing actually achieved

in the future would be what would govern how

things would work out in the formula agreed to

between them. In other words the formula was

'the deal' and it never changed. The terms of

financing were not 'the deal', as none were in

place in 1982, and so there was nothing to

change.

The projections were simply all

- 253 -

illustrations of the formula in operation

based on many assumptions.

Further he states:

...

the

limited

partners

seek

to

bamboozle this court with assertions that,

because of the actual terms of financing, the

limited partners are 'worse off' and the

general partner is 'better off' or is

'benefited' by those terms of financing. All

of these allegations are allegations of an

actual change from an earlier position. Such

a situation did not exist in the Alfor

scenario. There was no change.

I need not consider whether or not a "change in the deal" is an

accurate description of what happened. There was no binding deal

until after the third extension had been granted. At that point,

and for some time earlier, Tackama knew the terms of the deal, but

the limited partners did not.

The change in the deal evidence

really only establishes that no disclosure was ever made to the

limited partners, and no informed consent obtained from them.

If counsel's argument is to be accepted, then there was an

even higher duty per se on Tackama to disclose the terms of the

financing at the time that the latter two extensions, particularly

the last one, were sought. At that time Tackama knew that the

December 1982 information and projections given to the limited

partners were history. It knew the terms of financing. It knew as

well, if I accept its present position, or had the means of

knowing, not only that it was going to reap substantial benefits

but that those benefits would come from the cash flow which

ordinarily would have been distributed to the limited partners.

- 254 -

Counsel continues:

The simple fact is that the parties entered

into an arrangement whereby the absolute and

relative amounts which might come to them from

the project were undetermined and would only

be determined by the happening of future

events in accordance with the terms of their

agreements.

There is nothing remarkable,

unfair or in the slightest way inequitable

about such arrangements. The limited partners

knew they were taking a gamble when entering

the project without terms of financing in

place and cannot now complain of the results.

(My emphasis)

I note first that "the amounts which might come to them" were no

longer to be determined by the happening of future events. The

events had occurred and the amounts were known by Tackama at the

time that the last two extensions were sought. The change from

conjecture (what counsel described as "what if assumptions" and

"crystal ball-gazing") to fact occurred before the Partnership

Agreement was finally concluded by the granting of the third

extension.

With regard to the gamble, why should the gamble of entering

the project, without knowing the terms of financing, solely be

assumed by the limited partners? Tackama, their fiduciary, had

told them in the Partnership Agreement prepared by Tackama, that in

negotiating the financial arrangements Tackama would look after

their best interests. Again, by the time the second extension was

applied for there was no need for the plaintiffs to gamble. The

terms of financing were then known to Tackama.

- 255 -

Counsel's argument is based on a comparison between the

December 1982 information/projection, and the subsequently obtained

terms of financing. He describes the December 1982 information and

projections as "what if assumptions", "pie in the sky", and

"crystal ball-gazing" but in the same breath says that there was no

duty on Tackama, at the time that the extensions were sought, to

disclose the actual facts or the terms of financing then known.

Counsel's argument overlooks the fact that Tackama knew all the

terms before the limited Partnership Agreement was finally

concluded.

Finally, counsel argues:

There

was,

therefore,

no

"accelerated"

There was no

repayment of long-term debt.

change in respect to the requirements for

reserves.

The terms of financing did not

change any relationship, it crystallized it

and gave it substance where none had existed

before. They did not confer a 'benefit' to

anybody at the 'expense' of anybody.

They

were the first and only arrangements in place.

I do not agree with these assertions. There was in fact a change

from the reasonable assumption of a twenty-five year amortization

period and no reserves to a substantially reduced term and

substantial reserves. The terms of financing could not crystallize

the relationship before the agreement was finally concluded, with

only one party having knowledge of its terms. In my opinion, it is

an incontrovertible fact that, as a result of the financial terms

negotiated by Tackama, it received substantial benefits and

advantages, which were at the expenses of the limited partners.

- 256 -

The plaintiffs are calling on their fiduciary to account for

profits or benefits it has obtained without their informed consent.

The evidence as to the change in the deal is evidence of the lack

of disclosure of the terms of financing by Tackama, and the failure

to obtain an informed consent. The plaintiffs were entitled to

know about the changes, and to have their impact explained, in

order to give the informed consent required.

THE RESERVES

Counsel submits that Tackama did not receive any benefit by

virtue of the creation of the reserves. He says that under para.

4.02 of the Partnership Agreement, Tackama was entitled to set

aside reserves to meet the obligations of the partnership, for

example, the obligations under the Loan Agreement to maintain the

$1 million reserve, and the minimum working capital restrictions.

I am not satisfied that these are the types of reserves envisaged

by para. 4.02, but I will assume that they are. Counsel's point is

that the setting aside of the reserves was purely a management

matter and the court should not interfere. I have already dealt

with this argument. Tackama had a limited, or narrow, power to set

aside reserves under para. 4.02, but that power was subject to its

duties owed to the limited partners under para. 5.02.

Counsel says that reserves are simply an accounting term

indicating that earnings had been retained by the enterprise, but

- 257 -

were employed as assets of the enterprise for other purposes. They

are not all tangible funds and are not recoverable as such.

I

disagree. In my opinion they reflect the actual benefit received

by Tackama as a result of the exercise of a power by Tackama in its

fiduciary capacity. What happened to the monies, or how they were

used, after they were taken from the monies which ordinarily would

have been paid to the limited partners, is irrelevant. The benefit

of those monies, in cash or in kind, was obtained by Tackama and

taken from the limited partners. Tackama had no doubt about the

source of the reserves. In his letter dated May 5, 1986 to the

bank, Ure pointed out that the $1 million reserve was to be created

from "funds which otherwise would be paid to the limited partners".

In his letter dated June 29, 1983 to the bank, Lunde pointed out

that he was prepared to recommend to the Limited Partnership "that

a $1 million shut-down cash reserve be funded over a period of time

from the limited partners' share of income."

Counsel says that the setting up of the various reserves by

Tackama cannot be challenged.

He refers in particular to the

reserves set up in January of 1988. He says that at the time Alfor

was a fledgling enterprise in a cyclical industry with looming

adverse contingencies - the IMI claims, the United States/Canadian

memorandum of understanding and the stumpage and silviculture

controversies. He says that such matters justified the setting up

of the reserves.

- 258 -

It appears to me that Tackama was not called upon to pay any

sums as a result of the matters raised, save perhaps for the IMI

lien claims which were eventually settled. My recollection is that

Tackama had set some monies aside to deal with the lien claimants.

I point out also that at the time of the January 1988 reserve in

the amount of $862,000, Alfor was doing very well financially, and

was already holding reserves in excess of $2.5 million. In

addition, Tackama knew that it was highly unlikely that the banks

would ever call upon any portion of those reserves.

On the

evidence, as I have already indicated, I am satisfied that the

reserve was not a proper reserve under the provisions of para.

4.02, and that Tackama cannot justify the benefit it received

thereby.

I refer again to the dangers of the fiduciary position of

Tackama, as described by Lord Herschell in Bray, "human nature

being what it is". I am satisfied that in setting up the January

1988 reserves, Tackama was swayed by self-interest rather than by

duty, thus benefiting itself and prejudicing the limited partners

it was bound to protect. Both Lunde and Bolton admitted that the

setting aside of such reserves benefitted only Tackama, and was not

in the best interests of the limited partners.

Counsel says that a reserve is only created to cover an

obligation, or a future contingency or liability.

Generally

speaking this is true. Again, there is no question but that

- 259 -

Tackama had the right to set aside reserves which in its reasonable

opinion it deemed desirable to meet the obligations of the

partnership and to operate the business in a prudent fashion and

manner.

The plaintiffs cannot take quarrel with any reserves

properly set aside in accordance with the provisions of para. 4.02.

The plaintiffs take issue with Tackama's position, which

apparently it held from day one, that the reserves became its

property on the exercise of the option. That position, of course,

placed Tackama squarely in a conflict situation when it set aside

a reserve because that reserve, or its kind, would automatically

belong to it.

The reserve, therefore, was not in the best

interests of the limited partners, because it was set out of monies

which ordinarily would have been distributed to them and could not

be recovered, not because it was used in the business of the

partnership, but because it automatically became Tackama's on the

exercise of the option.

Counsel also argues that in the circumstances of the case "in

the best interests of the limited partners" must be the equivalent

to "in the best interests of the partnership". In my opinion this

does not necessarily follow and is contrary to the wording used in

the Partnership Agreement. A reserve, which for business reasons

may be in the best interests of the partnership, will not be in the

best interests of the limited partners if it is not used for the

- 260 -

legitimate purposes of the partnership, and is simply taken by

Tackama at the end of the day.

THE ROLE OF MR. SOJONKY

As I already noted during the trial process defence counsel

attempted to make Sojonky out to be, in a sense, the villain of the

project. I was asked to disbelieve his evidence in certain areas

and to find him knowledgeable in others such that I should find him

disentitled to recover in the action as a limited partner. There

was also some suggestion to the effect that Sojonky had represented

the limited partners at certain meetings, such that his knowledge

was their knowledge.

Counsel says:

This whole scenario, it is submitted, must be

viewed with repugnance by a court of equity.

Here is a professional advisor setting up his

alleged ignorance of and dereliction of duty

with respect to the very matters for which his

client paid handsomely for his advice as the

basis and foundation of his suit against his

client. Furthermore, his grounds of complaint

are based in part upon certain matters of

which he himself was the original author (i.e.

the 25-year amortization period and $1 million

interest reserve). Equity will not continent

such a state of affairs, as indicated in the

Gray v. Yellowknife Gold Mines case ....

He then goes on to review Sojonky's knowledge in November of 1983,

referring to him as the financial advisor to Alfor.

satisfied that counsel's description is accurate.

I am not

However,

- 261 -

assuming that it is, and having given the matter some thought, I

have chosen to give Sojonky the benefit of the same doubt that I

have given to Bolton. I have concluded that he never did fully

appreciate the impact of the terms of financing on Tackama and on

the limited partners or the nature and extent of the fiduciary

duties owed by Tackama to the limited partners. It is true that

Sojonky stood to gain by way of substantial fees if the project

proceeded, regardless of the terms of financing. Bolton was in a

similar position. However, it is the same position in which all

agents find themselves. It does not support an automatic finding

that Sojonky had sufficient knowledge and appreciation of the terms

of financing, that it can be said that Tackama had his informed

consent to do what it did.

I do not draw a parallel between Sojonky and the plaintiff in

Gray, nor was Sojonky in fact Alfor's financial advisor. I do not

think that the exact state of Sojonky's knowledge in the Fall of

1983 is relevant. He certainly had sufficient knowledge. He knew

in November of 1983 that the term of the long-term financing was

eight years or less and that there would be a $1 million interest

reserve as well as additional reserves for the working capital

requirements. Whatever the extent of his knowledge, I have found

that in the circumstances he did not appreciate the impact of the

terms of financing. I do not agree with counsel's submission that

he should be disqualified as a plaintiff, and that his claim should

not be entertained.

- 262 -

Counsel again attacked the claims being advanced as limited

partners by McKercher and the other lawyers at Bull, Housser &

Tupper. He says:

In November 1983 the situation existed where

Sojonky, McKercher, Bull, Housser & Tupper,

Tupper and Laventhol & Horwath all knew

intimately

the

obligations

under

the

partnership and management agreements, all

knew the basic terms of financing and yet not

one advised either his clients or advised the

managing general partner of the necessity of

disclosing to the limited partners the terms

of financing in order that they could take

action 'to protect themselves'.

Now the

lawyers at Bull, Housser, and Mr. Sojonky, the

very parties looked to by the general partner

to handle issues of disclosure, are suing him

on the basis of his non-disclosure.

A

situation, we say, unsustainable in a court of

equity.

(My emphasis)

I am not satisfied that all the named persons knew the

intimate details of the obligations under the Partnership and

Management Agreements and all of the basic terms of financing. For

example, there is no evidence before me that any of them, save

Bolton, knew of Tackama's position that on the exercise of the

option the reserves would belong to it and would reduce the

purchase price. Again, as I have indicated, Bolton's evidence in

this area is unclear. Further, I am not aware of the state of

their knowledge as to the impact of the fiduciary declarations on

the other provisions of the Partnership Agreement.

Whatever the state of the knowledge of the lawyers, the

evidence does not satisfy me that they appreciated the impact of

- 263 -

the terms of financing to such a degree as to constitute their

informed consent to the benefits received by Tackama. Again, I am

satisfied that Tackama's level of knowledge, through Lunde and its

other employees, was no less than that of the team members and, in

particular, of the top team member, Bolton. There is no evidence

which satisfies me that it was the duty of the team members to

advise Tackama of the necessity to disclose the terms of the

financing or that Tackama sought their advice in that regard. In

particular, there was no evidence that Tackama looked to Sojonky or

the lawyers at Bull, Housser & Tupper "to handle issues of

disclosure". The only evidence in this regard was that advice was

sought by Lunde with regard to disclosure in relation to the

provisions of the statutory declaration. Advice was received in

that regard only. Tackama has failed to satisfy the court that any

of the persons referred to should be prevented from recovering in

this action as limited partners.

Having criticised Sojonky, McKercher, Bolton and the others

for failing to advise Tackama of the necessity to disclose the

terms of financing to the limited partners, counsel then argued

that the advice was not given because the limited partners did not

need protection. As well, he argued that Tackama was acting within

the authority granted to it, and in the best interest of the

Partnership and the limited partners. The fact that the advisors

did nothing to cause the terms of financing to be disclosed "is

strong evidence that no such duty existed." I do not agree with

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any of the assertions contained in this argument.

They are

contrary to the evidence and again ignore the fiduciary

declarations.

Counsel then turned to the evidence of Bolton. He commenced

by saying:

I would now like to deal with Mr. Bolton's

evidence. I have already averted to what I

have no hesitation in calling the cowardly

attack on Mr. Bolton, whose endeavours in

putting so many people into this scheme has

enriched them so handsomely.

Mr. Bolton is not a party. No allegations in

the pleadings are made against him or his

firm.

Yet this case has unfolded in a way

clearly designed to besmirch and destroy his

professional integrity and his credibility,

without any opportunity for him to defend

himself or to have representation.

(My emphasis)

While there are conflicts between the evidence of Bolton and

Sojonky I find counsel's observations to be exaggerated. I have

already expressed my observations about Bolton's evidence and the

circumstances of him giving both expert evidence and lay evidence.

Given Bolton's substantial involvement in the various matters if

expert testimony was needed Tackama should have put forth the

testimony of an independent expert witness.

Counsel then attacked the credibility of Sojonky's evidence

paying particular attention to the "disclosure" issues. At the

risk of repeating myself, I do not accept counsel's review of the

- 265 -

evidence in this area, or his observations or arguments in this

regard. I refer in particular to his suggestion that at the April

8, 1983 meeting "these advisors discussed the issue of disclosure".

If he is suggesting that those present fully appreciated the impact

of the terms of financing on Tackama and on the limited partners,

and were in fact discussing whether or not to disclose them to the

limited partners in that context, I do not agree with him. That is

not the evidence. Even it were, it surely would not form the basis

of a defence.

On cross-examination, Sojonky stated that it was his

understanding that the duty of disclosure rested on Tackama.

Although it was not his responsibility, if he had observed

something that was not true, he would have pointed this out. The

evidence of Sojonky referred to by counsel does not satisfy me that

he ever assumed the responsibility for matters of disclosure to the

limited partners. It is true that he, from time to time, like

other members of the team, was involved in the relaying of the

information to the limited partners. However, there is no evidence

before me that he took it upon himself to be responsible generally

for disclosure to the limited partners.

As already stated, there was no evidence that Sojonky, or any

other member of the team, ever sat down in 1983 and analyzed the

impact of the terms of financing on Tackama and the limited

partners. Counsel's use of the word "disclosure", with reference

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to Sojonky's cross-examination, is a bit misleading. For example,

as I have already indicated, it is true that at the April 8, 1983

meeting, the advisors discussed the issue of disclosure, i.e., what

the limited partners would be told, but this was not with regard to

the disclosure of the terms of financing. It had to do with the

status of the negotiations and the reasons for the extension.

Sojonky and the other members of the team are not defendants

in the action.

Yet counsel's argument with regard to their

involvement is advanced as if they were, or as if their actions

constitutes a defence for Tackama. This of course is not the case.

Hence, the only purpose of this argument must be to establish that

Sojonky, and the other team members who are limited partners,

should not be able to recover in this action. I have already found

that in my opinion there is no reason why they should not so

recover, and I will not deal with the subject matter further.

Finally, I point out that it is not a question of who, other

than Tackama, should have been responsible for disclosing the terms

of financing to the limited partners and of explaining their impact

on them and on Tackama. The question is did Tackama obtain the

informed consent of the limited partners for Tackama to obtain the

benefits. Tackama must prove full disclosure and it cannot do so.

THE DRYER ISSUE

- 267 -

I have already discussed this issue. Tackama was obligated to

deliver the statutory declaration to the limited partners

certifying to them that it had arranged sufficient financing to

construct a fully operational plywood plant before it could require

them to put up the balance of their capital. It is common ground

that (while the statutory declaration was delivered) Alfor did not

arrange sufficient long-term financing to construct the plywood

plant.

What eventually happened was that Tackama financed the

purchase of one of the dryers with funds from the plaintiffs' cash

flow.

Counsel for the plaintiffs said that in effect the limited

partners have been required to make an additional capital

contribution in the amount of the financing shortfall. It does not

matter whether that capital contribution takes the form of

additional payments made by the limited partners (and which were

sought by Tackama) or cash flow which could not be distributed.

The net effect is exactly the same. I agree.

The plaintiffs say the result was a benefit to Tackama either

in money or money's-worth, i.e., the monies expended, or in a more

valuable plywood plant than the financing available to Alfor was

able to build. The plaintiffs say that Tackama did not have their

informed consent to receive the benefit, and Tackama must therefore

account for it. The amount of the claim is $660,000.

- 268 -

Counsel for the defendants said that the dryer issue amounts

to an improper challenge of a management decision which cannot

succeed unless the plaintiff establishes abuse on the part of

Tackama. He emphasizes also that the limited partners received

some tax write-off benefits as a result of the purchase of the

dryers. His arguments do not deal with the fact that the dryers

were purchased by the limited partners, just as if they had made a

further capital contribution. In my opinion Tackama must account

for the $660,000.

I turn now to the contractual issues which are twelve in

number; two involving the interpretation of the Partnership

Agreement and ten involving the interpretation of the Supply

Agreement.

The plaintiffs' expert, Mr. McDonnell, was qualified to give

general accounting and auditing evidence, and in particular

evidence with respect to the forest industry. I was impressed with

both his oral and written evidence. He was asked to go through the

books and records of Tackama and Alfor. He was asked to identify

amounts which in his opinion might not have been properly charged

to the cost centre, pursuant to the provisions of the Supply

Agreement.

These amounts would of course affected the veneer

transfer price charged by Tackama to Alfor. McDonnell challenged

some of the charges more strongly than others, the latter simply

being raised "for discussion".

Bolton supported the charges

- 269 -

challenged by McDonnell. To perform their task both men had to

read the applicable agreements, and to some degree interpret them,

and both gave evidence in that regard.

I turn now to the first issue under the Partnership Agreement.

CONTRACTUAL ISSUES, APART FROM THE SUPPLY AGREEMENT

(a) "Cash distributable" in the Calculation of the Option

Price.

The words to be interpreted are those contained in para.

3.31(d) of the Partnership Agreement,

(d) With respect to the March 1, 1988 exercise

date, the purchase price to be paid by the

managing general partner to each limited

partner for each unit purchased hereunder

shall be:

...the greater of:

I.

$6,239,00.00 plus an assumption of all the

liabilities of the partnership by the managing general

partner; or

II. Eight times the average amount of cash distributable

to the limited partners, as determined under para. 4.02,

in the fiscal years 1984, 1985, 1986 and 1987, plus

$250,000.00 and the assumption of all the liabilities of

the partnership.

(My emphasis)

The amount of cash distributable is determined under

para. 4.02. That para. reads as follows:

Reserves and Distribution of Cash Flow

- 270 -

Apart from reserves which may have been taken

into account in the determination of net

income, the general partners may set aside

such additional reserves as they may in their

reasonable opinion deem desirable to meet the

obligations of the partnership and to operate

the business in a prudent fashion. The general

partners will distribute the cash flow (after

taking into account the foregoing additional

reserves) to each partner to the extent

permitted by law, according to the allocations

set out in para. 4.01. For greater certainty,

it is provided that the general partners may

in addition to distributions arising from

profits earned by the partnership in the

ordinary

course

of

business

of

the

partnership, and in appropriate circumstances,

make a distribution of net insurance proceeds,

proceeds

from

mortgage

financing

and

refinancing or sale of interest in or sale of

any property of the partnership.

(My emphasis)

Reference should also be made to Article Four generally. The

title is 'Participation in Profits and Losses'.

Para. 4.01 is

entitled 'Allocation of Income and Losses'. According to that

paragraph at the end of each fiscal year the managing general

partner will allocate the net income or net loss. Most of this

amount, that is, 99.98 percent, is allotted to the limited

partners.

It is interesting to note that the words "profit",

"profits earned", "income" and "cash flow" appear to be used

interchangeably in these articles.

The

plaintiffs

argue

that

because

the

words

"cash

distributable" are not defined in the agreement the usual methods

of contractual interpretation should apply. What do these words

mean in the context of the facts?

What was the intention as

- 271 -

disclosed by the agreement? The objective purpose of the formula

clause was to base the price to be paid for the plywood plant on

the profitability of the operation. The decision of whether or not

to establish reserves is irrelevant to the question of

profitability and value.

The plaintiffs say that the proper construction of the words

is that reserves are to be included in the amount of "cash

distributable" for the purpose of calculating the option price.

The position taken by the defendants, that the words mean only the

cash which Tackama actually decides to distribute to the limited

partners after deducting a reserve, is without merit. It produces

the absurd result that Tackama can determine the price it will pay

for the assets through the use of reserves, subject only to the

minimum.

Tackama says that the reserves are not part of "cash

distributable" and disputes the suggestion that the purpose of the

formula was to set a price for the plant based on profitability.

Cash distributable means cash capable of distribution but for any

number of reasons not immediately distributed. If the drafters of

the agreement had intended to include reserves in cash

distributable the term "cash flow" could have been used. I do not

agree. To do so might have left open an interpretation that cash

flow meant cash distributed.

Again, cash flow by definition

- 272 -

includes Tackama's portion, that is, .02 percent of the profits or

income for distribution.

It seems to be common ground that cash distributable cannot

mean cash distributed. In this regard, counsel for the defendant

argues:

Cash distributable therefore has a very simple

and straightforward meaning.

It means cash

capable of distribution but for any number of

reasons not immediately distributed or

distributed to a party other than a limited

partner. If the drafters had intended to

include reserves in 'cash distributable' they

could have simply used the term 'cash flow'.

As they did not employ a defined term, a

different meaning must be taken to have been

intended.

(My emphasis)

I am inclined to agree with counsel for Tackama that cash

distributable means cash capable of distribution, but which may not

be distributed for one reason or another. His definition lends

support to my conclusion that the parties intended that reserves

were to be included in the amount of cash distributable for the

purposes of calculating the option price.

The cash is

distributable, and if no reserve is fixed, it becomes distributed

cash. If a reserve is fixed, it is still distributable cash to be

distributed once its purpose has been met.

I am inclined to agree with counsel for the plaintiffs, that

the objective purpose of the formula clause was to base the

purchase price on the profitability of the operation, and not

simply on distributions made to the limited partners. Under clause

- 273 -

4.02 it was mandatory for the general partner to pay to the limited

partners the net cash flow remaining after taking into account any

additional reserves set. That sum would not form the basis of the

purchase price.

It was the cash flow which was distributable

before the managing partner decided whether or not a reserve should

be fixed, which was to form the basis of the purchase price.

I am also inclined to agree with counsel for the plaintiffs

that Tackama's interpretation leads to rather absurd results. The

purchase price would be decided subjectively by Lunde (Tackama)

through the use of reserves, and without regard to value.

The

option price could always be maintained at the minimum price no

matter how profitable Alfor was. I do not believe that it was the

parties' intention that the purchase price, above the minimum

price, would depend simply on Lunde's view as to whether or not a

reserve was necessary in a given year. If that was the case, the

formula could have provided for eight times the average amount of

cash distributed to the limited partners. The use of the words

"cash distributable" avoids such an interpretation and makes it

clear that it was the cash or profits which were capable of

distribution, but not necessarily distributed, which counted.

(b) Calculation of the formula price - Four years or Three years?

Para. 3.31(d) (II) sets out the formula:

8 x the average amount of cash distributable

to the limited partners, as determined under

para. 4.02, in the fiscal years 1984, 1985,

1986 and 1987, plus $250,000.00 and the

- 274 -

assumption of all the liabilities of the

partnership.

It seems clear that the formula contemplates that cash is

distributable in each of the specified years, and that an average

of the four sums could be taken.

Initially Tackama contemplated that the plant would be in

production in 1984.

If it was not, there would be no cash

distributable in that year which could contribute to the

calculation of the average sought. In the Offering Memorandum at

p. 7 it is stated:

The construction of the plywood plant will be

carried out under a construction contract with

the general contractor, Industrial Mill

Installations Ltd. The project schedule calls

for the plywood plant to attain commercial

production levels within six months after the

financing is in place and work commences.

A six-month construction period was then contemplated.

appears to be inconsistent with the evidence of Lunde.

This

He

testified at trial to the effect that he was always of the opinion

that it would take approximately one year to put the plant into

production from the date of commencement of construction. Counsel

for the plaintiff argues therefore, that there was a duty on

Tackama to tell the limited partners that the plywood plant would

not be in production prior to January 1, 1985, when it solicited

their approval for the final partnership amendments or extension in

November of 1983. In this regard it is clear that the partners

were concerned about delays and had raised the issue at the

- 275 -

December 1983 partnership meeting.

They were specifically

concerned that the delay would affect the formula price for the

option.

In 1983 there was great delay in the obtaining of the term

financing which was eventually obtained from the Royal Bank of

Canada.

It would have been apparent to everyone well before

November of 1983 that the plant would not be in production by

January 1, 1984. It would have been apparent to Lunde that at the

least there would be no commercial production in 1984. In fact,

commercial production did not commence until early 1985.

In these circumstances counsel argues that Tackama breached

its fiduciary duty in failing to advise the limited partners in

November of 1983 that commercial production could not commence

until early 1985. Had disclosure been made, the limited partners

could have negotiated an adjustment to the formula. He submits

that Tackama should be precluded from being placed, by virtue of

its own wrong, in a better position than it might otherwise have

been. He submits that the year 1984 should therefore be excluded

from the average for the purposes of determining the option price.

Alternatively, he argues that in order to give the option

commercial efficacy I should imply a term into the agreement such

that only the operating years would be included, and the year 1984

would be excluded from the calculation.

- 276 -

Counsel for the defendant argues that there is no authority

for the proposition that a breach of fiduciary duty can be remedied

by excluding the year 1984 from the calculation formula of the

option price. The price is a matter of contract and the court

cannot change it.

He says that the plaintiffs cannot meet the

"officious bystander/business efficacy" test necessary before a

court will infer the terms sought by them. He emphasizes that this

term differs from that sought by the limited partners, and rejected

by Tackama, at the December 1983 limited partners' meeting. He

frames the issue in the following way: "My friend's implied term is

a figment of counsel's imagination, designed to impose terms and

definitions which the parties deliberately avoided". He argues

also that in fact the plant was operational and in production in

December of 1984. I disagree and have found as a fact that the

plant was not in commercial production, that is, in business as

opposed to the breaking-in period, in December of 1984. Commercial

production commenced in early 1985.

Counsel also emphasizes that there are four specific

enumerated fiscal years and that they were genuine fiscal years of

the partnership. Because 1984 was a fiscal year, he submits that

should be the end of the enquiry. I do not appreciate counsel's

emphasis of the use of the word 'fiscal', nor his application of a

strict interpretation to the words used in the formula, without

regard to its purpose. The parties were attempting to fix what

they thought was a fair price for the assets of Alfor based on

- 277 -

profit or cash distributable over a four-year period. They would

never have intended to include in the calculation a year in which

there was no production, and therefore no profit or cash

distributable. If the strict interpretation is applied, the absurd

result follows that if production had not commenced until January

1987 the parties still intended to average the cash distributable

over a four-year period when none was distributable for the first

three years.

I do not propose to deal with the arguments based on breach of

fiduciary duty and implied terms. It is not necessary to resort to

either tool to effect a proper interpretation of the subject words.

The plaintiffs should succeed on the relatively plain meaning to be

given to the words contained in the formula. It is clear that the

parties intended to average the cash distributable from an

operating plant in each of four fiscal years. The plant was not in

operation during the fiscal year 1984 and there was no amount of

cash distributable which could be determined under para. 4.02 for

that year. Hence, that year cannot be taken into account in order

to calculate the average amount of cash distributable for the

purposes of calculating the purchase price.

SUPPLY AGREEMENT ISSUES

Counsel for the defendant commenced his argument under this

heading by referencing Laventhol & Horwath who in their role as

- 278 -

auditors would determine such matters as cash flow under the Supply

Agreement. He states:

It must be remembered that it was the auditor's of

Alfor II who determined what was or was not a

proper charge to the cost centre and that this

determination was not made by the general partner.

Such determination was the responsibility given to

the auditors under the Supply Agreement and by the

terms of their retainer the auditors were obliged

to fulfil that obligation.

So what breach of

contract was committed by the general partner? If

Alfor's auditors made the wrong interpretation and

the partnership lost as a result, then there may be

a cause of action against the auditors - not a

breach of contract by the general partner.

I do not agree with this argument if Tackama is suggesting

that Laventhol & Horwath had some sort of absolute power or

discretion in the performance of its task, such that Tackama is not

responsible for their acts. Again, I do not accept the proposition

that any decisions or positions taken by Bolton were taken without

the knowledge and consent of Lunde. It is common ground that Lunde

was a hands-on operator of his company, Tackama. I cite, by way of

example, the depreciation issue.

Initially, Bolton was of the

opinion that depreciation could not be taken into consideration in

the calculation of the veneer transfer price, and he persuaded

Lunde at least in the first year that depreciation should not be

considered. Bolton also took the position that in auditing Alfor

he could not take depreciation into consideration for professional

reasons as well. Yet in the end, he gave in to Lunde's position,

which was pressed continually, that depreciation had to be taken

into consideration because otherwise there would be "an accounting

- 279 -

loss". This was occurred notwithstanding the plain wording to the

contrary contained in s-s.(a) of the definition of the words

"supplier's costs" in the Supply Agreement.

(a) Depreciation

This issue depends upon the interpretation to be given to the

provisions of the Supply Agreement.

It does not depend, as

suggested by counsel, on the evidence of Bolton (apparently the

author of the provisions) or of any other witness as to what was

said or done during the drafting of the Supply Agreement, or at

least before it was executed.

The issue is, as stated by counsel for the plaintiffs:

In calculating the veneer transfer price what

amount, if any, should be included in the

Supplier's Cost with respect to depreciation?

Para. 3.1 of the Supply Agreement provides:

The price at which the Supplier shall sell the

material to the partnership shall be equal to

the Supplier's Cost;

'Supplier's Costs' are defined terms in the agreement, and in my

opinion I need go no further in order to decide this issue. The

definition reads as follows:

'Supplier's Costs' means with respect to any

material supplied here under the amount determined

by the auditors of the Supplier on a Yearly basis

and calculated as follows:

(a) The Supplier's operation shall be

treated as a cost centre and all

other costs relating to the Supplier

or the Supplier's business unless

- 280 -

specifically referred to herein

shall be excluded from inclusion in

such cost centre;

....

(e) No allowance for depreciation shall

be debited to the cost centre but a

replacement reserve of $200,000 per

year after taking into account that

the Adjustment required for the year

shall be debited to the cost centre;

(My emphasis)

The wording is clear and precise. There can be no doubt that

depreciation, no matter how determined, was not to be taken into

account in determining the Supplier's Cost, and therefore the

veneer transfer price. It is replaced by a replacement reserve of

$200,000 per year.

(b) One Cost Centre or Two?

Tackama seeks to exclude two portions of the revenue it

received from its Fort Nelson operations from the calculation of

the veneer transfer price: $422,697 in the year ending September

30, 1985, and $187,983 in the year ending September 30, 1986. It

takes the position that the Supply Agreement provisions are

restricted to 180,000 cunits of timber per year and that any

surplus timber, whether cut from existing licences or not, could be

processed by Tackama for its sole benefit.

Tackama then took the position that only the revenues from the

180,000 cunits were to be credited to the single cost centre

provided for in the Supply Agreement. A second cost centre was

- 281 -

then set up for all timber in excess of 180,000 cunits.

The

plaintiffs say that they are entitled to share in all revenues

received from harvesting timber including that in excess of the

180,000 cunits. Tackama says they are not.

Tackama's position is based on the fact that the average

allowable harvest from the timber rights vested in Tackama on

December 1, 1982 was 180,000 cunits per year.

However, it is

common ground that from 1982 until the time of upgrading in 1987,

Tackama's capacity and production was in excess of 205,000 cunits.

In 1983, the cunits produced were 211,410; in 1984, 205,731; in

1985, 222,113 and in 1986, 224,643. In my opinion it is the actual

production which governed, not the average allowable harvest figure

of 180,000 cunits per year.

The definitions contained in the Supply Agreement do not

support Tackama's position.

Subpara. (d) of the definition of

'Supplier's Cost' provides that all revenues from products and by-

products from the Supplier's Operation, (excluding veneer and

residual logs) including logs, lumber and chip sales, shall be

credited to the cost centre.

Operations" provides as follows:

The definition of "Supplier's

'Supplier's Operation' means the operation of

the supplier as it presently exists at and

including the Supplier's Plant including the

manufacture of veneer and the sawmilling of

lumber and the logging operations of the

supplier with respect to the Timber Rights and

the transportation of such logs to the

Supplier's Plant and the sale of all products

- 282 -

therefrom and the administration and overhead

related directly thereto and the replacement

thereof;

(my emphasis)

'Supplier's Plant' is defined in the Supply Agreement as

follows:

Means the supplier's mill and plant at the

date of this Agreement situate on the Lands

with such replacements and additions of

equipment, machines and structures as may be

made by the Supplier in the ordinary course of

business to improve or increase the efficiency

thereof but not materially to increase the

capacity of Veneer or lumber production

thereof:

(my emphasis)

I am satisfied from a reading of these various definitions

that all of the revenue from the existing operations of Tackama, as

of December 1, 1982, was intended to be credited to the cost

centre.

The only rider was that provided in the definition of

'Supplier's Plant'. If improvements in the plant were made which

materially increased the capacity of veneer or lumber production,

such increased capacity would not be calculated in the veneer

transfer price. It is clear that the plaintiffs would have a hand

in any increase in capacity by virtue of para. 5.1(f) of the Supply

Agreement.

It provides that the prior written consent of the

partnership must be obtained before Tackama can make any

substantial change in its operations.

Para. 5.1(f) reads in part:

... Including the increase of capacity of the

Supplier's Plant which requires an expenditure

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in an aggregate amount per year in excess of

$1,000,000.00, without the prior written

approval of the partnership;

Tackama argued that the words "with respect to the Timber

Rights" contained in the definition of 'Supplier's Operation' when

read together with the opening words "the operation of the Supplier

as it presently exists" restricts the cost centre to the revenue

from an annual allowable cut of 180,000 cunits per year. This is

so because "timber rights" is defined to mean the crown timber

rights set out in Schedule 2 and any replacement thereof.

The

timber rights referred to allow an annual cut which must average

180,000 cunits over a five year period.

I do not agree with counsel's interpretation based on the

meaning to be given to the words "with respect to the Timber

Rights". We are concerned with all of the revenues from Tackama's

existing operation with respect to the timber rights then held.

Additional timber rights would not be included, and in fact when

they were obtained in 1987 they were not included. If there is any

limitation it relates to the timber rights themselves and not to

the amount of cunits and revenue produced therefrom. The words do

no more than modify the words which preceded them, "the logging

operations of the supplier".

The plaintiffs succeed on this issue. Tackama's Fort Nelson

operation ought to be treated as a single cost centre.

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(c) Log Costs and Log Handling Costs

Since the plaintiff succeeds on issue (b) "One cost centre or

two", the log costs and log handling costs are no longer at issue,

since it matters not how the costs are allocated as they end up in

the same centre.

(d) The Royal Bank Fee

The narrow issue here is whether or not that portion of the

fee charged to the cost centre falls within the definition of

supplier's costs in the Supply Agreement which reads as follows:

'Supplier's Cost' means with respect to any

material supplied hereunder the amount determined

by the auditors of the supplier on a yearly basis

and calculated as follows;...(b) all costs of the

Supplier's

Operation'

relating

to

logging,

manufacturing of logs into lumber, Veneer or other

by-products shall be accumulated and debited to

this cost centre except any interest or other cost

of borrowing monies which is not attributed solely

to the supplier's operation;

I am satisfied that the sum charged to the cost centre was a

cost of borrowing money, whether the transaction was labelled as an

option or fee transaction, and that it is attributable to Tackama's

operation. The only concern I have had is that while it was paid

in September of 1987 it relates to financing committed in January

of 1983 and involved all of the money borrrowed from the Royal Bank

at that time. However, given the date of the Supply Agreement and

the fact that the limited partners would recover tax benefits in

1983 and 1984, I have concluded that notwithstanding the delay the

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amount attributed to the cost centre falls within the definition of

Supplier's Costs and does not fall within the exceptions thereto.

(e) Write-off of Chip Inventory

The issue here is one of proof, the onus of which is on

Tackama.

The value of the wood chips recorded in the financial

statement for the year ending September 30, 1982 is $246,800.

Prior to that year wood chips apparently did not have a commercial

value and they were not recorded by Tackama in its inventory.

Tackama continued to record wood chips as an inventory item until

the year ended September 30, 1986.

In 1986 Tackama wrote down $398,000 of wood chips which was

then charged to the cost centre. 1986 was the first year in which

it became apparent that Alfor would earn a profit. It was also a

year in which Tackama itself recorded substantial taxable income.

Thus, says counsel for the plaintiffs, Tackama had a double

incentive to write off the chips in 1986 and, having elected not to

lead evidence to justify its actions, Tackama should not be allowed

to charge the write-down of the chip pile to the cost centre.

Bolton gave evidence on direct examination that in 1982

Tackama set up a chip inventory because chips then had a value.

That inventory was added to and deducted from as the chips were

blown on to the pile and shipped. In 1986 pulp mills were crying

for chips. He said:

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Tackama was able to ship all of its chips from its

pile that were acceptable to the pulp mills. And

during the period from '84 to '86 when the last

merchantable chips were shipped there had been a

deterioration which resulted in the write-off of

chips as reflected in the financial statement.

Bolton did not divulge the source of this hearsay information.

McDonnell was cross-examined in some detail about the chip

pile by counsel for Tackama.

He was obviously very suspicious

about the write-off. He was asked the following question and gave

the following answer:

Q:

Now, Mr. McDonnell, I've been instructed

that in fact in 1986 it was the usual

inclement and wet period of time and that

a portion of this chip pile deteriorated

rapidly, that all of the marketable chips

were sold and that the other was written

off. If indeed that happened that I am

correct in these instructions, you would

not find that to be an unusual accounting

procedure, or would you?

A:

No. But I guess I would question in

terms of the earlier statement that

the chips are turned over fairly

quickly so that the oldest chips are

sold first so that there is not

deterioration.

What the witness was saying was that if there was such a market for

chips in 1986 and the oldest chips were sold first off the pile,

and quickly, how could any chips deteriorate in that year?

McDonnell testified that he found the write-off of the chip

inventory in 1986 "somewhat unusual". He was concerned about the

age of the chips assuming that they were old ones. He based his

reasoning in part on a sheet from the working papers of the senior

- 287 -

auditor from Laventhol & Horwath who did the original investigation

into the chip write-off. It was stated on the sheet under the

topic for discussion purposes:

Items excluded from transfer price

(1) Write down a chip pile - $380,000 - chip

inventory booked in 1982, prior to Alfor's

operations. - has always been a 'soft' number.

The senior auditor was of the opinion that the write-off should not

be charged to the cost centre.

The sheet also indicated, and

Bolton gave evidence in this regard, that he did not agree with the

conclusions of the senior auditor. In the end he overruled her

decision that the chip inventory write-off should not be charged to

the cost centre.

McDonnell agreed during cross-examination that if the write-

off represented chips that were produced in the fiscal year ended

September 30, 1986, and that those chips had deteriorated because

of the unseasonably damp weather, then it would be appropriate to

write them off to the cost of operations in 1986. However, he was

concerned as he had been told that the chips were old chips

produced before Alfor went into operation. They therefore should

not have been written off and their cost charged to the cost

centre. He was also concerned with the suggestion that the chips

had been produced and deteriorated in 1986 in light of the

tremendous chip market from 1984 to 1986.

The evidence about the merchantability of the wood chips and

the validity of their being written off and charged to the cost

- 288 -

centre is solely within the knowledge of Tackama. As I recall no

one gave evidence on these subjects. I am satisfied that evidence

in support of Tackama's position should have been available, and it

would not have been a difficult task for Tackama to tender it. In

my opinion Tackama has not discharged the onus upon it. I am left

with some hearsay evidence and strong inferences that the claim

advanced is invalid for at least two reasons, viz, they were old

chips or they could not have deteriorated in 1986 as suggested by

counsel's questions. In my opinion the defendants cannot succeed

on this issue.

(f) Hicap Bonuses

The hicap plan is described in a document entitled "The

Tackama High Incentive" which is in evidence as:

A group structured R.R.S.P. financial program for

eligible Tackama participants which allows

a

savings fund and its investment earnings to

accumulate tax shelter until the funds are

withdrawn from the plan.

Bolton described it as a retirement plan that would provide a

pension upon retirement for the non-union employees, including

Garland and Lunde. Contributions were made by the employee and by

Tackama although Tackama is not bound to make contributions unless

at the time it was earning a profit.

The plaintiff's position is that these so-called bonuses

should not be charged to the cost centre because it was a

discretionary decision taken on the part of Tackama's management

- 289 -

and was, in effect, a deferred profit-sharing plan.

Bolton

disagreed with counsel's interpretation that it was a profit-

sharing plan. He described it as a retirement plan. The issue,

again, is whether the amounts paid pursuant to the plan can

properly be charged to the cost centre as "supplier's costs".

While

Tackama's

contribution

to

the

plan

was

discretionary and the timing of it raises the suspicion that it was

another method by which Tackama uses profit generated by Alfor to

its own advantage, I am not satisfied that the amounts paid do not

come within the definition of supplier's costs as contained in the

Supply Agreement. Specific provision is contained in subpara. (h)

of the definition limiting the debits to the cost centre for all

remuneration and fringe benefits of senior management to $150,000

per year after taking into account an adjustment for inflation.

The pension plan may be classified as a fringe benefit of senior

management and the amount paid pursuant to the plan would appear to

have been properly charged to the cost centre.

(g) Cantree Interest

Amount:

Date: September 30/86

$118,175

September 30/87

$118,122

The plaintiffs say that the Cantree Interest is not a valid

charge to the cost centre in accordance with the terms of the

Supply Agreement.

The interest was paid by Tackama on loans

- 290 -

assumed by it directly, as part of an overall reorganization of

Cantree.

At trial Bolton testified that the Cantree interest

expense was not an interest expense "which arises out of a loan

which relates solely to the forestry operation of Tackama Forest

Products at Fort Nelson".

investment of Tackama in Cantree Plywood, a New Westminster

company. Hence, say the plaintiffs, the sum is excluded under

He said that it was a separate

subpara. (b) of the Supplier's Cost definition.

Cantree had owed the Royal Bank some $5 million for some time,

and Tackama had guaranteed the indebtedness to the bank.

The

annual Cantree interest payment was approximately $750,000. Para.

3.3 of the Supply Agreement provides that in consideration of

Tackama agreeing to sell material to Alfor at its costs, Alfor

agreed to pay the Royal Bank, on behalf of Tackama, the amount of

any actual or contingent obligation pursuant to the guarantee up to

a maximum $750,000 a year. It is stated in the Offering Memorandum

that in addition to selling materials to Alfor at cost, Tackama

gave up its rights to profits on the Fort Nelson operation. This

is not so, for it is clear from Bolton's evidence that in fact

Tackama did receive a substantial portion of the profits, which

were included in its management fees.

The Royal Bank never called Tackama on the guarantee. After

returning to business in 1982, Cantree always made sufficient funds

to enable it to pay the yearly interest. In fact, in the two years

- 291 -

for which interest is claimed, ending September 30, 1986 and 1987,

Cantree's net income was respectively $1,779,437 and $3,108,009.

When Cantree was restructured in 1986, a company, Riverside

Forest Products, purchased a fifty percent interest in Cantree for

$2.5 million. Cantree paid the $2.5 million to Tackama and Tackama

assumed the $5 million loan as a direct obligation. The interest

payment, $118,175 in each of the two years, was paid pursuant to

that direct obligation. The plaintiffs say that because it was a

direct obligation, the interest was not paid pursuant to the

guarantee referred in para. 3.3 of the Supply Agreement, and it

should therefore not be a direct charge to Alfor. Counsel also

says that Tackama did not obtain Alfor's written consent to incur

this additional indebtedness as required by para. 5.1(g) of the

Supply Agreement, and for this reason as well Tackama cannot

succeed.

Counsel for Tackama seemed to suggest that Tackama was paying

the interest on the Cantree loan pursuant to its guarantee, and

that it had given up its rights to profit on its operation.

Neither of these points is in accordance with the evidence as I

recall it. He emphasized also that the contingent liability was

hanging over the heads of both Tackama and Alfor, and that in order

to resolve the problem the restructuring of Cantree was done. He

says that by selling a half interest in Cantree, Tackama relieved

Alfor of a responsibility of up to $750,000 a year cumulative, and

- 292 -

replaced it with a direct liability of what proved to be $118,000

in each of two years. I am not satisfied that these assertions are

correct. It seems to me that Tackama's investment in Cantree had

little to do, if anything, with the costs of Tackama's forestry

operations as defined in the Supply Agreement. Again, it seems to

me that Tackama exchanged a contingent liability, which never would

have been called on, for a direct one, which was.

In my opinion, the Cantree interest was not a cost of

Tackama's forestry operations, but falls within the definition of

other costs relating to Tackama or its business, and which is

specifically excluded under subpara. (a) of the definition of

'Supplier's Costs'. I agree as well, that it is probably excluded

under subpara. (b) of the definition, because it is not attributed

solely to Tackama's operations.

It is to be remembered that Tackama's obligations as the

guarantor of Cantree's indebtedness was specifically raised in the

initial documents and dealt with in para. 3.3 of the Supply

Agreement.

specifically if it was thought to fall within the definition of

Suppliers' Cost. The Partnership's liability was limited to

There would have been no reason to deal with it

$750,000 per year, and was contingent on Tackama being called to

pay on the guarantee. I also question whether the interest could

properly be charged to Alfor in light of the fact that it was not

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paid as a result of a claim on the guarantee, and in light of the

provisions of para. 5(g) of the Supply Agreement.

(h) The Sawmill Rebuild

Amount

September 30/87

$889,580

December 31/87

$784,117

In 1987 Tackama modernized its sawmill at a cost of $5

million.

In the year ending September 30, 1987, Tackama lost

$889,580 on the sawmill, and for the next three months the further

sum of $784,117. Tackama allocated both losses to the cost centre.

The losses arose out of the decision to modernize the sawmill.

This was undertaken in a year of "record sawmill profits being

reported". In the previous year Tackama had made $1.3 million on

its sawmill.

The mill was also rebuilt in a year in which Tackama was

giving serious consideration to exercising its option and

purchasing Alfor's assets. The rebuild was started in July and

completed in early October. Because of start-up problems the mill

did not reach production levels until December 1987. Thus Tackama

suffered a large loss on its sawmill operations between July of

1987 and March 1, 1988. The notice of exercise of option was given

on January 12, 1988. Earlier, in September of 1987, Tackama had

offered to purchase the units of the limited partners.

- 294 -

By para. 5.1(f) of the Supply Agreement, Tackama agreed not to

undertake any substantial change in its operations, including the

increase of capacity of its plant, which required an expenditure

"in an aggregate amount per year in excess of $1 million without

the prior written approval of the Partnership." Bolton testified

that he asked for, but never received, a written approval from

Tackama.

The gist of his evidence was that he was told by

Tackama's lawyer "that Tackama had given consent to Tackama

rebuilding the plant." Tackama never obtained the written approval

of the Partnership to the modernization.

Mr. R. D. Osborne, another accountant with Laventhol &

Horwath, was called by the Tackama to give evidence with regard to

actual and projected losses resulting from the modernization of the

mill. He testified that in September of 1987 Ure asked him to

assist him in "coming up with a calculation of a projection of what

the sawmill may have lost had they not proceeded with the

reconstruction."

information up to the end of August 1987, which he received from

Ure. Osborne later did a pro forma in 1989 when he had more

accurate information.

His projections were based on historical

Osborne testified that he initially estimated the losses

over a twelve-month period to September 30, 1987, assuming no

modifications were made, would be $700,000. For the three-month

period between September and December he estimated a loss of

- 295 -

$642,000 or $214,000 per month. He also calculated or projected a

profit of $321,000 during the same three-month period ending

December 31, 1987, if the modifications were done.

When Osborne did his pro forma in 1989 he estimated the loss

to September 30, 1987 at $826,000 as compared to his earlier figure

of $700,000. His estimate for the further three months to December

31 was $321,000 compared to his earlier $642,000 figure. On cross-

examination he agreed that the difference between the actual losses

suffered of approximately $1.5 million, and those projected in his

pro forma of $570,000, was approximately $900,000. The figures set

out in his working paper entitled 'Estimated Effect if Sawmill

Modernization was not done in July 1987' were actual losses of

$1,498,915 and projected losses of $570,536, the difference being

$928,379.

Bolton testified that by the time the mill was shut down in

July, Tackama was projecting a monthly loss of approximately

$214,000 a month. He said that it was imperative that the rebuild

take place in order to stem the projected losses that were being

forecast.

McDonnell's evidence in this area was general.

He

testified that given the fact that the industry was experiencing

record profits at the time "one could probably develop a case that

there should have been a sawmill profit, if it wasn't for the

decision to rebuild", and that all of the sawmill profits would be

credited to the cost centre. McDonnell was not asked to comment on

- 296 -

Osborne's calculations, and he did not do so.

Apparently the

calculations were made available to him in May of 1989. He did not

challenge them except in the general way, to which I have already

referred.

Counsel for the plaintiff emphasized that during the material

time in 1987 Tackama was actively considering the possibility of

buying-out the interests of the limited partners.

He says the

question is not what would have happened if the sawmill

modernization had not been carried out, but what would happen if

Tackama had sought the consent of the partnership as required by

para. 5.1(f) of the Supply Agreement. He submitted that if Tackama

had sought the consent of the limited partners, they would have

needed to make full and frank disclosure, including the fact that

it intended to exercise its option. In that scenario the limited

partners would have insisted that any risk associated with a

sawmill modernization would be to Tackama's account in the event

that Tackama subsequently decided to exercise the option.

Counsel for the plaintiffs says that the onus is on Tackama,

a fiduciary, to prove that the loss complained of would have been

suffered inevitably had the breach of fiduciary duty not occurred.

He challenges Osborne's calculations and then seems to rely on some

of them which had been given in evidence by Bolton, but were

subsequently corrected by Osborne.

Counsel also attacked the

foundation of Osborne's 1987 projections but seems to have

- 297 -

overlooked the 1989 pro forma ones, on which I understand the

defendants now rely.

Counsel for Tackama relied on the figures given in evidence by

Osborne. He pointed out that initially he had projected a profit

of $321,000 for the three months ending December 31, 1987 if the

modernization had been completed. He attributed the loss to two

factors:

The difficulties experienced in bringing the mill to

projected production levels, and lumber prices.

Counsel said the question for determination is whether the

loss is a proper charge to the cost centre. With regard to the

provisions of para. 5.1(f) of the Supply Agreement, counsel said

that Tackama's decision to rebuild the sawmill was reasonable and

prudent, and at the time was made in the best interests of all

parties. I find this latter statement difficult to accept in light

of the fact that Tackama was seriously considering exercising the

option at that time. He said that if I find that Tackama breached

its contract by not having Alfor approve the rebuild, then I should

also consider the that if no rebuild had taken place, the sawmill

would have suffered losses, and the limited partners would have

been adversely affected. He argued also that the loss which the

sawmill would have suffered if no action had been taken, was

established through the evidence of Osborne. He did not specify

what figures would apply.

- 298 -

In my opinion, Tackama was in breach of the provisions of

para. 5.1(f) of the Supply Agreement. Tackama did not obtain the

partnership's necessary prior written approval to the modification

of the mill, and probably did not for obvious reasons. I must now

decide whether the mill would have suffered losses which would have

been properly charged to the cost centre, had the modification of

the mill not been undertaken.

I was impressed with McDonnell as an independent and unbiased

expert witness. Like him, I am concerned about the timing of the

modification work. I also have concerns about his suggestion that

there may not have been any loss during the relevant period, had

the modification work not been undertaken. However, he did have an

opportunity to review Osborne's figures and calculations. There is

no evidence before me that he challenged them, other than to make

some comment. Having said that, I am still mindful of the fact

that the onus is on Tackama as a fiduciary to establish what loss,

if any, would have occurred during the relevant period of time had

the modification work not been undertaken.

On the whole of the evidence I am prepared to find that had

the work not been done, Tackama would probably have continued to

have suffered losses at the mill during the relevant period of

time. I therefore accept Osborne's testimony, as supported by his

working papers, that a reasonable projection of the losses which

would have occurred had the work not been done, is $570,536, and is

- 299 -

comparable to the actual loss in the amount of $1,498,915.

I

therefore find further, that the veneer transfer price was over

charged by $928,379. I leave it to counsel to work out the effect

of this finding.

SAWMILL WRITE-OFF

As the result of Tackama's decision in 1987 to rebuild or

remodernize the sawmill, Tackama wrote off the old plant in the

amount of $469,791.

The plaintiffs say that the write-off is

merely depreciation by another name. If I find that Tackama is not

entitled to depreciation (as I have done) that is the end of the

matter.

The defendants are not entitled to claim the sawmill

write-off.

Defence counsel argues that the sawmill write-off is entirely

different from, and unconnected with, depreciation. He relies on

Bolton's evidence to the effect that if depreciation is not charged

on an asset, and the asset is subsequently scrapped or disposed of

at a loss, then that loss or write-off is a legitimate cost to the

operation. The loss is calculated by subtracting from the original

cost any proceeds recovered on disposal.

On cross-examination, Bolton acknowledged that the amount

written off represented the undepreciated costs of the old sawmill

equipment. McDonnell said basically the same thing. Bolton also

- 300 -

acknowledged that if I found that depreciation was not a valid

charge to the cost centre (and I have made such a finding) then

Tackama would not have been entitled to claim any depreciation,

apart from the replacement allowance, in respect of the equipment

which is now the subject matter of the write-off.

It was put to Bolton that where depreciation is not to be

charged in respect of an asset, if one allows a terminal write-off

of that asset one is merely changing the time when depreciation is

charged in respect to the asset. Bolton would only concede that

what was being changed was the timing as to when the loss was

suffered and when the loss was recorded. He would not concede that

the loss was depreciation. He maintained that it was a terminal

loss on the disposal of an asset and that it was calculated by

deducting the proceeds on disposal from the original costs.

I have already found that the parties agreed that Tackama

would not be entitled to charge depreciation to the cost centre.

I have also found that in modernizing the mill without first

obtaining the partnership's prior written approval, Tackama

breached the provisions of para. 5.1(f) of the Supply Agreement.

Since Tackama was not able to charge the amount to the cost centre

when it was labelled as depreciation, it should not be allowed to

charge that amount simply because it can be relabelled terminal

loss as a result of Tackama's breach of contract. On this point I

agree with counsel for the plaintiffs that the write-off is merely

- 301 -

depreciation by another name. I am also not satisfied that the

write-off, which at the least is very similar to depreciation, is

a type of cost which the parties envisaged should be charged to the

centre when they drafted the relevant definitions in the Supply

Agreement.

(i) Is Alfor Entitled to 75 Percent

of Tackama's Veneer Production?

Amount

September 30/85

$349,069

September 30/86

$285,297

September 30/87

$376,053

Counsel for the plaintiffs deals with this issue on the basis

of a breach of duty by Tackama as general partner. Counsel for the

defendant treats it as simply a question of the interpretation of

the specific provisions of the Supply Agreement. I do not recall

either side leading evidence which might be of assistance on the

issue.

By para. 2.1 of the Supply Agreement, Tackama covenants to

supply the partnership with all material required in the production

of plywood, including veneer. Para. 2.2 requires that Tackama must

supply sufficient quantities of materials, including such veneer as

may be required by the partnership to enable the plant to produce

plywood on the two-shift basis "all as may be determined by the

partnership and communicated to the supplier from time to time."

- 302 -

Para. 2.3 provides the right for the partnership to call on

Tackama, on a weekly basis, to supply veneer in an amount which is

the greater of the requirements of the plywood plant operating on

a two-shift basis, and 75 percent of the operating capacity of

Tackama's plant. By para. 4.1 Tackama has the right to sell (for

its own account and profit) "the veneer not required to be supplied

to the partnership under para. 2.3." I take this to be a reference

to the 25 percent as well as the balance of the 75 percent, if any,

required by Tackama.

Para. 4.2 provides that if the partnership determines that

there is commercial benefit to be obtained not from the production

and sale of plywood, but from the sale of veneer, the partnership

has the right, on notice to Tackama, to take the veneer to which it

was entitled under paragraphs 2.2 and 2.3 and to sell it on its own

behalf.

Counsel for the plaintiffs argues:

Alfor had the clear right to require Tackama

to make available to it 75 percent of the

veneer production, and obtain the profit on 75

percent of that veneer production, whether it

manufactured that veneer into plywood or sold

the veneer in the market. It was the clear

duty of Tackama, as general partner, to

promote the best interests of Alfor, even if

those interests conflicted with Tackama. It

never occurred to Tackama to carry out that

duty.

Tackama is therefore answerable to

Alfor for any loss which Alfor has suffered as

a result of Tackama failing to carry out that

duty.

The claim then is for breach of fiduciary duty.

- 303 -

Counsel for Tackama interprets the subject provisions in the

following passage:

Alfor can only sell veneer if it is in its

commercial benefit not to produce plywood.

Once Alfor quits producing plywood it can

receive and sell veneer.

partnership must produce plywood from the

veneer. The partnership has no right under

Otherwise, the

the Agreement to take any veneer in excess of

the amounts required to produce plywood on a

two-shift basis, and to sell it for its own

account.

Only when the plywood price is

dropped to the point that it is no longer in

the commercial interests of Alfor to produce

and sell plywood is it entitled to sell

veneer. ...the supplier on the other hand, has

the right to sell for its own account the

veneer not required by the partnership.

It is clear that Tackama's primary obligation was to supply

veneer sufficient to enable Alfor to produce plywood on a two-shift

basis, and that the amount required would be determined by Alfor

and then communicated to Tackama. It is not clear when para. 2.3

would come into play. The partnership had the right to demand, on

a weekly basis, that Tackama supply further veneer to it, that is,

the difference between the amount of veneer required for the

production of plywood on a two-shift basis, and the amount of

veneer equivalent to 75 percent of the capacity of Tackama's plant

operating on a two-shift basis. Again, it is not clear what Alfor

would do with "extra" veneer, assuming that it used all it needed

to produce plywood on a two-shift basis.

Could it have

manufactured more plywood or could it sell the extra veneer in the

market? What were the markets at the appropriate time? There is

little, if any, evidence before me on these matters. However, I do

- 304 -

not accept Tackama's argument that the right to demand extra veneer

under para. 2.3 is tied to the right under para. 4.2 such that

Alfor can only demand the veneer when it would be commercially

viable to sell veneer rather than to make plywood.

Again, there is no evidence before me as to whether Alfor was

ever in a position to make a demand under para. 2.3 or whether a

demand was ever made. There is also no evidence of any breach on

the part of Tackama other than counsel's submission that the right

was there, and that Tackama should have exercised that para. 2.3

demand in discharge of its general duty to maximize Alfor's

profits. I have concluded that even if there was a duty on Tackama

as a fiduciary to explain their failure to demand the extra veneer,

I am not prepared to find for the plaintiffs on this basis given a

complete lack of evidence on the subject.

Counsel suggests that the plaintiffs seek an inequitable

result involving recovery to an extent far beyond any benefit

obtained by Tackama, in property or otherwise, and that this result

would put Tackama in a position of manifest impoverishment. This

probably is an extension of counsel's theme propounded both in his

opening and closing arguments to the effect that the plaintiffs are

greedy. The argument, as I have already said, simply ignores the

terms of the Agreement made by the parties.

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Counsel also reiterated his earlier argument that no benefits

flowed to Tackama as a result of nondisclosure or the creation of

reserves. Any benefit obtained by Tackama arose solely as a result

of the exercise of the option. I have already dealt with this

submission. In my opinion, the benefits flowed solely as a result

of Tackama's failure to discharge its fiduciary duties to the

limited partners.

Counsel also reiterated his earlier argument that the case:

is on no higher footing than a simple case

where partners or shareholders must establish

that the person in whom management was

entrusted by them has abused the powers

granted to him.

In all such cases, the

outcome is determined by the terms of the

Partnership Agreement, which is conclusive,

and no liability will be found for the

manager's benefits or profits, if his actions

were motivated by his consideration of the

best interests of the company or the

partnership.

He goes on again to draw the analogy that Tackama was a manager,

the limited partners were shareholders, and that what Tackama did

was within the terms and scope of its authority and manifestly in

the best interests of the partnership and of the partners. I have

already said that, in my opinion, such was not the case.

The

evidence is that the team members at the material times only

considered and looked after one set of interests, and those were

the interests of Tackama. They did not give any real consideration

to the interests of the partnership or of the limited partners when

making any of the decisions which eventually resulted in

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substantial benefits to Tackama, at the expense of the limited

partners.

Even if the management theory was applicable to the case at

bar (and I say that it is not because of the fiduciary

declarations) I would still have found that the manager, Tackama,

did not act in good faith in relation to, and in the best interests

of, the "Company" Alfor, let alone the limited partners.

Counsel's concluding paragraph probably best sets out

Tackama's position:

In conclusion, My Lord, the law of equity is

designed to protect sheep in sheep's clothing,

not to feed the appetite of wolves in sheep's

clothing.

The plaintiffs, who have done so

well from Alfor II have, frankly, tried to

lead the court down the garden path of Regal

(Hastings), et cetera.

These cases have no

application to the situation in the case at

bar at all. The relevance of those cases is

completely far-fetched and designed to mislead

the court. An award for the defendants would

leave entirely intact, and as vigorous as

ever, the principles of Regal (Hastings) for

its application in the proper circumstances.

It would uphold the right to manage, always

recognized by the courts, absent proof of

abuse, of which there is not a shred in this

case.

I am satisfied that I have responded to this argument, on more than

one occasion, and at the risk of repeating myself state again that

counsel's arguments simply ignore the terms of the Partnership

Agreement entered into by the parties, and which I agree is

conclusive.

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VENDOR'S LIEN

The plaintiffs claim priority over the defendant bank's

interest or security against the plywood mill subsequent to

February 26, 1988, the date that notice of the claim was given to

the bank, by virtue of a vendor's lien. The notice was given well

before any conveyancing took place. The defendant bank did not

participate in the trial, other than by way of a watching brief,

and did not oppose the claim for a vendor's lien.

I find that the plaintiffs are entitled to a vendor's lien in

priority to any security interest which the bank had or obtained

against the plywood mill subsequent to the date in question.

In turn now to the relief to which the plaintiffs are entitled

in addition to any already granted. I will follow their counsel's

outline in his argument. I reiterate that some of the figures I

use may not be entirely accurate, and I expect that counsel can

agree to the actual figures.

According to McDonnell's evidence the cash flow, including

reserves, should have been $4,727,997, and the reserves totalled

$3,326,941. According to counsel, the difference between the two

figures reflects the plaintiffs succeeding fully on the Supply

Agreement issues. They have not succeeded on all of those issues.

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I find that the plaintiffs are entitled to the following

relief:

1.

A declaration that Tackama holds in

trust and is required to account to

them for all of their cash flow

which was reserved by Tackama, and

which appears to be in the sum of

$3,326.941;

2.

A declaration that Tackama must

account to the plaintiffs for the

net benefit it received from paying

off the long-term debt faster than

it had the plaintiffs' informed

consent to do, which sum is in the

amount $907,000;

3.

4.

A declaration that the proper method

of calculating the option price

formula is to include the amounts

reserved by Tackama, and any other

amounts of cash flow available for

distribution, but not distributed;

A

declaration that Tackama has

overcharged the transfer price of

veneer in respect of each of the

supply agreement issues on which the

plaintiffs

amounts and

have

succeeded,

the

adjustment

flowing

therefrom to be calculated by

counsel;

5.

A declaration that in calculating

the option price, the year 1984 is

not to be included in the averaging

of the amount of cash distributable;

6.

7.

8.

An accounting;

Court order interest;

Costs of the action.

I fix the court order interest at five percent, which seems to

be to be in accordance with the law. However, counsel did not

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argue the issue and I will give them liberty to argue it in the

event that they feel it necessary to do so.

"S. W. Hood, J."

7 June 1991

Vancouver, BC