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1994 * 7538 (ON SC)
Levy-Russell Limited and Levy Industries Limited and
Tecmotiv Inc., Kenneth Foreht, Ronald Bradshaw, Morton Krestell, Terrence Godsall, Shieldings Incorporated, Canadian Imperial Bank of Commerce and Peat Marwick Limited
Ontario Court of Justice (General Division) D. Lane J.
Heard – November 2, 3, 5, 6, 12, 13, 16-20, 23-27, December 7-10, 14-18, 1992, January 22,
25-27, February 1-5, 8-12, March 1-5, 8-12, 15-18, 22, 23, April 5, 7, 8, 13-16, 19-23, 26-29,
1993.
Judgment – April 5, 1994.
Additional Reasons – May 30, 1994.
Barry S. Wortzman, Q.C., and Warren S. Rapoport for plaintiffs.
Paul LeVay, Christopher Wirth and Mary Macaulay, for Foreht, Bradshaw and Krestell, defendants.
D.J.M. Brown, Q.C., and T.J. Murphy, for C.I.B.C. and Peat Marwick, defendants.
R.A. Spence and W.B. McDiarmid, for Tecmotiv, Shieldings and Godsall, defendants.
29272/88
April 5, 1994. D. LANE J.: – Levy-Russell Limited emerged from receivership with all guns blazing. It, and its parent, say that its business was improvidently sold by the bank’s receiver as a result of the negligence of the bank and receiver and a conspiracy involving the remaining defendants. They sue their former bank, the C.I.B.C.; the receiver, Peat Marwick; the purchaser of the business, Tecmotiv and its principal backer Shieldings; Godsall, vice-president of Shieldings; and three former directors of the plaintiff Levy-Russell, Messrs. Foreht, Bradshaw and Krestell, who were majority shareholders of Tecmotiv.
The essence of the plaintiffs’ case is that three of Levy-Russell’s own directors – Foreht, Bradshaw & Krestell – conspired with Godsall to breach their fiduciary duties to Levy-Russell and to arrange matters so that, in concert with Shieldings, they could purchase the
Levy-Russell business from the receiver at far less than fair value. In doing so, they say, the directors were aided by the negligence of the bank and the receiver.
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As against the bank the action is based on allegations of negligence, largely failing to fully inform its receiver of the facts. As against Peat Marwick and the bank the case focuses on their alleged failure to act in a commercially reasonable manner in realizing upon the bank’s security.
TABLE OF CONTENTS
Page 13 Synopsis of the case
Page 15 The background
Page 16 Inventory valuation methodology
Page 16 Conduct of the business
Page 18 The first suspension: April 1983
Page 19 Prospects for 1985-86
Page 20 The second suspension: March 1986
Page 21 Possible employee purchase
Page 22 Reaction of the bank to the second suspension Page 24 Foreht and Bradshaw approach the bank – April 23 Page 25 The bank wants out
Page 27 The May forecast
Page 28 Seeking a solution – early efforts
Page 30 Shieldings enters the picture
Page 31 Godsall meets the branch bankers – June 9th Page 32 Are we being drawn into a conspiracy?
Page 33 June 17th meeting with the bank
Page 34 | Foreht’s ambition |
Page 36 | Another fruitless meeting – July 3rd |
Page 36 | The 1985 Annual Report |
Page 37 | The bank-company meeting – July 31 – Ben Hayeems arrives |
Page 37 | Renewed contact with Shieldings |
Page 39 | Shieldings’ letter of August 12th |
Page 41 | The Business Plan |
Page 45 | Foreht and Bradshaw visit the bank – August 22nd |
Page 49 | Repercussions of the Foreht-Bradshaw visit |
Page 50 | Foreht’s written explanation – August 25th |
Page 54 | Shieldings opens negotiations – August 26th |
Page 55 | The bank extends the loans – September 4th |
Page 56 | The horse gets out of the stable |
Page 56 | Godsall and Hayeems meet – September |
Page 58 | The first Shieldings offer – September 16th |
Page 59 | Clipping Hayeems’ wings—I |
Page 61 | The second Shieldings offer – September 23rd |
Page 62 | Foreht “hopes” for equity |
Page 63 | The counter-offer – October 23rd |
Page 65 | Which hat are you wearing? |
Page 65 | Foreht wears both hats |
Page 67 | The negotiations continue – November |
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Page 69 | The Schedule of Terms, November 28th |
Page 70 | The suspension is lifted – December 4th |
Page 70 | Godsall’s new terms – December 9th |
Page 72 | Montreal buyers show interest |
Page 73 | A three-meeting weekend – January 2, 3 & 4, 1987 |
Page 73 | Clipping Hayeems’ wings -II; January 5th |
Page 76 | The January 7th meeting: “no approach yet” |
Page 78 | The Bleiwas letter – January 15th |
Page 79 | Shieldings begins “due diligence” |
Page 80 | The Bilz Report |
Page 82 | “Result = $7.2 million” |
Page 83 | Shieldings’ January 20th offer: $7.2 million |
Page 84 | The inventory dispute |
Page 90 | Hayeems thinks his hands are tied |
Page 91 | The bank deadline looms: January 31st |
Page 92 | Clipping Hayeems’ wings: III |
Page 92 | Hayeems decides to resign but reconsiders |
Page 94 | Levy won’t stand in the way – February 5th |
Page 96 | A deal in principle at $7.2 million? |
Page 98 | The directors drop a brick |
Page 99 | The facilitation meeting – February 25th |
Page 100 | The bank urges a counter-proposal |
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Page 102 | The bank calls Levy-Russell’s loans; Bradshaw drops the ball – March 6, |
1987 | |
Page 104 | Foreht briefs Petrie |
Page 105 | Hayeems’ views of value |
Page 107 | Foreht seizes the initiative |
Page 108 | The directors meet the receivers—March 25th |
Page 108 | Godsall is enthused |
Page 109 | The last days – Shieldings’ April 1st offer |
Page 112 | The receivership begins |
Page 112 | Briefing the receiver: I. the bank |
Page 114 | Briefing the receiver: II. the Levy directors |
Page 116 | The account goes to Special Loans |
Page 117 | The receivers take possession – April 3, 1987 |
Page 120 | The receivership – valuations and marketing strategy |
Page 121 | Shieldings’ April 10 offer – $19.0 million |
Page 123 | Peat’s first report |
Page 126 | A conservative view of the inventory |
Page 129 | Competitors as potential purchasers I. Napco |
Page 131 | II. Mott-Haven |
Page 132 | III. SECO/Reomie |
Page 136 | Godsall revises his values: perceived degradation? |
Page 140 | Negotiating the deals |
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Page 142 Levy intervenes – June 1st
Page 144 The MICC offer – too late?
Page 145 The deals are made – June 5th
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Page 146 The bank brushes Levy off
Page 148 The Kleinstein strategy – calling his bluff Page 152 The story of Tecmotiv I. share ownership Page 154 II. operations
Page 155 Tecmotiv balance sheet, June 19, 1987
Page 157 Tecmotiv financial statements to August 31, 1987 Page 159 The valuation of “intangibles”
Page 163 The major witnesses: M.P. Levy; Ben Hayeems; Kenneth Foreht; Ronald Bradshaw; Morton Krestell; Terrence Godsall.
Page 168 Duties of directors and alleged breaches; – undermining the Business Plan; the best interests of the company; other breaches; bad faith.
Page 175 The conspiracy – law of conspiracy; was there a conspiracy? role of Godsall; summary.
Page 179 What did Hayeems and Levy know? – evidence of Levy; effect of suspicion.
Page 183 Consequences of knowledge of a conflict of interest: are disclosing directors free to act as they please? trust and confidence
Page 189 Duties of directors during receivership
Page 192 Conduct of the receivership Powers and duties of receivers; was there a duty to brief the receiver; the bank’s loss of the floor price; failure to keep Levy informed; failure to watch the directors; significance of Shieldings’
due diligence; significance of the benchmark; inappropriate appraisals; intellectual property; SECO “turn-off”; no need to sell at all; Levy’s
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June 1 letter; MICC offer; Shieldings or SECO?; the Kleinstein strategy; summary.
Page 213 The expert valuators: I. Mr. Douglas for the defence Page 215 II. Mr. Witkin for the plaintiff
Page 221 Discussion of fair market value Page 224 Damages I Page 225 Damages II Page 226 Effect of the conspiracy
Page 230 Does the rise in land value offset the low business price? Page 231 Punitive damages
Synopsis of the case
Levy-Russell, as “Levy Auto Parts”, supplied new, used and rebuilt components for heavy trucks and military vehicles. Its principal customers were the defence departments of Canada, the United States and allies of the U.S. who purchased equipment with funding from the U.S. Foreign Military Sales (FMS) support program. About 30% of the business in the early 1980s came from sales of the CD 850 transmission. Levy-Russell had developed and had high hopes for, a kit of parts to convert the M-41 tank’s gasoline engine to diesel. On its 38 acre headquarters on Weston Road in Metropolitan Toronto, Levy had its shops, an office building and a vast store of military surplus vehicles and parts, primarily acquired post World War II and kept in sheds and crates in the yard.
Although the business was a cyclical one, Levy-Russell had been profitable up to 1983. On April 29, 1983 the U.S. Defence Logistics Agency (DLA) suspended it from further U.S. government contracts for violating the U.S. embargo on military sales to Iran. The suspension was lifted in January 1985 due to a favourable court decision and reimposed in April 1986 when that decision was reversed. In March 1986 Levy-Russell was suspended again due to substitution of used parts for new and the bribing of inspectors to pass the substituted goods.
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Levy-Russell’s profitability suffered in this 1983-86 period. In April 1986, the bank asked Levy to find another financier by June 15, 1986 and repay its loans of some $17 million. This deadline was extended bit by bit throughout 1986 and into 1987 while the company sought to arrange alternate financing, bring in an investor or sell the company. Morris “Pep” Levy, who owned some 90% of the ultimate parent company, resigned as C.E.O. in August 1986 as part of a deal to get the DLA suspension lifted. Ken Foreht, Ron Bradshaw and Morton Krestell, all long-service executives at Levy-Russell, became the directors and Ben Hayeems C.A. became Trustee of the shares held by the parent company and assumed an ill-defined management role.
In March or April 1986, Shieldings, through its vice-president Godsall, was introduced to the situation by Foreht’s efforts and began to contemplate purchasing Levy-Russell’s assets. An offer was made in September 1986 of $8 million for fixed assets, inventory, intangibles and lands at Bradford, Ontario. The Weston lands were not included. Hayeems began protracted negotiations with Godsall. The three directors had formed a close relationship with Godsall and had developed an understanding – the plaintiffs say a conspiracy – that if Shieldings bought Levy-Russell, they would manage it and have substantial equity. Although Hayeems knew that the directors favoured a sale to Shieldings, expected to be the managers and might have some possibility of minor equity, he was not aware that the directors would in fact have a very substantial stake – over 60%. This fact was, the plaintiffs say, carefully concealed from Hayeems.
Hayeems was also not aware that the directors were actively working against him as he sought to negotiate with Shieldings. The directors fed Godsall information about every important event in the company often before Hayeems knew of it and sometimes without telling Hayeems at all. They did not tell Hayeems a number of important facts they learned about Godsall’s willingness to pay more than he was offering.
Hayeems was unable to close a deal with Shieldings which kept reducing the price, although in February 1987 Godsall committed to a floor price of $6.7 million for the inventory and fixed assets of the company. Other matters were open and no final deal was consummated.
1994 * 7538 (ON SC)
The bank lost patience and on April 2, 1987 appointed Peat Marwick as Receiver and Manager. Peat advertised both the business and the Weston lands and on June 5, 1987 agreed to sell the lands to Metrontario Ltd. and the business to Tecmotiv Inc. Tecmotiv was a company in which the Levy-Russell directors held a majority share interest subject to certain rights of Shieldings which put up all the money. The price paid to the receiver was $3.35 million for the whole business as of April 2nd, including payables and receivables from the receivership period. The receivership had generated a cash surplus of $290,000 in two months. Altogether, Levy-Russell’s cash and receivables (most actually collected by June 5th) amounted to well over half the price paid by Tecmotiv. The plaintiffs say that this sale was improvident and further that it was unnecessary since the sale of the land brought in enough money to pay off the loans, or at least, to leave so little owing that the Bank should have turned the business back to its owner who would have been able to refinance it. Morris Levy’s letter along these lines, dated June 1, 1987, was ignored by the bank. A substantial surplus realized in the receivership was turned over to the company.
In general terms the issues are:
Was there a conspiracy involving Godsall, Foreht, Bradshaw and Krestell to acquire the company at a bargain price by deceit?
Were the Levy-Russell directors guilty of breaches of their duty to the company in their collaboration with Godsall?
Was the business sold at less than fair market value?
Did the Bank and its Receiver act reasonably in their receivership decisions and the sale of the business and lands?
My answer to each of these questions is yes.
The background
Since 1927 the Levy family had been in the vehicle parts business through Levy Auto Parts, now the plaintiff Levy-Russell Ltd. (“Levy-Russell”). By the 1980s Levy-Russell was a wholly owned subsidiary through Levy Industries Limited of Seaway MultiCorp. Limited (“Seaway”), a public company. Some 90% of the shares of Seaway were owned by the Levy family. In June, 1985, Morris “Pep” Levy (Levy) acquired the shares of his brothers Ben and
1994 * 7538 (ON SC)
Mark, in part through his company, Peplevy Corp. He thus controlled Seaway and through its ownership of Levy-Russell and Levy Industries Limited, he controlled the vehicle parts business. Peplevy Corp.’s acquisition of shares was financed by a C.I.B.C. loan to Peplevy guaranteed by Levy-Russell in the amount of $1.6 million. In addition, the Bank loaned a similar sum to Levy personally.
At the time of this share purchase, as had been the case for many years, Levy-Russell’s major business was the supply of parts for military vehicles. Following the end of the Second World War, Levy-Russell had acquired a very large stock of surplus parts for tanks and military trucks and there proved to be a market for these parts both in the U.S. and in the smaller countries which had acquired such vehicles for their armed forces. The sales from this “mine” of surplus parts suffered after 1983 because the U.S. government cut back on its use of surplus material but other countries continued to buy. Levy-Russell also bought and sold parts as their customers required, often adding value by manufacturing, remanufacturing or assembling components. Much of this trade was either with the United States or with its allies.
Some business was financed by the U.S. under its Foreign Military Sales (FMS) program, under the general supervision of the U.S. Defence Liaison Agency (DLA). To the extent that manufacturing was done in Canada for the U.S. or other military purposes the Department of National Defence, by agreement with the U.S., supplied inspectors at the Levy-Russell plant, whose function was to ensure compliance with the standards required by contract or regulation.
Inventory valuation methodology
Because the value of Levy-Russell’s inventory plays a central role in the case an understanding of the company’s valuation methods is necessary. The surplus parts were stored in sheds and crates in the yard at Weston Road. There were inventory cards for each part showing quantities, price and cost data, etc. No annual physical count was done in the yard. Instead the inventory was valued by selecting 40 or 50 drawers (out of 600) of inventory cards and valuing them. The main valuation factor was the latest recorded selling price or the most recent U.S. government acquisition price for the part. In the remaining 550 drawers all items having an extended value exceeding $3,000 were valued individually. The remaining parts were estimated based on the values found in the sample drawers. Items known to be of
1994 * 7538 (ON SC)
no value were excluded altogether. From the total value was deducted a 10% obsolescence factor. To reduce the result to a cost figure it was multiplied by 13.5%, a factor approved by Revenue Canada. Sample physical counts would be done of selected parts as a check. The Domestic parts inventory and the Machine Shop inventory were more manageable and were physically counted and reconciled to a perpetual inventory. The yard inventory valuation was thus more an art than a science but it had functioned for many years in this fashion. The surplus inventory turned over at about 5% per annum in the 1980s, not out of line with past years.
Conduct of the business
Although during the 1970s Seaway Multi-Corp. was a conglomerate of a number of companies, by the mid 80s there were only two operating businesses left. Winnipeg Cold Storage, a cold storage plant in Winnipeg, was operated as a division of Levy-Russell through a subsidiary company. Levy Auto Parts Division was located on lands at 1400 Weston Road in Metropolitan Toronto. The Weston Road site was approximately 38 acres and was the only large tract of land in the area not already developed for residential or apartment use. On it were located Seaway and Levy-Russell’s administrative office, a machine shop where Levy-Russell did refurbishing and remanufacturing of components for the military vehicles of its customers and a very large number of sheds containing the company’s inventory of spare military parts acquired after the Second World War.
There was a long lead time in dealing with the governments who constituted the customer base for Levy-Russell. The negotiating and tendering process could take up to 18 months and the business had good years and lean years depending on the timing of sales. This was reflected in the company’s results which varied considerably from year to year as the following figures show:
Year Sales Gross Profit as a % of sales
Operating Income (Loss)
1980 | $25.58 mil | 43.8% | $2.88 mil |
1981 | $32.14 mil | 44.3% | $2,921 mil |
1982 | $36.00 mil | 37.7% | $1.67 mil |
1983 $25.06 mil 26.1% $1.90 mil (loss)
1984 $18.03 mil 35.9% $.845 mil (loss)
1985 $23.92 mil 30.8% $.458 mil (loss)
1994 * 7538 (ON SC)
Foreht in his evidence recalculated the company’s losses by adding back in the depreciation and amortization items to show what he regarded as the true operating loss. For the years 1983-1985 inclusive this came to approximately $2.9 million. For 1986 the situation was complicated by the fact that the company had taken a substantial write-down of inventory as a result of the sale (not completed until 1987) of its inventory by the receiver. However, backing out the inventory write-down and the depreciation and amortization items led Foreht to conclude that the actual operating loss for 1986 was $3.3 million. This gives a cumulative operating loss to the end of 1986 of $6.2 million. In the period 1983-1986, the company received extraordinary items of income from the sale of lands, withdrawal of a pension surplus, business interruption insurance proceeds and the sale of the Winnipeg Cold Storage business amounting to $7.4 million in all. As well, the company received an income tax refund of $1.5 million. Despite the fact that these extraordinary gains more than offset the operating losses, the bank debt rose by nearly $3 million in the three years, 1983, 1984 and 1985.
The explanation is that the company paid out very substantial sums to the Levy family, including debenture payments to M.P. Levy’s two brothers, whose shares he had bought, of some $2.8 million. In addition, company funds were used to pay the monthly interest payments on Levy’s personal debt to the bank running at approximately $660,000 annually.
The general debt position of the company held relatively steady in the area of $9 million between 1977 and 1981 and then rose steadily to $12.1 million in 1982 and $15.4 million in 1983, and then to the higher figures just noted. Gross profit as a percent of sales never fell below 35.2% from 1977 until 1982 inclusive and was twice above 40% in that period. In 1983 it fell to 26.1%, a drop of 11.6% from the previous year. The percentage recovered to 35.9% in 1984 but fell again to 30.8% in 1985.
In summary then, at the turn of 1986 the company’s profitability had been suffering for several years but the short-term impact of this fact had been more than offset by non-recurring items. The owners had withdrawn very significant funds and the bank debt had increased substantially notwithstanding the erosion of the asset base upon which it rested. On
the sales front, it was still true, as Levy testified, that there were good years and bad years. The general trend however, was in the direction of a lower gross margin.
The first suspension: April 1983
1994 * 7538 (ON SC)
In December 1982 Morris Levy, Levy-Russell and another employee were charged by the U.S. government with certifying that certain military goods were destined for Pakistan whereas they were allegedly actually destined for Iran, contrary to U.S. law. As a result, Morris Levy took a leave of absence from Levy-Russell beginning in January 1983 and in April 1983 the company was suspended by the DLA pending resolution of the charges. This “first suspension” remained in effect until January 10, 1985 when it was lifted because the indictment was dismissed on jurisdictional grounds. In April 1986 that decision was reversed and the indictment reinstated. By that time Levy-Russell was again under suspension for other reasons.
Levy testified that the first suspension gave the company problems. It could not deal with the FMS program and accordingly Israel, Egypt and Denmark could not get U.S. funds for the financing of sales which the company had expected to make. Large orders were lost from Egypt, Israel and Turkey. Further the company could not deal directly with the government of the United States. On the bright side, the company’s U.S. subsidiary was not suspended at first and continued to do business and restrictions were not imposed with respect to importing and exporting. However, in September 1983, the company’s chief U.S. subsidiary, American Gear Company Inc. was added to the suspension order.
These developments had not escaped the attention of the bank. In a memorandum dated September 27, 1984, Mr. G.L. Soucie, account manager in charge of the Levy accounts, referred to the difficult times that the company had been passing through in 1983 and 1984, but felt that a return to profitability was probable in 1985.
He recommended continued bank financing with the windfall items noted above being applied to reduce the bank’s loans. In October the bank’s head office approved the branch’s recommendation but wrote:
The bank’s level of support to this connection has grown out of proportion to security, net worth and profit performance and the principals have not displayed adequate financial discipline. They appear to have freely made personal drawings and
intercompany/account transfers and allowed interest to accrue. These aspects are not acceptable and will not be permitted. The principals must take responsibility for orderly operation of the respective accounts and repayment of each of the obligations. Cash injections will obviously be necessary.
The pressure of the suspension upon the company is illustrated by a letter written by Foreht to the company’s solicitors on October 29, 1984:
The military purchasing commissions of Turkey, Egypt and Israel in the United States have been advised in writing that FMS money will not be available for any future purchases from any company in the Levy organization.
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And:
Until the time that the suspension dramatically affected our business, we employed up to 400 people. Most of those people have been laid off. Our current staff is approximately 170… With this imposition of the FMS ban, all the jobs and all the spin-off jobs are in jeopardy.
Prospects for 1985-86
The bank’s memorandum of February 28, 1985 includes a review of the annual business plan of Levy-Russell for 1985. The plan was prepared by Mr. H.R. Cohen, Corporate Controller of Seaway, who enjoyed the confidence of the bank. For 1985 the business plan estimated sales of $29 million and a net profit of $3.6 million with no income tax liability anticipated because of the losses of the previous two years. The company had confirmed orders for 1986 of $12 million and was projecting sales of $31.8 million and net profit of $6.9 million. Some 35,000 tons of scrap at Weston Road could be sold generating $3.5 million. This process would be necessary in any event if the Weston Road site were sold for development and the business moved to another location. The plan envisioned total bank liability of Levy-Russell Limited reducing from $20 million in January 1985 to $14.4 million in December 1985. The bank had been pressing for a reduction in the operating line of credit by some $2 million by early 1985. It is clear from the tone of this memorandum that although the bank thought the company had achieved a turn-around to renewed profitability, there was nevertheless an underlying current of uneasiness about the extent of the bank’s commitment to the organization.
The second suspension
1994 * 7538 (ON SC)
In October 1983 the Department of National Defence requested Levy-Russell to provide objective evidence that certain parts supplied as new were actually new. The company could not do so because it had for some years been reworking used material and supplying it as new unused surplus material. An investigation led to no criminal charges in the
U.S. but to a civil suit there against the company.
On December 16, 1985, the R.C.M.P. laid charges against Levy Auto Parts, Morris Levy, Benjamin Levy, and another person alleging the conferring of unlawful benefits upon inspectors employed by the Department of National Defence. Foreht was put in charge of the company’s defence and his investigation disclosed that illegal payments had indeed been made to the inspectors. With effect from March 7, 1986, the company (and on the 25th its
U.S. affiliate) was once again suspended, and so prevented from tendering for contracts with the United States government, receiving awards of contracts, renewals of existing contracts or approval of sub-contracts. United States companies just could not deal with Levy-Russell.
On April 10th, the U.S. government’s appeal of the dismissal of the charges relating to Iran was allowed and the indictment against the company and Levy was reinstated. As a result any arrangement to raise the suspension would involve dealing with both the Iranian and the Canadian inspectors’ problems.
In 1985 Levy, under “tremendous” pressure from the bank, pursued a number of efforts to ease the strain on the company’s financial position. These included employee dismissals, the sale of the lands at 1400 Weston Road, and unsuccessful efforts to merge with Massey-Ferguson (which he dropped upon the advice of the C.I.B.C.); to sell the Bradford lands and to sell 49% of the defence business to the Israeli Military Institute for $7 million. In February 1986, the company agreed to sell the Weston lands to 1400 Weston Road Limited. Development was to be by a joint venture of the Levy companies (30%) and a purchasing group headed by Arthur Kleinstein (70%). Levy-Russell’s return would be approximately $10 million in cash and 30% of the profits from the extensive development which Kleinstein was contemplating. The deal was contingent upon the rezoning of the lands. Significantly, the company undertook to give vacant possession on the closing date (subject to possible extensions) and at its own cost to demolish all existing buildings, structures and foundations
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and remove them from the premises. Given that the company’s war surplus inventory was estimated at up to 35,000 tons, there would be a considerable expenditure involved in meeting this condition. Increasingly the bank had come to look upon the loans to Levy-Russell as substantially secured by the Weston lands, the major real estate holding of the company.
The company’s U.S. counsel, Mr. Ken Kramer reported on March 31, 1986 to Foreht that the DLA required that everyone named in the indictment be removed from the Levy operation before the suspension could be lifted. Since it was Levy-Russell that was suspended, an acceptable solution would be for the Levy-Russell shares to be placed in a voting trust.
Possible employee purchase
Kramer also advised Foreht that an employee purchase of the assets of Levy-Russell would be acceptable to the DLA. Foreht recorded in a memorandum of that day that he would check as to the requirements under the company’s various security agreements, preferred share arrangements and the like to see what would be involved in a spin-off of the Levy-Russell assets, and would check with the C.L.B.C. to determine how the company’s loans could be related to the various assets in the event that the employees purchased the business but not the land. He testified that this was a follow-up of an idea previously discussed between himself and Levy whereby Levy would retain the land and employees would buy the operating assets. The C.L.B.C. loan would be split between the parties and the purchasing employees would make a substantial cash payment over and above the amount of loan allocated to the business assets. Foreht said that he showed this memo to Mr. Levy and discussed the situation with him around March 31st. Foreht said that during their discussions Levy’s numbers changed from time to time but in general he contemplated that the business assets were worth $15 million and would carry $11 million in bank debt. Accordingly, $4 million would be paid in cash to Levy-Russell for the business assets.
It was thus clear from March that the terms upon which the DLA would raise the suspension included the departure of Pep Levy from management of the company. There would be little point in his continuing to own the company if its management had to be given over indefinitely to others with whom he could have no business contact. Bradshaw described Levy’s reaction to the suspension and to the DLA’s requirements as ranging from going
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quietly to fighting. Bradshaw said that Levy made a suggestion to him about the employees buying the company. Bradshaw could not take it seriously because what was needed was money and he had none nor any idea of how to get it. He discussed the matter with Mark Speyer, a colleague who had also been approached by Levy. Speyer told Bradshaw he would be crazy to pursue it and Bradshaw testified that he dropped the matter at that point. He felt it was obvious that someone was going to have to come into the company if Pep Levy was leaving.
Bradshaw was also concerned about the relationship with the bank. There was very good reason for this concern, for within the bank the suspension had given rise to a total reconsideration of the bank’s relationship with the Levy companies.
The reaction of the bank to the second suspension
Foreht visited the bank on April 1st to report the new suspension and discuss its implications. In particular, he noted the automatic suspension of FMS money flowing to customers as a result of the suspension. He raised the possible employee purchase of the business assets and asked the bank to determine what loan amounts might follow these assets.
On April 7th, Soucie wrote to his superiors noting that the previous suspension had resulted in a dramatic decrease in sales and consequent losses to the company. He felt that it was now unlikely that the company could generate sufficient sales to maintain profitability. He reviewed the options available to the company including sale to a third party, fighting the ban and getting it successfully lifted and, as option 4, the sale of the auto parts division to the employees. He wrote:
In regards to option 4, noted above, on April 1, we were approached by Mr. Ken Foreht, vice-president-finance, with a view to proceeding in that direction. Basically, a new corporation would be formed which would purchase the business assets of Levy-Russell Limited, and assume a portion of the debt. Foreht would be president, and he would be joined by other employees as shareholders, officers and directors of the new company. Foreht’s presentation was verbal, and he could offer no specifics about the value of the assets, what financing the new company would require, what capital a new company would have, etc. We have asked Foreht to prepare the usual financial information and
cash flow forecast which will allow us to assess the credit proposal. Foreht has promised to get back to us on this.
Soucie also wrote:
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Ken Foreht felt that a liquidation of assets by the bank and/or the appointment of a receiver manager would only result in further exposure to the bank.
On April 10th, Mr. Loewen, vice-president of the credit division of the bank, expressed concern at the position of Levy-Russell in a conversation with Mr. Bazarkewich of the branch. The latter recorded in his memorandum that on the same day he had spoken with Foreht who was putting together a proposal for new ownership of the company, and:
Ken also indicated that Pep has modified his original intention of the new group taking over $15 million dollars of the liability and the new figure discussed now is $11 million dollars.
Deliberations within the bank continued. On April 14th, Loewen advised Mr. Harrison (executive vice-president of the credit division of the bank) that he had serious reservations that the company’s suspension could be overcome quickly, if at all. He noted that a group of employees led by Ken Foreht were considering an offer but their financial strength was unknown. He said: “While it is difficult to be optimistic about the company’s future, our position seems reasonably well protected at present…”
In a handwritten addendum to the memorandum, Loewen noted that Levy had agreed to provide a plan for continuation or otherwise of the business by the weekend.
On April 15th, Harrison wrote to the branch as follows:
…the situation which has now come to light resulting in the action taken by the U.S. government is indeed most unsatisfactory and unacceptable to the bank. Whether or not the Company and its principal are able to develop a suitable plan of action for the ongoing viability of operations, we would not really be interested in continuing our association with the present owner or any other group which may acquire all, or part of, the connection.
On April 18, Bazarkewich, in obedience to the instructions received on the 15th, telephoned Levy and among other things instructed him not to issue cheques other than on
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essential matters and pressed him for information as to his intentions. Levy indicated that he was doing everything possible to respect the credit terms, was only paying essentials and had put the company on a 4 day week. He was actively looking to sell the Levy Auto Parts operation and had been in discussion with a Hamilton scrap dealer and another party and was also approaching a U.S. party. Bazarkewich also noted that “Kenny” (presumably Foreht) was working on “Newco” balance sheet, proposals etc. Also on the 18th of April, Foreht advised the bank that he had been to Washington to explore whether or not the suspension could be lifted “within the next 10 days” and had received the answer no. However, Kramer, the company’s Washington attorney, was preparing a draft agreement which he believed would lead to lifting the suspension.
Foreht also told Bazarkewich that purchase of the Levy assets by a group would be difficult as it would have to conform with the Bulk Sales Act. Bazarkewich then continues:
Ken’s belief is to get the bank out of its lending position, the business must continue to operate. A comment that he made which was not surprising to me was that it would be for the bank to seize the assets and sell them to a new party. This would do away with the payables and avoid creditors, etc.
A memorandum dated April 23rd written by Bazarkewich to his file notes that on that day in a discussion with Levy, the latter advised that he would like the employees to be part of “Newco” but he was talking to third parties as well. Bazarkewich told Levy that there was nothing to indicate that the C.I.B.C would be interested in financing Newco.
Foreht and Brads haw approach the bank: April 23
On April 23rd, an important meeting took place at the bank attended by Foreht and Bradshaw for the company and Bazarkewich and Soucie for the bank. Soucie records Foreht and Bradshaw as stating that Levy had not produced a realistic plan to deal with the situation and ranged between liquidating the company and fighting the charges. They considered the charges against the company and Levy personally to be very solid and that if the company was convicted, the U.S. would impose a 3 year debarment and Canada would impose an indeterminate debarment all of which would put the company out of business. The memo then continues:
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Levy has been approached by Foreht and Bradshaw re an employee purchase – Pep wants $15 million for the business assets (receivables, inventory, machinery etc.) –buyers would absorb $11 million dollars in bank debt, and payables and pay $4 million dollars to Levy – Levy would retain real estate assets and remaining bank debt, including CCB.
Foreht and Bradshaw consider Levy’s position unreasonable. Pep asking for too much.
Foreht and Bradshaw feel they and other employees can run the Levy operation profitably. They have the expertise. Prospects are good if U.S. ban lifted…
Foreht and Bradshaw could not/would not outline their own specific plan, i.e. information to assess a credit decision. They strongly indicated (but did not request) that the bank put the company into receivership, upon which they would deal through Newco at arm’s length. They indicated investors were in the background, and financing from other banks a possibility. They do not want to be involved in a conspiracy against Levy, or even appear so.
Soucie assessed the situation as follows:
Foreht and Bradshaw are on a fishing expedition. Their goal is to have the bank appoint a receiver, after which they will make their move.
The overriding fact here is that without U.S. funding, the company will most likely not be able to generate sufficient sales to remain profitable. Hence, our position becomes exposed, or more exposed than it is already.
Soucie then discussed the bank’s options. One was to continue to support the company pending resolution of the U.S. and Canadian difficulties, which would require increased loans of at least $1 million. He did not recommend this. The second option was to formally request the company to make alternate credit arrangements which he doubted it could do. The third option was to agree to a deal along the lines suggested by Levy but he doubted that a willing buyer could be found on those terms. The final option was to initiate a receivership. He considered that the grounds existed for doing so. A schedule attached showed that as at 23 April the debt owed by the Seaway group and Levy was $23.051 million excluding certain letters of credit which were offset by cash collateral.
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In evidence Soucie confirmed that he had prepared this memo immediately following the meeting of April 23, 1986 and it was discussed with head office the next day. When cross-examined about his assessment that Foreht’s goal was a receiver he stuck firmly to it and added that he thought it was also Bazarkewich’s assessment. He said that Foreht had not asked them directly or formally to appoint a receiver but his assessment was that that was the direction that Foreht and Bradshaw were trying to convince the bank to go.
Foreht testified that Soucie had it wrong and that he and Bradshaw did not want a receivership but confirmed the correctness of the other portions of the memoranda which I have quoted except for the use of the plural “investors” in paragraph 7.
The bank wants out
Whatever may have been Foreht’s intention, the bank did not put in a receiver but instead, on April 25th, delivered a letter to Levy in the following terms:
We refer to our recent conversations concerning the actions taken by the government of the United States against your company.
In our opinion, this action materially, adversely affects the financial position and viability of the company.
Under the circumstances, we require that your company arrange alternative financing with another bank or make other arrangements satisfactory to us by June 15, 1986. If this does not occur we will take whatever action we think advisable to protect our position and may at that time demand payment of our loans to your company and proceed to enforce our security…
Shocked, Levy requested a meeting with senior officers of the bank.
Levy’s great friend at the C.I.B.C. was Mr. Ormston and a few days after receiving the letter of April 25th, Levy and Bradshaw lunched with Ormston at the Primrose Club. Ormston informed them that he had been instructed to stay out of the affair. He could not overturn the decision. This was a nasty shock and Levy was uncharacteristically depressed as Bradshaw drove him back to Weston Road.
The meeting with senior bank officials requested by Levy took place on May 5th. Loewen prepared a memorandum, Soucie kept notes and prepared a memorandum and
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Foreht kept notes. Loewen’s memorandum describes an initial presentation by Sanderson of Levy-Russell at great length about the sales prospects of the M41 tank conversion kit and other matters to back Levy’s contention that the company was viable despite the loss of the customers funded by the U.S. government. Levy asserted that the bank was not giving the company sufficient time to arrange alternate financing and was forcing the company into a fire sale. Loewen’s note then continues:
The discussions carried on in this vein for about two hours with Levy having no real plan for liquidating the bank’s loans or overcoming the current difficulties being experienced by the company.
And:
And:
In any case, it is unclear if the company will be able to overcome the U.S. arms trading license suspension problems but there are no plans in place to deal with any of the eventualities he may be faced with. He (Levy) speaks of resigning, of retaining the real estate and selling the auto parts business to Bradshaw, Foreht et al., of liquidating the company, but he is unable to answer questions on how he would deal with Seaway preferred shareholders, other creditors, the price he would look for, etc.
The meeting produced little in the way of results or comfort that Levy was working toward meeting the bank’s request for payment. His support team did not indicate they saw the urgency of the situation and this may be the result of their interest in buying the auto parts business at “fire sale” prices and in a manner which might avoid going through the Bulk Sales Act procedures.
Soucie agreed with Loewen’s record of Levy’s statement about selling the auto parts business to Bradshaw, Foreht etc., but disagreed that the Levy support team was unaware of the urgency of the situation which Soucie felt they did indeed understand. Soucie further testified that when Foreht had first informed Soucie of the second suspension, Foreht had told him that there was an employee group wanting to buy. Soucie’s impression was that Levy did not know about this in early April but he certainly did a few days later and he said so at the May 5th meeting. During that meeting Bradshaw mentioned that the constraints imposed by the bank were tending to make an employee buy-out difficult.
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Foreht testified that Loewen might have misread the situation as to the position of the team on the Levy side of the table. He said that he and his colleagues would typically say little because at a meeting with Mr. Levy one did not contradict or correct him; such were the ground rules that he insisted upon. Foreht also testified that he had approached other banks in an effort to find alternate financing but without success. He had also unsuccessfully attempted to persuade Kleinstein to close the land deal early.
The May forecast
The company was to present to the bank, at a meeting scheduled for May 21st, a forecast of the operations for the balance of the year that would see the bank paid out. Foreht noted that a major difficulty with re-financing the company was the Kleinstein deal which effectively prevented re-financing on the basis of the land at Weston Road.
Backed by Levy, Foreht refused to prepare this forecast on the basis that the DLA suspension would continue since “that circumstance would cease once MPL and his family either sold or went into a trusteeship arrangement”. It appears from this that Foreht and Levy both expected an early resolution of the suspension.
The projection, when prepared, (largely by Cohen under Foreht’s supervision) did however show net income from the CD 850 cross-drive program on a separate line with the notation that this required the removal of the suspension. The document shows that without the cross-drive program the company was forecasting a loss slightly in excess of $1 million for the year ended December 31, 1986. With that program, a profit was forecast for the latter half of the year leading to an overall loss on the year of only $89,000. The removal of the suspension was thus necessary for a return to profitability. Although the removal of the suspension required the removal of Levy from management, he continued to waffle telling the bank during the meeting of May 21st that he was still considering it. He pressed for time but Harrison said only that if substantial progress were made by June 15, the bank would consider a reasonable extension.
Seeking a solution
During May, Foreht was occupied in dealing with the auditors regarding the company’s 1985 financial statement. The concern was that the auditors might feel it necessary to qualify
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their certificate or to insist upon explanatory notes relating to the suspension, its impact upon the company’s business, and the bank’s decision to ask the company to finance itself elsewhere. Such notes could lead to a serious question about whether the company was viable which in turn could lead the Securities Commission to suspend or even de-list the company’s shares. While at this time only the preferred shares and warrants were trading, nevertheless the company regarded the prospect of de-listing as very undesirable. Due to the uncertainty regarding the auditor’s position, it was necessary for the company to apply to the Ontario Securities Commission for an extension of the deadline for filing the 1985 annual report. On May 23rd a letter was sent to the company’s solicitors containing information in support of the company’s application. This letter was drafted by Foreht and signed by Levy. It contains passages which were relied on as showing that Levy was well informed of Foreht’s efforts to find a buyer. The relevant portions are:
I am at present involved in many areas of negotiation which, when concluded, will bring dramatic changes in both the companies and their staff,…
…
The following list represents some of the major negotiations and activities in progress:
I am dealing with a number of major investors, both in the United States and in Canada, with a view to providing financing for a joint venture for a large portion of the company assets and for working capital. This venture would have senior officers of the company owning an interest with the investors.
The assets which are involved in dealing with the U.S. Government then would be in different hands and the suspensions would be lifted, I am confident I will receive meaningful offer within three weeks.
Two months ago, I approached our two most senior executives (Ken Foreht and Ron Bradshaw) to invite them to make an arrangement which would have the effect of removing the suspensions by having the employees and outside investors take over the operating assets of the Automotive Division. Since then, I am aware that many meetings with Banks, (including several with the CIBC), potential investors and joint venture partners have taken place and are continuing. In fact, I have had the opportunity to meet with potential investors who have the interest and capacity to become associated with our senior executives. I am assisting their efforts whenever possible.
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In his evidence Levy took issue with the accuracy of parts of this letter, saying that he should have read it more carefully, and that foolishly he just glanced at it before signing it. Specifically, he denied the statement in paragraph 2 that he had approached Foreht and Bradshaw and that he had had the opportunity to meet with potential investors. He said the only man he had met through Foreht was a man named Frank Anthony and therefore the word should have been singular and not plural. In cross-examination he reiterated that he was careless in not reading the letter more carefully and then admitted that he had read enough to know that it referred to senior executives investing in the company. He said the senior executives he had in mind as referred to in paragraph 1 were Messrs. Krestell and Bleiwas but conceded that it was clear that paragraph 2 referred to Foreht and Bradshaw as having been approached. He emphatically denied approaching them and somewhat scornfully said that he certainly wouldn’t ask them how to solve this problem. Elsewhere in his evidence he said that they had approached him. He was referred to his discovery where he had agreed that he had asked Foreht and Bradshaw to make a proposal that the employees and outside investors take over the operating assets of Levy Auto Parts. I am of the view that the evidence amply supports the accuracy of the letter as drafted by Foreht. I think that Levy’s memory at trial was faulty on this point. There is ample evidence of meetings at which employee buy-out was mentioned in his presence. Foreht brought Anthony to meet Levy and while that meeting did not go well and Anthony did not turn out, in Levy’s opinion, to be a serious purchaser, he certainly knew that Foreht was actively seeking purchasers and encouraged the idea. Levy also said in his evidence that during the summer of 1986 he knew that Foreht had another potential purchaser and he was upset that Foreht would not identify that purchaser to him. Ultimately, he did learn that the potential purchaser was Shieldings.
During the spring and summer of 1986, Levy made strenuous efforts to find alternative financing or a buyer for the automotive parts business. He did not approach his competitors, saying in evidence that he felt they would try to steal the company. He did however approach a number of other people. Little would be gained by going into details; none of them followed up on the project. Indeed, throughout the entire pre-receivership period from early 1986 until March 1987, the only actual offers that were received were those from Shieldings.
At a meeting with Soucie on June 3rd, Foreht raised the question of the extent to which the bank would support an investor group headed by himself and involving others in the
company who wished to purchase the assets of Levy-Russell. Soucie told him to prepare a concrete proposal for consideration.
Shieldings enters the picture
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In early June, Foreht introduced the C.I.B.C. to Mr. Godsall of Shieldings. Before dealing with that meeting, I will review the way in which Shieldings came to be involved.
W.P. Rosenfeld, a lawyer in Toronto, had been a director of Seaway up until 1985. In early 1986 he became aware of the difficulties of Levy-Russell evidently through Foreht. He was acquainted with Godsall of Shieldings which he knew as a venture capital organization owned largely by financial institutions, pension funds and a trust company. He prepared a memorandum (March 26/86) which he gave to Godsall outlining the difficulties faced by the company and arranged for him to speak to Foreht. Either during this first contact, or very soon thereafter, Godsall explained to Foreht that Shieldings did not take a majority shareholding in the companies in which it invested. It preferred to exercise what he called “defensive control”, that is control by debt convertible into shares or by preferred shares having voting rights under certain conditions, or the like. The majority of the common shares would be available to management. Godsall agreed in cross-examination that Shieldings, although not unique, was not typical in this respect and it could fairly be thought by Foreht that such an opportunity would not likely be available elsewhere.
Godsall was interested and forwarded the material to his president, Mr. Willis, following up with a memorandum of his own (April 2nd) in which he analyzed briefly the elements of the Levy-Russell business, concluding that the most important element was the re-manufacture of power trained components (CD 850) and the sale of tank repowering packages (M41). He wrote:
The real assets of Levy are its machine tools, its know how, its inventories and some of its paid employees. There is reason to be confident that these real assets can be lifted out of Levy at no net cost to the purchaser. As a result of criminal charges laid against Levy and certain of its employees in Canada, the U.S. government has cut off funding for virtually all of Levy’s work.
This means that the existing business, as a “corporation”, is really dead. It will have to go through a very quick receivership in which the secured creditors realize on existing
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good receivables and some very expensive real property on Weston Road. A new company acquires the above mentioned real assets. It will take a new company untainted by Levy’s historical and traditional behaviour to get back on the U.S. government’s approved contract or list.
C.I.B.C. is the banker and, as recently as yesterday, a local manager was made aware of the dimensions of the problem. There is an exceptional opportunity in this apparent disaster which can only be accessed through C.I.B.C.
On April 11th, Godsall went to the C.I.B.C. to meet with Mr. Ian Harrison to discuss the Levy-Russell situation. He expected that the bank would be in a hurry to proceed. He was disappointed to discover that the bank appeared to be prepared to go along with Levy-Russell for the time being. Godsall testified that he essentially lost interest in the Levy-Russell situation.
Godsall meets the branch bankers: June 9th
However, Foreht kept in touch, “probably” told him when the bank asked Levy-Russell to change bankers, and eventually persuaded him to meet with the branch officers, Messrs. Soucie and Bazarkewich, on June 9th. Godsall told the bankers that Shieldings preferred investments in the range of $250,000 to $3 million although larger amounts were not out of the question. Shieldings did not take a control position but secured its interest by a variable combination of minority shares, shareholder’s agreements and convertible debentures. Shieldings, he said, was extremely interested in participating with the Levy employees in purchasing the assets of Levy-Russell using a new company. The bankers asked whether a specific offer had been made to Levy. The reply was that Pep’s asking price was “totally out of the question, being in excess of $15.0 million for the inventory plus a premium”. Foreht said that no one would be able to make a suitable deal with Levy as what he wanted and what Foreht considered reasonable were very far apart.
After the meeting the bankers advised their superiors that it was clear that Levy-Russell would not meet the target date of June 16 for re-financing the loans. The company was still projecting a loss of a million dollars for 1986 unless the suspension was lifted and there was no indication that would happen soon. The company had no concrete business plan. The overall position of the bank continued to deteriorate. The May 31st term loan
payment had not been made. The next meeting with Levy-Russell was scheduled for June 17th and they recommended that if concrete proposals were not received at that time formal demand for payment should be made and, if necessary, a receivership instituted.
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Their ball-park estimate was that a receivership would realize between $17 and $28 million with the Levy-Russell business assets estimated at approximately $7.5 million. They noted the likelihood that Foreht and his group would make an offer and noted a comment by Foreht that a receivership would be damaging to any potential investor group who might wish to continue with the Levy operation because of the disruption to the business.
Are we being drawn into a conspiracy?
Soucie’s handwritten notes of this meeting of June 9th are a good deal more revealing than his typewritten report to his superiors. He notes that in response to his question as to whether Levy was aware of the Shieldings interest Foreht said: “Pep has screwed one up already”. He also quotes Bazarkewich as saying that Foreht was “wearing two hats” being a director of the company that would be selling its assets to the new company and also participating in that new company. Bazarkewich went on to say that any offer would have to be made through Levy. Soucie records Foreht as stating that “Pep’s asking prices were outrageous” and that Pep would “queer” a deal. Foreht was in essence asking the bank to deal with Levy. Soucie records Foreht as hinting that the bank should remove Levy and finally Soucie records “are we being drawn into a conspiracy??”
In his testimony, Soucie explained that during this meeting he had felt strong pressure from Foreht upon the bank to pressure Levy into a buy-out deal with management. Soucie thought it inappropriate to gang up on Levy and the bankers told Foreht they would not do so. Soucie said he had no further concerns as to the bank being involved in a conspiracy after this meeting. The conspiracy he was referring to was the effort to get the bank to pressure Levy and the bank had refused to be involved. He did not recall reporting any concern about being drawn into a conspiracy to his superiors.
In his evidence as to the meeting of June 9th, Foreht acknowledged making the statement that “Pep has screwed one up already” saying that he was very frustrated as a result of the earlier unsatisfactory meeting between himself, Pep and Mr. Anthony. Foreht further said that he heard the “two hats” type of comment before but claimed “everyone knew
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my situation”. He felt that his two hats caused no problem; he had been encouraged to bring investors into the company. In cross-examination, Foreht agreed that he regarded Pep’s demands as unreasonable; could not understand why he had not reduced his demands; felt Pep had to leave the company but would not face that fact; and wanted the bank to tell Levy he should accept a deal with Shieldings. When testifying about this period in the early summer of 1986, Foreht consistently painted a picture of his personal frustration at Levy’s unreasonable refusal to lower his demands. He was critical of Levy for taking the position that he wanted some money out of the company if he was to sell it. In assessing this alleged frustration, it is pertinent to point out that at this time Foreht and his backer at Shieldings had made no offer to Levy nor even had any contact with him in which Shieldings was revealed as a potential purchaser. In spite of the absence of any actual offer, Levy had shown some flexibility in reducing from $15 million to $11 million the share of the debt to be attributed to the business assets. Levy in his evidence noted his frustration and upset at Foreht’s refusal to identify the unknown backer at this very period of time. In my view, Foreht never actually tested Levy’s degree of stubbornness before attempting to get the bank to put pressure on him to such an extent as to cause Soucie to fear he was being drawn into a conspiracy.
June 17th meeting
In preparation for the company’s June 17th meeting with the bank, Foreht prepared a status report summarizing the major efforts underway to meet the bank’s demand to be paid out:
Many discussions have occurred with potential buyers, employees and passive investors in an attempt to strike a price at which a third party and senior executives of Levy would purchase the assets of Levy Auto Parts. These attempts have not yet produced a firm offer but there is still much interest and negotiations are continuing.
This is a situation involving complex matters in addition to:
the lifting of the suspension
the financing required to purchase the assets
the equity to be shared between new investors and existing executives
future business
financing of the move from 1400 Weston Road to a new site.
Also, he confirmed that the May 21st projection of 1986 financial results was still regarded as valid. Foreht testified that Levy had reviewed this material before it was sent to the bank.
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The meeting of June 17th was a disappointment to both parties. The company did not present a comprehensive strategy for the orderly retirement of bank loans. Levy stressed the company’s sales potential and in particular a potential order from Taiwan for the M41 refit which would generate profit of $20 million. He formally requested a 90 day extension of the June 15th deadline to allow Levy-Russell time to work on these orders, arrange its finances and/or arrange a sale of its assets. The bank responded that the company was not facing up to the bank’s desire to be repaid in full. The company was in a serious emergency and a “survival plan” had to be provided by July 3rd. Bradshaw and Foreht were asked their specific plans for possible purchase of the Levy-Russell assets by their investor group. They noted that there was nothing on paper yet but they were working on a formal proposal. Levy was pressed by the bank about his intentions as to resignation and responded he did not wish to do so until the company was in a sound financial position.
After the meeting the branch representatives renewed their recommendation that unless the company presented a reasonable plan for orderly liquidation of the loans, a receivership should be instituted. They expressed the view that Levy did not know what to do and was relying on the bank’s goodwill and the potential for orders, particularly from Taiwan.
On June 19th Foreht introduced a new element into discussions with Soucie. He suggested he might be able to take the bank out entirely but only if the bank was willing to forgive Levy’s $2.7 million in personal loans. In evidence, Foreht said that he hoped that he might be able to interest Shieldings in the entire package if he had this concession from the bank. He felt the bank would never realize on Levy’s $2.7 million unless the Seaway shares had value and that Levy’s demand for $4 million cash from any sale was largely based on needing $3 million to pay off the bank. Hence, if that need was reduced or disappeared, he would be easier to deal with.
Foreht’s ambition
In his evidence, Foreht described his approach in the spring of 1986 in these terms: Levy had asked him to buy the company and he expected to own it at the end of the day.
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Ownership was his goal and he tried to structure something that would meet that goal even though he came to feel that he would probably not succeed if he had to meet Levy’s demands. He felt that other key employees should also have equity particularly Bradshaw, Krestell, Waisbord, Bleiwas and Hayden. It takes little imagination to realize how pleased Foreht must have been to hear Godsall’s description of Shieldings’ policy of taking defensive control only.
Neither Bradshaw nor Krestell knew who Foreht’s backer was in the spring of 1986 and indeed Foreht testified that he was having trouble keeping Shieldings interested. Foreht said he went to Levy on several occasions trying to get him to reduce his demands. It was in this context that he approached the bank to forgive Levy’s personal loans. At the time the concept being discussed was splitting the liabilities between the land and the business. Foreht felt that Levy’s split of $11 million of loans to be carried by the business and $7 million by the land was not equitable and that less than $10 million should be carried by the business. He felt he was unable to make real progress with Pep. He did not disclose Shieldings’ name to Levy, he said, because Shieldings had asked him not to do so. One problem with this decision surfaced on July 2nd, when Mr. Bazarkewich recorded a telephone discussion with Foreht as follows:
Ken advised that he discussed the plans of a group headed by himself putting in an offer for the assets of Levy-Russell Limited. Pep wanted to know who the players were behind the group and Ken indicated that at this stage he was not in a position to make any announcements. Ken indicated that Pep was rather abrupt and suggested that he would not be making any deals with Ken and would see to it that he was not around to pick up the pieces of the company. Ken indicated that as far as he is concerned his hands are tied and whether or not he will continue to be employed by the company remains to be seen. Kenny’s opinion continues that Pep is not dealing in a rational manner and no matter what anyone puts on the table, he will in all likelihood turn aside.
Foreht confirmed the accuracy of this note in his evidence and added that Levy had told him that he (Levy) would have to take something (i.e. money) away with him and if he could not do so he might as well put the company in bankruptcy.
One can surely sympathize with Foreht in his difficulty in negotiating with Levy. The latter exhibited from the witness box, in spite of suffering from a devastating illness, a forceful
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personality which by itself would enable him to quite outgun Foreht. Foreht’s status as a long-term employee appears to have affected the dynamics of the negotiations in a way unfavourable to him. But it is clear Levy was by no means irrational in the position he was taking. Foreht had put no offer on the table and Levy was not going to bargain without one. Subsequent events will show that he was capable of being negotiated with, that he was a tough bargainer and that in the end he achieved substantial success on the subject of his personal loans. In my view, Foreht had put his finger on the sensitive issue when he approached the bank on the subject of Levy’s personal loans. Foreht’s judgment that Levy was irrational and could not be negotiated with, whether correct or, as I believe, incorrect, played an important role in determining his conduct over the next several months. He decided to by-pass Levy and get the bank to do the job for him.
Godsall denied that he had instructed Foreht to conceal the identity of his backer. He said that following the meeting of June 9th, he was convinced that there was no real interest on the part of the bank in making a deal. He said he had told Foreht that there was no deal and not to count on Shieldings as a backer. It would thus appear that the real reason why Foreht did not disclose his backer to Levy was that he had no backer between June 9th and July 2nd. Godsall described himself as being “out of the play”.
Another fruitless meeting – July 3rd
On July 3rd, the company and the bank met again. No plan to get the bank paid out was presented. The meeting went over the usual ground of sales expectations, the search for new buyers and the need for time, the proposed sale of the Winnipeg Cold Storage plant, the bank’s demand to be taken out entirely and Levy’s lack of acceptance of the bank’s position. The bank extended the credit line to July 31, 1986 on the understanding that by then sale of assets or fresh capital injections would reduce the bank’s indebtedness by $10 million. In reporting to their superiors, Messrs. Bazarkewich and Soucie said it was not clear at this time whether the company would be able to comply with these arrangements and recommended that failing compliance, receivership proceedings be initiated. Foreht in his evidence said that the $10 million goal was unrealistic but he accepted it with the expectation that if he had a firm deal to sell Winnipeg by the end of July the bank would not be as rigid, a forecast that turned out to be accurate. In the course of the meeting, Levy continued to waffle on the
subject of his resignation saying that he did not want to resign until the company was in a sounder financial position.
The 1985 Annual Report
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The annual report of Levy Industries Limited for the year ended December 31, 1985 was released on July 14, 1986. There were very significant notes annexed to the statements. Note 1 observed that the company’s bankers because of the suspension had expressed concern about the company’s ability to service its debt and required a pay down of $10 million of bank indebtedness within a reasonable period of time. It went on as follows:
The company is presently in negotiations to divest itself of certain assets as well as alternative financing. Should the company be unable to satisfy the bank’s requirements or obtain alternative financing, there would be a question as to the company’s viability, which could result in significant downward adjustments to the amounts at which inventories and other assets are stated. Management is of the opinion that it can meet the bank’s requirements.
In the course of seeking purchasers, Mr. Levy wrote to his friend Abe Minowitz on July 15, 1986. He was offering the shares of Seaway and did an analysis of the book value at an aggregate of $10.8 million dollars or $8.33 a share. Since Levy-Russell was the operating arm of Seaway, this gives some idea of his approach to valuing Levy-Russell. In the course of the letter he said:
Senior management have also indicated their interest in acquiring an interest whether in the form of options or equity.
On July 7, 1986, the Winnipeg Cold Storage plant was sold. The transaction was to close in September and was estimated to provide $2.2 million towards loan reduction.
On July 28, 1986, Messrs. Bazarkewich and Soucie reported on the sale of the Winnipeg property, the annual report of Seaway and the current financial position. Sales were down from 1985 and trending downwards, although estimates indicated a loss somewhat smaller than budgeted. The branch officers recommended that if concrete plans for paying out the bank were not presented on July 31, the account should go into receivership. Interestingly, someone within the bank has noted in handwriting opposite this
recommendation: “is this a realistic recommendation in all circumstances?” to which another person has responded: “Not at present”.
The bank-company meeting of July 31st: Ben Hayeems arrives
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On July 31st the company and the bank met again. The company tabled its Winnipeg deal but was not able to offer any firm plan which would see reduction of the bank’s loan by the stipulated $10 million. Levy announced that he would be resigning without giving a specific date and introduced Ben Hayeems C.A., as the proposed trustee for his shares. The company suggested that upon Levy’s resignation and Hayeems being approved by the U.S. government as trustee, the company would promptly be reinstated. Once the reinstatement had taken place, it was expected that the cancelled contract with Egypt would be also reinstated. (After the meeting in conversation with Bazarkewich, Foreht expressed a lack of optimism that this contract could be reinstated). The bankers were disappointed and unwilling to finance the potential orders upon which the company was relying. Hayeems stated that having only been involved for a few days he had not been able to address the company’s situation in depth and asked for two weeks to come up with a “survival plan” based upon the resignation of Levy and the reinstatement of the company by the U.S. The bank agreed on the basis that the survival plan would be presented by August 14th at the latest. The bankers were critical of the company’s failure during the previous several months to prepare a survival plan. The branch officers continued to recommend receivership unless a drastic positive turnaround occurred. They regarded the company’s chances of survival as “somewhat remote”.
Renewed contact with Shieldings
After this meeting Foreht reported what had occurred to Godsall whose handwritten notes indicate that he received information that the company had obtained more time due to the intervention of “Gordie” (Ormston) over the objections of the “line operators” at the bank who wanted to “classify” the loan (i.e. as non-performing); and also that Bazarkewich had asked the company about a voluntary receivership. This was obviously confidential information. Godsall said that at this time he was still interested in doing a deal and Foreht was in the process of persuading him that the opportunity did indeed exist. Evidently Foreht had no qualms about using confidential information to interest Godsall.
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Foreht introduced Bradshaw and Krestell to Godsall but there is some confusion in the evidence as to when. Godsall was not sure of the date, but his diary showed a meeting on August 6th. He also said that he was uncertain whether by August 12th he had discussed management equity only with Foreht, or also with Bradshaw and Krestell. Bradshaw had trouble sorting out the dates but had a diary entry for August 15th to meet “Gerry” Godsall which makes it likely he had not yet met Godsall when he wrote the appointment down. Krestell said he didn’t meet Godsall until after the September 23rd offer, perhaps in November, and then it was with Hayeems. Foreht said he had introduced both Bradshaw and Krestell to Godsall; he thought first Bradshaw and then later Krestell but he would defer to Godsall that there had been a meeting of all three in August although he had no recollection of it. Godsall was confident that he had briefed Bradshaw and Krestell on the Shieldings’ policy of involving management in the ownership when they bought a company.
I find on this evidence that Bradshaw met Godsall at the latest on August 15th and that he was briefed at that first meeting on Shieldings’ policies on equity for management. I do not think the evidence establishes any involvement of Krestell in the August meetings. Bradshaw’s appointment diary for the August 15th and 24th meetings refers only to Godsall and Foreht. I find that Krestell began to attend meetings with Godsall somewhat later at which time he was similarly briefed by Godsall.
As to the discussions on August 6th between Foreht and Godsall and the 15th involving them and Bradshaw, Godsall testified that he considered Foreht a bit of a nuisance but agreed to meet because he saw an opportunity to hear from Bradshaw as to the state of the business and to bring Krestell and Bradshaw up to speed on how Shieldings operated. As well, Foreht had the news about Hayeems and the DLA and the possibility that Levy might finally be getting around to being ready to make some kind of deal. It thus seems very probable that Foreht told Godsall about the progress of the business plan being developed by Hayeems and the Levy management as well as discussing the proposal they themselves were about to make to the bank to finance their acquisition of the Levy-Russell assets. Godsall conceded that he “might” have been aware of Hayeems’ efforts regarding the business plan at August 6th. I think it highly probable that he was so informed in early August 1986 and I so find.
Shieldings’ letter of August 12th
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Following this meeting of August 6th, Foreht spoke to Bazarkewich about his group and Shieldings putting in a bid for the Levy-Russell assets. On the 12th, Foreht delivered a letter dated that day from Shieldings to Bazarkewich asking the bank to provide financing for such a bid. One passage of the letter refers to Shieldings’ unwillingness, expressed at the June 9th meeting, to deal with the Levy organization so as to avoid “contamination” by being seen to have a relationship with that organization which was “presently under scrutiny by North American government establishments”. This part of the letter concluded: “Accordingly we ask you to treat this letter as privileged communication available exclusively to the C.I.B.C.” Godsall explained that he asked for this as a precaution because he felt the bank was very close to Levy and he did not want the bank to reveal to Levy his assumption of Levy’s guilt. He said he feared being sued. In cross-examination, he conceded that all he had really said was that Levy was under scrutiny but claimed that implicitly the letter presumed guilt. He repeated that he did not want the letter in Levy’s hands for this reason. This explanation is somewhat strained. The letter is asking the bank to finance the proposed acquisition. In ordinary circumstances any bank would treat it as confidential and certainly would not discuss it with the target company. The reference to contamination by contact with Levy is innocuous and could readily have been left out. Was it put in the letter to provide an excuse for insisting that Levy not see the letter and not be told about it? In my view that is far more likely than the explanation Godsall tendered. Foreht said in cross-examination that he wanted the bank to change its June 9th decision and to deal directly with Shieldings. He expected the bank to treat Shieldings’ August 12th letter as an offer. He had an implausible explanation based on a note of his own dated June 6th why such an offer was to be made to the bank rather than to Levy directly as the bank had told them to do at the June 9th meeting. Godsall agreed that they had been told on June 9th to go via Levy.
Foreht said he was looking for a proposal from Shieldings but that he was not consulted about it in advance. I do not accept this evidence. Bazarkewich’s memorandum indicates (and Foreht agrees) that Foreht had told him that Shieldings would be making an offer. When he was reminded in cross-examination that as recently as June 9th, the bank representatives had told him to put any offer through
Levy, Foreht said he wanted to test the reaction from the bank before he went to Levy. This indicates that he had some input into the strategizing behind this letter. I am satisfied that
at his meeting of August 6th with Godsall there were discussions of how this approach to the bank would be made including the contents of the August 12th letter.
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In his evidence, Foreht stated that at this time he was still under what he called a gag order from Godsall not to discuss Shieldings’ role or reveal their name. Godsall denied issuing any such gag, saying that he told Foreht after June 9th not to say Shieldings was backing him because there was no deal, not because of a desire for secrecy. Although the letter of August 12th indicates that it is to be available to the C.I.B.C. only, Foreht said that he distributed “expurgated” copies of it with Shielding’s name blacked out to Hayeems, Krestell and Bradshaw.
A serious issue exists on the evidence as to whether this expurgated version was ever shown to Hayeems. The significance of the issue is that while Shieldings’ letter of August 26 is silent on the participation of the directors in the acquisition offer, this letter to the bank of the 12th refers to the distribution of equity between Shieldings and the operators. Hayeems denied receiving any copy, expurgated or otherwise, of the August 12th letter until he saw it when preparing for the litigation. In his memo of August 25th in which he denies a conflict of interest Foreht speaks of the “third party proposal” which in his evidence he equated with the August 12 letter. It was argued that the August 25th memorandum presupposes on its face that its recipient (Hayeems) had knowledge of the third party proposal and that therefore he must have seen the letter of August 12. Of course it is also possible that he was told orally about the proposal by Foreht.
On discovery, Foreht said that he would not have shown it to Levy without Shielding’s permission and he could not say if he showed it to Hayeems but his practice was to show Hayeems correspondence from Shieldings. He said he gave Bradshaw and Krestell expurgated copies. At trial, he said his memory had been jogged by a fuller review of the material and he was now sure that he had also given Hayeems an expurgated copy. Krestell said he had received one; Bradshaw denied ever having such a copy. Interestingly, not one of the persons involved, including Foreht himself, could produce such an expurgated copy.
If, as Foreht said, he would not have shown the letter to Levy, it is hardly likely that he would have done so to Hayeems since the latter could be expected to show it to Levy. In my view it is very unlikely that Hayeems was given such an expurgated version of the letter of August 12th. I accept his evidence that he did not see it until preparation for trial.
On August 22, 1986, Levy wrote to Hayeems appointing him interim Trustee of the shares and instructing him that:
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…you are hereby appointed interim Trustee, with full authority to carry on the operations of the company and to work together with the CIBC towards the continuation of the operations of the company.
His authority was to be further defined in a formal Trust Agreement. Although he never became CEO, it was clearly the shareholder’s intention that Hayeems would operate the company and deal with the bank. Initially this mandate was acknowledged by the directors. Hayeems became chair of a management committee.
On August 25th Soucie telephoned Foreht and told him that the bank would not finance Shieldings in this venture. Foreht passed this on to Godsall.
The Business Plan: preparation and presentation
Following the meeting of July 31st, Hayeems set to work to prepare the business plan. He asked Krestell and Cohen, both C.A.’s, and respectively the comptrollers of Levy-Russell and of Seaway, and also Bradshaw, who was responsible for production, to work with him and to obtain the input from Foreht regarding the special projects upon which he was working including the DLA and Winnipeg Cold Storage matters. Hayeems testified that he met with Krestell and Cohen and they agreed that the sales forecasts would be delegated to Bradshaw. Hayeems spoke to Bradshaw and asked him to do this. Krestell and Cohen were to prepare worksheets on the expenditure side. Bradshaw was to feed his sales information to Krestell and Cohen and then the team was to sit down and review all of this information to develop the plan. Hayeems said that a few days later Cohen told him that the basic information was ready and he, Krestell and Cohen sat down and reviewed it. Krestell expressed the view that the sales figures obtained from Bradshaw were reasonable. On the expense side, they found potential savings in the area of corporate expenditures at the Seaway level, which were paid out of Levy-Russell. Hayeems said he went to Foreht to discuss this.
One matter that required close attention was management remuneration. Messrs. Ben and Mark Levy were entitled to payments of $75,000 annually and Hayeems instructed Foreht to ask them to agree to defer these amounts. Pep Levy was to be asked to defer $25,000 of
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his remuneration. Hayeems also wanted to defer the payments made by Levy-Russell to service the Peplevy Corp. debt which had been incurred for the purpose of purchasing the shares from Ben and Mark Levy. Foreht was asked to defer $35,000 of his $85,000 remuneration and obtain the deferred amount from the proceeds of the
Winnipeg Cold Storage sale. Even at the trial, over 6 years later, Foreht’s bitterness at being asked to take this deferral was repeatedly evident as it is in the contemporaneous documents.
After reviewing the sales figures with Krestell and Cohen, Hayeems asked Bradshaw whether these figures anticipated the lifting of the suspension. Bradshaw told him it was too early to put anything in for that factor. They went through the sales projections and Bradshaw felt they were attainable. Schedule A to the business plan includes a summary of assets available to the bank as at August 1986. It includes estimates of the proceeds that could be obtained on a going concern sale versus a forced sale reproduced (in part) as follows:
Book | Going Concern (thousands) | Forced Sale | |
A/R | 2,400 | 2,100 | 1,500 |
Inventory | 15,000 | 9,500 | 2,500 (1) |
Equip (1) based on 50,000 tons | 800 | 800 | 400 |
Hayeems testified that these were his estimates as reviewed with Krestell and Foreht. The going concern inventory figure shows a substantial (40%) discount from book which arose from a discussion between Hayeems, Foreht and Krestell in which it was arrived at as a consensus figure on a going concern sale. The value on a forced sale of $2.5 million is based on scrap value as developed by Krestell. Much of the text of the business plan was written by Hayeems but circulated by him for comment. The sale section was based on information from Bradshaw; the staff costs section in consultation with Krestell and to some extent Bradshaw; the Weston Road lands based on a file obtained from Foreht; and the review of operations by Hayeems and circulated to Krestell, Cohen, Foreht and Bradshaw. Having completed all of
this consultation, on August 12 Hayeems sent the business plan to the bank for review prior to a formal presentation on August 19.
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Cohen did not testify but Krestell and Foreht sought to distance themselves from this business plan.
Krestell denied being given a draft of the business plan nor being asked to show it to Foreht, Bradshaw or Cohen for comments. He denied being consulted at all about staff costs, corporate costs, management remuneration, the likely value of the assets if sold as a going concern and the amount of scrap in the yard (50,000 tons). He said he first saw the complete plan after it had been sent to the bank on the 12th. He got it from Hayeems between the 12th and the 19th.
He felt the sales forecast was too optimistic and he was not prepared to accept deferral of his own salary in view of the fact that other payments were being made.
In spite of these objections which he said he had, he did not discuss the business plan with Hayeems between receiving it on or about the 12th and the time the group met with the bank on the 19th. He said he had given his views to Cohen. He did concede that he had assisted Cohen in putting parts of the business plan together including the operating figures as shown on pages 11, 12 and 13 of the business plan. There was some confusion as to whether he had seen those pages themselves or the spread sheets but it makes no serious difference since there are only differences of detail. He admitted giving Cohen assistance on sales and accounts receivable and he expressed his view to Cohen that the sales figures in respect of West Germany and Israel were optimistic. He denied telling Hayeems that these sales figures were reasonable. On cross-examination he was confronted with his discovery in which he had said that he saw the business plan or at least pages 11, 12 and 13 before, not after, it was submitted to the bank. He conceded he was critical of the sales figures to Cohen but did not take up the opportunity to speak directly to Hayeems about them. Part of Tab 72 in the agreed book of documents is a handwritten page “Page One” largely in the handwriting of Bradshaw setting out by country the expected sales receipts from August 1986 to January 1987. The bottom third of the page is in Cohen’s handwriting in which he has added additional sales to West Germany and Israel. Krestell felt these added sales were optimistic but he conceded that he had seen the entire page before the business plan went to the bank. The
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pages Krestell admits he saw are the heart of the Plan being the income and cash flow projections and the sales breakdown. I am satisfied that Krestell was appropriately consulted on the business plan, and played a not insignificant role in developing it and was not disturbed enough about any of it to contact Hayeems about it.
Further, Krestell’s conduct was such that Hayeems would be fully justified in believing, as I find he did believe, that the business plan carried Krestell’s approval with the possible exception of the treatment of Krestell’s own salary. I accept Hayeems’ evidence as to the role of Krestell in preference to Krestell’s.
Bradshaw said that Hayeems asked him to work up sales forecasts for the following six months. As noted, the basic working paper came to be known as “Page One”. Most of it is in Bradshaw’s handwriting but there is also handwriting of Cohen and Krestell. It was prepared by Bradshaw on a very conservative basis, listing only those orders where shipments were expected to take place in the August 1986 – January 1987 period. He did not include anything that was not firmly in hand. For example, he did not include an order from
Israel where the purchase order had been issued but not yet mailed in respect of the re-working of 36 transmissions which were already physically present on the Levy-Russell site. Cohen added certain West German and Israeli sales and produced the schedule of projected income which became page 11 of the business plan. Bradshaw said he saw this before it was submitted and he recalled thinking that Hayeems had selected figures that were in the top part of the range and saying to Hayeems that he thought the figures were optimistic. He said he did not recall seeing the entire plan before it was sent to the bank or indeed before the meeting of the 19th at the bank. However, he was quite clear that he had reviewed page 11 in its final form before it went to the bank. This coincides with Hayeems’ evidence that he did not discuss the whole plan with Bradshaw but did discuss with him the inventory, sales and related matters.
Foreht testified that he provided Hayeems with information regarding the Weston lands, the DLA suspension, the Bradford lands and Winnipeg Cold Storage but not the rest of the plan. He denied being shown a draft of the business plan before it was sent to the bank nor, he said, did he go to meetings to assist in preparing it. However, in a memo he wrote on August 25, he complained that he had been asked for his opinions on the Plan in the
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presence of Ed Levy who was not supposed to participate in corporate business. It seems from this that an opportunity was given and he could have followed that up had he wished to do so. Foreht said he first saw a copy of the plan just shortly before the August 19th meeting with the bank. He said he could not assess it at that time and did not in fact do so until after that meeting at which he had made no comments.
Hayeems said he wrote the section in the plan reviewing operations generally and sent it to Krestell to examine and pass to Cohen, Foreht and Bradshaw for comment. No comments were forthcoming. Krestell denied that he was responsible for soliciting comment. Whether Krestell performed this task or not, it seems to me implausible that Hayeems, who had not been auditor of the company since 1984, would not seek comments from management on this vital document on the success of which the company’s future depended. I accept Hayeems’ evidence that the plan including Schedule A was prepared through a series of discussions as described by him and culminating in a draft plan being circulated prior to submission to the bank for comment by those participating in the preparation. Hayeems specifically said, and I accept, that he reviewed the draft with Krestell and parts of it with Bradshaw. He did not say he reviewed it all with Foreht and Foreht said he received the plan only just before the meeting with the bank.
The business plan was forwarded to the bank on Tuesday, August 12. Bradshaw’s diary shows that on Friday the 15th he, Foreht and Godsall met. There is no direct evidence as to what transpired but there can surely be little doubt that the discussion covered the business plan, its chances for acceptance by the bank and the impact of such acceptance upon the group’s plan to purchase the business through dealing with the bank. Even if Foreht had not yet received a copy (as he claimed) Bradshaw had prepared much of it and could discuss it knowledgeably.
Notwithstanding Foreht’s testimony, it seems implausible that he, the chief financial officer of the parent organization, had not been provided with a copy of the business plan, or that he could not have obtained one for the asking. He was very vocal when he felt slighted on other occasions, yet there is no suggestion in the evidence of any contemporaneous complaint on this occasion. Hayeems’ testimony is more probable and I accept it in preference to Foreht’s.
The plan was presented to the bank by Hayeems who was accompanied by Levy, Foreht, Bradshaw and Krestell. The bank agreed to get back to them with a decision.
Foreht and Bradshaw visit the bank
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Foreht said that following the meeting he got additional backup information and came to the conclusion that the plan had material deficiencies largely in what was omitted. He felt it did not take into account the circumstances facing the company. He consulted Mr. Rosenfeld who was both a personal friend and his lawyer who, he said, advised him that if there was something materially wrong with the plan he should report it to the bank. He also consulted Mr. Slan, the company’s lawyer who, Foreht testified, said that if he felt strongly about a misrepresentation he should advise the bank.
One person with whom he did not discuss his problems was Hayeems. At the latest, Foreht had the plan on the 19th shortly before the meeting at the bank. That is his own evidence. The meeting, according to one of the sets of handwritten notes, was at 10:30 a.m. Hence he had the afternoon of the 19th and the 20th and 21st to study the plan and discuss any problems with his colleagues. On the morning of the 21st he called Soucie for an appointment to discuss the offer that he and Shieldings had made (i.e. the August 12th letter) and also to describe the “real” situation in the company. He conceded in cross-examination that by the morning of the 21st he had done enough study of the plan to be able to discuss it. He really had no explanation for not consulting Hayeems; he admitted it was a mistake not to do so. He explained he was a director and Hayeems was not but conceded that Hayeems had assumed Levy’s mantle and that he had accepted that situation, None of this explains not doing the clearly proper thing and discussing the problems with Hayeems. Prior to going to the bank on the 22nd he prepared a memo outlining what he was going to say. He showed it to Krestell but not to Hayeems. None of the evidence about the advice of Slan and Rosenfeld indicates that either of them was asked or advised him on the question of approaching Hayeems before going to the bank. Godsall testified that before the 22nd he was aware of the intention of Foreht and Bradshaw to go to the bank to express their doubts about the Plan. It seems clear thus that Foreht had the time – and the inclination – to advise Godsall and Krestell of his intentions, but not Hayeems.
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On the 22nd of August, Foreht and Bradshaw met with Baird and Soucie. Foreht told them the Plan was unworkable. He raised a number of points. Firstly, there was no provision for relocation costs. The Plan only extended for six months and the Kleinstein deal was not expected to close within that period because the rezoning had to be accomplished. The closing was to be “no earlier than 185 days after draft plan approval…” However, Foreht testified, in his mind since Kleinstein had the right to close as early as December 31, 1986, (presumably by waiving the rezoning conditions) some provision should be made for the costs of relocating the company.
Secondly, he said that the potential orders from Israel ($3 million) and Egypt ($3 million) would be subject to a new U.S. government (100% U.S. content) policy. There was no provision for substantial set-up expenses to convert the company’s U.S. warehouse for manufacturing.
Thirdly, there was no provision for potential legal bills for the company’s defence of the criminal and civil charges in the U.S. and Canada. Fourthly, there was no provision for the suit expected from the U.S. government for the substitution of used parts in place of new parts. Fifthly, he mentioned possible lawsuits from Ben Levy and the widow of M.A. Levy if the payments to them were not made on time.
The bank memorandum records that after setting out the above problems and declaring the plan untenable, Foreht and Bradshaw advised that should the bank accept the Plan they would both leave the company to pursue other interests and they expected to be followed by all of the senior people in the company. They said that a major consideration was that all of these key people had been asked to accept salary deferrals but the Plan called for the continuance of payments by the company to cover the interest on Levy’s personal loans, an arrangement felt to be unfair by the senior management of the company. In this connection, Foreht and Bradshaw showed the bankers a copy of a letter of resignation from Cohen.
Foreht and Bradshaw then followed up by asking the bankers, in the words of the bank’s memorandum
to give immediate and serious consideration to their offer to purchase the operating assets of the company.
After outlining that offer for his superiors, the author continued:
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Foreht and Bradshaw emphasized that time is of the essence here, as their offer has been on the table for some time, and other investment opportunities were being looked at. Shieldings may withdraw their offer if an early decision is not made.
Concluding the meeting Foreht told the bankers that he had attempted to discuss the offer with Levy who had adamantly refused to discuss it. He claimed he had discussed the offer in general terms with Hayeems who was in general agreement that it might be a viable solution. Foreht and Bradshaw requested the opportunity to meet with senior bank management bringing along a representative of Shieldings early the following week.
This somewhat extraordinary meeting was the subject of fierce criticism by counsel for the plaintiff. Not only was the validity of some of the points made challenged but in particular the bona fides of Foreht and Bradshaw in arranging such a meeting without first discussing their problems with Hayeems was challenged and it was suggested that their true motivation was to scuttle the business plan and force the company into receivership.
There are a number of aspects of this visit that call for comment. First I note that the essential accuracy of the bank memorandum is not disputed by Foreht or Bradshaw.
Many of Foreht’s points of objection are not on the surface questionable, were conceded by Hayeems to be points of interest in assessing the company and indeed are largely reflected in the bank’s subsequent credit extension letter. An exception is the moving costs which would only be incurred when the sale of Weston Road became final. Not only was the re-zoning a condition which Foreht knew was many months from accomplishment, but Kleinstein had declined to close early when asked to do so by Foreht himself. Foreht knew that as of August 19th final approvals were not expected until the final quarter of 1987. Closing was to be “no earlier than 185 days after draft plan approval…” which put it into the second half of 1987. Since the plan was a short term document dealing with the period ending January 1987, one can certainly question the bona fides of bringing this obligation into the equation. Finally, on this point, although the cash flows do not – correctly in my view – reflect moving costs, they are clearly set out in Schedule A to the plan at an estimated $1.5 million. If Kleinstein changed his mind and agreed to close early, these moving costs would be part of the negotiation with the bank over the proceeds. It is not possible, in my view, that Foreht
honestly believed that these costs would be a serious problem in the period ending January 31, 1987. He was grasping at straws.
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Moreover, as C.F.O. Foreht had been responsible for financial forecasts provided to the bank on May 21st and confirmed on June 17th as valid. He admitted that some of the very items that he complained were omitted from the plan had also been omitted from his May 21st
June 17th projections. He also admitted that the May-June projections were more optimistic than Hayeems’ August ones, but sought (unconvincingly) to distance himself from the May forecasts saying they were done by Cohen. He was pressed and conceded that he had supervised the work, reviewed it and endorsed it to the bank. It is, regrettably, not untypical of Foreht’s evidence that he, the C.F.O., would not accept responsibility that was clearly his when to do so would have been inconvenient for his case. Evidently his conscience permitted him to live with these omissions in May and June but not in August.
Bradshaw’s evidence about the meeting of the 22nd does him no credit. He was a senior officer of the company accompanying the C.F.O. to the bank. He claimed he did not know why he was going although presumably they rode downtown together – a trip of some length; the statements made were Foreht’s not his; it was not his view that the plan was untenable but he said nothing to correct the contrary impression given the bank; he had no plans to leave the company but did not correct Foreht’s statement that they both would leave if the plan was accepted; he knew Foreht was exaggerating in claiming all the senior staff would leave but did not correct this impression. His lack of candour with the bank was deplorable.
The bank’s memorandum records Foreht and Bradshaw advising that senior staff found the plan’s salary deferrals unacceptable because cash would still flow out to fund Levy’s interest payments. The bankers then note: “In this regard…” they were shown Hilly Cohen’s resignation letter of August 22nd. The clear implication is that this resignation was the first of the key employees upset by the Plan. The truth is quite different as was extracted from Foreht in cross-examination. Cohen had told Foreht in May or June that he wanted to leave to go into private practice as an accountant, and would do so as soon as he had built up a practice. Foreht knowingly misrepresented the situation as part of his effort to persuade the bank not to accept the Plan.
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Bradshaw testified that he was surprised that Foreht dwelt upon the facts behind the various charges. It seems fair to ask how the details of the facts underlying the charges were a necessary part of a discussion of the business plan. This evidence adds to the impression that Foreht was grasping at anything that might influence the bank to pull the plug on Levy-Russell.
On Sunday afternoon, August 24th, Godsall met with Foreht and Bradshaw. Neither Foreht nor Bradshaw produced any note nor admitted any detailed recollection of what was discussed at that meeting. Godsall also had no written record of this meeting. He sought to down-play its importance by explaining it was held on Sunday not because it was urgent but because it was not important enough to use up his busy work week. I do not accept this explanation. He had already met twice during the work week – Wednesday, August 6 and Friday, August 15 – with Foreht and/or Bradshaw. The topics covered on Sunday included a “debriefing” regarding the events of the 22nd. I note that this, once again, was confidential company information. As well, Godsall conceded it was probable that they discussed the prospect of a meeting during the week with senior bank officials. Godsall was unimpressive in this part of his evidence. He admitted he wanted a meeting with the bank, professed to be happy to have Levy included if the bank wanted, but admitted he did not want Levy to see the letter of August 12 and had no explanation for why he had not removed the offensive parts from that letter and sent it to Levy. It is clear that he did not want Levy to be represented at the hoped-for meeting with the bank even though at least Foreht of the Levy directors would be present. It seems highly probable that not only the dramatic events of Friday, August 22nd but also Foreht’s August 25 letter to Hayeems explaining his actions were subjects of discussion.
Repercussions of the Foreht-Bradshaw visit
The Foreht and Bradshaw visit to the bank had repercussions both within the bank and within the company.
Within the bank, on Monday, August 25th, Soucie telephoned his superior Doug Loewen, to ascertain his decision on the requested meeting with Foreht. Loewen saw no need for a meeting, noting that Foreht and Bradshaw were officers of the company. If they made an offer to the shareholders which was acceptable to the shareholders, the bank would
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then be in a position to discuss the matter and make a decision as to its attitude. Loewen further indicated that the bank would not be interested in financing Newco. Soucie telephoned Foreht and told him the foregoing. Subsequently on Loewen’s instructions, Soucie telephoned Hayeems that same morning. Soucie’s memorandum continues:
We spoke to Hayeems, and he said that he had had discussions with Foreht wherein Foreht had indicated that he might resign from the company. Hayeems also said that he had spoken with Foreht concerning the offer to purchase the assets, and Hayeems [sic] advice to Foreht was to make a formal offer which he would review. Hayeems was unaware of any other employees threatening to resign.
Later in the afternoon of Monday 25 August, Soucie records receiving a telephone call from Loewen as follows:
He (Loewen) advised he had spoken independently with Hayeems. This afternoon Hayeems had a meeting with all the senior personnel, and reportedly received their cooperation in a salary cut and continuing on with the company. Hayeems also had a conversation with Foreht, and Hayeems told Foreht that if he wished to submit an offer, please do so to the company with a copy to the bank. Loewen also advised that he told Hayeems that Foreht appeared to be wearing two hats in this situation, and if Foreht was prepared to make an offer, perhaps it would be best done if Foreht was outside the company.
Hayeems learned of the meeting of Friday August 22nd from Soucie on the morning of Monday August 25th and later that day from Loewen. When Loewen called, Foreht was sitting in Hayeems’ office and made some notes. It is clear from these notes that Loewen forcefully condemned Foreht’s act and asked rhetorically “who’s he working for?” Hayeems told Foreht he should resign and demanded an explanation in writing for his conduct. At the foot of Foreht’s notes of this occasion there is a final sentence he wrote to himself, which casts considerable light upon his attitude towards Hayeems:
Since H’s only function is standing in for Pep why LIL (Levy Industries Ltd.) pay him and at what rate.
Foreht’s written explanation – August 25th
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As requested, Foreht provided an explanation for his conduct in a memo dated August 25, 1986 adapting the document he had shown Krestell the previous week. The memorandum is too lengthy to quote in full but it is a crucial document in this case. It begins by outlining three areas that will be discussed:
My objections and the lack of support for your proposal.
Method of dealing with the third party proposal now in the hands of the bank.
Areas of conduct, some of which overlap into the other areas involving my actions, conflicts of interest, your actions and your role.
Under section A, Foreht told Hayeems that the business plan had “absolutely no chance of succeeding and, in fact, is a poor and unfortunate substitution for the third party proposal.” He then listed the reasons for this conclusion. The first was that payments were going to be made to Pep Levy including interest on Pep’s personal loans at the C.I.B.C. and the payment of legal fees in the various proceedings involving Pep. He asserted “the suspension will not be lifted if these payments are permitted to continue.” The evidence does not support this last statement; the DLA was requiring Levy to withdraw from management, not to sever his financial connection to the company. Further, it was the bank that demanded its interest which originally had been excluded from Hayeems’ proposal, and thus the criticism was hardly valid when made to Hayeems.
Foreht went on to refuse to accept any reduction in salary for himself because it would go into Levy’s pocket and asserted that other members of the staff had taken the same position. The second point was legal costs. He suggested that serious costs would be incurred in the next six months. The third was the “$1.5 million cost of moving” which he asserted would have to be spent soon. (As noted, this is a very dubious assertion.) The fourth was that no provision had been made for capital costs arising out of meeting new U.S. content requirements for FMS funding. The fifth was cost required to provide duplicate facilities in Canada and the U.S.A. to satisfy FMS U.S. content requirements. (This appears to be the same as point four.) The sixth was that no provision had been made for a certain $1 million tax assessment which was under appeal. He assessed the chances of success as no better than 50-50 and stressed the cost of the fight. Finally, no provision had been made for the lawsuits which would arise when the payments to the other two Levy families were deferred.
Based on these seven points, Foreht predicted a serious deterioration in the ability to sell the assets of the business as a going concern “and realize sufficient funds to come anywhere close to duplicating the offer on the table.”
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Section B of the memo was to deal with the method of handling the third party proposal. Foreht opened by acknowledging that Hayeems had suggested to him that the third party make an offer to the company. He said that no one had any objection to doing that provided the offeror could be sure of getting good title. He said that the bank was not presently in a position to deal with the assets and that “there is unlikely to be any other material offer”. The third party would likely be in a position to acquire the assets from a receiver but he did not want that to happen.
Section C opened with the following:
I fail to see where I have a conflict of interest. On the contrary, the offeror has met with the bank, without my prior knowledge.
He continued by saying that he had told Levy frequently that he was endangering the company by staying in office since the suspension would not be lifted until he left. He complained of Levy’s “threat” that without a satisfactory settlement “he would plunge the company into receivership” and asserted that no one would buy the company until all contamination from litigation, tax cases and the like was removed. Then:
No one who can make a decent living outside Levy’s is going to ride with the company to its impending doom if they have an opportunity to leave. You must help me provide this opportunity. I am not an Officer, Shareholder, employee or connected in any business way with the offeror. They are interested in my talent, experience and knowledge of the military business.
By way of a footnote he complained that, while he was asked to express his opinions on the business plan, it was in the presence of Ed Levy who was not supposed to participate in corporate affairs because he had retired from the company. Foreht then continued:
You have in the past issued instructions and carried on in a manner assuming authority. You now have a letter from Pep which I am holding. I am not sure how that conflicts with my position or whether or not other measures have to be taken in order to give you the authority which this letter purports to give you. I do believe that if you are to be
separated from Pep, you should have some independent authorities (sic) given but I have not yet addressed that issue with you or anyone else.
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The issues raised in section A were largely those discussed with the bank. I have noted the lack of merit in a couple but their merits were not the main point; that was: why did Foreht not raise them with Hayeems before going to the bank? Nowhere was this point addressed. At the end of the memo where he complained that although he was asked to comment on the plan, it was in the presence of people who should not be privy to the company’s business, he did not explain why he did not seek out another forum.
In section B Foreht noted that Hayeems had told him that the Third Party should make an offer to the company; said there was no objection to that but offered no explanation for the “offer” i.e. the August 12th letter being made to the bank instead.
In section C there are two express statements, one denying Foreht had any conflict of interest, the other denying he had any business connection with the offeror. Neither statement was true. As to the first, it is possible that Foreht “fail[ed] to see where I have a conflict of interest”. If so he was wilfully blind. He was a director of the potential vendor and had a personal stake in the success of the offeror. His defence of this statement was that every7 one knew he was involved in the buy-out, therefore any conflict disappeared. But even if everyone did know, the conflict would still exist. Foreht was unable to point to any occasion on which he had told either Hayeems or Levy that he expected to get significant equity. In my view this is a sentence designed to mislead. The next sentence is also misleading, It is true that Shieldings, through Willis and Godsall, had been in touch with C.I.B.C. about Levy-Russell in March without Foreht knowing of it. But he had since been with Godsall to the bank and discussed the prospects of purchasing the company’s assets. To say that the offeror had met with the bank without his prior knowledge was a partial truth and very misleading. These words show every evidence of having been carefully chosen to be literally true but substantively a lie.
Finally he denied being connected “in any business way” with the offeror. This he defended by saying he would only be connected with Shieldings if they succeeded in buying the business. This is the kind of statement for which the word “sophistry” was invented. He was already connected in a business way with Shieldings; he was working with them to buy
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the company; he had an understanding that he would be the major shareholder in the new business that he and they would set up. This is a further example of Foreht deliberately concealing his own role from Hayeems and Levy. Indeed, the use of “Third Party proposal” seems also designed to create a false image of arms-length dealing.
In the light of all of this evidence, I find that Foreht and Bradshaw went to the bank on the 22nd with the joint purpose of scuttling the business plan in the hope that the result would be a receivership or direct negotiations with the bank, to the exclusion of Levy and Hayeems, for the acquisition of the Levy-Russell assets at a reduced price.
On August 25th, Levy expressed disappointment in Bradshaw’s conduct in going to the meeting with the bank and told him that he was letting Foreht lead him around by the nose. Later, Bradshaw told Hayeems that the things he had heard Foreht say were true. In evidence he denied apologizing to Levy or Hayeems or admitting to either that he had been influenced by Foreht. He said his working relationship with Levy and Hayeems was not affected; not long afterwards Hayeems asked him to become a director and president of Levy-Russell, and set up a management committee consisting of himself, Krestell and Bradshaw. Hayeems’ target was to get a better grip on the cash situation of the company and this was a means to do so without personally taking over the management. At this time, Hayeems was on the premises part of most days.
In the afternoon of August 25th, Hayeems convened a meeting of the management people and laid out his view as to why salary deferrals were necessary. Bradshaw said he was not impressed with the presentation because no selling job was done on the sensitive issue of people’s salaries. The meeting deteriorated into argument and there was no consensus. Bradshaw told the meeting that he felt strongly enough about the company that if he had to take a deferral he would do it. His feeling was that the senior management did not refuse to do so so much as that the matter ended up not being pursued by Hayeems.
Shieldings opens negotiations – August 26
On August 26, 1986, Godsall wrote to Hayeems telling him that Shieldings was interested in acquiring all or most of the assets of Levy-Russell. He raised several concerns including:
The continued availability, absent degradation of motivation, of a core group of key personnel must be assured.
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It seems probable that this reference to “degradation of motivation” arose from Godsall’s knowledge of the debate within the company as to whether senior management would take deferrals of salary in order to allow the business plan to succeed. Godsall also wrote that there must be no continued impairment of sales by difficulties with government agencies; and inventories and tools must be maintained. He sent a copy to the bank. Hayeems said that when he got this letter he took it to Foreht and asked “is this one of your buyers?” to which the answer was “yes”. Hayeems contacted Godsall to arrange a meeting in a few days. Around this time, Bradshaw said, Hayeems cautioned all three directors that they must exercise a high degree of discretion regarding their obligations as Levy-Russell directors vis-à-vis Shieldings.
On August 27, 1986, Hayeems received a call from Doug Loewen to inform him that the bank was going along with the plan and that a letter would follow setting out conditions.
On August 28, Foreht records Hayeems as telling him that he (Foreht) was not doing anything, was useless and should quit the company which could not afford him. The word “traitor” appears in Foreht’s notes. He also records Hayeems telling him that the bank would “close us down if we presented the true facts to them” and Foreht noted that that was something he (Foreht) was obligated to do. Hayeems said that Foreht’s note was not accurate, that they discussed only that Levy-Russell could not afford Foreht’s salary for the work he was doing for Seaway. Hayeems said that Foreht did little or nothing for Levy-Russell directly and he suggested that Seaway should get bank accommodation for Seaway’s expenses. He denied making the statement that the bank would close the company down if the true facts were presented. In this connection, it should be noted that the bank had been given Foreht’s version of the true facts on August 22nd without shutting the company down. In his conversation of August 25th with Hayeems, Loewen had said that the bank was generally supportive. Foreht’s notes for August 25th record: “meetings today/general acceptance –report back.”
The bank extends the loans
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On September 5, Messrs. Bazarkewich and Soucie met with Hayeems, Foreht, Krestell and Bradshaw and delivered a letter dated September 4th confirming extension of the existing credit line to January 31, 1987. However, the first condition provided that the bank’s support would be on a month by month basis within the confines of the cash flow projections presented by the company in the business plan. Other conditions included the sale of the Winnipeg Cold Storage facilities and application of the net proceeds of some $2 million to the bank’s loan; acceleration if possible of the sale of the lands at Weston Road; expedition of lifting of the suspension; installation of Ben Hayeems as trustee with the consent of the DLA; appointment of Ben Hayeems as CEO for Levy-Russell and the formation of a management committee from the senior management group; continued efforts to sell Levy-Russell as a going concern; and certain reporting requirements to the bank. Although Messrs. Foreht and Bradshaw’s visit of August 22nd had not resulted in the bank rejecting the company’s plan, the points made by Foreht were included in condition No. 10 as matters upon which the company was to report by September 30th. Hayeems told the bank that he did not want to be CEO of Levy-Russell and recommended Bradshaw.
After the delivery of the letter, the group discussed the major points, including the pursuit of a sale of the business of Levy-Russell as a going concern. The minutes prepared by Soucie record:
…Ken Foreht again indicated that he had an offer. Both we and Ben Hayeems indicated to Foreht that his “offer” was insufficiently detailed to act upon, and the point was made if Ken and his group wanted to pursue the matter, a formal offering including price, terms etc. should be tabled for consideration.
Foreht identified the offer that was discussed at this meeting as the letter of August 26. Hayeems accepted the bank’s memorandum as essentially correct and agreed with Foreht’s identification of the offer as being the Shieldings letter. He disagreed however with the bank’s characterization of the offer as coming from “Ken and his group”. He said there was no indication that Foreht was personally involved in the offer in any way. He agreed that he had told Foreht that the Shieldings offer was not detailed enough. When one recalls that the bank knew much more about what Foreht was doing than Hayeems did and that it was only a few days earlier that Foreht had denied flatly in writing to Hayeems that he was involved with Shieldings in any business way, it seems unlikely that Hayeems would have been discussing
an offer from “Ken and his group” at this meeting. It appears likely that Soucie’s reference is based on information which the bank had and Hayeems did not.
The horse gets out of the stable
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The bank’s letter was obviously a document of extreme importance to the company. While it gave the company some breathing room, its duration was limited and the conditions were very stringent. The information contained in the letter was highly confidential, particularly on the eve of negotiations with a potential purchaser of the assets of the business. Armed with this information, such a purchaser would be in a position to negotiate from strength, knowing the pressure upon Hayeems. Somewhat later in 1986, Hayeems put it expressly to his colleagues when he told them he did not want Shieldings to know the extent of the pressure being put on the company by the bank. In so instructing them, he was articulating something which would have been obvious to anyone in the position of any of the directors in September 1986. He was also closing the stable door a couple of months after the horse had gone. Foreht, although he acknowledged in cross-examination that the letter was clearly private, also admitted that he had sent a copy of it to Godsall probably as soon as he got it. At first when he was asked this question, he said he could not recall whether he gave a copy to Godsall. However, when confronted with the copy produced by Godsall, he acknowledged that Godsall’s document was a photocopy of Foreht’s own file copy with his own handwritten notes. He then acknowledged that if Shieldings had it, it was likely he who gave it to them. When he was pressed further he said he wanted them to know the status of the company. He denied giving the letter to Shieldings to assist Shieldings in their negotiations with the company and asserted that the fact that the company was under pressure from the bank was not news to Shieldings. When it was put to him that he could have told Godsall that the bank had given an extension but concealed the details he was evasive.
Foreht’s performance in the giving of this evidence was evasive and unconvincing. I am entirely satisfied that he gave Godsall a copy of the September 4th letter as soon as he got it and that he did so for the purpose of ensuring that Godsall was fully armed with a complete understanding of the pressure under which the company was operating so that Godsall could conduct the negotiations more successfully. It was in my opinion an act of pure treachery on Foreht’s part.
Godsall and Hayeems meet ~ September 1986
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Godsall and Hayeems met in late August or early September at the Prince Hotel in Toronto. Godsall explained who Shieldings was and their interest in the assets of Levy-Russell to complement an existing or anticipated defence-related business. Godsall asked for financial data and made notes on the back of his copy of the letter of August 26 of the data that Hayeems gave him. What Hayeems gave him were book values which he obtained from the figures contained in the business plan. The figures Godsall recorded were as follows:
BV (Book Value) | LIAB. | ||
Receivables | $2.0 million | Payables | $3.0 million |
Inventory | $15.0 million | Bank loan | $18.0 million |
Tools | $0.8 million | ||
Land | $14.0 million | ||
Total | $31.8 million | Total | $21.0 million |
There are also references to the M41 and to some customers’ names and a reference to “Winnipeg ‘if’ – $2 mil”. There are also some references which Hayeems said were not matters discussed in the meeting but were apparently notations made by Godsall of his own thoughts. Hayeems told Godsall about the Winnipeg sale, which was expected to yield $2 million and about the company’s M41 project and their hopes for sales to Thailand and other countries. Godsall described Shieldings as a venture capital company but according to Hayeems, did not say what other ventures they had financed or who owned the company itself. At that meeting, Hayeems testified, and I accept, Godsall said nothing to him regarding the proposed deal being an employee buy-out although there was a discussion of the need to maintain the core group of managers. Nothing was said about the possibility that these managers would end up with equity in the business, nor about Shieldings’ concept of defensive control under which they maintained control of the company by debt instruments leaving many or most of the shares to the managers.
Godsall confirmed that these notes were his outline of the financial situation of Levy-Russell as detailed to him by Hayeems in the meeting. He concluded that the land could contribute about $10 million towards the bank loan which would reduce it from $18 to $8 million. Therefore the net liabilities of the business after the sale of the land would be about
$11 million and the business assets would be $17.8 million. He said he told Hayeems about
Shieldings, what it did and how it did it and its philosophy. The meeting ended with Godsall agreeing to put together an offer which Hayeems said they would entertain. The actual terms of such an offer were not discussed between them at this time.
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The first Shielding s offer: September 16th
Following his meeting with Hayeems, Godsall put together a letter offer dated September 16th for the assets, other than the Weston Road lands, at a price of $8 million. Foreht classified this letter as a draft but it is signed and I think it is better to call it the first Shieldings offer. By this time Godsall had seen the September 4th letter and knew the terms upon which the bank was extending credit to Levy-Russell. He was concerned that this accommodation would not be enough to keep the company from deteriorating but he denied that he regarded it as an impediment to the making of a deal. Hayeems and Godsall had telephone discussions about the contents of the offer of September 16th and Hayeems reported to the bank on September 22nd that he had received an offer and that it had been returned for clarification.
On Thursday, September 18, 1986, Godsall met with Foreht, Bradshaw and Krestell at the Prince Hotel. Although Krestell felt he had not met Godsall until November, the evidence on balance is that he was at this meeting in September. Bradshaw said he was uncertain as to what had been discussed at the meeting. Foreht had scheduled a meeting with Hayeems for the 19th to discuss the Shieldings offer. Godsall was uncertain whether Foreht had told him about this scheduled meeting but be did know that at some point Foreht would attempt to sell Hayeems on treating Shieldings’ proposal seriously. It was put to him that the meeting of the 18th had been called to strategize how Foreht would approach Hayeems on the 19th. Godsall did not agree but preferred to characterize the meeting of the 18th as one designed to encourage the directors to discuss the merits of the offer because Godsall had the opinion from his first meeting with Hayeems that Hayeems might have an “exaggerated” view of value of the business. Godsall said that discussion at the meeting focused on how the directors would make the case that Shieldings offer was a suitable one. The distinction insisted upon by Godsall seems to me to be a quibble; they met to plan how to persuade Hayeems and Levy to accept their offer.
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At the same time, Godsall was engaged with the help of Rosenfeld, in revising the September 16th offer to produce what became the offer of September 23rd. Godsall denied that the three directors had given him any substantial input. He acknowledged that item 4 of his September 23rd offer, relating to the DLA, came from Foreht and that input regarding the CD 850 came from Bradshaw and Foreht and other information came from Krestell but he was adamant that the language and the scope of the offer were his own and Rosenfeld’s. Foreht, however, said he made some changes to Shieldings’ letter but had no input on price.
Clipping Hayeems’ wings: I
Foreht characterized his relationship with Hayeems as ranging from fair to bad, certainly never good: they tolerated one another. He said that in mid-September he felt that the best solution would be to reach an agreement on the authority and responsibility of each. He denied the cross-examiner’s suggestion that his purpose was to limit Hayeems’ activities to the smallest possible scope. However, Bradshaw in cross-examination confirmed that Foreht had told him at this time that such was indeed Foreht’s objective.
On Friday, September 19, Bradshaw, Krestell, Hayeems and Foreht met. Foreht prepared some notes for discussion. They included that Hayeems would accept a title and a directorship if asked; that there would be no policy or administrative changes without the approval of the directors; that Hayeems would retain the services of the key employees defined by Shieldings’ letter; that Hayeems would agree with the directors on a realistic selling price which a purchaser with all the relevant information would pay; that Hayeems would support Foreht’s efforts to conclude the Shieldings deal; and that Hayeems would resign if requested by the directors.
Hayeems did not recall a meeting at which such a list was tabled but did recall discussions of several of the topics. The directors made it clear that they were to be involved in and aware of every discussion with potential buyers or with the bank. Hayeems did not agree to become a director. His mandate was to represent the major shareholder which, Foreht’s notes indicate, meant he was to have full authority. Foreht felt, not unreasonably, that the office should be accepted if the authority was to be wielded. For whatever reason –his part-time presence, lack of D & O insurance perhaps – Hayeems did not assume an official title. Nevertheless, he functioned as the senior executive of Levy-Russell in late 1986.
It is not clear how constrained he felt by these requests from the directors, but he was at the least under the necessity of retaining them, as well as other key employees, in order to comply with Shieldings’ terms.
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Foreht said he met with Hayeems again on the 24th of September and prepared several pages of notes. The litany of complaints against Hayeems in these pages speaks volumes for the truth of Foreht’s description of their relationship as bad. Foreht charged that his authority had been reduced arbitrarily; that Hayeems persisted in telling others that Foreht had no real role to play in Levy-Russell; that Hayeems was saying that Foreht’s trip to the bank on the 22nd of August was wrong and had undermined the company and Hayeems’ efforts and that Levy-Russell should not be paying Foreht’s salary; and that his activities were not relevant to Levy-Russell’s day to day operations. Of particular interest is his complaint that Hayeems thought that:
I (Foreht) am somehow personally involved with the Shieldings group therefore I have divided loyalties and should leave the company so that I can negotiate from outside.
Foreht said these were notes made by him after a meeting on September 24th with Hayeems which certainly implies that the points were discussed. Hayeems was referred to this memorandum’s note that Hayeems was to involve the directors in all negotiations with asset purchasers. He confirmed (as did Bradshaw) that this point was discussed and I prefer that testimony to Foreht’s denial. Whether or not all of the points were actually communicated to Hayeems, these notes cast considerable light upon Foreht’s state of mind in late September. He clearly was maintaining to Hayeems, as he had done in his memorandum of August 25th, that he had no connection with Shieldings and no possibility of divided loyalties while ensuring as best he could his own access to all negotiations and passing the information on to Godsall.
Later in the same set of notes, he set out a description of his view of the respective responsibilities of himself and Hayeems. The responsibility assigned to Hayeems was the obligation of creating the circumstances in which the trust agreement could be carried out in good standing, i.e., to force Levy to disassociate himself from Levy-Russell. The responsibilities Foreht assigned to himself were very sweeping indeed:
Dealing with the banks and negotiating credit.
The sale of Bradford and 1400 (Weston Road) lands.
The sale of Levy service (a subsidiary company).
The sale of Levy-Russell assets.
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Contract negotiations and planning for the organization.
Refinancing the company.
Chief financial officer for the organization.
If put into effect, this sweeping claim for responsibility would have excluded Hayeems from any involvement in the negotiation with Shieldings and would have placed such negotiations firmly in the hands of Foreht. This document illustrates clearly the validity of Bradshaw’s evidence that Foreht’s aim was to narrow Hayeems’ responsibilities as much as he possibly could. No doubt there was little chance that Hayeems would ever agree to such a division of responsibilities but the documents throw an uncompromising light upon Foreht’s state of mind.
The second Shieldings offer – September 23rd
On September 23rd, Shieldings’ offer, revised as a result of Godsall’s discussions with Hayeems, was received. Shieldings proposed to purchase all of the business assets of Levy-Russell plus the Bradford lands but excluding the Weston Road lands for $8 million. It would be granted an economic rental lease of 1400 Weston Road for a period to be determined by Shieldings as adequate to permit the realization of the materials on site on a going concern basis. From the rental would be deducted the cost of removing and relocating the business. This was a change from the proposal of the 16th of September which had contemplated a rent free period of occupation. Godsall explained that he felt the adjustment would wipe out the rental and so the effect of the change was more cosmetic than real.
A number of key employees were identified and the offer was conditional upon their continued employment. These included Messrs. Bleiwas, Bradshaw, Foreht, Hayden, Krestell and Ms. Weisbord. Termination arrangements were to be concluded with Levy. The offer was conditional upon no material change in the inventories and intellectual property of Levy-Russell from September 1, 1986 with a specific requirement that Levy-Russell maintain all initiatives, development and research for the maximum realization of the M41 project and
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the CD 850 transmission overhaul business. It was further conditional upon the DLA accepting the purchase by Shieldings as freeing the purchased assets from the effects of the suspension of Levy-Russell. The offer was open for only two days. Hayeems responded on the 24th proposing an extension until Friday, October 3, 1986. He also asked the three directors for their views and they responded on the 25th in writing. The memo begins:
After careful deliberation of all aspects of this offer, including purchase price, and the ramifications which were apparent to the board, we believe that the following changes which should be acceptable to Shieldings, could be made to the Shieldings Inc. offer of September 23, 1986.
Then follow seven proposed wording changes designed to ensure that Shieldings assumed benefit program liabilities, compensation packages of employees and the like. Although some of the changes would have a modest impact upon the final price, conspicuous by its absence is any discussion of the purchase price itself, its adequacy, its make-up or the possibility that it might be improved. The directors offered no advice whatever in writing upon the central issue, whether the price offered by Shieldings was the best price available or not. The evidence is that the oral advice offered was to accept Shieldings’ offer. Not one of these experienced men thought that some negotiation might be in order.
Foreht “hopes” for equity
Hayeems testified that around the time this offer arrived, Foreht came to him and told him that he “hoped” to have “some” equity in the business should the Shieldings deal go through. Foreht said there never was an occasion when he sat down with Hayeems (or Levy) and said he would be getting substantial equity should the Shieldings offer be accepted. When asked if he had told Hayeems he “hoped to have some” equity he said he did not recall; he doubted if he quantified his expectation; he did not think he had told Hayeems that; he had no obligation to do so; he could not say what was in his mind; and finally that everyone knew he would have a position in the new company. It was apparent that he either had no actual recall of such a discussion or was dissembling. Hayeems said that Bradshaw and Krestell never raised equity with him nor did Foreht suggest that they might also have equity although Hayeems inferred that it was a possibility. Hayeems said he told Foreht that Foreht had a conflict and should keep his distance from the negotiations. Nevertheless he agreed that the
board, including Foreht, should be kept fully informed as the directors had demanded. Hayeems testified that he always thought of Shieldings as an arm’s-length buyer.
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Hayeems reviewed the Shieldings offer of September 23rd with Levy who felt that the price was too low. He also reviewed the offer with Foreht, Bradshaw and Krestell. Foreht urged that it should be accepted saying that he thought it was a good offer.
On October 2nd, Hayeems wrote again to Godsall asking for a further extension of time to respond to the offer of September 23rd. The solicitors for the company were determining the various procedures for obtaining necessary approvals and they asked for a further two weeks.
At this time also the Winnipeg Cold Storage plant was sold with a net recovery of approx. $2 million to be applied against the C.I.B.C. indebtedness.
On October 6, the U.S. Supreme Court refused to hear Levy-Russell’s appeal of the Court of Appeal’s reinstatement of the U.S. charges.
The counter-offer
On October 8, Messrs. Hayeems, Levy, Foreht, Bradshaw and Krestell visited the bank. Levy told the bankers that Shieldings’ price was too low and he would be left with nothing. Foreht, Bradshaw and Krestell recommended acceptance and Hayeems indicated that it was his intention to make a counter-offer as a step towards finalizing an agreement. Levy spoke of the possibility of two other offers that might come in, one from Marconi and another from an unidentified company also in Montreal. He was working at this time with agents seeking to interest Montreal financiers and corporations in investing in the company. The bankers said that Shieldings was the only actual offer and they would proceed on that basis until they saw another offer.
Following the meeting, Soucie prepared a memorandum to his superiors. He noted the views of Levy, the directors and Hayeems and Hayeems’ intention to prepare a counter-offer and to try to make a Shieldings deal in the next two weeks. He noted that the net result of selling on Shieldings’ terms would be a payment to the bank of approx. $6.5 to $7.0 million, reducing the outstanding loans to $12.2 million, primarily secured by the Weston Road property which should be enough to recover the loan. Failing Shieldings or another
acceptable offer, Soucie saw no option but a receivership which he estimated would produce
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$2 to $3 million (after receivership costs) for the operating assets and perhaps $12 million for Weston Road resulting in a loss of $4 to $5 million for the bank. Accordingly, he recommended that the bank press Hayeems and Levy towards acceptance of the Shieldings offer or a better one if available by November 1st.
On October 23, 1986, Hayeems forwarded a counter proposal to Shieldings. In preparing it Hayeems met with the directors. He testified that Foreht and probably Krestell, told him again that the original offer was satisfactory and should be accepted. This evidence is consistent with the views expressed by the directors to the bank as recorded in Soucie’s memorandum. The counter proposal continued the base price for the business of $8 million but excluded the Bradford lands, which could be had for an additional $500,000; excluded the machinery and equipment, which would be available for an additional $800,000; and excluded certain work in process and inventories which would be necessary to complete specific orders on hand as of closing. Shieldings was to be provided with a “study period” of approximately 3 weeks to satisfy itself that the inventories and equipment were satisfactory. Shieldings was to complete work in process for Levy-Russell’s account. Shieldings was to lease the 1400 Weston Road property for $25,000 a month for a period of at least one year and not more than five years. The offset against this rent contained in the Shieldings offer was dropped. Shieldings was to pay a retirement allowance of $75,000 a year to Levy for 9 1/2 years. The inventory valuation date was changed to October 15th. The terms proposed by Shieldings as to key employees, the lifting of the DLA suspension, compliance with the Bulk Sales Act, and a non-competition clause were all accepted.
Godsall said he was disappointed in this response and formed the opinion that Hayeems had no real interest in pursuing the deal. The long delay in responding, the retirement allowance, extra charges for tools and the Bradford land, the rental provision without a set-off for the cost of moving and the change of inventory valuation date from September 1st to October 15th were indications of a lack of interest.
I have considerable difficulty in accepting this evidence at its face value. Godsall gave the impression of being almost affronted by Hayeems and Levy making what appears to be a normal sort of counter-offer.
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In cross-examination, Godsall indicated he was surprised at the amount of change between the counter-offer and his offer of September 23rd. At first he said he thought he had very little contact with the directors at that time and disagreed that he had advance notice from them of the counter-offer. He was however confronted with his examination for discovery in which he had said he was sure he did have discussions with Foreht, Bradshaw and Krestell who would have told him their anticipation of what Hayeems would do and accordingly he was not surprised at the October 23rd response. As a result of this being drawn to his attention, he finally agreed that he did have such discussions in advance of receiving the counter-offer.
On October 28th, he wrote to Levy rejecting the counter-offer on the grounds it would substantially increase the cost to Shieldings of the assets at a time when the making of sales from inventories had diminished their value. On the same date he wrote to Hayeems enclosing a copy of his letter to Levy and making the further point that Shieldings would not be responsible for any liabilities of Levy-Russell and would consider only a straightforward sale of assets. Both letters indicated a willingness to reopen discussions; that to Levy spoke of such discussions as being based on the original offer. Hayeems advised the bank on October 30th of the rejection of the counter-offer and of his intention to attempt further negotiations with Shieldings. Hayeems further advised that Levy was very unhappy at the loss of the proposed retirement allowance; that he would be “very reticent” to accept $8 million; and that Levy was confident that an offer would be received from Bombardier in the near future.
Which hat are you wearing?
Also on October 30th, Soucie was instructed to advise Foreht that his request for a separate operating line of credit for Seaway was not approved. When Soucie spoke to Foreht to pass this message on, the conversation continued with reference to the Shieldings offer. Soucie’s memorandum describes the conversation, in part, as follows:
Several times during our conversation, we asked Foreht which hat he was wearing, i.e. as an officer of Levy-Russell Limited or an associate of Shieldings. In any event, Foreht said that he could not understand the bank’s position in not pressuring Hayeems to accept the original Shieldings offer. We replied that we were aware of the original Shieldings offer, $8 million for everything, and we are also aware of Hayeems’ reply which asked for more money. In our view, the entire exercise was a normal negotiation
in a buy/sell situation, and presumably, the two parties would saw off somewhere in the middle…
And later:
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Foreht advised that the revised offer Hayeems sent to Shieldings actually would equate to a purchase price of some $14 million. We asked Foreht how he arrived at that figure, and he replied vaguely that it had to do with work in progress not being included in the initial $8 million, etc. We advised Foreht that the bank would prefer that the two parties continued to negotiate to reach an agreement in principle, at the earliest date.
Hayeems testified that neither Foreht nor Soucie told him anything about this conversation.
On October 28, Hayeems wrote to Foreht saying that he did not believe that Levy-Russell should pay for meetings with Shieldings, Foreht testified that this demonstrated that Hayeems knew that he was meeting with Shieldings and that it was on Foreht’s personal business rather than on Levy-Russell business.
On November 1st, Bazarkewich was promoted to vice-president of Metro Toronto Corporate Group of the C.I.B.C. and was replaced as manager of the branch by Mr. A. Petrie. Bazarkewich continued to maintain an interest in the file from his new position. Soucie remained senior account manager with direct responsibility for dealing with the Levy-Russell account.
Foreht wears both hats
On November 3rd, Godsall and Foreht met. Foreht kept notes of the meeting which reveal that they had a full discussion of the outstanding issues in the negotiations. Godsall said that in his view the price would only continue to diminish; that Shieldings was the only buyer because no one else would be prepared to put up the very high cost of due diligence and finally “will not go to the bank – prepared to wait to deal with receiver. Wants to do deal without receiver”. These notes indicate that the delay in lifting the DLA suspension was troubling Godsall. Foreht did not warn Hayeems that this issue was becoming more important in the negotiations. On November 4, the bankers met with Messrs. Hayeems,
Foreht, Bradshaw, Krestell and Levy at the Levy-Russell premises. The bankers pressed for a resolution of the DLA suspension. (The settlement had been signed and sent to Washington 3
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weeks earlier.) Levy spoke of possible sales and of another possible banker. Hayeems indicated he would probably go to Washington to bring the DLA matter to a head. Bazarkewich stressed that the bank was not interested in further delay and it was necessary for a deal to be made to sell the company. Shieldings was the only buyer available.
On November 5, Hayeems and Godsall met once again at the Prince Hotel to further the negotiations. Godsall’s evidence was that progress was made; there would be no retirement allowance for Pep Levy, at least not paid directly by Shieldings; the tools and equipment would be back into the base price; the work in progress deduction was clarified; the inventory valuation date would revert to September 1st; and the Bradford lands would be put into the deal and the price increased by $500,000. The rent for Weston Road was not resolved.
Godsall denied having any discussions at this time with any of the three directors about how he would deal with Hayeems, conceding only that he spoke to them after he had spoken with Hayeems. It is not possible to accept this evidence in the light of Foreht’s notes which show Godsall had a full discussion of the outstanding issues with Foreht on the 3rd, just two days before the meeting with Hayeems. This evidence continues a trend, evident earlier in Godsall’s evidence about his contacts with the directors at the time of the counter-offer, of minimizing such contacts at the expense of candour.
The following day, November 6th, Godsall and Foreht had a discussion in which Godsall reported on this meeting with Hayeems. Foreht kept notes of this discussion. The very first item reads as follows:
Hayeems sweating like a pig.
This tasteless remark is of no importance beyond the light which it casts upon the closeness of the relationship between Godsall and Foreht at this time and the estrangement of the latter from the Levy-Russell interests. It is not conceivable that Godsall would have made such a remark had he not been totally confident that Foreht was in complete sympathy with him. Also on the 6th, Hayeems briefed
Foreht on the November 5th meeting. Thus Foreht was privy to both sides of the negotiation, as indeed he would be throughout its duration.
The negotiations continue: November
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On November 10th, Hayeems sent to Godsall a term sheet summarizing the arrangements made at their meeting at the Prince Hotel as he understood them. It included as the inventory valuation date the date of acceptance of the formal offer.
On November 11th, at 9:10 a.m. Godsall telephoned Foreht. Foreht’s note of the conversation reads as follows:
November 11
Godsall phoned at 9:10 a.m.
he told me to call the C.I.B.C. to say he is in a rage and is writing a letter disputing what B.H. says Godsall agreed to
he is near walking from the deal
he said that his letter is mild compared to how he feels
wants me to take a hand with the bank to hold the deal together.
November 11th was a bank holiday. On the 12th Foreht notes that he called Soucie “re above”. He presumably did as he was asked. Soucie asked to see Godsall’s letter.
In testifying in chief about the November 10th term sheet, Godsall said “there was improvement but I was disappointed re the start up date”. There was no suggestion here of the rage that he told Foreht to convey to the bank. Nor does Hayeems’ term sheet, in my view, offer any basis for such a reaction on the part of an experienced businessman. Godsall was here showing a shrewd, if unprincipled, skill in negotiating.
Once again this incident illustrates the relationship that had developed by this time between Godsall and Foreht. Foreht was Godsall’s messenger and was here willingly being used by Godsall to put pressure on Hayeems through the bank by leading it to believe that Godsall was about to walk from the deal. It was a “snow job” and Foreht knew it.
Also on November 11th, Godsall wrote to Hayeems reviewing his position: his perception of the value of the Levy assets had declined; nothing could happen until the DLA problem was resolved; Shieldings would not fund directly or indirectly any of the liabilities of
Levy-Russell. On the handling of the work in progress Godsall had been reassured by what he was told at the meeting of November 5th but the language of the term sheet regarding this point was unacceptable and he was now reluctant to make any accommodation on the issue.
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This letter must be the one that Godsall referred to in his 9:10 a.m. conversation with Foreht. It was intended, therefore, to dispute what Hayeems said Godsall agreed to. The only item objected to is the treatment of work in process, hardly a basis for rage. Godsall had said in the letter that he would make no response to Hayeems’ term sheet until the DLA suspension was lifted. In the next paragraph he makes such a response, escalating a minor matter into a major one, but does not mention the inventory valuation date, a far more significant factor monetarily, and one that he said disappointed him when he got the letter. His testimony does not hang together. He says that on November 5th Hayeems agreed to a September valuation date. Hayeems’ term sheet uses a much later date – one that makes a dollar difference of about $2 million according to Godsall’s own testimony. He is “enraged”, not at this, but over a minor point about WIP and does not even mention the valuation date. In my view, these facts discredit his evidence that Hayeems had agreed to the September valuation date.
When Hayeems got Godsall’s November 11th letter, he phoned Godsall and told him that the work in progress was not a serious issue. He followed this up with a letter of November 14th to Godsall proposing they meet again after the DLA suspension was lifted. He had accepted the new Godsall position that negotiations would not resume until the DLA suspension was lifted.
On November 19th, Foreht explained to Soucie Shieldings’ position that there would be no further negotiations without the lifting of the DLA suspension. He evidently put Shieldings’ case quite forcefully because he records Soucie as asking him “KF which hat are you wearing?”, to which he records himself as responding “everyone has an interest to protect. Everyone who stays has an interest in doing the deal.”
On November 24th, Hayeems and Bradshaw went to Washington to see the DLA and returned with a promise that the suspension would be lifted promptly as those charged were no longer active in the company.
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On the 26th, Hayeems, Foreht and Krestell met with the bankers. Hayeems reported on the lifting of the suspension and his expectation that there would now be substantial new orders. He inquired if the bank would finance them. The bankers could see no justification for increasing the loans to the company. Obviously this put added pressure on the company and the situation was not improved by bank V-P Harrison saying that the bank felt that the officers of the company were the best receivers to maximize proceeds from the sale of the company’s assets. He stressed the bank was looking for an early resolution and the best course available seemed to be the sale of the assets. Hayeems made the point “that he did not want [it] to appear that the bank was putting pressure on the company to sell its assets, as this would compromise his further negotiations with Shieldings for a higher price”. Foreht argued that the current Shieldings offer was fair, no better offer could be expected and the deal should be done. Soucie’s notes show Hayeems reminding Foreht that the board of Levy-Russell must make the best deal. Foreht said the Shieldings $8 million would be more or less net to Levy-Russell and thus to the bank. The purchaser would have to pay to move the inventory off the Weston Road lands and acquire and prepare new premises, all of which would have a substantial cost. Hayeems reported that in his negotiations with Shieldings they had agreed substantially on the price of $8.5 million. Hayeems would be having further meetings with Shieldings and would report to the bank as soon as possible.
Hayeems testified that after this meeting of November 26 and because of his feeling that Foreht was acting as a kind of ringleader, he said to Foreht “I don’t understand what you are doing. You said you would distance yourself”. Foreht replied that it was a good deal at $8 million and should be taken; there would not be a better deal; he was doing what he knew was best for the company.
On the morning of November 28th, Hayeems, Foreht, Krestell and Godsall met. In his testimony in chief, Godsall, speaking of this meeting, said, as I noted him, “I have no particular recollection of this meeting. We were to try to overcome the problems. I was more of a spectator while the other parties ground into a little closer position”.
This piece of evidence is somewhat astonishing and raises the issue of who was negotiating with whom? The impression left is that Foreht and Krestell were doing Godsall’s work for him in the discussions with Hayeems.
The Schedule of Terms: November 28th
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As a result of the November 28th meeting, Hayeems prepared a schedule of terms and conditions upon which the parties had agreed. It provided for the acquisition by Shieldings of the business assets, but no lands, at a price of $8.5 million with some work in progress exclusions; a Shieldings study period of three weeks; an inventory valuation date as of the acceptance of a formal agreement; and $25,000 a month rent for the 1400 Weston Road site for between 18 months and 5 years. Shieldings was to have the opportunity during its study period of considering whether or not to accept this rental rate. There was no Levy pension. It is significant that the valuation date has not changed. This reinforces my view that Godsall made no issue of it between November 10th and 28th. It was, in effect, agreed as at this time.
On the same day, Hayeems called Soucie and advised what the parties had agreed on and that a draft agreement should be available from the solicitors by the end of the following week. Soucie asked Hayeems what reaction he expected from Pep Levy. He records:
…in Ben’s opinion, there is no viable alternative but to proceed with sale of the company, to Shieldings or another purchaser. In the latter regard, he agrees that if Pep does have another purchaser in the background, a formal offer will have to be tabled within a matter of days, certainly no longer than the next two weeks. He will communicate same to Pep. It is Hayeems’ intention to try and convince Pep that this is the only alternative which will work, as the reality is that Pep can expect nothing from the sale proceeds of the company.
In cross-examination, Hayeems confirmed the general accuracy of the note but added that he had spoken about the pressure from the bank giving Levy no alternative but to sell at the best available price. He denied that he had reached the conclusion that the company was no longer viable.
The suspension is lifted: December 4th
On December 4, 1986, the DLA formally lifted the suspension of the Levy group of companies. The agreement that made this possible required that Hayeems remain as trustee; that none of the charged individuals would hold any employment with the companies; nor serve as an officer or director of them; nor have any contact with or act on their behalf. None of the charged individuals were to have contact with the officers or directors of Levy-Russell regarding its business affairs nor would they be permitted to maintain offices on the premises.
The agreement was silent on the issue of payments by Levy Auto or Levy-Russell to any of the charged individuals.
Godsall’s new terms – December 9th
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On December 9th, Godsall wrote to Hayeems proposing three new terms: the approval of each class of shareholders of Levy-Russell Limited, Levy Industries Limited and Seaway for the sale; no significant diminution in the business or the prospects for the business from August 1, 1986; and compliance by Levy-Russell with the agreement with the DLA. The most significant of these was the insertion of the August 1st date. The November 28th schedule of terms and conditions provided that the inventory valuation date would be the date of the acceptance of the formal agreement of purchase and sale. The back dating of that date to August 1st incorporated into the transaction four months of inventory ins and outs and an element of uncertainty as to the final price. Godsall testified that he expected that this change would reduce the price by about $2 million. This calculation was based on his possession of the September 4th letter from the bank from which he had deduced that, with no additional credit available, the company would have to meet its expenses – overheads, bank interest of
$200,000 per month and cost of sales – by drawing down its inventory. Soucie reached a similar conclusion – albeit not for the same period – using similar reasoning. Oddly enough, the recorded change in inventory from August 1, 1986 to December 12, 1986 was a reduction of only $222,000, so Godsall might in the end have been disappointed in the outcome. But his expectation was to save $500,000 for every month back to the start date.
In giving this evidence, Godsall said he was generally happy with the results of the meeting with Hayeems, “but we needed a start date” (i.e. inventory valuation date); quite ignoring that two consecutive term sheets had included an agreed date: the agreement signing date. Further, this proposal for a start date of August 1, 1986 was a full month earlier than the September 1 date specified in Godsall’s letter of September 23rd and given up during the November negotiations. Godsall was thus expecting to recapture everything he had yielded in the November negotiations. Reverting to September 1st would have brought him back to the September offer position in every respect but the nominal price. Reverting to August 1st would, he expected, recapture the $500,000 increase in nominal price that he had just agreed to. Such conduct is not bargaining in good faith and raises grave doubts about Godsall’s true intent – did he want a deal, or did he want to prolong the negotiations until the
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company’s credit expired on January 31, 1987? Surprisingly, Hayeems did not make a large issue of this bold proposal. The reason emerged from a passage in his cross-examination where he noted he did not give the question much consideration; there were, he assumed, flows in and out of inventory and he had no figures to assess them. Had the directors been supporting Hayeems instead of Godsall, they would have advised Hayeems not to accept such a change without working through the figures, but they kept silent.
Another of Godsall’s new terms was of serious significance. Although shareholder approval and perhaps a Plan of Arrangement, had been discussed as possibilities, Godsall now required that these approvals be obtained before he conducted his due diligence – i.e. before the deal was final. It was not unreasonable to ask for shareholder approval, including the shareholders of Seaway whose only significant remaining business was Levy-Russell. The requirement that such approval precede even the beginning of due diligence seems unusual. Shareholder approval is normally a condition of closing and often the result of the due diligence is required to be reported prior to the shareholders’ meeting. However, it is the time implications that are the most important. The proposal would have had the practical effect, given the late December holiday season, the time needed to prepare the documentation and the necessary notice periods for a public company meeting, of pushing shareholder approval into January, or later if the Court’s approval was also sought and thus pushing due diligence into February at the earliest. There would thus be no final deal possible until after the company’s credit extension expired. Again this raises serious issues of whether Godsall wanted an agreement at all.
Montreal buyers show interest
In mid-December, Levy received a letter from Mr. Kertz of the firm of Geoffrion, Leclerc Inc., whom he had engaged to find buyers for the company in the Quebec market. Kertz advised that he represented three clients, U.D.T. Industries Inc., the SNC Group Inc. and Bombardier Inc., all of Montreal. SNC and U.D.T. would be sending teams to meet with Levy-Russell officials to discuss the possible acquisition. Kertz noted that he had been discussing a price for the shares of Levy Industries Limited of $12 million plus an additional $15 million if the land was wanted. Armed with this letter, Hayeems and Levy met with Messrs. Harrison and Ormston from the bank who agreed that assistance to the company would be continued to January 31 to allow time for negotiations to take place with the Montreal groups. Late on
December 16th, Foreht asked Soucie for a meeting of himself, Bradshaw and Krestell with Soucie. Soucie assumed that the topic would be the bank’s attitude towards Shieldings’ offer and told Foreht that he saw no need for such a meeting.
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On December 17th, Hayeems briefed Foreht about the meeting at the bank regarding the Montreal interest. It was suggested to Foreht in cross-examination that he had actually been aware of the Montreal agent’s letter prior to the 17th and that it was this awareness that had caused him to seek a meeting with the bank in his telephone conversation with Soucie on the 16th. He indicated that he was not sure what he knew about the letter and that he had no recollection of knowing in advance that there was to be a meeting to discuss a competing offer.
On December 18th Bradshaw wrote Hayeems urging that Levy should not show purchasers the premises because of the DLA agreement. That evening Bradshaw, Foreht, Krestell and Godsall met at Bofingers Restaurant, although Bradshaw left early, being ill, and hence was unable to say what was discussed. He did say that he was not concerned about the Montreal interest. Godsall said the subject of the meeting was the mechanics of how they were going to do the deal.
On December 30th, Mr. Willis of Shieldings called the bank to request a meeting to discuss their “takeover of Levy-Russell”. The bankers felt that Hayeems, who was away, should be present and no meeting took place.
A three-meeting weekend – Jan. 2, 3 & 4, 1987
On Friday, January 2nd, a further meeting took place at Bofingers at which Godsall, Foreht, Krestell and Bradshaw are all shown as present according to Bradshaw’s diary. Krestell confirmed his own presence as did Godsall. Foreht stated that he did not recall any such meeting.
Bradshaw’s diary shows a further meeting on the 3rd of himself, Foreht and Krestell plus “GW” whose identity was never satisfactorily established although it may have been Mr. Waisbord. Krestell had no recollection of any such meeting.
Bradshaw’s diary shows a further meeting on Sunday, January 4 of the three directors and Godsall at Spinnakers restaurant. Krestell, Bradshaw and Godsall confirmed their own
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attendance but Foreht said he had no recollection of any such meeting. Foreht was not sure that the meetings of January 2nd and 4th actually took place but if they did they were not triggered by fear that Levy might actually have found a buyer in Montreal; that never occurred to him and he would have welcomed competition. Krestell said the meetings of January 2 and 4 were regarding the general operations of Levy-Russell; its receivables and payables and sales and general business developments. Godsall said that the meeting of January 2nd was called because they thought they had a deal and they were simply charging ahead and denied that it was due to the appearance of the Montreal competition. He said the meeting of January 4th did spend some time discussing the contents of a letter which was to be written on January 5th, signed by the three directors and forwarded to Hayeems. He said the text of the letter was not before them but the subject matter was discussed. Bradshaw agreed with the cross-examiner that the January 5th letter was discussed at the January 4th meeting but did not think Godsall had added anything to that letter and did not agree that the Montreal competition was the real reason for the meeting.
Clipping Hayeems’ wings: II
On January 5th, the directors handed Hayeems their letter of that date saying that they had reviewed the relationship between the directors, Hayeems and Levy, over the holidays and had concluded that it was unsatisfactory. They gave a number of reasons of which the salient are as follows:
Hayeems’ daily presence at the company enabled him to discuss company activities with Levy in detail and they alleged he gave instructions to company employees based on those discussions.
The board was responsible for Levy-Russell but had been excluded from relevant discussions with the bank including at least one meeting at which Levy was present and Levy-Russell business was discussed. This appears to be a fairly obvious reference to the December 17th meeting. The letter also complained of Levy continuing to come to the premises; of certain changes in company procedures that Hayeems had insisted on; and of the cost of Hayeems’ services.
The directors asserted that they had total responsibility for the management and operation of the company and required that Hayeems “guarantee compliance with the DLA
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agreement by Pep” and that Hayeems come to the company only once a week and confine himself to discussion of matters directly related to his position as trustee. They offered to make themselves available for a weekly meeting to bring him up-to-date on business matters and to brief him prior to any meeting with the bank.
This letter contains demands which, if acceded to, would have effectively excluded Hayeems from the negotiations with Shieldings and from discussions with the bank. This would have meant that the negotiations would have been conducted by the directors themselves, primarily by Foreht. There is certainly nothing strange about directors asserting that they have the right to manage the company, that is in law their position. However, Levy-Russell was a company controlled by a company of which Levy owned 95% approximately of the shares and Hayeems was his trustee. In making these demands, the directors were seeking to change the system that had been in place since Hayeems’ arrival in August the previous year under which he played a significant role in the management of the company in substitution for Levy who had played an even larger role prior to his being suspended. In practical terms, the letter contained a totally unrealistic set of demands with no chance of being accepted at least so far as Hayeems’ role was concerned.
Foreht said that this letter was prepared by Bradshaw with some input from himself. Bradshaw said that the entire letter was prepared by Foreht except for two sentences at the end expressing the directors’ willingness to do their best to help Hayeems meet the demands of his position as trustee. Bradshaw said that Krestell may have helped a bit with the wording but that he had no reason to think that Godsall was involved; the letter articulated concerns which Foreht had, not all of which were shared by Bradshaw who saw the need for Levy to go to the bank because of his great personal involvement in loans from the bank in support of his share purchases. Godsall said that the contents of this letter were discussed with him the day before and that he was given a copy of the letter at the time. Foreht, he said, gave it to him to show him that the directors were doing what they could to move the Shieldings deal ahead. There is nothing in the letter about the Shieldings deal Godsall’s evidence that the directors felt that by taking an activist role they could move the deal ahead is plausible only if moving the deal ahead is equated with getting rid of Hayeems.
It was submitted that Bradshaw’s memo of December 18th warning Levy against showing purchasers around, and the meeting of that evening were in response to the
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unwelcome news of possible competition from Montreal. Similarly, it is said, the three early January meetings and the letter of January 5th to Hayeems which flowed from them were a renewed effort to ensure that no discussions with purchasers or about competitive offers could be conducted in the absence of the directors. About the only thing the participants in these meetings agreed on in evidence was that they were not concerned about the Montreal competition. After that they either had no recollection, or said they met about routine company matters or they were forwarding the progress of the deal with Shieldings. I do not accept their evidence as to the purpose of these meetings. It is not possible to believe that the men who gathered on the 18th did not discuss the new developments from Montreal. No more can it be believed that most of them met three consecutive days – through a weekend – to discuss routine business or the mechanics of doing the Shieldings deal. It is conceded that at least some of the meeting of the 4th was spent on the problems raised by the directors in their January 5th letter to Hayeems. These problems were internal to Levy-Russell; why then was Godsall involved? The evidence supports, in my view, the inference that they were engaged in planning a way to diminish Hayeems’ role to ensure a continuation – or an enhancement –of the advantageous bargaining position that Shieldings had enjoyed because the directors had access to complete information about Hayeems’ efforts. The advent of potential competitive bidders was the trigger for this activity, including Bradshaw’s December 18th memo about Levy showing the property to purchasers.
Hayeems was taken aback by the memo of January 5th. He did not respond in writing. He said it was a nonsense letter which he ignored and that he may have given Foreht and Krestell the impression that he thought it was a stupid letter. In cross-examination he said that these topics were not serious enough to respond to given the more pressing concerns which the directors should be looking after, particularly the haemorrhaging of the company. Levy was still an officer of Seaway which had an office in the premises and he came for his mail to that office; he had legitimate reasons to meet with the C.I.B.C. regarding his personal affairs and further Hayeems did not regard the agreement with the DLA as precluding Levy from being involved in the showing of the premises to potential purchasers or in discussions regarding the bank financing of the group of companies.
Soucie’s January 7, 1987 memorandum to file notes the receipt of a copy of the directors’ letter to Hayeems from Foreht. Hayeems testified that he was not told by the
directors that they had copied this letter to the bank. It is difficult to imagine any motive for copying Soucie other than to assist in driving Hayeems out of the situation.
The January 7th meeting: “No approach yet”
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An important negotiating meeting took place on January 7, 1987 at the offices of Mr. Slan, the solicitor for Levy-Russell. In attendance were Messrs. Hayeems, Bradshaw, Foreht, Krestell and Slan for the Levy-Russell side and Godsall and his solicitor, Mr. Phillip Dawson. There is some controversy as to what occurred. Two sets of handwritten notes are in the evidence, one by Krestell and one by Bradshaw. Neither Slan nor Dawson gave evidence.
Krestell’s notes contain the following references of importance, in a group near the top of the first page:
Personnel – % of ownership – shareholders passive owners objectivity of directors
Krestell testified that the first line of his notes did not mean that the meeting discussed that he and the other key personnel would get a percentage of the shares. Rather he said that this referred to a discussion of the impact of the deal on the existing shareholders of Levy. In this evidence I think he is mistaken. Firstly, the impact on other shareholders is discussed in the next section of Krestell’s notes. Secondly, looking at Krestell’s notes alone it is hard to make sense out of the passages quoted if they are references to the existing shareholders. That leaves no meaning for the word “personnel” in the first line and no one could call Levy, the major existing shareholder, a “passive owner”. Further, it is puzzling as to what is meant by “objectivity of directors” in the context of a discussion of existing shareholders.
In the opening entry of Bradshaw’s notes, underneath the list of people who were present, appears the following:
Terry G.
Shareholder concerns – Shieldings practice – management owns shares but no approach yet
Concern – do individuals become part of situation requiring shareholder approval e.g. a director voting for Newco that would give him shares not already owned.
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Bradshaw said in chief that he did not understand at the time, nor even when testifying, what was meant by the reference to whether a director would become part of a situation requiring shareholder approval by voting for Newco. He said in cross-examination when referred to the reference “Shieldings practice=management owns shares” that he wrote it down without really understanding what Godsall was getting at. It was fair however that he would have concluded that management would include himself. It was put to him that this practice of Shieldings had already been explained to him in August of 1986 by Godsall to which he responded that Shieldings’ practice was not clear in his mind. However, he did not understand the reference “no approach yet” because obviously there had been an approach on the subject. He did not suggest, however, that Godsall had not said these words. He was prepared to leave uncorrected a statement that was clearly misleading as to the degree of involvement of the Levy directors with shieldings. He saw Godsall the next day but did not think it sufficiently important to ask for clarification about what the management shares reference entailed. His interest in shares was minimal, he said, and he was prepared to wait and see what happened.
Bradshaw’s note was put to Godsall in cross-examination. He defended the statement “but no approach yet” on the basis that no decision had been made as to the structure of the deal and therefore the participation of individual employees could not be dealt with. Hence no approach was possible. When pressed further, he said that he had already explained Shieldings’ investment policy to Hayeems and assumed that Hayeems would know that the directors had been told the same thing.
He agreed that his discussions with the directors about Shieldings’ investment policies would lead them to assume that management would get a majority of the common shares although not necessarily become the owners of the whole equity. He conceded he did not explain this to the meeting of January 7th.
Foreht had been unable to find any notes made by him of this meeting. Krestell’s and Bradshaw’s notes were put to him. He said that Godsall spoke of the fact that management of Levy-Russell was to become shareholders and owners of the new company and raised the issue of whether that put them in a conflict position, “no approach yet” means Shieldings had not given consideration to the magnitude of management’s share of ownership. In cross-examination, Bradshaw’s and Krestell’s notes were put to him in particular Bradshaw’s
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quote of Godsall: “No approach yet” and it was suggested that this was a wrong statement. Foreht conceded that there had been discussions of Shieldings’ practice and it was reasonable to suppose that there was an understanding that the Shieldings deal would lead to equity for himself and that Bradshaw also had such a discussion. He said however that he thought that Godsall was referring to other shareholders in Seaway and whether they would have an interest in the transaction and whether the current Levy directors, if they had an interest, would be able to vote. He was not sure that the meaning of the phrase was to link this to management owning equity. He denied that he and Godsall had deliberately fudged the issue of management participation in the new company at that meeting.
Hayeems in his evidence took a position similar to Krestell. He said the question of the key personnel and directors getting a percentage of the shares of the new company was not discussed at all at this meeting. Again, I think Hayeems is mistaken in this regard. From the whole of the evidence, it appears that Hayeems’ recollection that personal percentages of ownership by individual directors were not discussed at this meeting was correct. What was discussed was Shieldings’ practice that the management would own shares and a statement by Godsall that there had been no approach to the management on this subject at this time. Hayeems’ impression that the subject was not raised at all is understandable in view of this statement. I do not accept the glosses sought to be put upon Bradshaw’s note by himself and Foreht nor the explanation given by Godsall. I regard the statement as misleading and it is hard to imagine that it was anything but deliberately so. Godsall who made the statement and Bradshaw, Foreht and possibly Krestell who heard it, knew full well that they had had discussions with Shieldings that management would own shares and it was simply not true that there had been no approach.
The Bleiwas letter – January 15th
On January 15, Godsall wrote to Mr. Aaron Bleiwas at Levy-Russell with copy to Bradshaw. Bleiwas was a key employee and Godsall was aware that he was considering leaving Levy-Russell. In his letter, Godsall reminded Bleiwas of Shieldings’ efforts to acquire Levy-Russell and of his own importance to the ongoing operation. As an inducement to remain with the company at least until March 15th, Godsall offered Bleiwas $5,000 payable on March 15th if Bleiwas chose to resign on that date. The letter continues:
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We make this offer as tangible evidence of our sincerity in pursuing the business and assets of Levy-Russell, and further, we have asked Ron Bradshaw to review with you his expectations of how the management team would be involved in equity of a new company formed by Shieldings to acquire specific assets of Levy-Russell.
Bradshaw said that he did give Bleiwas an explanation that “management was going to have some piece of this thing” but he didn’t know how large a piece. He explained that he understood in the broadest and loosest of terms that there would be equity for managers in a new company formed by Shieldings. Foreht knew of Bleiwas’ un-happiness and, although he did not think he saw the letter itself, he knew that money and equity in the ultimate company were to be offered to Bleiwas. Neither of them told Hayeems that Godsall was so keen to purchase that he was offering money to key employees to remain. Bleiwas was not called so the opportunity to have his independent recollection of what was said about equity was lost. Godsall’s choice of Bradshaw to explain the management equity situation to Bleiwas casts doubt upon the veracity of Bradshaw’s evidence, given in explanation of his notes of the meeting of January 7th, that he really did not understand Godsall’s reference to “management owns shares” which he recorded in those notes. Why would Godsall pick a messenger who did not understand the message? If he did not understand the proposals that he was to make to Bleiwas, would not Bradshaw have called Godsall to get an explanation?
Shieldings begins “due diligence”
Turning to the substantive business accomplished at the meeting of January 7th, Godsall expressed concern that the inventory was deteriorating, i.e. being used to fill orders. There was a need to do some objective testing to determine values both of the inventory and intellectual properties. Concern was expressed that the deal might be frustrated by third parties and discussion was had regarding the use of a Plan of Arrangement. Godsall agreed to begin immediately to review the value of the inventory while the Levy-Russell side studied the Plan of Arrangement idea. A new offer was to be brought forward based on the up-dated financial data.
The due diligence undertaken by Shieldings began on January 8th when Godsall went with Mr. Frank King and Mr. Ed Crosbie to 1400 Weston Road to assess the value of certain trucks on the site and to consider what environmental problems they might be buying into.
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King was a former president of a large construction and mining equipment dealer and Crosbie was a shareholder of and active in an environmental company. They concluded that the environmental problem was minimal. They came to the same conclusion about the value of the trucks.
Shieldings’ next step was to involve Mr. Ray Bilz who was employed under contract by Shieldings to do their accounting. Bilz was to review and spot-check the inventory records for the machine shop, the truck shop, the domestic parts department and the outside yard. He attended at the premises on January 13 & 14 to do this work for which he billed 15 hours.
Meanwhile, Levy continued his efforts to sell the company. He met with representatives of Norseman Plastics on the 13th of January for a discussion of their possible purchase of the shares of Seaway. However by the 22nd, Hayeems was advising the bank that the Norseman Plastics interest seemed to be a dead issue. The other interest from Montreal through the agency of Kertz did not materialize. In his evidence, Hayeems said that in January the Montreal interest pretty well dissipated.
The Bilz Report
On January 15th, Mr. Bilz having completed his work of reviewing the inventory of Levy-Russell, provided his report to Godsall. The report is an important document but also very brief and worth reproducing in its entirety:
Levy-Auto Parts January 15/87
Estimated worth to purchaser
Levy Inv. Value | From | To | |
Domestic | $840,000 | $420,000 | $500,000 |
Mach. shop | $3,300,000 | $2,000,000 | $2,500,000 |
Mine | $8,750,000 | $2,300,000 | $2,500,000 |
$4,720,000 | $5,500,000 |
Estimated realizable value over 12 months
Domestic – (disposable) – $ 800,000 (4 months)
Mach. shop – $3,300,000 (6-8 months)
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Mine – $8,000,000 (-12 months)
$12,100,000
Although there were several pages of backup materials on the copies which were produced from the files of the Levy directors, Godsall testified that he did not get these backup materials from Bilz along with the report. Regrettably, by the time of trial Mr. Bilz was deceased and no explanation was forthcoming as to why the backup materials were not sent by him to Godsall. In view of the circumstances, a certain amount of hearsay was admitted to clarify some aspects of Bilz’s report.
Godsall had testified that the business he would like to establish based on the Levy-Russell assets was a niche manufacturer focusing on the CD 850 transmission system and the M41 tank engine replacement kit. Accordingly, he was primarily interested in the materials and inventory to be found in the machine shop and in the tools. The directors had a broader view and felt that the traditional Levy buy and sell business was also a profitable enterprise. Accordingly for them the so-called mine or yard was inventory whereas to a large extent Godsall testified he saw it as scrap. Godsall said that the machine shop inventory had a good manual control system and that Bilz’s view of values at $2,000,000 – $2,500,000 was a conservative one. As to the domestic inventory, his opinion was it could largely be sold but not at the book values because he saw a lot of very old inventory. According to Godsall, Bilz’s yard or mine figure of $2.3 to $2.5 million was largely from Bradshaw and his (Bilz’s) estimate was based on a high rate of scrapping and a low rate of full recovery. According to Godsall, Bilz also said that the “estimated realizable values” contained in his report were largely quoted to him by Foreht and Bradshaw and did not include any cost of realization. Godsall testified that after consideration he wrote, on his copy of the report, a value of $500,000 for “domestic”, of $3,000,000 for “machine shop” and of $2,500,000 for “mine” giving a total of
$6,000,000. These were, he said, his judgments of what Shieldings could afford to pay based on Bilz’s analysis. He exceeded Bilz’s valuations in the case of the machine shop because Bradshaw persuaded him there was some good material there. He denied placing any real reliance on the “estimated realizable value” figures. He felt the high percentage of older parts
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in the domestic meant it would not be possible to obtain the estimated values. The machine shop realizable value was not relevant since Shieldings did not expect to sell but rather to use it. He also testified he did not think that the mine would develop an $8 million realizable value over several years let alone 12 months. He was also quite conscious of the cost of realization that would have to be netted against gross sales.
To arrive at a proposed price for the whole business, Godsall said he took his $6 million inventory total and added in $800,000 for the tools for a total of $6.8 million. Since these were January values and there had been sales made out of the inventory since October 31st which he intended to be the valuation date it was necessary to back the sales into the
$6.8 million figure and he estimated that the sales net of inventory additions would amount to a $400,000 reduction in inventory value between October 31st and January. Accordingly, the value at October 31st would be $7.2 million. He testified he was not aware at that time that the ins and outs of inventory were in fact available on a weekly basis in the records of Levy-Russell.
Krestell testified that he was one of the people who gave Bilz information. He gave Bilz access to the card index of the inventory and to a computerized listing of all items of surplus parts (i.e. in the yard) with an extended value of $3,000 or more. He said Bilz did not ask his opinion of the value of the inventory. Foreht was away in the United States from January 12 to 16 during the period of the Bilz investigation. His personal contribution to the information given to Bilz would obviously be limited. He testified that he may well have given Godsall inventory data but he was unable to remember what he gave him and when. He felt that he had been aware at the time that Bradshaw and Krestell had given Godsall inventory data. He confirmed, after some pressure based on discovery answers, that he did know that it was Shieldings’ intention at all times that the price would vary depending upon the inventory ins and outs. This testimony is in line with Godsall’s position that it was necessary to have an inventory valuation date and work from there. It was put to Foreht that he knew before Godsall sent his letter of January 20th that there would be a reduction in price to $7.2 million. He said he was not sure when he learned but assumed it was when everyone else did. He was then confronted with Bradshaw’s diary which shows for January 15, 1987 an entry:
R.B.M.K. to T.G.
Result = $7.2 million.
He pointed out he was not present at that meeting and did not recall being told about it although it was possible.
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Bradshaw said that on January 8th he spent some time helping Bilz get a feel for the inventory. Bradshaw showed him the computerized list of all items having an extended value exceeding $3,000. Bilz chose perhaps 50 items and asked him in respect of each item “is this item saleable?” and Bradshaw gave him his opinion. He had no discussions with Bilz regarding the latter’s conclusions as to the inventory value. He saw the Bilz report at some point but had no recollection of any meetings to go over it. Bilz had made a comment that he might value the inventory at about 50% of book value and Bradshaw did not disagree. Bradshaw was shown his own handwritten notes of a meeting on February 5th at which he records himself as explaining to Levy how Bilz had valued the inventory at a figure of 28% of book value. However, by the time of trial he was unable to explain where the 28% figure came from although he believed it probably came from Bilz.
“Result = $7.2 million”
Bradshaw did not think he knew before the Shieldings letter of the 20th that the price would be reduced to $7.2 million. He was unable to explain the entry in his diary for the 15th of January “result = $7.2 mil” and conceded that it was possible that he knew about it. He denied however that he had any involvement in arriving at the price. It was put to him that logically he would have met with Godsall after the Bilz study to review Bilz’s results and agree with Godsall on the next step. He denied that that was how it happened and asserted that Godsall made his own decisions. I do not accept Bradshaw’s evidence on this point. In my view, the only reasonable inference from Bradshaw’s diary entry of January 15th is that he and Krestell went to meet with Godsall and the result of that meeting was the price of $7.2 million. They would not have had a meeting just to be told what price Godsall had already chosen.
Shieldings’ January 20th offer: $72 million
Godsall’s letter of January 20 noted that Shieldings had reviewed the Levy-Russell inventories on the basis of a going concern, reminded Hayeems that the inventory figure put forward by him at the meeting in the Prince Hotel in August 1986 was $15 million upon which the original proposal was based and continued:
The physical inventory taken at October 31st (1986) which will serve as the basis of establishing closing values is almost $2 million less than the expected $15 million on which earlier proposals were based.
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Obviously, the most marketable items have been sold first. Accordingly, the price which we are willing to pay for all of the property generally described in paragraph 1 of the schedule to our letter of December 9, 1986 is reduced from $8,500,000 and fixed at
$7,200,000, effective October 31, 1986. Any additions and deletions from the inventory based on Levy-Russell’s accounting records from and including November 1, 1986 until the date of closing will be included and calculated to the final determination of amount owing at closing.
The letter continued that Shieldings’ price was recognizing values at the high end of their potential, that these values were based on selling prices which were “becoming unrealistic” and accordingly a prompt deal was necessary. He proposed that his offer of December 9, 1986 as amended by this letter would be open until January 30, 1987 by which time he anticipated Levy-Russell would have applied to the court for the approval of a Plan of Arrangement.
The rationale for the price reduction given in this letter to Hayeems is quite different from Godsall’s trial evidence as to how he came to his price. In the letter it is related to a recently discovered variation in book value from the numbers quoted earlier by Hayeems. In his evidence at trial, as noted earlier, he gave a different explanation, – $6 million for the inventory and $800,000 for the tools – based on the Bilz numbers and an estimated $400,000 inventory reduction from October 31 to January. He said he had to estimate the inventory situation because he did not know the real figures. That evidence does not hang together. He had met on the 15th with Bradshaw and Krestell and reached a price of $7.2 million. They could have obtained the inventory variation with a phone call; there was no need to estimate. He was a potential purchaser doing due diligence; he had a right to that information. Why did he not just tell Hayeems that he was adjusting his offer as a result of the due diligence? It seems likely that he saw a chance to put Hayeems on the defensive by implying that he had been misled about the inventory by Hayeems and to make his $1.3 million price reduction appear very reasonable.
The inventory dispute
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When Hayeems received the January 20th letter from Godsall he was upset by the suggestion that the book value was some $2 million less than the $15 million he had quoted. He called Bradshaw and asked why Shieldings knew about the valuation before he did. Bradshaw said he would have Foreht and Krestell look into it. Hayeems followed up with a note to Bradshaw on the 22nd. After referring to the reduction and the explanation for it in Godsall’s letter, he wrote:
Book value figures given to us as at October 31/86 is [sic] $14,697,000 for inventories and $800,000 for shop equipment.
Comment: Where did Terry get his figures from and on what were they based? Obviously his basis is not supportable from LR accounting records.
As noted, Bradshaw referred the request to Krestell and Foreht. When asked why, he said it was their field. He did not tell Hayeems that he and Krestell had met with Godsall on January 15th and discussed the Bilz report: – “result = 7.2 mil”. He knew where Terry got his figures, but said nothing. He said he did what he thought was necessary at the time and that there was no reason to tell Hayeems. There was one very good reason to do so; he had been directly asked. Bradshaw did not answer because he did not want Hayeems to know how close his relationship to Shieldings had become.
Levy-Russell had weekly reports showing receivables, payables, sales, cash and inventory levels. The report for August 29, 1986, the closest date to Hayeems’ Prince Hotel meeting with Godsall, showed an inventory balance of $15,145,000. Hayeems’ statement to Godsall that inventories were about $15 million was thus in accord with these reports. The equivalent report for the week ended January 16, 1987, when Bilz did his work, showed a closing balance of $14,050,000. Bilz showed as the Levy book value a figure of $12.89 million. Hayeems’ request was to know where this number came from and also, not incidentally, why Shieldings had the number, a significant adjustment in the company’s position, before Hayeems himself did. By memo of January 27, 1987, Foreht and Krestell wrote to Bradshaw in response to Hayeems’ request. Their memorandum does not refer to the Shieldings numbers at all. It offers an explanation of how the inventory as shown in the weekly summary ($14,697,000) and Krestell’s current estimate ($13,800,000) for the physical count as at October 31, 1986 could be reconciled. Hayeems testified that when he received the Foreht, Krestell memo of January 27th, he went to speak to Krestell about it and Foreht
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and Bradshaw were also there and he asked them to show him how Shieldings got to a physical inventory figure of less than $13,000,000. At this point, Krestell gave him the Bilz report. The copy which he received was subsequently put in evidence as exhibit 10. Upon it, Krestell has written certain information, primarily the effective dates of the Levy inventory valuations. The domestic and machine shop were valued as at October 31, 1986 but the mine as at October 31, 1985. At the same time Krestell told Hayeems that not all the work in progress was included in the figures given to Shieldings and Hayeems noted that at the foot of exhibit 10.
Krestell told Hayeems he did not know where Bilz had obtained the data but he could surmise it. Krestell had the backup documents behind Bilz’s report. These were Levy-Russell internal documents and they showed as of October 31, 1986 a domestic inventory of
$838,602 which it appears that Bilz had rounded off to $840,000. Regarding the machine shop, Krestell felt Bilz had got his number of $3.3 million from the Levy-Russell document headed “Summary of machine shop inventories” which showed $2.43 million in four categories that had been counted with three categories not yet counted. He assumed that Bilz had estimated those three categories to arrive at his number. As to the mine, shown in the Levy-Russell inventories document as “surplus parts”, this was blank for 1986 but Krestell noted that the 1985 figure was $8,761,591 and he deduced that Bilz had taken his figure of
$8,750,000 from that number. Krestell confirmed that he showed Bilz the numbers in these documents plus the results of the physical counts. He did not show Bilz the reports circulated within the company which had not yet been adjusted for the physical count.
In short, Bilz came to do his due diligence at a time when part of the inventory stock-taking as at October 31, 1986 had been completed and he was given those figures even though they had not yet been incorporated into the company’s own internal weekly reports upon which Hayeems was relying. As well there was some partial data from the yard inventory to which Bilz was given access, again not as yet reflected in the documentation provided internally. Out of this information, Bilz had come to his $12.9 million book figure; Krestell’s figure was $13.8 million and the official book figure remained at $14,060 million because none of these adjustments had as yet been incorporated into it. The Foreht, Krestell memo of January 27th had not addressed the real issue so far as Hayeems was concerned. He was unhappy that Bilz had been given information which had not been given to him and
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accordingly in his negotiations with Shieldings he had been surprised by the numbers that were quoted to him. His credibility was inferentially attacked by the challenge to the $15 million figure. He called Godsall in early February, apparently to restore that credibility, for on February 2nd, he sent a note to Bradshaw as follows:
I spoke to Terry G. and mentioned that the book value of the inventory as at October 31/86 was shown as $14,697.00*. He was prepared to take a quick look at the inventory and ask that it be faxed to him today. I was prepared to meet with him soon which he agreed to. I conveyed the foregoing to Morty and Ken.
* Subject to audit.
Hayeems described himself as furious at the way in which the inventory data had been handled and he dictated a memorandum on February 4, 1987 to Foreht and Krestell, copy to Bradshaw. Because the events surrounding this memo and the directors’ response to it arguably cast light upon the motives of all concerned, this so-called “inventory dispute” assumed an importance at the trial which was greater than might be expected on its own merit. Accordingly, it is useful to ‘set Hayeems’ memorandum out in full:
There is very great concern as to the manner in which the inventory figure in the books of Levy-Russell Ltd. is being treated.
You have been using the book figure of 14 1/2 million dollars plus on all financial statements prepared, particularly for the shareholders in the quarterly reports. On the other hand, the figure of inventory you have supplied Shieldings is approximately 12.9 million dollars. You have stated that part of that figure includes the figure as of October 31, 1985, rather than October 31, 1986.
Your response to me is that the book figures are wrong and that the information given to Shieldings is correct. In other words, “you are taking one position for the shareholders and another for the buyer”.
I would suggest that you seriously consider amending the information given to the shareholders and the Ontario Securities Commission on your quarterly reports for the year, including the third quarter of 1986, based on what you deem at this stage to be the correct book inventory.
I have several times pointed out that you Morty and Ron can be perceived to be in conflict with your position as Directors of a Public company, on the one hand, and that of acting on behalf of a buyer who will include you as part of his team.
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Although it appears that Hayeems was wrong in asserting that the book figure of $14 1/2 million was used in the 1986 quarterly reports (inventory was not reported separately), this range of figure was consistently appearing in January and February 1987 in the weekly financial statements circulated within the company. He was certainly not wrong to suggest that correct figures be used both for shareholders and buyers.
Hayeems’ memorandum evoked an extraordinary response in a memo of February 5th from Foreht and Krestell. In his written argument counsel for the plaintiff aptly said Hayeems’ enquiry was treated with derision and contempt. The anger demonstrated in this memo is almost tangible. The tone of much of it can be illustrated by its opening paragraph:
Your memo is an ill-advised and erroneous account of the so-called facts which you purport. It is not our intent to start a paper war over your memo, but because of the veiled threat and professional insult contained in it we have little choice but to respond.
It goes on to speak of “unfounded accusations”, “nonsense”, “hogwash”, “self-serving assertion” and similar phrases. The arguments presented range from the absurd position that in spite of his trusteeship (which he had briefly resigned on February 2nd; resignation withdrawn on February 3rd as everyone knew) he had no right to forward such a memo or even use Levy-Russell letterhead; to complaints of reducing the income of officers of the company contrary to Shieldings’ requirements. The first substantive argument presented was that there was no genuine issue about inventory; Hayeems alone was raising it because he had presented a $15 million figure to Godsall which was incorrect and he was now trying to blame the directors for that. However, as we have seen, the inventory was indeed shown on the books of the company at $15 million at the time that Hayeems used that figure. This letter of February 5th represents an effort on the part of its authors to put Hayeems back on the defensive about the use of book values. However, no explanation is offered as to why figures differing from book were offered to Bilz without consultation with Hayeems who was conducting the negotiations.
One paragraph of the letter reads as follows:
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Your self-serving assertion that we are taking one position for the shareholders and another for the buyer is hogwash. Ken Foreht has made no representation about the company’s inventories to Shieldings, and both of us have made certain that you made inventory representations to Shieldings throughout the negotiation.
The last part of the second sentence is clearly wrong. Only three weeks before this letter was written, Krestell and Bradshaw had made inventory representations to Shieldings by giving Bilz figures which differed from those given to Hayeems through the weekly reports. If this is not making an inventory representation to Shieldings, I am not certain what that phrase could mean. The thrust of much of the letter is that Hayeems is stubbornly refusing to recognize that the correct figure could possibly be less than $15 million. There is no indication in Hayeems’ own memorandum of any such stubbornness. He is asking for an explanation and expressly suggesting that the book figures be amended to whatever is the correct figure.
In the penultimate paragraph of this memorandum, Foreht and Krestell, having admitted “we realize that we have conflict of interest” assert they have been careful to ensure that only Hayeems dealt with Godsall except that on occasion Hayeems had requested them to meet with Godsall and continue the negotiations. This is a gross misrepresentation of the true relationship they had with Godsall. The letter continues by charging Hayeems with ignoring their recommendations, making drastic changes in the company’s position without their knowledge, failing to meet deadlines, failing to be responsive to the Shieldings offer, jeopardizing Shieldings’ interest as a willing buyer and leading to a situation where Godsall was unwilling to continue to deal with Hayeems. They go on to charge him with reducing their income as officers of the company contrary to the requirements of Shieldings and overstating the business prospects of the company to Shieldings. The last paragraph of the directors’ letter asserts that they, unlike Hayeems, will not act in a self-serving manner and will not tolerate further abuse from Hayeems. In a P.S. they note that Hayeems’ accounts “have been turned over to K. Foreht for approval. Would you discuss them with him at a mutually convenient time”. Finally, they attached a letter from Shieldings dated February 4th in which Godsall observes that the offer of January 20th has expired, invites a response and explains that the price is based on his and third parties’ views of value. He then writes:
Book values have not been a factor in the determination which we have made.
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What is one to make of the two directors’ letter? Firstly, in my view it resulted not so much from the actual memo sent by Hayeems as from the general frustration that was felt, particularly by Foreht, as Hayeems persisted in seeking better terms, rather than signing on Shieldings’ terms. It is vehemently one-sided and goes way beyond the Hayeems memo. Virtually every allegation made against Hayeems is untrue or distorted. For example, the evidence does not disclose that Hayeems requested the directors to meet with Godsall and continue negotiations; he expressly told Foreht to distance himself and endeavoured to conduct the negotiations himself. Foreht admitted that the alleged ignoring of the directors’ recommendations referred to Hayeems’ failure to follow their importunings to accept Shieldings’ first offer, and the making of the counter-offer. Much of what is written amounts to gratuitous whining about old issues, non-responsive to Hayeems’ memo.
The attachment of Shieldings’ letter denying that book values had been a factor is bold indeed considering that just two weeks earlier an unexpected deviation from book value was the reason given for a huge drop in price. Godsall admitted that this letter had been written by him at the request of the directors although he put it that they wanted to get the negotiations moving. In my view, this is at best a half-truth. Godsall had tried to justify the price reduction and put Hayeems on the defensive by implying that his original $15 million figure had been overstated. Hayeems’ vigorous reaction to this indicated that the tactic was backfiring and Godsall reversed himself smartly to take the heat off the directors. It is clear that he was fully informed of events within the company and was quite prepared to intervene in the company’s internal affairs on cue. These events strongly support an inference that the directors and Godsall were working together to drive Hayeems off the position that the value of the inventory as shown in the company’s books was a factor in the negotiations. This is a clear effort to assist Godsall in resisting Hayeems’ efforts to negotiate a better price on behalf of the company. At the time Bazarkewich saw this dispute as “another example of a situation where Foreht was at odds in terms of acting for the account of the company, and being a purchaser” and I agree.
It is also a reasonable inference that the virulence of this attack was designed to cause Hayeems to reconsider the withdrawal of his resignation. There can be no doubt that the resignation of Hayeems on February 2nd at a crucial point in the negotiations, thereby removing the one person within the company who was advocating a real negotiation with
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Shieldings, would have given great comfort to the directors and Godsall; equally his speedy withdrawal of that resignation and his return to the fray must have given them great disappointment. In all probability, that disappointment is part of the reason for the language in which this letter is phrased and the extent to which it goes beyond the memorandum to which it was a reply. Similarly, the gratuitous and almost contemptuous addendum that Hayeems’ accounts had been turned over to Foreht for approval evidences the bitter frame of mind in which the authors found themselves.
Hayeems, in evidence about this episode, made the point that he did not estimate the inventory figure; it came from the records of the company which were under Bradshaw’s control His view, which in my opinion is a very sensible one, was that before Bilz was given inventory figures which differed from those shown on the books of the company, Hayeems should have been consulted. Foreht admitted in cross-examination that although he was away from the company while Bilz was there he became aware that Bradshaw and Krestell had helped Bilz with his figures and had given him inventory data. When he was questioned closely about whether it was not true that he himself had given inventory representations to Shieldings, he was evasive.
In summary, the inventory dispute is important more for what it demonstrates than for its intrinsic merits. The revised figures were probably more accurate, but that was not the real point. Hayeems had never been told by the directors that the value of the inventory had declined; he had not been shown the Bilz report which they had; and when he sought to make enquiries he was met with abuse. This dispute was allowed to spread to the bank with both sides presenting their case as noted in the contemporaneous bank memoranda. It is hard to imagine why Foreht would have presented this dispute to the bank on February 3rd except as part of an effort to destroy Hayeems’ credibility. Indeed, as late as February 9th Soucie had to stop him from further attacks on Hayeems over this matter.
Hayeems thinks his hands are tied
Hayeems said that the directors’ involvement with Shieldings had now come to the point where it was obvious they were communicating with Godsall directly
…even though they had many times said that they are going to distance themselves and they recognized that they have a conflict of interest. So that’s what upset me considerably.
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Q. With all that obvious to you, why didn’t you fire him?
A. Well, my hands are tied, really tied. First of all, the Shieldings offer indicated that they were required as employees. The bank had a further knot in the rope – that’s to say that I had to retain the support of the management team – and we had the D.L.A. agreement which in effect said that you have to notify the D.L.A. authorities in advance if you wanted to remove any directors.
He acknowledged that he was faced with a decision and he discussed it with Levy. They decided to carry on with the directors; it was the best that could be done; Hayeems’ hands were indeed tied.
On January 21st, the bank received a copy of the letter from Shieldings reducing the offer from $8.5 million to $7.2 million and received a call from Slan, the solicitor for Levy-Russell, to discuss the procedures which would be followed if the deal went through. Soucie was sufficiently alert to the difficulties within the company to ask Slan to clarify who had retained him. The answer was Foreht, Bradshaw and Krestell as directors of Levy-Russell but he felt he was working in the interests of Mr. Levy as well.
The bank deadline looms: January 31st
On January 26, in the light of the imminence of the January 31st termination of the credit extension granted in September, Soucie prepared a memorandum recommending that the bank make formal demand for the repayment of its loans and consider appointing a receiver. The bank’s losses continued to escalate and its margin position to worsen with no reasonable assurance that the company would turn around. The company needed a substantial infusion of capital in the order of $5,000,000 to $10,000,000 and there was nothing to indicate that such a sum would be forthcoming. Further, there were no major negotiations underway to sell the company apart from Shieldings which Levy and Hayeems seemed to think was too low and which they might not accept. He said:
It is considered that the only way the bank can now make it abundantly clear to Pep and to Hayeems that we are serious about finalizing this matter is to proceed to making demand and putting them on notice that the bank will appoint a receiver.
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Soucie analyzed the bank’s position in the event of a receivership. The operating assets of the company would greatly diminish in value and those apart from the Weston Road lands would largely be offset by the costs of the receiver, the demolition of building and the movement of unsold inventory from Weston Road to allow the property development to proceed. In essence, the only security for the roughly $21 million bank liability was the Weston Road property which if sold to Kleinstein would bring at best $14 million. The bank was therefore looking at a potential write-off of $7 million on the Levy-Russell account plus the loans to Pep Levy of about $2.7 million. He noted that the bank’s mortgage division felt that the value of the Weston Road lands could well be close to $20 million if rezoned as expected. On the other hand, if Shieldings’ offer was accepted, the bank would write off
$1.7 million in Levy-Russell loans and Pep’s loans of $2.7 million for a total loss of $4.4 million. The bank would therefore be $5 million to the good by seeing the operating assets sold to Shieldings. Soucie estimated that keeping the company in business, an option he did not recommend, would require increased loans of at least $5 million and the conversion of
$10 million of debt to equity. If this course was followed, the bank would be funding orders which might not prove profitable and the company would probably lose its senior officers.
At a meeting held on January 29th with Hayeems and Levy and the bankers, Russell, Harrison, Bazarkewich, Petrie and Soucie, Soucie said that since April 1986 the bank’s position had eroded by about $3 million. The loans had remained fairly stable but the security position had eroded through sale of Winnipeg Cold Storage and a reduction in the saleable inventory. The meeting was told that the only possible opposition to Shieldings was from a Montreal group which was not now expected to arrive to inspect the premises until February 4th. Hayeems asked that the bank continue its support to the company for a further six months but the bank declined. The bank also declined to give Hayeems two weeks to negotiate with the Montreal group. Harrison said the bank had granted substantial time for the company to secure other arrangements and would have to consider appointing a receiver. Hayeems and Levy asked the bankers whether they wanted the Shieldings offer accepted. The bankers declined to say, preferring that the principals of the company make that decision
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themselves. As to his personal loans should the assets of the company be sold, Levy said that he was not in funds. Hayeems indicated there would be meetings with the Montreal group and with Shieldings devoted in the case of the latter to a possible increase up towards $8 million. A further meeting was scheduled for the 5th of February.
On January 30th, Foreht called Soucie about the meeting the day before. Soucie confirmed that the bank had refused further extensions of the credit and was looking for plans from Levy and Hayeems as to the repayment of the loans. Foreht asked that he be present at the next meeting and Soucie advised he would pass the request along.
Clipping Hayeems’ wings: III
At the end of January the three directors agreed, at Foreht’s urging, to withhold payment of Hayeems’ fees. Foreht’s memo on the subject complains that Hayeems is doing Foreht’s job, rather than confining himself to a trustee role; that Foreht was not consulted about Hayeems’ rate and other matters. The fees had been paid since August without the rate being questioned, so the bona fides of this decision at this time is certainly questionable.
Hayeems decides to resign but reconsiders
On February 2nd, Bradshaw and Krestell met briefly with Hayeems who said he was upset with the memorandum of Krestell and Foreht on the inventory matter. Bradshaw told Hayeems that this inventory matter meant nothing to Shieldings. It was at this meeting that Hayeems told them of his intention to resign.
Foreht then advised Soucie that Hayeems had resigned as trustee effective on the 4th. In the telephone conversation, Foreht asked the bank’s view of the value of the company’s inventory. Soucie pointed out that as loans had remained stable and accounts receivable increased slightly while the company suffered losses of approximately $2 million, the losses had to be funded by a decrease in inventory from about $15 million to about $13 million.
On February 3rd, Foreht told Soucie that Godsall was no longer willing to negotiate with Hayeems; that Hayeems had, at the request of Levy, agreed to stay on as trustee; and that there was a dispute between the directors and Hayeems as to the value of inventory which Hayeems was overvaluing. The bona fides of the first statement seem very doubtful. It was only the day before that Hayeems’ note to Bradshaw had said that Godsall and he had
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agreed to meet soon. Soucie then talked with Hayeems who confirmed that he was staying on as trustee and told Soucie that Levy had decided to accept the Shieldings offer but he wanted to know the bank’s intentions regarding his personal loans first. Hayeems indicated that the Montreal people had not shown up as promised and that he no longer expected them. Hayeems indicated his feeling that Foreht was deliberately undervaluing inventory so that Shieldings could justify a lower offer and that he wanted accurate inventory information for future discussions with Shieldings.
In a later conversation that day Foreht unsuccessfully raised a fuss over not being invited to the meeting scheduled for the 5th. Foreht also said that he was having great difficulty with Hayeems who felt that Foreht was deliberately undervaluing inventory whereas Foreht felt that Hayeems was overvaluing in an effort to get Shieldings to increase their offer. Foreht said he would be in contact with Shieldings as to the offer. At the foot of this note, Mr. Petrie of the bank has written “Presumably all officers of the company would wish to see a maximum offer from Shieldings assuming no misrepresentation”. It is perhaps not unfair to Petrie to note that he was relatively new to the file and that this notation indicates that, unlike his colleagues, he was unaware of Foreht’s personal interest in the Shieldings deal.
On February 3rd, Hayeems wrote to Foreht and Krestell as follows:
In order to determine the net change from the October 31, 1986 inventory figure to be negotiated with Shieldings, would you please prepare a monthly schedule from November 1, 1986 to January 31, 1987 showing the inventory “Ins” and “Outs”.
I have a tentative appointment with Godsall tomorrow (depending on his having received yesterday from you the October 31, 1986 book inventory) and then a meeting with the bank the day after.
On February 3rd, Bradshaw’s telephone notes record Godsall as saying the following:
Tell bank Hayeems wrong. Someone else must deal. Will not meet. No intent to meet tomorrow. Told B.H. I would look if material difference. Told him Krestell figures arc correct. Call bank and tell them. Please make this clear to the bank. No purpose served by having Hayeems involved.
In the same note Bradshaw records that he told Godsall that there would be no CD 850 contract with Israel for about 12 months due to Israeli budget problems. He also discussed
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with Godsall the resignation of Hayeems and the results of the bank meeting on the “26th”. This reference to the 26th appears to be in error as there was no bank meeting that day. The key meeting was on the 29th and this must be what Bradshaw referred to. It is an irresistible inference that Bradshaw told Godsall that the bank had refused at that meeting to extend the credit line. This memo reveals another occasion of Godsall orchestrating information to be passed to the bank by the directors: Bradshaw is to emphasize to the bank that the lower inventory figures are correct. When cross-examined, Bradshaw “did not think” he had told Hayeems about these discussions, and I find he did not. Here again one of the directors – this time Bradshaw – informs the purchaser of the pressures facing his adversary in the bargaining, for the obvious purpose of undermining Hayeems’ remaining ability to bargain for a higher price.
Levy won’t stand in the way: February 5th
On February 5th, the bankers and the company met. Levy again floated the idea of an accelerated closing of the Weston Road property which Hayeems suggested would enable the company to relocate, make substantial reductions in employees and become profitable. This would take six months to a year to organize. The bank was not impressed; it was not prepared to finance the company’s losses estimated at $900,000 for the next six months. Shieldings’ offer was discussed and Bradshaw gave his opinion that the inventory numbers supplied to Shieldings were accurate. Levy said he would not stand in the way of a sale of the company’s assets to Shieldings at a fair market price but asked for another week to 10 days to continue negotiations with Shieldings, and possibly other interested parties. Bradshaw then said that Godsall was willing to continue negotiations but not with Hayeems. Later, he went out, at the suggestion of the meeting, to phone Godsall. He returned to say that Godsall was willing to meet with Hayeems, Levy and Bradshaw later that very afternoon. Russell said the bank’s position had become further exposed; it appeared that the officers of the company might be working at cross purposes with Hayeems; the bank was not prepared to see undue delay and was to be advised within 24 hours of the progress of the negotiations. After Bradshaw left the meeting, Hayeems and Levy discussed Pep’s personal loans with the bank as well as the issue of retirement allowances to Levy, Speyer and Bartlett. Harrison said the bank would not be unreasonable in the matter of the personal loans but did not speak to the question of the retirement allowances.
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Bradshaw’s notes dated February 5, 1987 show that, prior to the meeting that day at the bank, he spoke by telephone with Godsall who wanted Bradshaw’s opinion on his letter of February 4th (“book values have not been a factor”). Bradshaw told him it was “okay, good”. It was put to Bradshaw that the reason Godsall asked for his opinion was because Bradshaw had asked for the letter to help in the dispute with Hayeems. He replied as I noted it:
I don’t necessarily agree; one could select that conclusion from several possible ones; there may have been other reasons. I don’t think I was aware that letter had been asked for and I didn’t ask Foreht. I can’t be certain because I can’t recall.
The most plausible inference from Godsall asking Bradshaw’s opinion on the letter is that there had been previous discussions between them about its contents. Given the otherwise inexplicable reference in that letter to book values it is obvious there had been discussion with someone who had briefed Godsall upon the need for support in the inventory dispute. I do not think Bradshaw was being candid in this evidence.
These notes of February 5th continue with Bradshaw telling Godsall that he was attending a meeting at the bank that day and they would talk afterwards. He continued that the bank “just want their money out – but only by leaning on us”, and that someone needs to negotiate on behalf of the shareholder and it “cannot be any of us”, by which no doubt he meant the directors. He went on to tell Godsall that he had suggested to Hayeems that he and Hayeems meet with Godsall and that they would pursue this after the bank meeting today. He then records Godsall as saying, “Has nothing against BH, except every time they meet and discuss and agree everything then changes.” It is obvious from the context that this conversation took place prior to the February 5th meeting at the bank. Paragraph 7 of Soucie’s notes of that meeting:
Bradshaw confirmed his earlier advices to us that Terry Godsall of Shieldings was willing to continue negotiations, but not with Ben Hayeems.
I have great difficulty in accepting the good faith of this episode. Bradshaw was surely a good deal less than honest in making the statement to the meeting which Soucie records, because he had every reason to believe that Godsall was indeed ready to negotiate with Hayeems. They had discussed a Hayeems-Bradshaw-Godsall meeting earlier that very day. It was surely a charade for Bradshaw to leave the meeting to get Godsall to agree to that to
which he had already agreed. It is not unfair, I think, to draw the inference that the purpose of this charade was to ensure that Hayeems would agree to be accompanied by Bradshaw at such a meeting.
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It should also be noted that the notes of February 3rd and 5th disclose a close relationship between Bradshaw and Godsall. It is not possible to regard the exchange of confidences in these notes as having any resemblance to an arm’s-length relationship. In particular, Bradshaw gave Godsall some additional interesting information by telling him that the bank “just wanted their money out but only by leaning on us”.
Following the meeting with the bank, Bradshaw, Levy, Hayeems and Godsall met and after some further discussion about the inventory valuation agreed to put that matter behind them and get on with making a deal and to meet the following Monday to forward the matter.
A deal in principle at $7.2 million?
On Monday, February 9th, Godsall, Hayeems, Levy, Foreht, Bradshaw and Krestell met for further negotiations. When the meeting ended, Godsall thought that he had a deal. Levy and Foreht also thought there was a deal, each of them phoned the bank to report on it, Levy saying that he had decided to accept the deal in principle. The nominal price was $7.2 million made up of $6.4 million for the inventory and $800,000 for the machinery. Soucie’s reporting memorandum said: “Pep has thrown in the towel”. On the 11th, Shieldings’ solicitor forwarded a draft set of points of agreement to Slan. A copy was delivered to the bank on February 12th for study. The bank’s reaction was that the agreement was incomplete and open-ended as to the final price. This open-endedness arose from three factors: (a) the inventory price was subject to adjustment depending on changes since October 31, 1986; (b) the rental for the land following closing was unsettled; and (c) the price was subject to the condition that there had been no diminution in the “prospects of the business” since October 31, 1986, an obviously subjective clause open to interpretation.
On the 13th, the bankers met with Bradshaw, Foreht and Krestell to try to clarify these points. The reduction in inventory since October 31 was a serious problem. Soucie wrote:
While Krestell said that the reduction in inventory since October 31 should not be greater than 4/500,000, he is not willing to put this in writing. It is conceivable that the deduction could be far greater than his estimate.
Soucie’s memorandum also contains the following sentence:
We also understand that deletions may include inventory on hand at October 31 and still on hand at date of closing, but which Shieldings may decide they no longer want.
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If this was truly Shieldings’ position it obviously made the whole inventory figure totally open-ended at Shieldings’ option. The bankers were concerned about this. When he was cross-examined on why that new twist was put on the inventory matter, Foreht said that while Soucie recorded such a statement he did not recall it. When it was put to him that he deliberately exacerbated the bank’s fears by raising this new issue, Foreht answered: “That’s what you say”. When pressed further for some explanation he was obviously in great distress and finally said he did not recall that period of time, a statement he repeated not long afterwards in respect of another question in the same mid-February period of time. For his part Soucie testified that he did not remember ever drawing this new contingency to the attention of Hayeems or Levy. Bradshaw could not recall any discussion of leaving any inventory out of the deal and was sure he did not make such a statement. It is very puzzling why the directors would deliberately introduce a fresh element of uncertainty just when they seemed on the verge of a deal but I find on the evidence that one of them did so.
Plaintiffs’ counsel urged that Foreht and his colleagues never wanted a deal, they wanted to force the bank to put in a receiver and certainly that is one plausible reason why they might seek to disrupt the negotiations by introducing this element at this time.
The meeting’s conclusion was that there were many loopholes in the Shieldings offer, the foremost being the open-ended price. However, that was not all. Foreht told Soucie on the subject of the rent of the Weston lands, “Don’t look for a large figure – cost of removal”. He was pressed to say whether or not he had discussed the fact that the net rent would not be large with Hayeems before he went to this meeting and could not say. When he was pressed further he said he had little recollection of that period of time. In short, the bank was being asked to assess and approve the deal prior to the establishment of the final price.
On the 16th, the bankers met with Levy and Hayeems to continue the discussion of Shieldings’ offer and Levy’s personal situation.
All were concerned regarding the open-endedness of the offer. The retiring allowance for Levy was discussed. The bank did not agree that funds would be made available and a decision was postponed until Shieldings’ offer was clarified.
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Following the meeting, Soucie analyzed the situation as unsatisfactory. Because of the open-endedness of Shieldings’ offer there was no assurance that $7.2 million would be received and every likelihood that it would be significantly reduced. He recommended that the bank see a comprehensive agreement specifying the amounts to be paid and the terms of the lease before taking a position on the acceptability of the Shieldings deal. He recommended against making any retirement allowance to Levy, who already had assurances from the bank regarding his loans.
The directors drop a brick
On February 18th, the directors wrote Soucie that they had investigated the inventory as at October 31, 1986 and:
…have determined that only the work in process inventories would affect the value of
$6,400,000 placed on all inventories by Shieldings.
Work in process as at October 31, 1986 and shipped in November, December and January amounted to approximately $550,000 at cost. The letter then continued:
Shieldings was contacted and advised of this estimated diminution in the work in process inventories and in terms of their offer they felt that the downward adjustment would be approximately $500,000.
Hayeems testified he was not consulted about this calculation before the letter was sent, nor after and was not sent a copy of this letter. Krestell confirmed that he did not believe a copy had been sent to Hayeems. Hayeems said that he asked Krestell on the 19th or 20th about it, having learned on the 19th from Soucie that Shieldings’ offer had now dropped from
$7.2 million to $6.7 million because of the inventory in/out calculation. Krestell said he was still working on it. Krestell denies this conversation with Hayeems.
Bradshaw’s notes of the 18th of February reveal that by 10:45 that morning he was calling Levy to tell him of the price reduction from $7.2 million to $6.7 million due to the inventory changes.
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When asked why the information was not given to Hayeems, Krestell responded that it was the bank that had asked for it and they replied to the bank. It certainly seems that this reflects the attitude which the directors had adopted at this time. Shieldings would be informed at once; Hayeems not at all. Hayeems was to be pushed out of the loop and would get no information from them voluntarily.
In the meantime, Levy had been busy seeking other investors. On the 6th a Mr. Mendelsohn called Soucie about a take-out of the bank at $12 million. On the 19th Levy advised Soucie that he would soon be delivering a written offer from a group in New York headed by Wayne Tannenbaum to take the bank out for $14 million.
On February 23, 1987, the bank’s real estate arm reported that the target date for final approval of the Weston lands re-zoning had slipped from May 5th to June 30, 1987.
The facilitation meeting – February 25th
Soucie received instructions from his superiors to convene a meeting of bank officers, the officers of Levy-Russell and representatives of Shieldings plus lawyers for everyone, to seek clarification of Shieldings’ offer and facilitate the other parties in reaching an agreement.
Such a meeting – the facilitation meeting – was held on February 25th. Godsall said that the inventory had deteriorated through ongoing sales which led to a reduction from the original offered price of $8.5 million to $7.2 million. As well, he said the lifting of the DLA suspension had not resulted in a significant restoration of sales. The $7.2 million offer was tied to the inventory as at October 31st and inventory reductions since that time approximated
$500,000. Accordingly, his offer stood at $6.7 million. In order to facilitate a deal, he offered to guarantee that the purchase price would not fall below $6.7 million and could be increased based on a further physical count of inventory. Such guarantee was subject to receiving immediate approval in principle from Levy and the bank. After the bankers confirmed with Godsall that he would proceed at a price not lower than $6.7 million, they asked Levy his position. Levy said he would not stand in the way of the deal. There were also discussions about the economic rent for the Weston Road premises but the only progress made was that Shieldings would be prepared to finalize this point within two to three weeks. The bank agreed to consider its position and respond within the next few days. At this point, the Shieldings representatives and the officers of Levy-Russell left.
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Godsall testified that he thought a deal had been made and that if they had brought the lawyers in they would have had a deal at $6.7 million right then. Foreht testified that he thought a deal had been done. Notwithstanding this testimony, it seems reasonably clear that until the economic rent issue was resolved, there was in fact no complete meeting of the minds. Nevertheless all parties felt that a big step forward had been taken. Following the first meeting, the bankers met with Levy and his solicitor. Levy asked the bank to forgive his personal loans of approximately $2.7 million and release his collateral. He did not raise the issue of a retirement allowance.
The bankers prepared an assessment of this meeting. They felt that a receivership would realize $2.5 million on receivables and $2.5 million on inventory and machinery less receivership costs of about a million dollars leaving a net of $4 million. Obviously, $6.7 million from Shieldings would be preferable particularly since the company would be left with the receivables and payables which would be roughly a wash. They noted that Levy’s personal position was poor from the bank’s perspective. Most of his assets were in his wife’s name and a personal bankruptcy would likely net the bank only about $175,000. They recommended giving approval in principle to Shieldings and telling Levy the bank would not pursue him for his loans. However, they were concerned that between February 25th and the closing, the bank’s position might worsen by the company using the bank’s funds to acquire inventory which would become the property of Shieldings on closing. They suggested therefore that Shieldings be approached about taking on the receivables and payables.
On March 3rd Levy called Hayeems to tell him of the February 25th meeting. Hayeems recorded in a memo:
M.P. Levy said that Ken Foreht was speaking negatively about the company and its prospects and acting as though he was negotiating for the purchase of (sic) Shieldings rather than acting responsibly for the vendor.
The bank urges a counter-proposal
On March 4th, Bazarkewich and Petrie met with Levy. They communicated the instructions which they had received from the credit division. Bazarkewich’s memo includes this:
Essentially, we communicated in the meeting that we were not in a position to tell Pep whether to accept or not accept Shielding’s offer, however, wanted the following further considerations to be taken into account.
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The plan of arrangement and sale of the company under the Bulk Sales Act should also now include accounts receivable and accounts payable.
We were looking for a net of say, $7 million, I believe I may have mentioned $7.2 million to Pep Levy.
We are not prepared to have any retirement allowance allocated to Pep Levy or the other two employees from the proceeds received by Levy Russell Limited in connection with the sale of their operating assets.
We advised Pep that on the understanding of his co-operation we would not look to him personally for repayment of the Peplevy Corp. indebtedness. At this stage we would continue to hold the cottage property and if negotiations reached a satisfactory conclusion we would be prepared to release the cottage property.
Pep was, to say the least, subdued in hearing our response. Particularly, Pep felt he should be allotted something for his 50 years of service with the company, and in addition to the cottage he would have expected 4/5 years payments. He went on to say that he would have to further assess the situation with his solicitors. Pep did make the comment that there was certainly nothing for him to co-operate and although he did not come out and say so, it would appear that we may be faced with the course of last resort of appointing a receiver.
At least in retrospect it is clear that the bank, in urging Levy to make a counter-offer at a higher figure than the figures agreed on at the facilitation meeting, was placing the $6.7 million floor price in jeopardy. There is nothing in the bank’s memoranda to suggest that the bank addressed this issue or thought it a serious problem. The bank’s own memorandum of the facilitation meeting indicates that the floor price was subject to immediate approval both from Pep and from the bank. In addition, one of the sets of handwritten notes of that meeting records that after Godsall presented $6.7 million Levy suggested another $500,000 and Godsall indicated he would not go higher. So at least in retrospect there were some straws in the wind that indicated it might be difficult to hold Godsall to the $6.7 million floor if swift acceptance was not forthcoming.
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The Soucie/Petrie recommendation was to negotiate on the basis of $6.7 million. There was no recommendation that the bank ask for more, except as the payables/receivables might fall out. The authorization given was to negotiate “along the lines proposed” and so it is not clear why the figures $7 or $7.2 million came up. Soucie was on vacation at the time and could give no evidence on the point. Bazarkewich and Petrie handled the meeting and neither was called. Since the bank had already decided not to grant Levy a retirement allowance, the increase was not to fund such an allowance. One might speculate that it was an attempt to recoup some of Levy’s personal loans that were being written off or just an attempt by Bazarkewich to make a marginally better deal and look good; but that is speculation.
Mr. Wortzman in his argument asserted that Godsall had in effect been trapped at the facilitation meeting into offering the “floor price” and that the bank’s counter-offer carelessly and foolishly permitted him to escape from it. I will deal with this argument later.
On March 6th, Godsall, his colleague Willis, Hayeems and Levy met and Hayeems put forward the counter proposal that the price be fixed at $7 million including accounts receivable and payable. In so doing, Hayeems told them he was carrying the bank’s message. Towards the end of the meeting, Willis showed an interest in the land and the Shieldings people declared that they would look at a deal, including all of the assets. Hayeems testified that he did not see a problem with this change. He felt that the company could deal with the Kleinstein situation. Following that meeting, Godsall wrote to Hayeems acknowledging that he had today been informed that Shieldings’ offer was inadequate. He than continued:
…if your business is to be financed and operated in an orderly way, during the next 8 to 10 weeks, we would give consideration to attempting to find an alternate approach which might be acceptable to you.
The letter closed with an expression of concern about continued deterioration in the business.
Hayeems felt that Shieldings had not rejected the proposal so much as changed ground and accordingly Levy wrote to Shieldings on the 11th confirming that he would approve the sale of the assets of Levy-Russell for a firm price of $7 million and asking that Shieldings consider acquiring as part of the above mentioned price the accounts receivable and payable.
The bank calls Levy-Russell’s loans; Brads haw drops the ball -March 6, 1987
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March 6 was a busy day for Bradshaw. At noon, he received a call from Godsall who told him that Hayeems and Levy had just left and that Godsall was sending Hayeems a letter. (No doubt this is the letter noted above.) After blowing off a little steam about being misled and double-crossed, Godsall said if the bank gave another 60 days Shieldings would stay and try to make a deal. He felt that Shieldings’ research had shown consistently that the assets were not there to support the higher offers made earlier. He is then quoted by Bradshaw as saying:
If another 200 M more or less would clean up the deal, that could be done.
Bradshaw’s note concludes by quoting Godsall as saying it must be made clear to Bazarkewich that the only way Shieldings could do better would be to bring in the real estate.
That afternoon the bank officers arrived with the bank’s formal written demand for the repayment of all of the loans. If payment was not received by March 31st, it was the bank’s intention to appoint Peat, Marwick Ltd. (“Peat”) as receiver and manager of Levy-Russell. In the meantime, the bank had appointed Peat as agent to review the financial position of Levy-Russell and asked the company to give full co-operation.
Bradshaw recorded in his notes that $7 million was the bank’s target figure. The notes continue:
Too many people wearing 2 hats. Can’t get to bottom line.
When the bankers left, Bradshaw called Levy and read him the bank’s demand letter. The response as recorded by Bradshaw was:
I told them if there was nothing for me and the other 2 who are out because they listened to a stupid president, they could do whatever they want. I am not going away with nothing.
That call was at 5:15. At 5:40 Godsall and Willis telephoned. Willis told him that they wanted the land thrown into the deal and Godsall told him that Willis had spoken to Russell (of the C.I.B.C.) that day.
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Five minutes later Hayeems telephoned to say he had the two letters and wanted to go to the bank and get them to consider Godsall’s new position. Bradshaw then spoke again with Levy who said he was at the bank that morning and did not know the letter was coming. He commented that he had met with Godsall and Willis that morning and thought they were interested in an overall deal. A few minutes later Bradshaw again called Levy and read him the Shieldings letter and agreed to take copies of the day’s correspondence to him at his house.
In all of these conversations there is no reference to Bradshaw telling anyone that Godsall would be prepared to pay another $200,000 on the original basis in order to clean the matter up. In cross-examination, Bradshaw confirmed that he had no note or memory of telling Levy or Hayeems about it. Godsall agreed that he had said to Bradshaw that if another
$200,000 more or less would keep the receiver from being appointed it could be done. This was from a base price of $6.7 million. He did not call the bank directly because he felt he had had little success in communicating with the bank but he did feel he had told Bradshaw to pass the message to the bank.
It is a matter of some perplexity why an experienced business person like Bradshaw failed to recognize the significance of what was occurring. He knew that Godsall had offered
$6.7 million and he knew that the bank was looking for $7 million and here was Godsall offering to close two-thirds of that gap and he told no one about it. Was this because mentally he regarded himself not as a director to whom an offer was being made, but as a confederate to whom a confidence was being disclosed? In my view, no other inference is plausible.
On Monday, March 9th, the bank began a series of meetings with Peat, about which more later.
Foreht briefs Petrie
On March 10th, Petrie, the new manager of the branch, spoke to Foreht in connection with a press release prepared by the latter reporting to the public the demand made by the bank. The memo continues:
We also discussed with Foreht the state of the Shieldings deal and some of the background, which presumably is already in the file. Reportedly, Shieldings is not an
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operating industrial company, but rather takes usually minority positions as an investor. It is backed by 4 large companies (20% each) including a bank (BNS?) and a trust company. 20% of the company is owned by 4 individuals of which both Terry Godsall and Bud Willis have 5% each. Foreht mentioned the management group would own some portion of the company but indicated it was not substantial.
And:
Foreht also spent considerable time outlining how he has tried to discharge all of his responsibilities in a fully ethical and responsible manner. He pointed out that Pep Levy is not able to deal with the company assets by virtue of the agreement. Foreht also advised that while he has not played a role in the negotiations with Shieldings to date, in view of the fact that time was now running out, he believed that he should become directly involved and would be meeting with Shieldings tomorrow.
In cross-examination Foreht conceded that he had made the statement about the management group not having a substantial interest and explained that he had in mind that Levy-Russell’s assets would be pooled with those of other companies that Shieldings was acquiring and therefore he said:
I could have been diluted, that’s one explanation; also I hoped for equity but I had no guarantee.
He conceded that the other company with which Levy-Russell assets might have been pooled was the Jolley company in Montreal that had been mentioned back in November 1986 and he conceded that he did not think there ever was a deal made with Jolley. When it was put to him that he had never been told by Godsall that his equity would be diluted in this way he responded that he had not discussed equity with Godsall at this period of time. I do not accept this explanation. In the light of the evidence referred to elsewhere I am satisfied Foreht was misleading Petrie on the scale of the management interest.
Certainly the impression left with Petrie, according to his note, is that Foreht, who expected to get some equity but nothing substantial, would now for the first time become involved in the negotiations because Levy could not himself deal with the assets. It is a striking fact that the role of Hayeems is nowhere referred to although Foreht certainly knew
that it was Hayeems’ job to sub for Levy in the situation. It was, to say the least, disingenuous of Foreht to pull the wool over Petrie’s eyes in this way.
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Petrie had only come into the account late in 1986. His memorandum speaks of getting from Foreht the background which “presumably” was already in the file, indicating uncertainty as to exactly what was in the file. On discovery, Bazarkewich testified that he would have discussed his concerns about the directors and their dual role and possible conflict with Petrie but he had no actual recollection or note of such a discussion. An answer to an undertaking recorded that Petrie had no recollection of any instructions from Soucie or Bazarkewich regarding whether or not Foreht and the other key management people were also purchasers through the Shieldings deal. In the absence of either of them recalling such a discussion and recalling Petrie’s naive notation (supra) presuming that all directors sought a maximum price, I find it did not occur.
Hayeems’ views of value – March 6th
About March 6th, Hayeems prepared a document entitled “Calculation to show benefits in taking over the bank’s position”, seeking to interest possible investors in doing so. He also gave it to Shieldings when discussing with Godsall the value of the $5 million tax loss which could be taken advantage of by a purchaser who bought the shares. One of the main objectives of this calculation was to show the advantage of keeping Levy-Russell in business so as to shelter that loss. It is however also significant for two additional reasons. First, the light it throws upon Hayeems’ ideas of value at the time; second, it is one of a number of instances when Hayeems pressed the proposition that the underlying value of the Levy-Russell assets was vastly in excess of the bank’s debt even at $19 to $20 million of debt. The current estimated assets are shown in this document as follows: (thousands)
Accounts Receivable | Inventories | Plant Equipment |
$3,500 | $7,000 | $500 |
1400 Weston Road | Bradford | |
$ 10,000 (70% share) | $400 | |
$7,500 (30% value) |
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Total assets $28,900 Liabilities
Payables – $3,000
Bank loan $16,000
(assuming a settlement at this figure with the bank)
Total liabilities – $19,000.00
Excess $ 9,900.00
Add tax loss $ 5,000.00
Subtotal – $14,900.00
Carrying costs (to keep company in business)
to December 1987 – $ 2,400.00
Net Surplus $12,500.00
The notes show that this calculation was made on the basis that the value of the Weston Road lands had increased considerably and the 30% retained by the company would be worth about $7 1/2 million implying an overall value for the project in excess of $22 million. This is perhaps not an unreasonable assumption bearing in mind the bank’s own estimates of value noted earlier. This document puts numbers on a theme that had been pressed by Levy and Hayeems, would be pressed upon the bank with increasing force in the next couple of months and forms an important theme in this litigation. It is the proposition that the underlying land values were so great that it was improvident of the bank to dispose of both the business and the land when the land alone, properly marketed, could have recovered the bank’s indebtedness. This proposition was vigorously disputed by counsel for the bank and I will deal with the dispute in more detail in another part of these reasons.
Hayeems’ analysis was presented to the bankers on March 11th. It did not persuade them to continue long term support of the company. The bank’s memorandum of the meeting,
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after referring to Hayeems’ views of the value of the company’s assets, refers to the Hayeems/Levy meeting with Godsall the previous Friday (March 6th) and a subsequent letter from Godsall indicating that consideration was being given to making an offer for all of the assets. By paragraph 4, Bazarkewich indicates that Levy had advised him that following a weekend of consideration, he had decided to attempt to avoid personal bankruptcy. Bazarkewich then wrote: “To this end it would appear that Pep is prepared to co-operate with the bank and sign back an offer to Shieldings.”
Foreht seizes the initiative
In his memo of March 16th, Petrie records his understanding that the bank is willing to accept $7 million for inventory, equipment, accounts receivables less accounts payable. He also records a conversation with Foreht on March 12th that the probable maximum offer was now $6.5 million due to a $500,000 deficit between accounts payable and accounts receivable. Petrie asked for lists of payables and receivables to be provided immediately and expressed surprise at the result. Foreht explained receivables had been collected and put into the bank while payables had not yet been paid. Hayeems testified that no one told him anything about these discussions.
On March 23rd, Foreht advised Soucie that a meeting between Kleinstein, Shieldings and Foreht was scheduled for Tuesday, March 24 about Shieldings’ purchase of Weston Road and the interrelationship with the Kleinstein deal. Hayeems testified that no one told him such meetings were going on and he asked rhetorically why Foreht was involved at all. He stated he did not ask Foreht to become involved and was not aware he was involved. It is clear that Foreht had seized the initiative and had moved Hayeems out of the decision-making loop.
On March 24th, Foreht reported to Soucie that he had met with Kleinstein and Shieldings and expected a revised offer from Shieldings to the company no later than Thursday, March 27th. The same day Levy called and Soucie told him a further offer was expected from Shieldings on Thursday. There is nothing to indicate that Soucie told Levy about the prominent role that Foreht was playing in these negotiations. Later that day Soucie called Foreht to tell him that the bank wanted him to meet with Peat and it was agreed that
the initial meeting would take place on an informal basis away from the premises of the company.
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On the morning of the 25th, Soucie telephoned Levy to inform him that the bank would be putting Peat into the company for an investigative role. He recorded:
Pep was incensed, and could not understand the bank’s actions in view of the impending revised offer from Shieldings expected tomorrow.
In the result, the bank agreed with Pep that they would instruct Peat not to enter the company premises until the 26th at the earliest.
The directors meet the receivers – March 25th
At noon on the 25th the bankers met with Bradshaw, Foreht and Krestell at the Triumph Hotel and introduced them to Messrs. Cumming and Rimer of Peat. The company officers agreed to cooperate with Peat and Foreht agreed to press Godsall to submit a comprehensive offer to the company as early as possible on Thursday, March 26th. That afternoon, Harrison instructed Soucie that unless an offer was received from Shieldings by noon on the 26th, Peat was to proceed to the company’s premises to undertake their pre-receivership investigations.
Godsall is enthused
Subsequently on the 25th, Godsall called to advise Soucie that Kleinstein would not provide Shieldings with the 50% participation Shieldings required. A meeting was scheduled for 3:00 on the 26th to discuss the matter further. Soucie’s memorandum then continues:
7. Godsall then advised that Shieldings is now even hotter to close the deal. He volunteered that General Motors has just put on the market their Detroit Diesel Alison Division, which makes tank transmissions. According to Godsall, the company that acquires that Division would be in the driver’s seat as far as the primary and secondary markets in servicing tanks worldwide. Godsall mentioned that they would be willing to close a deal tomorrow at whatever it takes to take the Bank out, be it $19, $20, or $21 million. However, the snag is the Kleinstein deal.
The problem here lies in the ability of Shieldings, if they purchase the business assets, being forced to move the inventory off the site at a greater pace than they would like in
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order to realize the full value of the inventory assets. Accordingly, they want at least 50% of the Weston Road project in order to have some measure of control in the timing of development, to give maximum profit potential to the inventory. With any less than 50%, they would be at the mercy of the developer, and might be forced to scrap what could turn out to be valuable inventory.
We indicated that we understood Shieldings position. We also indicated that the Bank required something concrete in order to make an assessment of the situation. Godsall agreed to send us a letter tomorrow morning outlining two possibilities. Possibility (A) would be the original asset purchase, with a guaranteed time frame for the inventory remaining on the Weston Road site. Possibility (B) would be a comprehensive offer to include the Weston Road property. The latter, of course, would be subject to satisfactory arrangements with Kleinstein.
Although Soucie met with Cumming and Davidson four times in the few days between this memo and the appointment of Peat as receiver, none of them recalled any reference to Godsall’s willingness to pay the higher range of price; nor was it passed to Levy or Hayeems. It should be noted that Godsall testified that a few days later he learned that GM was only selling part of its operation. He did not say so, but that may have cooled his ardour. However that does not explain the failure of the bank to pass to its customer, or its own receiver, this very critical information.
The last days – Shieldings’ April 1st offer
Shieldings and Kleinstein conducted intensive negotiations in the latter part of March seeking to structure a joint venture as to the Weston lands. Foreht testified that he attended most, possibly all, of these meetings and that everyone thought a deal was possible until, at the end of the month, they simply could not get together and the negotiations broke off.
One of the meetings with Kleinstein took place in the afternoon of the 26th of March. Willis told the meeting that Shieldings was thinking of an offer of not more than $19.5 million of which they would attribute $14 million to the land and $5.5 million to the other assets. Foreht’s notes also reflect Shieldings’ concern about the possible costs of a “forced march off the lands”.
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On the 30th Foreht had a number of telephone conversations as the negotiations were coming to a head. He spoke with Petrie and recorded: “discussed flip indemnity”. It was put to him that that meant that referred to the need for an indemnity to be given to the bank in connection with a proposed “quick flip” under which the bank’s receiver would take charge of the Levy-Russell business and immediately resell it to Shieldings. Foreht said the topic was discussed but he did not know who suggested it and he said he was no longer sure exactly what the note meant. He thought perhaps it had come from Davidson. He conceded it could mean that they discussed an indemnity to the bank for such a quick flip but he could not say that it did mean that. Later that day, Bazarkewich called Foreht and asked for information about the negotiations between Kleinstein and Shieldings and what Shieldings might ultimately offer. Foreht said he told Bazarkewich, based on the tenor of the discussions that he had been attending, that $18.5 million would be a fair price. Neither his testimony nor the notes indicate that he mentioned at all to Bazarkewich the price of $19.5 million which Willis had mentioned as his top price at the meeting of the 26th.
Foreht said that he did not keep Levy informed regarding the Shieldings-Kleinstein talks. He explained that he did keep the bank informed and he felt the bank would let Levy know what was going on since he knew Levy was phoning the bank. He said he had not seen Hayeems during this period and did not advise him or even know if Hayeems was still involved.
Foreht also made notes of a meeting on the 30th with Davidson of Peat which contains some further references to the flip idea. In particular, he records the following:
Want to do quick flip – why is S [Shieldings] bid so high?
Item 6 of these notes quotes Davidson as saying:
Their report will be on what we’ve told them and the figures and item 9 quotes Foreht himself as telling Davidson
offer $18-18.5.
There is nothing in the notes or in Foreht’s evidence to indicate that he told Davidson that Willis’ contemplated top price was $19.5 million. Nor is there any indication in Foreht’s evidence nor in the notes of this conversation that he took the opportunity, when Davidson
asked why Shieldings’ bid was so high, to explain what Shieldings had in mind. Foreht’s evidence was vague; he had trouble recalling this topic.
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These references to the quick flip should be viewed in the context of Soucie’s memorandum of March 26th in which he quotes Davidson as telling him that Foreht’s preference was for a quick receivership and sale to Shieldings. Foreht in his testimony denied that he pressed the bank to go through a quick flip and suggested that it was Davidson who proposed it, but was, as noted, vague in his recollections of this period. I find that he did urge the quick flip idea on the bank at this, as well as other times.
On the 31st, Godsall wrote to the bank that a meeting with
Kleinstein would take place at 3:00 on the afternoon of the 31st immediately after which it was the intention of Shieldings to make an offer for all of the assets of Levy-Russell. He noted Shieldings’ “very sharp interest in the Levy business which we have been pursuing for approximately a year”.
During the final two days of March, the pressure mounted as the bank’s deadline approached. A representative of a New York branch of Levy’s family called to discuss putting together a syndicate to take out the bank but of course required time to do it. Hayeems met with the bankers with a plan to keep the company going in its present structure, based upon the substantial increase in the value of the land. The bankers responded that they could not see how the bank would agree to increase its liabilities.
The Shieldings-Kleinstein discussions were more difficult than predicted and finally at 5:45 p.m. on March 31 Foreht called Soucie and advised that the Shieldings group felt they could not do a viable deal with Kleinstein; they were meeting that evening to discuss their options and Foreht or Godsall would get back to the bank in the morning with the results.
On the 1st of April the bank waited with increasing impatience most of the day. The Shieldings offer finally arrived very late in the day and the bankers agreed to meet on the morning of April 2nd to discuss it. The offer was to acquire the whole of the assets of Levy-Russell including the Weston lands for $19 million. Shieldings would acquire accounts receivable and discharge accounts payable and all commercial obligations. No obligation would be undertaken to any employee implicated in proceedings by the U.S. or Canadian
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governments. All adjustments were to be made as of April 1, 1987. The purchaser required unencumbered title to all assets including the lands. Soucie said they had hoped for an offer to take out the bank’s position; instead they got an assets offer for which they could not make title.
On the morning of April 2nd, the bankers discussed Shieldings’ offer and felt that they could not give clear title to the lands. There was therefore no alternative to a receivership. Soucie testified the consensus was that they would do the receivership “by the book”, by which he meant it would be widely advertised, tenders would be asked, etc. Around mid-day they met with Levy and Hayeems. Levy could suggest no alternative to receivership except $2 million his New York relatives could raise. However, he said, the bank knew the value of the land and he never understood why the land alone was not sold. The bankers informed them that there would be a receiver appointed.
The receivership begins
In the early afternoon the bankers met with the company officers who agreed that the company could not repay the debt and could not convey clear title. Accordingly, the bank issued a formal letter of appointment to Peat, Marwick as receiver and manager of the company under the authority of the demand debenture of May 9, 1977 and the security agreement of October 27, 1980.
Briefing the receiver: I. the bank
At this point it will be convenient to return to the middle of March to trace briefly the bank’s steps in engaging and briefing its receiver, because the bank’s alleged failure to ensure that its receiver was properly briefed is an important element of the plaintiff’s case.
Peat came into the Levy matter by way of a telephone call from Mr. Kee of Blake’s to Mr. Cumming of Peat in the morning of March 9th. Cumming’s notes contain two entries of interest: “Pep Levy uncooperative” and “Board wants to buy Coy.” [Company]. Cumming did not recall this conversation nor the meeting held that afternoon at which Mr. Davidson accompanied him to meet with Messrs. Petrie and Caruana of the bank and the Blake’s lawyers. Davidson said he might have known at that meeting that the Board wanted to buy but could not recall. He conceded it would be reasonable to surmise from the phrase that the
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Board would have significant equity. Soucie was on vacation, so Petrie conducted the meeting. He said he had received no information from Soucie or Bazarkewich that the Levy directors would have a substantial interest in the purchase; nor about any concerns they had about the conduct of Foreht and the others. It follows that he could not have communicated these matters to those at the meeting, which appears to have been very general.
On March 16th Petrie called Gumming to report that Levy was now co-operating with the Shieldings sale. Cumming then went on vacation from which he was recalled to meet on the 25th with Soucie to be briefed. Mr. Rimer of Peat took notes of this meeting.
It was intended that Peat would do a pre-receivership study of Levy-Russell. Soucie testified that he had briefed receivers in similar circumstances upwards of 100 times and he had neither notes nor particular recollection of this meeting. Rimer was not called. Cumming had no real recollection of detail. He did recall Foreht’s desire to have the receivership as discreet as possible; Foreht’s enthusiasm for the Shieldings’ deal; and Bradshaw’s involvement to a lesser extent in working with Shieldings to accomplish the deal. The basic source of information about the meeting is thus Rimer’s notes.
Rimer recorded the key people identified to him by Soucie:
Hayeems, Bradshaw, Foreht, Krestell, Godsall, Willis, Harrison of the C.I.B.C, solicitor Kee and Kleinstein. Rimer’s notes then continued: “Mgt. of Co. extremely interested in effecting Shieldings deal”.
Rimer’s notes reveal that Soucie briefed them on the corporate structure of the Seaway organization, the operations of Levy-Russell and its marketing activities. Sales were reported as approximating a million dollars a month and the company was losing money primarily because of the debt load. Inventory was stated as 50,000 tons of well-catalogued inventory consisting of engine parts and other surplus parts located on the Weston lands. There were also U.S. facilities. The problems facing the company included a drop in sales volume due to the U.S. suspension and poor image due to the conviction of principals of the company. There was insufficient cash flow to enable payment of the debt. The company was awaiting an offer to purchase the company by Shieldings which would encompass both operating assets and land. It was expected to arrive on the 26th. They were informed that at a
meeting on February 25, 1987 Shieldings had said they would offer not less than $6.7 million. The Kleinstein deal was discussed.
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As to potential outcomes of the receivership, Soucie is recorded as explaining the first possible outcome:
Shielding to purchase operating assets and land of co. therefore PML would have limited involvement. This could be accomplished by a “quick flip” i.e. effecting a receivership and setting up a new co.
Soucie explained that Shieldings was concerned that if the Weston lands were sold to Kleinstein, Shieldings would have to move the business off the lands.
Soucie’s second possible outcome was that the Shieldings deal might collapse and, in the absence of other solid buyers, the bank would put Peat into the company to liquidate the assets. A worst case scenario was that inventory realization might be very slow – perhaps two years. A third possibility discussed by Soucie was that management of the company in conjunction with Shieldings might purchase the assets.
The bank’s briefing of its receiver was severely criticized by counsel for the plaintiff who said that the inadequacies of the briefing led to the receiver being unaware of crucial matters that would have affected its tendency to rely upon Foreht, Bradshaw and Krestell and would have led to it conducting much more determined negotiations with Shieldings to achieve a significantly higher price when it sold the business to Shieldings in the receivership. I will deal with these criticisms in a later part of these reasons.
Briefing the receiver: II. the Levy directors
Following their meeting with Soucie, Messrs. Cumming and Rimer met later on the 25th with Foreht, Bradshaw and Krestell at the Triumph Hotel. Although Hayeems was known to represent the owner, and although Soucie conceded that it was unusual not to have the owner involved in pre-receivership discussions, Hayeems was not invited.
Notes were kept of the meeting at the Triumph and further meetings at the company premises the next day. These notes do not differentiate between the two occasions. They show a wide ranging discussion covering the company’s customer base, domestic, foreign
and U.S.; sales and gross margin figures; the major reasons for the losses; valuations of the machine shop ($3.3 million); and the surplus parts in the yard ($8.7 million); inventory valuation practices; potential and actual contracts; U.S. facilities; the various actions of the
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U.S. government and the resulting suspensions; accounts payable, accounts receivable and numerous other matters. Krestell testified that he was the source of much of the information recorded by Rimer in these notes. In particular, he gave Rimer the figure of $3.3 million as the inventory value of the machine shop. This was the figure that Bilz had used. Similarly, he gave the receiver the figure of $8.7 million for the yard inventory which he testified related to the number arrived at by Bilz. He denied having discussed the DLA issues with Rimer.
Late in the afternoon of the 26th, Soucie recorded: “Davidson indicates Foreht’s preference is for a quick receivership and sale of the assets to Shieldings. Davidson is as yet not prepared to make a recommendation to the bank…” I have discussed this point before. Foreht’s evidence was vague. On March 31st, Soucie recorded that Foreht told him that it was Peat’s idea that a quick flip would be in the interest of the parties. I prefer the evidence of Davidson as recorded in Soucie’s contemporaneous note. In part I do so because references to a “quick flip” seem to follow Foreht around.
Foreht prepared a handwritten document entitled “Shortfalls and Costs of Business Under Receivership”, 27 March 1987. The document reads as follows:
Site Clearing Costs | $800,000 |
Shortfall in receivables | $200,000 |
Cost of Trusteeship | $900,000 |
Contributions to Rezoning Costs | $100,000 |
Payments for real estate, taxes, insurance and guard | $200,000-$400,000 |
Realization excluding Land: | |
Bradford – quick | $300,000 |
Inventory/equipment – quick | $2,000,000 |
Nine months $3,500,000
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Foreht said in chief that he prepared this document at the request of Peat “off the top of my head”. In cross-examination he agreed that his figures were liquidation values whereas the figures in the Bilz report had been going concern values. He said he did not recall whether the receiver had asked for his help regarding the nature and value of the inventory or about the company’s prospects. It was put to him that he had volunteered this document on the basis of liquidation values, to which he responded that he could not recall the exchange nor could he recall volunteering the data. He likewise had no recall of any discussions about Shieldings’ due diligence or the Bilz documents and the latter were not supplied to the receiver.
Davidson on the other hand testified on discovery that Foreht volunteered this information. It was normal for them to draw upon management’s expertise and they probably did so in this case. He thought Foreht’s figures “silly wild-ass guesses”. He thought that he had obtained inventory valuation figures from all of the directors. The estimates of liquidation values contained in Peat’s document “Levy-Russell Limited Preliminary Statement of Affairs as at March 20, 1987”, prepared at about this time, were said to be based on management’s information. These numbers fall within the Foreht estimate in the March 27th document. It is hard to reconcile this fact with Davidson’s pejorative characterization on discovery. At trial, in chief, Davidson was more definite about Foreht’s document. He said that these were notes that were given to him to support Foreht’s view that the costs of liquidation could well exceed the amount to be recovered by the bank in the event of a receivership. Hayeems testified he was not informed about any of these figures being given to the receiver. I accept Davidson’s evidence that Foreht volunteered these figures to him.
It was argued that Foreht’s presentation of these figures to the receiver in the pre-receivership period was an attempt by him to forestall a receivership. I do not accept this argument. In my view it is much more probable that Foreht’s intent was to persuade the receiver of the low value to be attributed to the inventory and thereby contribute to the likelihood that Shieldings’ offer, when it arrived, would be found acceptable.
On March 30 & 31, the bankers met with the receivers to review the entire position. The agenda of the meeting shows that they reviewed the company’s financial position, the
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expected Shieldings offer for the assets, a series of alternatives to an assets sale to Shieldings including the purchase by Shieldings of the bank’s security, an arrangement under the Companies Creditors Arrangement Act, a “quick flip” receivership, an “orderly sale” receivership and some general receivership considerations.
Soucie conceded that the only candidate for a “quick flip” sale that he knew about was Shieldings.
Davidson testified on discovery that he recalled learning after April 2nd, that Shieldings had made various offers for the business assets in the $6 to $8 million range but he was not aware there had been a floor price fixed at $6.7 million, even though that is mentioned in the Rimer notes. He did not know what the significance of the floor price might have been to the bank.
The account goes to Special Loans
Upon the appointment of the receiver, the responsibility within the bank for the file shifted from the branch and the knowledgeable Soucie to the Special Loans department. In that department, Mark Dixon and Chris Kalmer were the persons responsible for dealing with the account and thus with the receiver. Of the two, Dixon was the officer in charge. In evidence read in from his discovery, Dixon said his first awareness of the Levy account was April 2nd when he attended a meeting at the credit division with Harrison, Bazarkewich, Soucie, Kee (Blake’s) and Cumming. He attended as an observer, made no notes and was given no briefing before or after he attended the meeting. He did not believe he was ever briefed by the branch officers regarding the Levy-Russell account. He was never told of any concern held by the bank that Foreht had a conflict of interest or that the C.I.B.C. had any concerns about Foreht and his conduct. Kalmer likewise testified in an undertaking answer that he never had any briefing from any bank officer regarding the history of the Levy account prior to April 2nd. Neither he nor Dixon had any information or belief regarding whether or not Foreht, Bradshaw and Krestell would have an equity interest in the purchaser. It appears from this evidence that the handover of responsibility from the branch did not involve any sharing of key information with Special Loans. Special Loans was thus ill-equipped to remedy any defects in the receiver’s knowledge and to properly supervise the receiver’s work.
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Davidson prepared a number of documents for reference at the March 30 and 31 meeting. He said that Foreht felt a prolonged receivership would damage the reputation of the business with its customers and suppliers. Foreht supplied Davidson with his notes (27 March 87) referred to earlier to support Foreht’s view that the costs of liquidation could exceed the amount recovered by the bank. Davidson also talked to Bradshaw and Krestell about values and said he had more faith in their information than in Foreht’s. He prepared a preliminary statement of affairs in which he showed an estimated gross realizable value of inventory at $2 to $2 1/2 million. Note 1 to the document indicates that:
the estimates of the liquidation values of the assets are based on the opinions of the Levy management group and have only been subject to our preliminary review. We have not yet obtained independent appraisals for the inventory (scrap values and removal costs), equipment or the Weston property.
This note reveals an attitude towards the inventory which focuses upon it as scrap and upon the assets as being worth “liquidation values”. The value of the Weston lands is carried at $10 million, being the cash component of the deal. The value of the company’s ongoing 30% interest in the development of the lands was valued at zero. The same approach is carried forward into the preliminary statement of the bank’s security. Davidson said these were very preliminary documents. He held discussions with management to review the reasonableness of their estimates but it does not appear that he was in touch with either Levy or Hayeems at all at this time in order to check on the information he was getting from management. Davidson said he felt the business was insolvent. It had incurred substantial losses and was continuing to do so, its sales were far below budget and he thought it doubtful if there was a viable business there.
During these meetings of the 30th and 31st of March, the quick flip to Shieldings was discussed and Davidson testified that he supported Cumming whose view was that such a flip was not appropriate because of the problem of showing that the sale was a provident one. The market had to be tested more widely.
Although Davidson did recall the reference to the $6.7 million floor in Rimer’s notes, he said that he did not have a detailed understanding of the previous dealings with Shieldings although he knew that it had made some offers. At this time, of course, all parties were awaiting the receipt of the expected Shieldings’ offer.
The receivers take possession – April 3, 1987
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The Shieldings offer of $19 million proved disappointing to the bank. Soucie explained in evidence that when they got the Shieldings’ offer there was a consensus at the bank that this offer was Shieldings’ final position. Therefore, notwithstanding Godsall’s statement to Soucie on the evening of the 25th that Shieldings would close at $20 or $21 million to take the bank out, they did not go back to Shieldings to get them to up their offer. When it was put to Soucie that there is no reference after March 25 to that conversation with Godsall, he was only able to say that he would have reported the conversation to meetings in late March and early April but had no actual recollection of doing so. It seems very probable that Soucie is mistaken and that the “19-20-21 million” conversation was not raised by him after his memo; otherwise it is hard to see how the consensus could have arisen that $19 million was a final figure.
Late on April 2nd, Peat was appointed receiver. Davidson immediately met with Krestell and Bradshaw to discuss the commencement of the receivership the following day. Cumming went with Foreht to speak to Shieldings. Cumming testified he did not want Shieldings to be completely frightened off by the receivership. He wanted to talk about how a sale might be concluded under a receivership situation and also try to improve the offer that had previously been submitted. Cumming said that Foreht’s role at this, as at any of the meetings he attended, was that of a spokesman for the management group that was interested in effecting a Shieldings sale. Godsall said that at this meeting he tried to impress on the receiver the need to take care of the business.
Dixon testified on discovery that on April 3rd he went with Kalmer, also of Special Loans, to Shieldings’ office and met there with Foreht, Godsall and someone from Peat, at which point what he called the “conceptual prospects” of Shieldings’ purchase were addressed. At that time, Godsall said that Foreht and others whose names he could not recall were integral to the future operation of the business if Shieldings purchased it. No one said to Dixon then, or ever, that apart from being integral to the business operation, Foreht and the others were to have equity participation or ownership interest. Dixon suspected that might possibly be the case but made no further inquiry, nor did he discuss the possibility with the receivers.
On April 3rd, the receiver’s team led by Davidson took possession of the Levy-Russell premises. They asked management to stay on so the business could be sold as a going concern. All decisions were to be approved by the receiver.
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Foreht said that Davidson explained to him that his authority and responsibility as an officer and director of Levy-Russell had ceased and he had become an employee who was responsible to the receiver. He offered to resign as an officer and director but Davidson said that was not necessary as Foreht had no powers anyway. In cross-examination, when pressed on whether he owed duties to Levy-Russell, Foreht contended that Davidson had told him on April 2nd or 3rd that he no longer had authority or responsibility. The receiver had written to all employees on April 6th. Foreht conceded there was nothing in that letter that spoke of any cessation of responsibilities but contended that that is what Davidson had told him. When asked directly whether he contended that he had been relieved of any duty to act in the best interests of the company, he responded evasively by referring once again to his offer to resign and said there was no longer any substance to the directorship and he assumed he was no longer a director. When pressed again as to whether he had to act in the best interests of the company, he said he had never thought of that. His discovery was then put to him in which he had responded at Question 3563 that the suspension of the officers’ authority by the receiver meant that he had a meaningless title with neither authority nor responsibility, “a free for all” in which he could give any information he wanted to Shieldings. He was then asked whether before the 2nd of April he had considered that he had an obligation to provide full information to a receiver. He responded that his obligation was to answer their requests. He was then pressed that he had a duty apart from requests to inform Peat voluntarily of the true situation as to the values of the assets of the company and its prospects. He retreated to evasions saying that it was a matter of record what happened. He was then pressed as to whether the receiver had asked for his help regarding the valuation of the inventory or about prospective orders and in each case he said he could not remember.
This evidence of Foreht should be contrasted with that of Bradshaw on the same subject. Bradshaw said that upon the receivership taking place on the 2nd of April, Davidson had spoken to him. He agreed that at no time had Davidson relieved him of responsibility for acting in the company’s best interests. He recalled no such statement being made to him nor
to Foreht or Krestell. They were removed from financial responsibility for the operation of the company.
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Krestell said that he also received the Receiver’s letter of April 6th. He understood from Davidson that his powers as a director had ended but he was never told his duty to act in the best interests of the company had ended. He said his responsibilities to the company continued although some tasks were taken away and he acknowledged that he had duties to the company and also to the receiver.
Davidson said that he met with the management team and advised them that they no longer had signing authority or decision-making authority to act on behalf of the business. All the decisions as to selling, purchasing, incurring obligations etc. were to be approved by the receiver but they were to continue their day to day operations.
Bearing in mind the evidence of Davidson, Bradshaw and Krestell and the probabilities of the situation, it is most unlikely that Davidson undertook to advise Foreht that he no longer had any obligation to act in the best interests of the company; or that he was no longer a director; or anything beyond that final authority now rested with the receiver. I reject Foreht’s evidence on this point.
It is interesting to contrast Foreht’s attitude towards his duties and obligations in respect of the business plan, with his attitude in respect of the receivership. He called not one but two lawyers to confirm his “duty” to go to the bank to undermine Hayeems’ business plan in August of 1986. There is no evidence that he called any lawyers to discuss the problem of his duty to Levy-Russell in the course of the receivership. In my view, the probabilities are that Foreht wanted to go to the bank and used the lawyers’ opinions as an excuse, whereas he did not want to come clean with the receiver and was afraid to get lawyers’ opinions lest that be what they told him.
The receivership – valuations and marketing strategy
After taking charge of the Levy-Russell premises, the receiver’s team prepared a budget for receivership operations and prepared an information package on the business to assist marketing. The objective was a going concern sale and effort was devoted to identifying who might be prospective going concern purchasers. Prior to the receivership, at
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the meeting of March 30th, competitors had been identified as possible going concern purchasers. The direct mail recipients were identified by management, were competitors or were found by library research on related businesses. Peat’s research librarian was responsible for locating approximately 60 of the targets. Bradshaw provided a list of competitors and a further list of people who were frequent tenderers on national defence contracts.
It was determined that outside appraisals of the assets, particularly inventory, machinery and real estate would be required and the receiver selected Maynards Industrial Auctioneers (Maynards) and LVG Auctioneers (LVG). In choosing these appraisers Davidson testified that they sought to obtain advice from people specializing in bulk disposals as they intended to obtain liquidation level appraisals as a check against going concern bids. Maynards was a foremost appraiser and auctioneer in this area and LVG was known by Davidson from past experience to have expertise in machinery and equipment.
On the real estate side they selected a Mr. Weir, who although not their first choice was regarded as a competent appraiser. Cumming focused on the real estate purchasers and Davidson on the business purchasers over the long haul, but initially Davidson was the one who went to a public meeting held by the City of York regarding Kleinstein’s development proposal. He gained the impression that Kleinstein was at an early stage. There were many unanswered questions and a good deal of vocal opposition from local residents particularly regarding traffic.
By the 9th of April Cumming was forwarding to Kalmer at the C.I.B.C. a marketing plan which had been prepared by Davidson with Cumming. It proposed newspaper advertising and direct mail to be accomplished by the 21st of April, followed by the distribution of the full information package to those parties showing a specific and realistic interest. This distribution and any site visits that resulted would be accomplished by May 11th and the last date for accepting offers was proposed as May 14th.
It is obvious therefore that the receiver proposed to dispose of the assets of Levy-Russell in a very prompt manner.
The information package stressed that potential purchasers were to conduct their own investigation and not rely upon the information contained in the package. Recipients were to
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sign and return an acknowledgement that the information was proprietary and confidential. Interested readers were invited to obtain further information which would be provided in conjunction with a supervised tour of the premises. The package contained a general description of the business noting the company’s specialization in the supply of maintenance, spare parts and major assemblies for wheeled and tracked armoured vehicles of Canadian and U.S. military design. It referred as well to the manufacture and supply of components and assemblies for drive trains, engine assemblies, transmission assemblies and the like for these vehicles. It noted the company’s experience as a supplier of spare parts to NATO countries and its ability through its manufacturing facilities to provide engineered products and spare parts for military vehicles.
The package was criticized by plaintiffs’ counsel as not being explicit as to the technology owned by the company. Davidson’s evidence was that he was not aware of any patents and the financial statements did not reveal technology. He understood that the company had know-how and he felt that was adequately described by the description of the business itself. He was aware of the M41 retrofit project which he listed as one of the company’s inventory products in section IV of the information package. He said that if he had thought the M41 had value on a stand alone basis, it would have had its own section. There was likewise no specific reference to the CD 850 project.
The advertisement and direct mail evoked considerable interest and some 75 information packages were sent out and some 17 site visits were scheduled. The breakdown shows that 5 recipients of information packages had indicated interest in both inventory and real estate, a further 14 in the inventory alone and 33 in the real estate alone.
Shieldings’ April 10 offer – $19.0 million
On April 10, 1987, Shieldings offered to purchase all of the assets with an adjustment date of April 2nd and assume all liabilities except the costs of the receiver and the defence of Levy-Russell on any of the criminal charges. The price once again was $19.0 million. As with previous offers, a condition specifically referred to the continuation of the M41 project. Davidson did not agree that this showed that the purchaser accorded some value to that project, conceding only that Shieldings could have seen some value as a future possibility. He did not feel, he said, that Shieldings’ stipulation with respect to the M41 should have caused
him to reassess his view that the technology of the company was essentially undeveloped and of little stand alone value. Nor did he ask management what value Shieldings might have been seeing that he did not.
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In this part of his testimony his attention was drawn to Bradshaw’s letter of May 19, 1987 to Export Development Corporation regarding possible support from it for export sales of the M-41 kit to Thailand. Although this letter was written during the receivership, the receiver had not seen it until preparation for this trial. Nor could he recall being told that the company had recently obtained a $1.9 million sale of M-41 kits to Denmark. He said if he had known of the sale he would have made inquiries as to its profitability and the prospects of more sales. He made no such inquiries and I am satisfied he was never told of the sale. He said:
…if the Levy directors had indicated to me that [the sale] was an extremely profitable venture and that there was further potential to exploit similar opportunities in the future, that would have attracted more my attention.
Q. The EDC letters certainly suggest there is future prospects?
A. In Mr. Bradshaw’s mind but that was not drawn to my attention.
Q. Exactly. Had it been brought to your attention and had you been conscious of the earlier sale, and had you thought about the significance that Shieldings appeared to be placing on the M41 and CD 850 [in] their offers including the April 10 offer then perhaps you would have taken a different view of the value ascribed to the company’s technology. Do you agree with that?
A. If all those things were present in my conscience [consciousness] at the time, I certainly would have held different impressions. Whether that would have changed the ultimate outcome of our negotiation process, I can’t say. (emphasis added)
Other evidence demonstrates that the Levy directors believed that the M41 project had great potential and was a very important element in the value of the company. Yet the receiver negotiated and sold the company’s assets to those directors in ignorance of the existence of this potential because they did not give him the information he needed to make an evaluation of it.
Continuing with the chronology, the receiver decided not to respond at once to Shieldings’ April 10th offer. It was open until May 14th and could be addressed later when the
market had been more fully tested. Godsall said he did not expect an immediate response, it would not have been prudent.
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Foreht denied having any input into the price being offered by Shieldings but he did say that he knew roughly what the breakdown was because they had discussed it so often in the previous months. He testified the business was between $5 and $5 1/2 million and the land was the remainder. There is, however, significant evidence that the breakdown was more complex than that. Godsall said the April 1st offer was based in part on his knowledge –from the directors – of the company’s bank debt, operational costs, inventory changes and the unreliability of the company’s internal information. He identified an analysis dated March 17, 1987 as something he had when working on the April 1 offer. It shows:
Inventory and Equipment $6.7 million Bradford .4
Recoveries .5
Land 12.121
However, with the failure of the Shieldings-Kleinstein talks, Willis had arranged financing for the lands at $14 million and I am satisfied that the replacement of the 12-6.7 split by the 14-5 split had more to do with that than with any changes in the business or the addition of the receivables and payables to the equation.
On April 6, Levy-Russell pleaded guilty to the last remaining charges in the United States and was fined $10,000. It entered into an arrangement with the DLA superseding the December 1986 agreement. This arrangement continued to require the presence of Hayeems as trustee and of Foreht, Bradshaw and Krestell as directors and officers. As well, a number of former Levy-Russell employees, including Levy, continued to be forbidden to participate in the business of the company.
On April 14th, Kleinstein’s company, 1400 Weston Road Limited, filed a notice of action in the Supreme Court of Ontario against the bank, the receiver and the company claiming that its purchase agreement for the Weston Road lands was binding on the bank and the receiver. The action did not in fact get underway until the statement of claim was filed on
May 5th, at which time Kleinstein also launched a motion for an interlocutory injunction restraining the bank from disposing of the lands.
Peat’s first report
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On April 29th, Cumming wrote to Kalmer enclosing Peat’s first report on the receivership. The report was largely prepared by Davidson. Under the heading, Realization Strategy, the report begins:
In general, the ongoing concern value of a business exceeds the liquidation value of its assets. To facilitate a going concern sale it is usually necessary for the receiver to continue a company’s operations on a “business as usual” basis.
Due to the interest expressed by Shieldings Inc. and the risks of liquidating a specialized scrap inventory housed in some 30 acres of sheds, the bank agreed to the continuation of operations to provide time to seek a going concern purchaser.
After discussing the marketing program, the report notes the receipt of Shieldings’ offer and the first portion of it concludes as follows:
To assess the reasonableness of going concern offers we have endeavoured to estimate the liquidation value of the assets with the assistance of real estate and other appraisers.
The report then presents an estimated statement of affairs of Levy-Russell Limited as at April 2, 1987 which shows accounts receivable having a book value of $1.652 million and an estimated gross realizable value of $.915 million; and inventories of $12.7 million having a gross realizable value of $800,000 to $1.8 million on a liquidation valuation approach. The report notes that the going concern value of the company may exceed the liquidation value but for the purpose of valuing the bank’s security the more conservative approach was appropriate.
The analysis of the inventory is of interest. It reads as follows:
INVENTORY
The Company’s inventory consists mainly of used spare parts from military vehicles such as tanks and trucks. These parts are sold “as is” or used in the machine shop in refurbishing transmissions, axles and engines. The vast majority of the inventory was
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acquired 20 to 40 years ago and in the past seven to ten years the business has changed such that utilization of the spare part inventory has substantially diminished. In recent years only 5% of Levy’s revenues were generated from the sale of existing inventory. Approximately 70% of the sales were generated from buying new parts for resale. Levy’s role as a middleman has greatly reduced profit margins.
The Company management has indicated that the book value of inventory is
$12,700,000 allocated as follows:
($000’s)
Spare parts in the yard $ 8,700
Machine Shop – parts and some work-in-progress 3,200 Domestic parts – (truck items for over the
counter sales and use in the truck service operation) 800
$12.700
The book value is calculated on the basis of approximately 15% of historical selling price.
The actual cost of the inventory may have been somewhat less than this however, the Company is unable to provide that information.
Further, management has not made any attempt to estimate a provision for obsolescence.
In arriving at our estimate of the liquidation value, we surmized that approximately 20% of the inventory may be saleable or useful to someone operating this business. The remaining 80% must be assumed to be scrap.
To assist us in this valuation we engaged the services of Maynards Industrial Auctioneers and LVG Auctioneers (refer Appendix 5 for their reports). Maynards is of the opinion that the 20% saleable portion of the inventory has a gross liquidation value of
$1.5 to $2.5 million under a 6 month program of selling this inventory to existing customers, competitors and foreign governments. Costs involved in this type of liquidation would include:
fixed costs for the facilities including utilities, insurance, telephone, etc.; and
labour costs for sorting and shipping inventory (approximately 25 men at a cost of
$50,000/month).
Our preliminary estimate of operating costs for the 6 month period is $600,000 to
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$700,000 under this scheme. Thus, the net realization would be $800,000 to
$1,800,000.
LVG Auctioneers estimated a value of $325,000 to $450,000 for the entire inventory in the event of an unreserved public auction. This represents the downside risk of quick liquidation of the inventory.
Both appraisers indicated that due to the costs of removal and handling, scrap dealers may be unwilling to pay even scrap value ($40 to $60 per ton) for the remaining inventory.
Thus, based on the scenario used by Maynards in total we have estimated the net liquidation value of the inventory to be $800,000 to $1,800,000.
In his evidence, Davidson explained that discussions with Krestell and a review of inventory records had demonstrated that in recent years only 5% of Levy-Russell’s revenues were generated from the sale of the existing parts inventory. It had been increasingly becoming a buyer of material to be refurbished, rebuilt and resold rather than a seller from its existing used parts inventory. Davidson stressed that Peat did not arrive at those percentages solely on their own. They had information from the Levy-Russell’s directors. Similarly, the “surmize” that approximately 20% of the inventory may be saleable and the remaining 80% scrap came from the directors, as confirmed by Maynards’ assessment of the inventory. As to the 80%, Davidson testified that it was Maynard’s opinion that there was a risk that cost of removal might exceed the scrap value and he also recalled in his testimony the expression to him of that same opinion by Foreht (in the latter’s memo of 27 March 1987). This estimate was not based on a specific identification of each portion of the inventory as scrap or useable but on the basis of turnover. Davidson said he recalled both Bradshaw and Foreht telling him that the costs to remove could be greater than realizable value of the scrap but his recollection was much stronger as to Foreht.
A conservative view of the inventory
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It is apparent that the receiver took a conservative view of the value of the inventory. The spare parts in the yard were carried on the books at $8.7 million. That figure was the net result of a complex system of evaluation by sample and a valuation at approximately 15% of historic selling price. The receiver depended in significant measure upon information received from the three directors as to the values to be attributed to the yard inventory. Davidson had expressed the view that the directors were co-operative and professional in their dealings with the receiver. In cross-examination it was established that Davidson had not been informed by anyone about Shieldings’ due diligence and he had not been given a copy of the documents prepared by Bilz for Shieldings although the directors each had a copy in their possession. Nor was that in any sense a confidential document from Shieldings. Several pages of it were actually Levy-Russell internal working papers made available by Bradshaw or Krestell to Bilz but not to Davidson. Foreht denied in evidence that he had been asked for this type of information but Davidson’s evidence is quite different. In the transcript of his cross-examination at page 164 he is shown the Bilz papers and the questioning proceeds:
Q. Now, I take it that the directors never gave you a copy of this material.
A. No, sir. I’ve never seen that before.
Q. And yet you were asking for their assistance with regard to the description of the inventory, the value of the inventory, and the inventory, to your understanding, being very difficult to assess. Correct?
A. Correct.
Q. And you made that very clear to them, didn’t you?
A. I think so, yes.
Q. And if you turned the page, you’ll see a listing of certain items by number and by quantity and unit price and so on. There is an attachment to the Bilz analysis.
A. Yes, sir.
Q. Now, I take it you were never given that document either by the directors.
A. No, sir, I don’t believe I’ve ever seen this document.
And at p. 196, Davidson is shown material prepared by Foreht and sent by him to the auditors of Tecmotiv on June 19th, ten days after the Tecmotiv purchase closed, breaking out the inventory into categories. He is then asked:
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Q. Now, did you ever request of Foreht, Bradshaw or Krestell that they provide you with that kind of estimate or indeed any kind of estimate beyond what was seen in the material at March 27, Foreht’s numbers on liquidation? Apart from that, did you ask them for their estimate of the inventory value in terms of the scrap and the balance?
A. Through those parts of the receivership, the two days we were doing the assessment, I believe I requested summary information to describe the inventory so we could make a more informed assessment of the inventory. It is typically the way people in my profession work. When we do our assessment, we try and get breakdowns of assets into component parts to focus on key assets or key elements of the inventory, and as I recall, there was none of that type of information provided to me, that the focus was on the cards and the extended value, detailed computer listing, which was – again was not in summary form. It was 8 to 10 inches thick of detailed part listings.
Q. And all of the – all of the information that was provided by the directors led you – it was one of the factors that led you to have a very dim, conservative view of the inventory.
A. Yes, it was one of the factors.
It is apparent from this evidence, which I prefer to the evidence on the point of Foreht, Krestell and Bradshaw, that although Davidson made it clear to the directors that he desired and needed their help in matters of inventory valuation, they never disclosed to him the information which they had both from Bilz and elsewhere that could have assisted him. Certainly they never hinted to him that it could have the kind of value that they were planning to extract from it if they were able to purchase it. They misled the receiver and they did so deliberately.
The mindset of the author of the receiver’s first report was to regard most of the inventory in the yard as scrap. Davidson said this conservative view was in part because only 5% of current revenues were being generated from it; as well as the valuations from LVG and Maynard’s. In my view, the evidence of Davidson shows that this mindset was also very significantly contributed to both by Foreht’s memorandum of 27 March and the directors’ collective failure to produce the data which could have assisted the receiver in valuing the inventory on a different basis, a basis consistent with the true views of management and the purchaser.
During this period Cumming’s evidence is that he was in touch occasionally with Levy but Cumming was unaware of the details of the matters with which Davidson was dealing and never raised the value of inventory with Levy or Hayeems. Davidson did not do so either.
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The Bilz documentation would have been of double value to the receiver. It would have assisted the receiver in the process of coming to its own valuation of the yard inventory. It also would have given the receiver an insight into the kind of information as to values which Shieldings had, upon which, presumably, it was basing its approach to the purchase of Levy-Russell. Foreht, Krestell and Bradshaw, experienced men all, knew full well the importance of this information to the receiver. No other inference is reasonably possible than that they deliberately withheld it because to disclose it was contrary to their personal interests.
That this was important information is confirmed by Davidson’s evidence on cross-examination (page 226) where he was asked:
Q. I’ll try it this way. If you had known on the 5th of June of the estimated value accorded to the inventory and the intellectual property both by Shieldings and the directors, and given the fact that at least one prospect, to your understanding SECO was still interested, do you agree with me that you would not have simply signed an agreement on June 5 for $3.35 million but rather would have gone back to SECO to try to negotiate further?
A. If we had the knowledge of the Levy directors’ opinions on the value of the inventory and technology and if we knew what Shieldings valuation is, which is an odd circumstance to know, what a purchaser is thinking, but if I was availed of that information, I think we would have done two things: 1. we would have probably negotiated harder with Shieldings, trying to conduct some form of brinkmanship to try and increase their offer, which we did diligently through that period, but maybe with that knowledge we would have pushed even harder and we may, based on that knowledge, have gone back to SECO on this assumption that possibly Shieldings was not offering a reasonable price in the circumstance.
Later in his evidence Davidson was shown the so-called “special purpose statement” prepared by Tecmotiv for its first fiscal period after its purchase of the Levy-Russell assets. In the notes to this financial statement under the heading of Intangibles, a value is given of $1.5
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million. The evidence was that this covered the potential value of the company’s technology, primarily the M-41 and CD 850. The figure was arrived at by Tecmotiv by taking 1% of the anticipated sales of the M-41 kit and using that as the present value of this particular technology. Davidson acknowledged that this may have been management’s view of the matter but he felt it was not fair to value assets in this way and drew attention inter alia to Tecmotiv’s subsequent inability to realize any such profit. In my view, this comment missed the point. The question at issue is not whether Tecmotiv ultimately made a profit on the M-41 technology but whether at the time of the receivership the Levy directors, potential purchasers of that technology, believed it had value for which they and their backer were prepared to pay, and the extent to which they disclosed their ideas of value to the receiver. I will discuss the role of the special purpose statement and the weight to be given to it later in these reasons. For the moment, assuming that it reflects to some degree the director’s views about the M-41, there was a vast gap between their views and the information given to the receiver upon which he based his assessment of a proper price for the Levy-Russell assets.
Competitors as potential purchasers – Napco
From the outset of the receivership it had been recognized that competitors would be among the potential purchasers. One of the most important competitors of Levy-Russell was Napco International Inc., of which Gary Rappaport was Chairman. On April 29th, Mr. Rappaport and four other representatives of Napco arrived at the Weston Road premises to inspect the assets of Levy-Russell. During the course of the visit, Rappaport requested a computer tape of the inventory list of all items having an extended value greater than $3,000, plus details as to open orders, part numbers, customers and accounts receivable. He explained that they wished to use the computer tape to scan Levy-Russell’s inventory for items that would fill back orders held by Napco and as well to compare Levy-Russell’s outstanding orders for items which Napco’s inventory could provide.
Davidson realized that the cardex system of inventory which Levy-Russell had, (which involved one card for every part and accordingly thousands of cards), would not be easy to review. He offered all purchasers the opportunity to review the inventory at the premises with the assistance of a librarian who was quite expert in locating cards for relevant items of inventory. He testified that Rappaport was not anxious to spend the hours necessary to review the data and in addition wanted to manipulate it. He said he got the sense that
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Rappaport wanted to cherry-pick the inventory but was not really interested in the on-going operation. When he was asked for the data in computer form, Davidson felt that it was akin to handing over a customer list and he was concerned that he was giving a competitor a commercial advantage over whoever purchased the business as a going concern.
He discussed the matter with Cumming and with Bradshaw, seeking a way to fulfill Napco’s request while at the same time protecting the integrity of the Levy-Russell information. Bradshaw suggested that he ask for a copy of Napco’s inventory listing. Cumming suggested a cash deposit as security. Although there was a confidentiality agreement in the package of material which every potential purchaser received, Napco was in the United States and Davidson felt he would not have much recourse against it. Indeed, he did not recall the confidentiality agreement being specifically discussed. Having considered the matter, Davidson called Rappaport on April 30th and said he wanted their inventory listing or a cash deposit to prevent their use of Levy-Russell’s data. Rappaport was not prepared to accept this arrangement and said that Davidson could contact him later if he didn’t get any acceptable offers by the May 14th deadline. Davidson testified that he felt Rappaport wanted the data more than he wanted the assets. Davidson testified that he felt he had to maintain a delicate balance between protecting the value of the data to the ultimate purchaser and promoting the sale of the company.
This decision was attacked by counsel for the plaintiffs as unnecessarily favouring Shieldings and “turning off” potential purchasers without justification. In my view it was a reasonable business judgment in a tricky situation. Given that there was a serious going concern purchaser on the scene, it was reasonable for the receiver to be cautious in releasing such data. Although at least one bidder said he would have taken the data without customer names, that was said in the witness box and not suggested at the time. The situation was put to the experts called on the conduct of receiverships; both would have asked for a deposit. The request for comparable data from the bidder was over-kill but Rappaport would not have accepted the deposit alone anyway. Receivers, like other professionals, must be given scope for the exercise of professional judgment within the sphere of reasonable choices as seen at the time. This decision, in my opinion, was within that sphere.
Following up his telephone conversations, Mr. Rappaport wrote to Mr. Davidson on May 1, 1987, confirming the position regarding the receiver’s refusal to provide computerized inventory information and continuing:
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We believe that a relatively small proportion of the physical inventory could yield the value of $1 million to $2 million to a qualified purchaser, even in this depressed market for the type of equipment which is in the Levy inventory.
It is apparent that he was able to reach at least some conclusions from the data he was given.
Mr. Rappaport testified that the information contained in the information package circulated by the receiver did not come close to the data which he needed to bid as it lacked specificity. He was very unhappy at being refused further data and indicated that he did not know how it was possible to put a bid together without the data which he had asked for. He deduced from this refusal that there was probably a management buy-out type of operation being put together to keep the company as a going concern. He said that he would have accepted the data without the names of customers and thus protected the interests of Levy-Russell as a going concern. He said flatly that if the receiver expected a bid they had to give Napco the inventory data. Without it, he said the receiver was telling him: “You compete with Levy-Russell and you cannot buy this business. Go away.” Napco had an M-41 refit kit of its own and Mr. Rappaport testified that it would probably have been worth something in the area of $200,000 to his company to remove Levy-Russell as a competitor in the field of the M-41 refit. He did agree in cross-examination however that when he bought the assets of Tecmotiv from the receiver of that company he did not regard any of the price as being paid to get rid of competition.
Mott-Haven
Henry Moed was the executive vice-president of Mott-Haven Industries of the Bronx, New York, a company which has been in the spare parts business since 1932 and in the military spare parts business since the end of the Second World War. His company and Levy-Russell were direct competitors both for the purchase of surplus government materials and sales. Nevertheless, they bought and sold from each other over the years as necessary. The basic data he required was not in the information package. He needed an inventory listing by item, stock and part numbers. One of his people asked for this more detailed information but
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was informed that it would not be made available to Mott-Haven or others in the industry who were competitors. He felt that he should review this position with Ron Bradshaw whom he knew and he called Bradshaw. Bradshaw affirmed that the inventory would not be made available to Mott-Haven. Mr. Moed knew the Levy-Russell facility well enough to know that the inventory was vast and he regarded the data which he was being refused as the key ingredient in putting together an offer. Accordingly, there was no purpose in proceeding further and he did not do so. Later, at the time of the Tecmotiv receivership, he had come to Toronto to inspect their inventory and had been provided with full inventory data including part numbers and the rest but in the end decided to make no bid.
SECO/Reomie
In 1987, Elijah Thomas Hodge III was President of Southeastern Equipment Company Inc. (SECO) which was in the business of buying and selling military spare parts. In 1986-87, SECO had sales in excess of $15 million and a net worth of some $6 million. It had always been profitable and it regarded the market for military parts as good. He was aware of Levy-Russell as a supplier, a customer and an active competitor in Canada, the United States and internationally. His interest was in its assets not in its name or goodwill. He was acquainted with Mr. Wichart, the President of a Dutch company, Reomie, which was also in the military supply business. He spoke to Wichart and the two men decided to pursue acquisition of Levy together. Acting on their joint behalf, Wichart flew to Canada and inspected the Levy operation. He reported to Hodge that he was not allowed to look at all of the data that he would have wanted to see because SECO was a competitor. Hodge spoke to Davidson by telephone, told him he intended to make an offer and discussed what parts of the business were available. He then faxed a letter of May 14th to Davidson confirming his interest in the purchase of certain assets:
We would like to submit our proposal for the purchase of inventories, fixed assets (less land and building) and all existing orders in process and unfilled at a price between $2 million and S3 million dollars.
This proposal would be subject to a more detailed inspection of the inventory items and a thorough review of all unfilled orders. Should you be interested in this arrangement, Mr. Wichart and/or myself would be more than happy to meet with you on Monday or Tuesday of next week to consummate this agreement.
Later the same day he again faxed Davidson to confirm that the prices discussed in his letter were in Canadian dollars.
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He testified that there had not been enough data in the information package to enable him to make a bid and Wichart had not obtained sufficient data on his trip. He needed a view of the stock itself to study its condition and how and where it was stored, a list of part numbers and quantities and an outline of the orders in progress including value, order date, delivery date and special terms. He said the identity of the customers was not necessary in the first instance, although it would be necessary at a later date. He was willing to sign a confidentiality agreement. Since none of this detail was available, the offer had to be in the non-specific terms I have quoted. On May 20th, he called to see if his offer had been accepted and was told there were other offers for higher amounts but that Davidson was still reviewing the bids. Hodge offered to come to Toronto with Wichart if that would assist. On Friday, May 22nd, he called Davidson from Richmond, Virginia where he was visiting his family. Davidson said SECO’s bid was not high enough and unless SECO was willing to increase the bid to around $6 million, he would be wasting his time. Hodge replied that based on the data he had, no such price could be justified but he would be pleased to come to Toronto to talk. Hodge called Wichart and the two men agreed not to proceed further. Since he did not have all of the information necessary, Hodge could not say to what amount he might have been willing to increase his offer.
He testified that Davidson had told him that there would be 12 months following closing in which to remove the inventory from the Levy-Russell premises. He did not recall being asked to consider putting up a bond to guarantee that removal. He was told that the purchasers received 18 months for removal. He said that there was a big difference between 12 and 18 months because with the latter you could be guaranteed two summer seasons for moving the goods, plus a longer period in which to sell rather than move goods. He was shown a note made by Davidson of a conversation on May 20th with Wichart in which the latter had said the SECO/Reomie combination would not be prepared to go over $3 million. Hodge had no recollection of Wichart discussing this conversation with him. He was also shown a similar note that he had expressed interest at $2-$2.5 million. He responded that he had put a $3 million offer in writing and if there had been simply a $500,000 difference between the parties he would have come to Toronto. He denied refusing to come to Toronto
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because he was unwilling to pay $3.5 million. He did not recall Wichart saying anything to him about any proposal at $3.5 million. He further denied flatly that Davidson had told him on the 20th that $3.5 million would be an interesting price. The price that Davidson had mentioned to him was $6 million on the 22nd, which he regarded as a ludicrous suggestion on the data available to him.
Davidson recalled speaking to Hodge on May 14th to clarify whether the currency was Canadian or United States dollars. On the 20th he said he called Wichart and suggested to him $3.5 million for the inventory and the machinery with 12 months to vacate and a bond to ensure vacant possession after 12 months. Wichart said they would not go over $3 million. In the afternoon, Davidson reached Hodge and repeated the proposal. Hodge responded his interest was in the range of $2-2.5 million and he would not come to Toronto to do more investigation since he was not prepared to pay $3.5 million. Davidson denied mentioning $6 million to Hodge as a purchase price. Davidson’s notes of these conversations are in evidence and support his version of events. Equally the analysis which he did comparing the Shieldings’ position and the Reomie position, which is also in evidence, also supports his version of the offers that were discussed with Wichart and Hodge. In cross-examination, Davidson again denied that he had put a $6 million figure to Hodge. He did not have an asking price but a price he was prepared to recommend to the bank. There was some contradiction between this evidence at trial and his evidence on discovery when he said that he did not put the $3.5 million forward but rather may have suggested a range of prices but not a price that would be an acceptable offer. He also said on discovery that he “didn’t believe” that he had said to Hodge that SECO would need to be prepared to go to $6 million to make it worthwhile to come to Toronto. In his testimony at trial he said that on reflection he felt that he had put the $3.5 million to Wichart. He did not however change his evidence as to there never having been a $6 million figure put to Wichart.
Levy testified that he was discussing a joint venture with Wichart. Gumming said he thought he had told Levy on the 20th that they were discussing a figure of $3.5 million with Reomie, certainly his note shows Reomie was discussed.
All of this was taking place around the time that Davidson was discovering that Shieldings’ price for the business would be in the $3.35 million range. He conceded that once
it became clear that Shieldings was in the range between $3 and $4 million, SECO was a prospect worth pursuing.
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Foreht’s notes of his encounters with Wichart note him as a potential $3 million offer. Foreht also notes that Wichart “doesn’t sound serious” and “Davidson is calling Wichart a bargain hunter”. This last seems an odd comment about a potential $3 million offer considering that Shieldings’ offer was then in the same range. Foreht also noted that he had told Wichart that Shieldings’ interest was not dead; it had offered $8 million in February.
Krestell met with Wichart and testified that he recalled Wichart saying that the inventory he had seen was not worth more than $2 or $3 million. Bradshaw also met with Wichart and recalled that Wichart estimated the inventory at about 10,000 tons and Bradshaw thought that was way too low and believed that he told Wichart so. Bradshaw didn’t think he told Davidson that Reomie would be a “low ball” bidder but he thinks he told Foreht and Krestell that. Foreht’s notes show that on the 15th he told Wichart he could not discuss the matter with Levy. Bradshaw expressed the opinion that Levy could discuss the sale of the business with potential purchasers but not on the site. He was however not surprised that Foreht had told Wichart not to talk to Levy because Bradshaw regarded that advice as consistent with the advice of Kramer, the U.S. lawyer.
It was put to Davidson that SECO had been turned off by the combination of not being given the detail about the inventory, the receiver’s protective attitude towards the inventory data, Bradshaw and Foreht’s conversations with Wichart on the 14th and 15th and Davidson’s reference to $6 million. Davidson conceded that if all those things had happened, it would have been a turn off but denied that he had ever mentioned $6 million and denied that there was a protective policy on inventory data, although he conceded Wichart may have got that impression from one of the directors.
I have already noted that the receiver’s refusal of the computer tape was a reasonable exercise of business judgment. It amounted to insisting that prospective purchasers make an on-site study of inventory as Shieldings had done. I am not persuaded that there was any broad policy of refusing data adopted by the receiver. According to Hodge’s evidence, Wichart obtained the impression that detailed inventory data would not be made available. He did not, apparently, ask for a tape, just for the data. This was hearsay and was admitted only
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to show the state of belief of Hodge: It was not clear who gave Wichart that impression. Hodge’s offer was conditional upon further inventory and order information and there is no evidence to suggest that Davidson refused him this opportunity in their telephone contacts. I am satisfied that Davidson did not give Wichart this impression. It is highly probable that Wichart obtained it from one of the directors when he met with them on his visit to Weston Road. Moed got the same mis-information from Bradshaw. I accept that Hodge had that impression; but he did not get it from Davidson, nor did Wichart. The only reasonable inference, leaving the hearsay out altogether, is that Hodge got it from the directors via Wichart.
As to the reference to $6 million, Mr. Hodge was attempting to help the court but I have concluded that he was mistaken. His recollections do not square with the contemporaneous notes of their conversations nor with Cumming’s evidence about his discussion with Levy on the 20th. I find that Davidson did not suggest that an offer under $6 million would be a waste of time. His proposal was $3.5 million as he and Cumming had strategized. Someone may have mentioned $6 million to Hodge but it was not Davidson.
Godsall revises his values: perceived degradation?
By letter of May 14th, the receiver responded to Shieldings’ offer of April 10. The bank offered a form of indemnity to Shieldings against any damages that might be awarded to Kleinstein in his action to enforce the agreement to purchase the Weston lands, and to indemnify Shieldings for the costs of defence. The receiver asked Shieldings to allocate the purchase price among the various categories of assets. All operations of Levy-Russell from April 2, 1987 would accrue to the Shieldings account; the receiver’s fees and disbursements, other than expenses incurred to operate the business, would however be paid by the bank. The letter also expressed the view that $19 million did not represent the fair value of the assets which the receiver asserted was “significantly higher”.
On May 20th, Godsall met with the receiver to discuss the allocation of the purchase price. Godsall said the business was worth more if he also controlled the land than if someone else controlled the land. This position was taken, he testified, partly because Shieldings actually wanted the land but also because the owner of the land would control the degree of pressure to be exerted on the business to remove itself from the Weston site. He
told the receiver that the $19 million was broken out at $14.5 million for the Weston lands and
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$4.5 million for the business. If the business was purchased alone the price would be $3.75 million inclusive of the Bradford lands. Since the latter were valued at $400,000, the price for the actual business was $3.35 million plus payables. Godsall was cross-examined closely on how he reached this figure which is less than half of the amount offered shortly before the receivership. His response was that the reduction was based on perceived degradation of value. His $6.7 million floor price plus his willingness to increase by an additional $200,000 to avoid receivership was the situation in March. He was now working in May and his subjective feeling was that the business had deteriorated. He said that Levy-Russell’s basic problem was lack of reliable data and accordingly he had to rely on his own subjective judgment as to the values and how much they had been damaged in the interval since his earlier offer.
On further cross-examination, he conceded that the only degrading asset was the yard inventory. Was there in fact a reduction in the value of the yard inventory that could account for this drop? Davidson learned from the directors that 5% of the sales came from the yard. In the accounts for the year ending 30 September 1987, Levy-Russell’s cost of product sold is
$3.7 million of which sum 5% is $185,000 or about $30,000 per month for the six months of actual operation. While they are only a rough guide these figures cannot begin to support Godsall’s testimony. I found this evidence of perceived degradation of value internally inconsistent and unpersuasive. It represents a huge drop in a brief time without any factor internal to the business itself to justify it. Godsall’s effort to explain it by suggesting that the company was selling its inventory without replacing it was shown not to be true. He then resorted to suggesting that the inventory was being “high-graded”. He offered, however, no evidence in support of that alleged perception.
Not only was this evidence internally inconsistent but it was also inconsistent with Godsall’s letter of May 22, 1987 to Mr. S.D.N. Belcher, one of his directors. This letter was written for the purpose of persuading Belcher to give his approval to the proposal and accordingly may be regarded as putting the best foot forward. However, Godsall denied any suggestion that he was not being straightforward and reflecting his real views in this correspondence and I accept that denial. The letter is sufficiently important to justify reproduction in full:
Dear Dennis,
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Fifteen months ago we thought we saw a significant business opportunity based on the Levy assets. Essentially that business is niche manufacturing and remanufacturing of hi-tech powertrain components. The existing business that is of interest to us centres on two models of automatic transmissions formerly manufactured by the Detroit-Diesel Allison Division of GM. Last August, after protracted discussions, we made a contingent offer to Levy-Russell to purchase all of the inventory and tooling assets together with all of the intellectual property of Levy-Russell for $8.5 million. We felt that could have been a good purchase.
This week we hope to be able to purchase all of the assets of Levy-Russell, excluding land at 1400 Weston Road, for $3.75 million. In addition to those assets for which we made a contingent offer last August, these assets will now include the following:
1. Cash $820,000
Land at Bradford, probably presold at Receivables $1,700,000 $400,000
less conservative reserve $200,000 Net $1,500,000
Net profit in presold Danish govt, contract $300,000
If we are able to conclude the transaction on the basis of yesterday’s discussions with Peat Marwick and the Canadian Imperial Bank of Commerce, we will acquire the assets which we valued at $8.5 million last August for approximately one-tenth of that figure. The machine tools, which we valued at $800,000 one year ago, we still value at
$800,000. We intend, therefore, to acquire the inventory and intellectual property which was on the books of Levy-Russell for approximately $15 million and which we valued nine months ago at approximately $7.5 million, for nothing.
We propose to agree to make the purchase this week and take over operations of the business on Monday of next week with closing scheduled for June 30. On that schedule, the acquisition would be self-financing to the extent of $1,750,000 (further disposals, cash and receivable financing), and we would initially add $2 million of capital. A minimum of $1 million would be recaptured from the net of bulk disposals (which have been well researched and planned for the past nine months) during the first 120 days after closing. We will live rent free on the property for a period of 18 months. Prior to departing the site, we will have recovered all of the remaining $1 million of our initial investment plus interest and a financing fee of $250,000.00.
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During the first fiscal year of the business, which will essentially be one of disposals and reorientation of the entire business to our core strategy, the business will earn a minimum net cash flow of $2 million. Obviously, this anomaly is due to the fact that all of the sales which we make under the head of “dispositions” or “disposals” will have zero cost of goods. In addition, all of the sales made from what we characterize as the core business will have artificially high margins. We would expect to value the tools and equipment acquired in this transaction at approximately $400,000, which means if we allocate the balance of our purchase price to work in process and the good inventory presently located in the plant, that inventory is then valued at approximately one-third of its present book value.
Through acquisition and diversification, we intend to make this a very successful business. The key to the quality of the transaction at its inception and the high probability of large success is people. While there has been some degradation of business and inventory quality (really very little), we have not lost any of the key employees. The reason for employee loyalty is that an employee-owned company will own 70% of the business if our investment with interest plus fee is returned prior to the expiration of 18 months. The basic plan is that the employee-company will have “carried interest” of 20% and that we will recover our last $1 million of investment via the company’s redemption to treasury of enough of the shares initially issued to Shieldings to reduce our final holdings to 30% of the outstanding shares. Obviously, we will have a strong, even-handed shareholder’s agreement from inception.
We seek your approval to proceed with this transaction. It is a perfect example of a business situation where the universally perceived risk is extremely high, and through our own knowledge and construction, the risk to us is extremely low. We are hopeful of being able to consummate the transaction on the terms described in this letter for
$3,750,000. There is a faction within the Bank and Peat Marwick who hold a strong preference for liquidation of the business. They have made the case that there is more to be gained in absolute liquidation than there is in a sale of the business. We hope and expect that it will not be necessary, however, we would certainly be prepared to raise our offer by $500,000 to preserve the transaction.
We should note, in addition, that there is a surplus of more than $2,000,000 in the employee pension fund, and should the receiver push us up in price, we are confident
they would terminate any consideration of trying to “tap off” the surplus in the employee pension fund. The employees would wish to invest most of that surplus in the company.
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Having laboured through a rather elephantine gestation on this transaction, we would like to act promptly.
Sincerely,
T.G. Godsall
Of particular interest, in the context of his explanation for the reduction in price as being based on perceived degradation, is this passage: “While there has been some degradation of business and inventory quality (really very little)…”. Godsall said this referred only to the transmission business where there had been no degradation of inventory, but in my view this was an afterthought invented in the witness box to explain away a difficulty. No rational and supported justification for the drop in price was put forward; only Godsall’s alleged subjective view. In explaining his break-out of the $19 million offer between the Weston lands ($14 million) and the business ($5 million), Godsall justified the drop from $6.7 million to $5 million because of assuming the receivables and payables and because of the possible need to compromise on moving to satisfy their land developer partners. The accounts as at March 27, 1987 as prepared by Krestell showed a significant excess of receivables over payables. Even allowing for some bad debts this item would be very close to a wash. It cannot account for any part of the drop. The cost of vacating the land was estimated at $500,000 to $1.5 million. This cost was not a new one; from the first offer it had been understood that the business would move to let the development proceed. No “compromise” – of a wholly unexplained nature – with the land partners would likely cost anything like an additional $1.7 million. I cannot accept this evidence. The reasons for dropping the price for the business must be found elsewhere.
In summary, I do not accept the evidence that the substantial drop in price was due to a perceived drop in the inherent value of the company. Rather, I think it quite plain that it was due to a perceived drop in the minimum cost that the company could be acquired for. Now dealing with a receiver and aware, through his contacts with the Levy directors, of the level of the competition, Godsall calculated his price with reference to the price he had to beat. Foreht sized Wichart up as about a $3 million offer and in my view it is not a coincidence (as Godsall claimed) that the price offered was just above the competition.
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As the recital of events to date has shown, the Levy directors systematically kept Godsall informed of all important developments inside the company from August 1986 onwards. It would strain credulity to think that this process ceased with the receivership, now that the acquisition of Levy-Russell was near at hand. Foreht conceded in cross-examination that he had told Godsall in March that his view of the value of the inventory was $7 million – a figure interestingly close to the $7.7 million used in the August 31, 1987 Special Purpose Statement of Tecmotiv prepared almost a year later. Foreht had two encounters with Wichart and formed the view recorded in his May 14th memo – that there was a “potential $3 million offer”. He at first said he had no input into Shieldings’ $3.35 million price but when confronted with his discovery statement that: “I suspect I had something to do with the numbers… I would hope I did; I do not recall”, he retreated to saying he was “not sure” if he had something to do with the offer amount. He denied passing the $3 million Wichart number to Godsall: he “had no recollection”, he did not think it possible. I do not accept this evidence. I am satisfied he did have input into Shieldings’ price. He was involved extensively with Godsall and Davidson on the 19th and 20th of May, including attending on May 20th with Godsall, Davidson, Cumming and Kalmer at the meeting when the bank pressed Godsall to put a formal separate price on the business. Given these facts, his discovery evidence and his history of informing Godsall, it is inconceivable that Foreht did not pass on to Godsall his knowledge of Wichart’s intentions and I find that he did.
Bradshaw said he regarded SECO and Reomie as the chief serious buyers; that he expected them to be “low-ball bidders” and that he probably told Foreht and Krestell his opinion. Godsall said he was not sure he learned it from Bradshaw, but he did expect SECO/Reomie to be low bidders. No explanation was offered as to how he could have known that except from the Levy directors.
Negotiating the deals
On May 20th, the same day that he spoke to Wichart and Hodge, Davidson met with Godsall, Foreht and Kalmer of the C.I.B.C. Davidson testified that Godsall at this point still wanted a land deal but needed a partner and the meeting discussed whether Tridel or Minto would be available. Shieldings wanted a guarantee that the Weston property would be available for at least 18 months and some mechanism with which to recover unexpected costs of removal of the inventory. The bank would not accept that liability. Davidson did a
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comparison of Shieldings’ offer for the business with the proposals he had been discussing with Wichart and Hodge, using Hodge’s numbers. He concluded Shieldings was a better deal than anything that was in sight with Reomie. He also had Weir do an appraisal of the Bradford lands which showed an appraised value in the area of $500,000.
On May 21st, Metrontario made its offer of $22.5 million for the Weston lands only. Davidson noted that this was the “least conditional” offer in the receiver’s hands. The conditions were a soil test, the resolution of the Kleinstein litigation and vacant possession in 18 months. The soil test condition was designed to establish the water table and whether or not there was any contamination from the Levy-Russell operations.
Thus, by late May, the receiver had in its possession a number of offers for the land, the best of which was considered to be Metrontario’s; plus an offer from Shieldings for the business with no other serious offers. The Reomie/SECO negotiations were valued by Davidson at $3-$3.5 million whereas he valued the Shieldings offer at $4 million. Both figures included the Bradford lands at a valuation of $400,000.
The Weston lands situation was complicated by the Kleinstein litigation and also by a series of offers from solicitors representing Kleinstein for purchase of the land from the receiver. Another such offer arrived on May 22nd for $21 million, the purchaser to get vacant possession on closing approximately a year later.
On May 11th, Smith J. of the Supreme Court of Ontario, rejected Kleinstein’s motion for an injunction enjoining the bank from exercising its rights under its debenture. Smith J. pointed out that Kleinstein had been aware of the debenture and had attempted to secure a release of the bank’s interest prior to expending funds on the pre-development applications. Kleinstein had obtained no assurances and knew when he spent the money he would not receive any assurances. He held there was no prima facie case of unfairness or breach of a fiduciary relationship and that if the case had any merit it was one for damages. He refused both the injunction and a certificate of pending litigation.
On May 25th, Kleinstein’s motion for leave to appeal from Smith J.’s decision was dismissed. On the same day, negotiations continued between Shieldings and the receiver. The bank and the receiver wanted to ensure that the structure of the deal brought all assets under the umbrella of the security and to remove the pension surplus in the Levy Industries
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pension plan from the deal. On May 28th, Davidson met with a possible purchaser of the Bradford lands who was prepared to offer between $525,000 and $550,000. This was slightly above the appraisal value obtained by the bank and well above the $400,000 at which these lands were valued in the Shieldings deal. Accordingly, Davidson told Shieldings that the receiver wanted to take the Bradford lands out of the deal. Through the period of several days at the end of May and up until June 3rd, the parties continued to negotiate the finer points of the possible deal.
Mr. Levy intervenes – June 1st
On June 1, Levy wrote to Harrison at the C.I.B.C. stating that the Weston Road lands had a current value of $22 to $25 million and urging that the receiver maximize the return from these lands so as to return to Levy-Russell all of the business assets. He then asked the receiver to respond to the following questions:
Current estimate of value of the Weston Road lands which are now very close to final rezoning.
An accounting setting out the current liability to the C.I.B.C. and the components which have increased the liability from the amount of $19 million as of the date of the Receivership to date.
Whether the receiver considers it in the best interest of all concerned that he continue to operate the business knowing that it is generating losses with no possibility of recouping such losses from the sale “of the business as a going concern”. It is to be expected that the receiver is acting prudently and responsibly and is not dissipating the company’s assets without regard to the interests of the other creditors and the shareholders.
Whether the Receiver will make every effort to first realize on the Weston Road lands, which we believe will cover the total liability to the C.I.B.C. – thus returning the remaining assets to the company.
This letter was written by Levy following some conversations with Cumming. On May 22nd, Cumming told Levy there was an agreement in principle for the sale of the business assets. He did not tell him the price. On May 25th when Levy called Cumming about the possibility of making a bid himself, Cumming told him that “he would likely be too late with an
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offer of $3.5 million”. On the morning of June 1st, Cumming notes a telephone conversation at 9:50 a.m. with Levy in which he told Levy that nothing had been “inked”, meaning that there was no written deal for the sale of the business as at that time. Later that day Godsall called Cumming to say the business deal was to go ahead.
The letter of June 1st was received by Harrison on that day. He sent it to Dixon of Special Loans and at 5:10 p.m. on June 1st, Dixon called Cumming to discuss it. Davidson said he was aware of Levy’s position as set out in the letter before the Shieldings sale was completed but could not recall any specific discussion about it. Likewise Cumming was not sure if the letter’s contents were discussed with him. He had, he said, no understanding at the time that Levy wanted the land sold but not the business. Nevertheless, Cumming’s notes show that on at least one occasion – the telephone call with Dixon -the Levy letter to Harrison was discussed with him. In his cross-examination, Cumming was confused about what he did and did not know about this letter. When shown Kalmer’s response of June 12th, he said he had never seen it before. It does seem therefore that, apart from the one call, he was out of the loop when this letter was being dealt with.
Hayeems testified that he assisted Levy to prepare the letter of June 1st to the bank. He had learned from Cohen (the former comptroller of Seaway) that the receiver was about to sell the business assets. From discussions with a number of real estate agents, he was satisfied that the Weston lands were worth in excess of $20 million and would therefore largely satisfy the bank.
Levy’s letter was sent to the bank and not to the receiver and this may explain the evidence of Davidson and Cumming that they had very little knowledge of how it was handled. Evidently, it was sent by the bank to its solicitors for comment. Mr. Kalmer’s reply on June 12th was a pro forma piece of work and did not address any of the issues that Levy raised. Of course by that time the matter had become academic. The receiver made its deals with Shieldings and Metrontario prior to the bank responding to Levy’s letter. Kalmer’s reply expresses his understanding that Cumming had kept Levy informed as to these sales. Levy testified that he was never so informed although Cumming’s notes show telephone discussions with Levy on May 14, 20, 21, 22 (three calls) 25, 27, June 1, 4 and 8 in the month preceding Kalmer’s letter. Cumming said he had no recollection of having had any input into the contents of Kalmer’s reply.
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The bank’s failure to deal promptly with Levy’s letter; the receiver’s failure to involve him in the decision making of the first few days of June, and the signing of both transactions before responding to Levy were characterized by counsel for the plaintiffs as unreasonable, improper, arrogant and a flagrant disregard of their duty to their debtor. These were decisions directly affecting the size of the surplus which would be generated and therefore impacted upon the companies and their shareholders. This matter will be analyzed later in these reasons. For the moment I record that the plaintiff’s position is that the lands alone would have sufficed to pay or very nearly pay the whole of the debt, leaving the business assets intact or at worst requiring some liquidation perhaps of the Bradford lands to finish paying the bank.
The MICC offer – too late?
On June 5th the receiver accepted offers from Metrontario for the land and from Shieldings for the business.
The plaintiffs argue that an offer from MICC at $26.75 million for all assets offered a total consideration in excess of the combined total of the separate sales of the business to Shieldings – $3.35 million – and of the land to Metrontario – $22.5 million – i.e. $25.85 million. An additional $900,000 would thus be gained by accepting the MICC offer. In addition an earlier land closing date would provide savings of another $350,000 in interest for a total differential between the two deals of $1.25 million, increasing the surplus to the benefit of the company and its unsecured creditors.
This offer was not MICC’s first offer. As at June 4th, their offer was $25 million subject to conditions including a vendor take back (VTB) mortgage.
On the morning of June 4, 1987, Davidson convened a meeting attended by Cumming, Kalmer, Kee and McElchern to review the land offers and come to a decision. The four front-runners included Metrontario at $22.5 million for the Weston lands alone and MICC at
$25 million for all assets with the VTB condition. Davidson’s analysis favoured Metrontario. During the meeting Cumming called the contenders for last minute discussions, including speaking to Don Cameron of MICC. Evidently he conveyed the sense of the meeting because later that day, Cameron called him back and, either then or early on June 5th, MICC delivered a further offer for all Levy-Russell assets at $26.75 million, again with a VTB mortgage.
According to Cumming’s evidence, Davidson felt the conditions, particularly the mortgage take back, reduced the present value and Metrontario was still better when combined with Shieldings.
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Cumming thought that the decision to sell to Metrontario was made and communicated to Metrontario on June 4th. This is consistent with the evidence that by 5:10 p.m. on June 4th Cameron of MICC had heard via Dixon that the receiver had a firm deal and called Cumming to check. On the other hand, Davidson’s diary shows he was still reviewing offers with an offeror at 9:00 a.m. on June 5th, so it is likely the actual decision was made after that time.
On the morning of June 5th, the first call recorded by Cumming is at 11:45 a.m. with Shoel Silver (Metrontario) and the notation is “draft coming”. It seems virtually certain that this was a call by Cumming to Silver to alert him that he would shortly be receiving on his fax the draft letter of intent prepared by Peat accepting the Metrontario offer. At 12:10 p.m. Silver faxed Cumming and Davidson indicating that he had received that letter and suggesting a couple of changes.
At 11:50, five minutes after the Shoel Silver phone call, Cumming spoke to Mark Dixon who confirmed that he had told MICC that the deal was gone. At this point, for the first time, Cumming learned, as he noted: “MICC apparently withdrew the VTB”.
On this evidence, I find that the decision to sell to Metrontario had been taken and communicated to it at the latest by 11:45 a.m. on June 5th (although probably much earlier that morning) well before Cumming learned that MICC had “apparently” withdrawn the VTB mortgage condition.
Based on these findings of fact, I cannot accept the plaintiffs’ argument that the receiver’s failure to accept the $26.75 million offer evidences an arrogant and flagrant disregard of the rights of the Levy group. MICC put its best foot forward too late and lost out on the deal. The receivers acted reasonably in the way in which they reviewed the offers which they had before them. Cumming spoke to Cameron of MICC in the course of the meeting on the morning of June 4th. There is no evidence that Cameron told him during that call that a larger offer was coming or that the vendor take back mortgage issue was negotiable. It seems to me unlikely that Cumming and Davidson, who were not under any pressure to decide the issue on that particular day, would have proceeded in the face of such
information if it had been mentioned. The evidence shows that MICC had not communicated its readiness to drop the mortgage condition to the receiver prior to the acceptance of the Metrontario offer.
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The deals are made – June 5th
On the afternoon of June 5th, Davidson met with Godsall, Foreht and solicitor Dawson to sign the agreement of purchase and sale. The last items of negotiation were the withdrawal of the pension surplus from the deal and the rental of the Weston Road lands. The assets were to be conveyed to Tecmotiv Inc.
The letter of intent as to the Weston lands was executed by Metrontario on June 5th. The purchase price was $22.5 million with a closing of October 27th. Metrontario had three months to test soil conditions to ensure they were suitable for development and the bank agreed to refund the purchase price and pay half of the costs of litigation should Kleinstein succeed in recovering the property. Finally, the Tecmotiv lease was accepted by Metrontario.
The sale of the business assets of Levy-Russell to Tecmotiv Inc. closed on June 10th. Foreht became Chairman of Tecmotiv, Godsall Vice-Chairman, Bradshaw President, Aaron Bleiwas Vice-President and Krestell Secretary-Treasurer.
The bank brushes Levy off
The bank’s response to Levy’s letter of June 1st came on June 12th. It did not answer any of Levy’s questions. It asserted that Cumming had kept Levy informed of the status of the sale of the various assets. A few days later a further letter was sent by Levy to Davidson asking for an accounting of the proceeds of the receivership and for confirmation that the excess funds would be held in trust for Levy-Russell Limited and not paid to that company until there had been a new appointment of directors and officers in place of the former directors. As a result of this letter, a meeting was arranged for July 2nd to review the receivership with Levy.
On June 30th, Peat reported to the bank on the receivership of Levy-Russell and Levy Industries, the sale of the business to Tecmotiv, the lease to Tecmotiv and the sale of the Weston Road property. It noted that Tecmotiv had occupancy for 18 months in order to permit “the orderly removal of approximately 35,000 tons of inventory and scrap…” It also reported
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that the Kleinstein group was continuing to pursue legal remedies. Correspondence had been received from that group waiving all conditions in the agreement to purchase 1400 Weston Road and proposing the closing of that original agreement on June 20th. For this reason Kleinstein’s claim was listed as a contingent liability of unknown amount in the statement of financial affairs of the receivership. Other contingent liabilities included the possible fines in connection with the charges of conferring benefits on the Canadian government inspectors and an allowance of $643,000 for a tax dispute with Revenue Canada. The receiver noted that in order to protect the interests of the company in a way that a receiver might not be able to do, consideration was being given to placing the company into bankruptcy so that a trustee would be in place to act in connection with these matters. The report showed a dramatic change in the bank’s security position. In their April 29th report the receivers had indicated a shortfall of $3.9 million. Primarily because of the $8.5 million increase in the Weston Road valuation, there was now an indicated surplus of approximately $4.5 million. The full reconciliation is as follows:
Reconciliation of Surplus/Shortfall Estimates:
Indicated surplus (shortfall) per April 29, 1987 report | $ (3,900) | ||
Plus: Increase in Weston Road valuation | 8,500 | ||
Increase in Bradford land valuation | 250 | ||
Inclusion of Levy Industries potential pension surplus | 800 | ||
Increase in realizations on business assets from going-concern sale | 1,176 | ||
Cash in Receiver’s bank account | 114 | 10,840 | |
Less: Guarantee of shareholder loan not included in April 29 report | 1,600 | ||
Accrued interest and exchange adjustment | 562 | ||
Costs of realization and Receiver’s commitments | 215 | (2,378) | |
Indicated surplus (shortfall) per June 30, 1987 report | 4,562 | ||
Say | $4,500 |
This statement is as of June 19th. It is not unfair to observe that virtually all of the items would have been known to the receiver and the bank at the time that Levy’s letter of June 1st
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was received. These figures demonstrate that Levy’s request was by no means outlandish and deserved a good deal more than the minimal attention it received. The impression that the bank’s response was a simple “brush-off”, which is apparent from the face of the letter, is strengthened by the evidence of Cumming and Davidson that neither of them could recall being asked for any input into the bank’s response.
On July 2, 1987, Levy and Hayeems met with Cumming and Davidson to discuss the receivership up to that date. Hayeems made a memorandum which was accepted by both Cumming and Davidson as generally accurate. Davidson made some brief handwritten notes. They went over the Shieldings sale, the Weston Road sale and the net results of the receivership assuming the Weston Road sale closed. It appeared there would be a surplus of
$3.25 million plus the Bradford lands. Cumming said that Peat believed itself to have a fiduciary duty to protect the rights of the remaining creditors whose claims would be approximately $1.5 million plus the unspecified damages of Kleinstein and fines from the criminal charges. It was agreed the receiver would take no action concerning the Bradford lands or the possible pension plan surplus without consulting Hayeems and Levy.
Hayeems’ notes show he raised the question of why Peat did not approach Levy-Russell to redeem $3.35 million of the loan rather than sell the business assets for this very low amount. Gumming testified he did not think this question was raised. Davidson said that he had no specific recollection of the meeting but this item, if raised, was not in a confrontational fashion. He was quite firm that no criticism of Peat’s actions as receiver had been raised at that meeting. However, his own notes show that he had referred to the liquidation values as at April 2nd in the course of the meeting. It was put to him that these numbers were recorded because they were used to justify the sale at $3.35 million and he conceded that that may have been discussed but denied any expressions of anger at that time. In my view, the presence of these figures in Davidson’s notes does indeed indicate that there likely was a discussion at the meeting about the relationship of the sale price to liquidation values. This tends to support Hayeems’ evidence that the low price had been the subject of discussion. I accept Hayeems’ evidence that he raised at the meeting the point that he did not understand the sale of the business when the Weston lands brought in so much and that he further did not understand why Peat did not approach Levy to redeem the business before concluding a sale at so low a price. Cumming’s reply was that Levy had the
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opportunity to bid like anyone else which indirectly confirms that no opportunity to redeem was specifically given. Further evidence that Hayeems and Levy were critical of the conduct of the receiver is found in Hayeems’ list of items to be further considered, which includes possible action against the bank/receiver for acting “imprudently”.
Following this meeting, Levy and Hayeems decided that Levy-Russell should make a holding proposal to its creditors under the Bankruptcy Act so as to put a trustee in place to deal with the outstanding matters. Levy-Russell made a proposal on July 3rd contemplating payment in full of all creditors by October 31, 1987 and the appointment of Yale, Kline, Geary Limited as Trustee. The statement of affairs showed a surplus of $2.25 million.
The Kleinstein strategy – calling his bluff
On July 15th Kleinstein’s company applied to the court for a judgment declaring that it was entitled to redeem the Weston lands on payment of the amount owing to the bank.
As a result of this, Metrontario and the receivers met on July 21, 1987. Metrontario put forward a proposal which Davidson recorded as follows:
(b) Metro will consent to giving Kleinstein the 35 day notice period for redemption (re take the risk of calling his bluff).
Later in the memo he records:
I raised the issue of the impact the redemption would have on unsecured creditors (re lost surplus – improvident realizations if no right to redeem existed). McElcheran said the Bank could sell its security and a redemption opportunity would be given to the Trustee under the holding proposal.
Davidson subsequently spoke to Kalmer who consented to the proposal for the bank.
Someone then prepared a document headed “Levy-Russell Flow Chart” which set out a series of steps to resolve the issue created by the Kleinstein group’s application in line with the tactical decision taken at the meeting on July 21st. The first step was to amend the Metrontario agreement to provide for giving notice to all parties entitled to redeem and terminating the agreement if redemption occurred. Step three was recorded as follows:
Report to Bank re discussion of July 21st meeting and position of Metro and its alternative courses of action.
Elements:
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Metro insists on notice being sent “to call Kleinstein’s bluff” and resolve any uncertainty regarding new litigation.
No effective remedy (aside from deposit of S250,000) if Metro won’t close.
Kleinstein likely won’t redeem.
No one in a position to complain:
no liability for accepting redemption,
no one with sufficient interest to incur costs of litigation,
no one could prove damages,
no practical alternative.
Although it was clear that there was now a high probability of a substantial surplus in the receivership, no one brought Levy and Hayeems into these discussions even though the issue of the impact of the redemption on unsecured creditors and the possibility of the loss of the surplus was raised by Davidson on the 21st. The only involvement of Hayeems and Levy was to be through receipt of a notice under the Mortgages Act under which they would have a power of redemption. Even that notice would go to the Trustee.
This failure to include Hayeems and Levy in the discussions about the strategy for dealing with Kleinstein’s claim is a matter of some astonishment. The strategy adopted exposed the lands to Kleinstein at a price of $19.7 million rather than the Metrontario $22.5 million and the difference in price was the company’s money.
When forwarding the notice of exercise of power of sale to the solicitors for the Kleinstein group, Mr. McElcheran, solicitor for the receiver, wrote as follows:
…it has always been our position that Canadian Imperial Bank of Commerce and Peat Marwick Limited were under no obligation to complete any transaction entered between 1400 Weston Road Limited and Levy-Russell Limited. Further, it has been our position throughout our dealings with you and your client that it would be improvident for
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Canadian Imperial Bank of Commerce and Peat Marwick Limited to complete that transaction considering the apparent value of the property at 1400 Weston Road… I did, however, advise you that one of the reasons why your client could not now redeem the property was that it had been sold by the Receiver to a third party. Further, I indicated my doubts that the agreement between your client and Levy-Russell Limited afforded your client a right to redeem in any event.
The letter goes on to state that it is at the request of the third party purchaser that the Kleinstein group and Levy-Russell were being given an opportunity to redeem the debenture.
In the light of these expressed concerns on the part of the bank and the receiver as to the improvidence of closing with Kleinstein and the doubtfulness of Kleinstein’s right to redeem, the plaintiffs argue that it is only reasonable that Hayeems and Levy should have been involved in the decision.
Robert E. Lowe, C.A., vice-chairman of Coopers & Lybrand and a licensed Trustee in Bankruptcy, was called as an expert by the bank and receiver. On this question of involving Levy in the development of the Kleinstein strategy he was asked:
Q. And if anticipated surplus is a million and a half to pay the unsecured creditors, would you have considered it reasonable to have involved Mr. Levy in discussions at that time as to how to deal with Kleinstein?
A. If I had a… I always try to involve what I call the “goree”, the person who is getting some of their money back, the person whose “ox is being gored”. If I was satisfied that creditors would likely be paid, then I would want to have discussions with the shareholders. I am not familiar with all of the circumstances subsequent to the sale to Shieldings, so I am speaking in theory instead of in specifics, but if you tell me that there was a surplus over and above the amount required to pay the creditors, then it (the receiver) should be dealing with the shareholders.
This evidence supports the view that professional practice calls for consultation with the person – in this case the company as represented by Levy and Hayeems – whose funds will be affected by the decision to be made. I will deal with whether any legal liability results from these facts later in these reasons after I have reviewed the law relating to receivers.
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In late August or early September, 1987, Hayeems and Levy met with Kleinstein and his solicitor. The notice of sale had been issued by that time. The intention was to negotiate a price at which Levy-Russell would transfer title to the Weston lands. It will be recalled that under the original arrangement with Kleinstein, Levy-Russell had a percentage interest in any future profit. Hayeems started with the $22.5 million amount of the Metrontario offer. Kleinstein countered with a claim for all of his expenses and development costs to date amounting to $1 million and a claim for future loss of profits. At the first meeting Hayeems’ response was that the price of $22.5 million stood. A few days later the group again discussed the price. Kleinstein was quite aggressive in asserting a $3-5 million claim. Levy offered to reduce the price from $22.5 million to $21 million on the basis that there would be no claims made by Kleinstein against Levy-Russell. In the end, a net price was agreed at
$20.5 million and Kleinstein would surrender all claims against Levy-Russell. On September 24, 1987, Levy-Russell and Kleinstein’s company delivered a cheque for $19.761 million to the bank in exchange for the discharge of all of the indebtedness of Levy-Russell and Levy Industries Ltd. The Levy-Russell trustee then conveyed the property to Kleinstein’s company for $20.5 million subject to Tecmotiv’s lease. Almost immediately that company in turn sold the property to a third party for $22.5 million. The plaintiffs say, therefore, that $2 million which otherwise would have come to Levy-Russell from the Metrontario deal by way of surplus in the receivership was diverted into Kleinstein’s pocket. I will analyze this allegation in the part of these reasons devoted to the claims against the receiver.
On October 20th, the Trustee of Levy-Russell Ltd. issued its third report. It included the following passage:
Subsequent to the Trustee’s second report to creditors, the debtor negotiated and closed an agreement of purchase and sale for S20.5 million covering the real estate at 1400 Weston Road.
The Trustee was advised that completion of a conditional offer to purchase for $22.5 million held by the Receiver could give rise to a material unsecured claim against the debtor and if successful, such claim would negate the price differential in that although the proceeds of realization may have been higher, the unsecured claims would also be greatly increased. Two legal opinions indicated a significant likelihood of success of the claimant’s action. The foregoing resulted in the acceptance of an offer to purchase 1400 Weston Road for $20.5 million that would not initiate such an action. If such a claim had
been initiated the debtor was informed that it would be for a minimum of $8,000,000.00 which would both reduce the recovery and delay the ultimate payout to creditors.
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In 1988, the Bradford lands were sold in two parcels for a total price of $3.7 million. Their removal from the sale by the receiver was thus a fortunate decision.
The story of Tecmotiv -I. share ownership
Some aspects of the operations of Tecmotiv after its purchase of the assets of Levy-Russell featured in the argument. I will accordingly carry the story on somewhat further. The sale to Tecmotiv closed on June 10, 1987 and the receiver was paid $3.35 million. Tecmotiv assumed the receiver’s liabilities ($815,000), certain bank letters of credit ($56,000) and an obligation to leave the Weston Road lands within 18 months. Shieldings guaranteed all these obligations. Tecmotiv could occupy 1400 Weston Road rent free for 18 months, but a punitive rent of $250,000 per month was payable if it did not leave the premises vacant on schedule. The cost of clearing the inventory from the premises was variously estimated at $.5 to $1.5 million. (The lower estimate was made by Tecmotiv to Arthur Anderson in January 1988.) Mr. Witkin’s report valued the rent-free period at $450,000.
Equity ownership of Tecmotiv
At about the time of closing, a shareholders agreement was made among the shareholders of Tecmotiv. Shieldings held 33% of the common shares plus voting preference shares which enabled it to take control if necessary. These shares were intended to be redeemed, repaying Shieldings its investment. Thus the ultimate value of the common shares depended upon the ability of Tecmotiv to generate cash to repay Shieldings. The remaining 67% of the common shares were held by former Levy-Russell managers as follows:
Foreht 51% – (voting)
Bradshaw 5% – (non-voting)
Krestell 3% – (non-voting)
Aaron Bleiwas 3% – (non-voting)
Arthur Hayden 2% – (non-voting)
Balderston 2% – (non-voting)
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Foreht thus emerged with 51% of the common shares of Tecmotiv; Bradshaw, Krestell and several others had single digit nonvoting percentages. Why? Foreht put no money in. He was not a key man in the actual operation of Levy-Russell’s business; Bradshaw, Bleiwas and others were the operating people, Krestell the financial person. Foreht said in cross-examination that he did not even think of himself as a key manager although Bradshaw certainly was. No plausible reason exists for such an allocation of shares on the basis of value to the business. Although Foreht said at one time that Shieldings wanted him for his knowledge of the military business, Godsall denied this saying that Foreht knew Shieldings did not want to be in the military business as such but in the CD 850 and M-41 remanufacture niche. Furthermore, the evidence shows that it was Bradshaw, not Foreht, who had the hands-on experience in the remanufacture and sale of military equipment. Foreht worked at the Seaway level and was primarily concerned, as he said, with trouble-shooting, acquisitions, divestments and financing the organization. It was not spite, but reality, at work when Hayeems told him he was not performing useful functions so far as Levy-Russell was concerned. Aside from Levy-Russell there was, after the sale of the Winnipeg business, nothing much left of the Seaway empire for him to manage. Why he should have received over half the common shares – all voting – when others received single digit percentages –non-voting – was never satisfactorily explained.
Foreht testified, as did Godsall, that from their earliest conversations in March 1986, Foreht knew that Shieldings only took minority positions in companies it financed, leaving management the larger share. In discovery evidence Foreht said he had negotiated the share allocations with Godsall and had represented the others in so doing. There is no evidence that any of the others ever engaged in discussions or negotiations as to their respective shares; they were simply informed in the spring of 1987, although some – Bradshaw, Krestell and Bleiwas at the least – knew from much earlier that they would have some equity interest. I infer from this that the question of who was to have the lion’s share was already settled. Foreht’s admitted ambition from the outset was to “own” the company. He said he dropped this aim but I find that he merely changed his tactics when Shielding offered him equity. From the perspective of June 1987, that is what happened; he became the owner, albeit subject to paying out Shieldings.
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Considering all of this, together with Foreht’s conduct from mid-1986 onwards in so single-mindedly pursuing the completion of the Shieldings deal that, as he admitted, he forgot his responsibilities to Levy-Russell; the sorry tale of deceit; and the many instances in which his acts or omissions were clearly grounded in self-interest, I find that Foreht and Godsall had a mutual understanding from mid-1986 that if Shieldings acquired Levy-Russell’s business, Foreht would have the predominant interest in the new company. This was the price exacted and paid for what followed. Only such an incentive could account for the scale of the deceit practised upon Hayeems, Levy and Davidson in an effort, not merely to sell the company to Shieldings, but to do so at the lowest possible price.
This finding necessarily means I do not accept fully Godsall’s evidence that he turned his mind to the structure of Tecmotiv only in the spring of 1987. That is likely true so far as the legal structure is concerned but I have no doubt that Foreht’s majority position was a given long before then.
The operations of Tecmotiv
Unfortunately things did not go well for Tecmotiv. Its sales from April 3 to August 31, 1987 (the “stub period”) amounted to $3.95 million. The year ending August 31, 1988 produced gross sales of $11.49 million but in 1989 gross sales plunged to $5.93 million. The company moved from 1400 Weston Road on schedule at the end of 1988. The cost of moving was higher than planned. The recoveries from scrap sales were much less than expected. The company operated continuously at a loss and was unable to repay the Shieldings investment. Bradshaw testified that it became apparent to them that a trend had set in among their traditional customers towards domesticating the manufacture of parts of the kind formerly sold by Levy-Russell and now offered by Tecmotiv. Tecmotiv could not attract M41 sales or other new work apart from a CD 850 contract with Venezuela. In June 1990, Shieldings placed Tecmotiv in receivership. Shieldings’ net loss on the Tecmotiv venture is in the order of $10 million with a chance of some partial further recovery.
These subsequent events featured in the argument in two principal ways. The relatively swift collapse of the Tecmotiv business provided fertile ground for argument that the price obtained by the receiver was at the top of the market and that the receiver could not be faulted. That argument is essentially one of hindsight and in my view, to be developed more
fully shortly, misses the main point. This case was not about some notional “actual value” of the Levy-Russell enterprise but rather about what it could be sold for in 1986-87 given the perceptions of the potential buyers including Messrs. Foreht, Bradshaw, Godsall and Krestell.
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The second way in which the subsequent history of Tecmotiv featured in argument is the light that certain financial statements prepared by Tecmotiv arguably cast upon the beliefs of its principals as to the value of what they had purchased.
Tecmotiv Balance Sheet – June 19, 1987
Shortly after closing the purchase, Foreht prepared an unaudited, estimated balance sheet of Tecmotiv as at June 19, 1987 for Arthur Anderson, the new company’s auditors. The assets and liabilities portion of the balance sheet are as follows:
TECMOTIV INC.
UNAUDITED
ESTIMATED BALANCE SHEET
as at June 19, 1987
ASSETS | $000’s Cdn. | Notes |
Cash on Hand | $ 360 | (3) |
Accounts Receivable (Net) | 1,800 | (4) |
Inventory (at estimated market value) | 6,749 | (5) |
Advance Payments to Suppliers (at cost) | 250 | (6) |
Equipment (at disposal value) | 800 | (7) |
$9,959 | ||
LIABILITIES Accounts Payable and Accrued Liabilities | $ 400 | (8) |
Shieldings Incorporated – Fee payable Secured Debentures Payable Shieldings | 250 | (9) |
-at Prime – Due Dec. 10, 1988 | 1,600 | (9) |
-at Prime – + 2% – Due Feb. 28, 1988 | 750 | (9) |
[508] Note 2 reads as follows: | $3,000 |
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This Balance Sheet was prepared to reflect the values on a conservative basis. Methods of valuation of assets are stated in subsequent notes. Goodwill, primarily arising through industrial design rights and research and development programs, has not been valued and no estimate for intangible assets has been included in this Balance Sheet. Moving expenses have not been provided for. It is anticipated that these costs will be provided for by future operations and realization of scrap values in excess of the amount included in this statement.
The inventory is the subject of note 5 which indicates that the basis of estimating inventory value is:
Where a segment of the company’s business is to be disposed of now, an estimate of the current disposal proceeds is included; where an area of inventory cannot be sold as a segment, realization over 18 months was a standard used.
The note then continues:
Surplus/Scrap. Estimates of Surplus have ranged from 30,000 to 50,000 tons. The Company has arranged to sell its scrap based on a minimum of 23,500 tons of # 2 Steel and 400 tons of aluminum and alloys at prices which at current market will result in net recoveries of over $2,000,000 to be covered by Letter of Credit. The anticipated revenue does not include Truck bodies and cabs and like material. The arrangement includes a share of the Joint Venture profit, which is anticipated to cover sorting.
Labour and other costs involved in cleaning, removing contamination, etc., will be recovered by higher prices realized from the upgraded material. Steel prices have been at least at current levels for several years, and are anticipated to increase this Fall in some areas (Detroit, for example).
Remaining Inventory will consist of 6,000 to 12,000 tons of parts. The following schedule sets out 13 major assemblies with a current value of $1,047,000 and a weight
of 955 tons. For purposes of this Balance Sheet $2,000,000 = 7,500 tons at an average price of $200 U.S. per ton converted @ $1.34 Canadian was used.
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The optimistic tone of these notes is reinforced by the payment schedule indicated under liabilities. The company had committed itself to pay Shieldings $750,000 by February 28, 1988 (as well as the $250,000 fee payable for the arranging of the financing) and an additional $1,600,000 on December 10, 1988. It may well be unfair to suggest that management really expected Tecmotiv to throw off enough cash to pay Shieldings out altogether in so short a time period. However, it does reinforce the other evidence that they expected there would be substantial cash flow from the outset. The schedule of inventory analysis attached to the June 19th statement puts the inventory in a number of categories as follows (estimated market value June 19/87): (Domestic and Machine Shop Other summarized by me).
Domestic (resale trucks, truck parts, tractor parts etc.) $330,000
Inventory in Transit (mainly M41 forgings for Denmark) $728,000 Surplus Parts – Yard
Sale of scrap $2,000,000
Value assigned to remaining inventory $2,000,000 Machine Shop
CD 850 Cross Drives $900,000
M41 Repower Kit Parts $ 80,000
Other Parts $711,000
The June 19th statement was prepared by Foreht with some input from Krestell and none from Bradshaw according to his evidence. It seems however quite obvious that it would have been circulated, since the officers of Tecmotiv would have been most interested in it. Taken together with Godsall’s letter to Belcher a few weeks earlier, it demonstrates the high expectations which the Tecmotiv group – Foreht, Godsall, Bradshaw and Krestell – had for their new company. Foreht testified that this balance sheet contained no reference to intangibles because he had not yet had an opportunity to turn his mind to their valuation. There were no market studies or the like to support a value for the company’s technology.
Such a value was however placed upon intangibles in the next financial statement, that for the company’s first fiscal period.
Tecmotiv’s financial statements to August 31, 1987
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For the period April 2, 1987 – August 31, 1987, two financial statements were prepared. One was based upon Canadian generally accepted accounting principles (GAAP) and the other was the so-called “special purpose statement”. Both were completed in February 1988. Foreht explained that the Canadian GAAP statement was in the traditional form for audit, tax and banking purposes. The special purpose statement was needed by the company to replace the former Levy-Russell statements which had been widely circulated to customers. Under Canadian GAAP rules, the allowable valuation of inventory was actual cost. Many Levy-Russell customers, now to become Tecmotiv customers, had relied on their supplier having inventory on hand. The defence industry is full of “desk companies” that have no stock and simply obtain an order and then go out and buy the goods. Countries prefer to do business with companies which maintain inventory since it greatly improves the security of supply. For example, the basic sales agreement with Taiwan had an inventory floor of about
$5 million U.S. This problem led to the production of the special purpose statement to show the inventory the company actually had. Each of the two financial statements contains an allocation of the purchase price. They differ in significant ways. The allocations are as follows:
Canadian GAAP | Special Purpose | |
31.8.87 | 31.8.87 | |
Cash | $ 935,605 | $ 935,605 |
Accounts Receivable | $ 915,000 | $ 915,000 |
Inventory | $ 3,874,218 | $ 7,679,000 |
Prepaids | $ 81,497 | $ 81,497 |
Fixed Assets | -- | $ 829,586 |
Intangibles | -- | $ 1,500,000 |
Accounts Payable and Accrued Liabilities | ($ 2,456,320) | ($ 2,456,320) |
Purchase Discrepancy | -- | ($ 6,134,368) |
$ 3,350,000 | $ 3,350,000 |
In the Canadian GAAP statement, the following appears after the allocation:
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The cost assigned to inventory of $3,874,218 is the difference between the purchase price of $3,350,000 and the fair values assigned to cash, accounts receivable, prepaids, accounts payable and accrued liabilities. Such assigned cost is less than the inventory’s fair value.
The special purpose statement contains certain notes to explain the difference between itself and the Canadian GAAP statement. In Note 1, it is said that the purpose of the statement is:
…to present the consolidated assets, liabilities, revenues, expenses and changes in assets and liabilities using values assigned by management for intangibles, fixed assets and inventory following the purchase described in Note 2. The financial statements therefore do not present the assets, liabilities, revenues and expenses in accordance with generally accepted accounting principles.
As to inventory, the special purpose notes include the following:
All inventory acquired at June 10, 1987 (Note 2), with the exception of scrap, is valued based upon the cost to the Levy Auto Parts Division of Levy-Russell Limited, the former owner, adjusted for current market conditions. Management estimates that this value does not exceed net realizable value.
Inventory acquired at June 10, 1987 (Note 2), which has been designated as scrap is valued at zero. Costs incurred in sorting and removing this scrap will be charged to the statement of revenue and expenses as incurred along with proceeds on sale of the scrap.
Special purpose note 1(c) advises that, “intangibles” represents technology primarily associated with the rebuilding and modifying of tank engines and transmissions. (This obviously refers to the M41 and CD 850 projects.) The note continues:
This technology is valued at approximately 1% of the sales that are estimated to be made using this technology over the five years ending August 31, 1992. The intangible will be amortized to the statement of revenues and expenses on the basis of related sales with a minimum amount of $105,000 being amortized in any year.
The item “purchase discrepancy” is explained as follows:
The purchase discrepancy arose because the recorded value of inventory, fixed assets and intangibles exceeded the purchase price (Note 2).
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In his evidence for the plaintiffs, Mr. Witkin explained that “purchase discrepancy” as used in the special purpose statement is the difference between management’s valuation of the assets and what was paid for the assets. Management has therefore said in this note that when they bought the business they bought it at a price so significantly below what they thought it was worth that they revalued the assets to show that on the financial statement. That had to be done on a special purpose statement because Canadian GAAP rules only permit the recording of inventory at actual cost.
The valuation of “intangibles”
The valuation of the intangibles was primarily based upon a memorandum prepared by Foreht dated January 28, 1988 entitled “Background information on Technology acquired for the purposes of allocation of purchase discrepancy”. This was prepared by him in the course of the finalizing of the statements for the Tecmotiv year ended August 31, 1987. As the title implies, it was prepared to support the allocation of $1.5 million to intangibles in the special purpose statement. That figure received thorough consideration. On cross-examination, Bradshaw agreed with Godsall’s discovery evidence that the matter of this valuation had come up for discussion on several occasions leading up to the directors’ meeting that accepted the statement. Godsall had relied on Bradshaw as much or more than anyone for these values and had to be satisfied that the sales forecasts were reasonable.
Foreht’s memorandum reviews six specific items of technology and lumps the remainder in a seventh category having no discernible value. The four lesser items were valued at about $475,000. Two, the TCMD 1790 cylinder rebuild and the T16 M24 Control Differentials, were proven sellers. The remaining two were valued at less than the cost of their development primarily because of the small market. The remaining items were the CD 850 and the M-41.
The CD 850 transmission development costs exceeded $1 million to June 1987. At the time of the acquisition of the technology by Tecmotiv, the only competitor, a division of General Motors, had ceased production. Accordingly, Tecmotiv became the only civilian supplier of the CD 850. There had been a steady demand of about 150 per year although no
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orders were received during Levy-Russell’s last year, possibly because of the suspension. Tecmotiv had by far the largest parts inventory in the world, anticipated the transmission would stay in use for at least another 20 years and expected to “vastly increase” this business. A back-up memo from Bradshaw shows that the General Motors Division was still actively marketing licensing rights but was not proposing further production.
The M41 repowering program had cost approximately $1.25 million to develop at the time of the purchase in June 1987. The technology involved modernization of the Cummins VTA-903 engine to power the M41 series vehicles. The M41 series had an approximate world population of 9,500 tanks made up of 5500 M41’s and a further 4,000 in the “family”. Since buying the Levy-Russell assets, Tecmotiv had gone into a joint marketing venture with Cummins, the manufacturer of the engine, to sell the M41 refit. Foreht testified he thought this enhanced the chances of success tremendously, particularly since the warranty would now come from the manufacturer of the engine itself which was also a much larger enterprise than Tecmotiv. The memo points out Tecmotiv’s exclusive sales rights to the modified engine, the 1986 sale of 63 units to Denmark and the prospects for sale to Taiwan, Spain, Thailand and a number of other countries. In Spain, the government had approved the purchase of 32 kits in 1987 and funding was being awaited. Thailand and Taiwan were countries in which Tecmotiv was continuing long standing negotiations which had been carried on by Levy-Russell. Foreht’s memo concludes that the recoverable value of the M41 technology far exceeded the development cost.
Mr. Witkin prepared an analysis of the estimated realizable values of this technology based on Foreht’s memorandum and backup papers attached to it. He considered the recoverable values estimated by Foreht, prospects for recovery as seen by Foreht and development costs. This gave a range of technology values, depending on whether the CD 850 was included, from $1.725 million to $2.725 million. In addition, he referred to a schedule prepared by Tecmotiv, found in the Arthur Anderson working papers, for the year ending 31 August 1987, showing potential sales by fiscal year from 1987-88 to 1992-93, of the technology of approximately $135 million. It forecast sales of CD 850’s at 2/3 of the historical rate. As to M41’s it forecast the sale to Spain of 42 kits, already sold but awaiting financing, and assumed that the Thailand proposal for 300 kits would be accepted. It forecast 1,000 kits to be sold to Taiwan on the basis of a 10% royalty to Tecmotiv.
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Foreht’s analysis and the 1% valuation were attacked both as unjustifiably optimistic and irrelevant. In my view, these attacks miss the point. The question is not whether the managers were right in their forecasts but whether these forecasts reflected the views of the purchasing group at the time of purchase. The fundamental issue under debate is the perceived worth of the company when it was purchased. In his testimony, Mr. Douglas, called for the defendants, downgraded the importance of the M41 program on the basis that no sales were ever made by Tecmotiv. For the same reason, this evidence missed the point so far as the ascertainment of the attitude of the purchaser at the time of purchase is concerned.
More to the point was the criticism by Mr. LeVay in argument that a number of the factors discussed by Foreht occurred after the purchase and hence could not have had a bearing upon the attitude of the purchasing group at the time of purchase. The joint venture with Cummins, the approval of the Spanish bid and the Thailand E.D.C. financing were all post-closing. As to the CD 850, there is a reference in the back-up material to potential in Israel which is post-closing. There are other instances as well. It is clear that, to the extent that this after-acquired information affected the estimates, they are to that extent less valuable as a guide to the views of management at the time of purchase. This is a strong argument and has caused me to view this particular aspect of the special purpose statement with care. However, there is ample evidence outside of this statement that the purchasing group believed that the technology was of great importance. One need only recall that the technology was the subject of a special clause in each of Shieldings’ offers. In his letter to Belcher of May 22, 1987, Godsall says:
…essentially that business is niche manufacturing and remanufacturing of high tech power train components. The existing business that is of interest to us centres on two models of automatic transmissions, formerly manufactured by the Detroit-Diesel Allison Division of GM.
While there are no figures in Shieldings’ offers specifically assigned to the technology, it is clear from the Belcher letter, as well as from his oral evidence, that Godsall’s view was that the niche manufacturing business, a large part of which was the technology in question, was the key acquisition he was making. It was Witkin’s view that the values shown in the special purpose statement as at April 3/87 could well be low at $1.5 million and might be as
high as $2.7 million, based essentially on the Foreht memorandum. The use of the $1.5 million figure, at the low end of the range, therefore introduced an element of conservatism.
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In discussing the schedule from the Arthur Anderson papers, Douglas said he reviewed this document with Foreht and Bradshaw. He said the issue regarding this technology was not the valuation at 1% of potential sales but rather whether any value should be ascribed to it. He was questioned closely about whether or not Foreht and Bradshaw had said anything to him about the 1% factor and he reiterated he was not concerned with that factor but rather with the sales prospects. This led him to decline to accept any value for this technology. Douglas and his colleagues had reviewed publications and military reviews to determine what was going on in the countries most likely to purchase M41 refits, Thailand, Taiwan and Spain, and concluded that the market was a developmental one for a quasi startup product. There were, therefore, too many unknowns to be confident in forecasting sales prospects. That may be, but it is not what the purchasers thought.
In his report, Douglas opined that the CD 850 and M41 technology would not lead a buyer to pay an additional amount for the business. A buyer will usually only attribute additional value to technology if that technology is producing a higher than adequate return or “…can be forecast with confidence to produce predictable profits…” This describes the very state of mind that the evidence shows the purchasers were in; confident of profit from these technologies. Douglas failed to recognize this. He valued the intangibles at zero or at least felt that the adoption of the going-concern approach effectively recognized whatever value there was. This approach effectively divorces the Douglas report from the evidence which I heard. The niche business which Godsall wished to acquire was founded on the CD 850 and M-41 technology and spin-offs from it.
Douglas’ evidence on the technology value was in conflict with his evidence as to why the going-concern approach was the preferred choice. The Levy directors and Godsall had a high level of confidence in their ability to take Levy-Russell’s niche products – the CD 850 and M-41 – and make a viable business. It was that level of confidence which allowed him to use the going-concern approach, to valuation. Yet, despite this, Douglas attributed no value to it in the eyes of a purchaser. I cannot accept such a proposition. Once again Douglas is out of touch with the evidence of the purchasers’ perceptions of the Levy-Russell business and their intentions for it.
For these reasons and my respect for the views of Witkin, I reject Douglas’ view that there was no value to be attributed to this technology in the circumstances of this case.
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All things considered, I find that a reasonable purchaser would, and Godsall and the Levy directors did, attribute a significant value to the Levy-Russell technology as at April 1987. It is neither necessary nor possible to put a precise figure upon this asset but I have no doubt upon the evidence that its value was recognized by Shieldings and the Levy directors as significant and that $1.5 million is not an unreasonable figure.
The major witnesses
Analysis of the credibility of evidence is one of a judge’s most difficult tasks. The demeanour of a witness is of importance but one must remember that “actors can lie and liars can act”. I have sought to rely upon the inherent probabilities of the evidence to the largest extent possible. Nevertheless, as will become apparent, occasionally the demeanour of a witness is itself one of the compelling elements in the assessment of his evidence.
M.P. Levy
It is a particularly difficult task to assess the credibility of Mr. Levy due to the fact that while he was in the box he was suffering from the effects of a serious illness which appeared to have impaired his powers of recollection and which has since taken his life. The fatigue of his illness and the stress of testifying meant that his powers of recollection tended to diminish as the day wore on. Frequently, even when counsel attempted to refresh his recollection by showing him documents which he had seen at the relevant time, he was unable to recall the events in question with an independent recollection. He was intensely emotionally charged with respect to the events giving rise to this litigation. His dislike of, and scorn for Foreht were expressed frequently and firmly in the course of his testimony. These factors led him several times to make overly sweeping statements. He also showed a frequent and marked tendency to project his present knowledge, opinions and hostilities on to past events and in particular to attribute to the past certain views formed as a result of information acquired more recently. His involvement in the acts underlying the charges against the company and himself is a further ground for caution. I view the evidence of Mr. Levy with very great caution for these reasons. On the whole, Mr. Hayeems made a much better source of reliable testimony.
Ben Hayeems
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It was argued that Hayeems’ evidence should not be believed because he had adopted a partisan role during the 1986-87 period. This was so, it was said, because he did not accept the bank’s desire that he become CEO and a director so that he could devote himself to protecting Levy’s interests rather than those of the company. I have no hesitation in rejecting this view of events; on the contrary Hayeems struggled valiantly in the company’s interest throughout his involvement. That he was a paid consultant to the trustee in bankruptcy of Levy-Russell and that he recommended this suit be brought are matters that I will not overlook but I do not regard as serious. It was also argued that he was partisan in his evidence and twisted events to fit a theory. An example was used of his disagreement with some parts of Soucie’s memo of August 25, 1986 recording a conversation with Hayeems (para. 6) and one with Loewen, who reported to Soucie his own conversation with Hayeems (para. 9). In para. 6 Soucie records:
Hayeems also said he spoke with Foreht concerning the offer to purchase the assets, and Hayeems’ advice to Foreht was to make a formal offer which he would review.
Hayeems said that was wrong; it was not Foreht’s own offer they spoke of, but rather any offer from any buyer Foreht had been able to interest. Foreht had not spoken of being the buyer himself, Hayeems said.
In para. 9 Soucie is recording what Loewen told him Hayeems had told Loewen that he had told Foreht. He uses the phrase: “…Hayeems told Foreht that if he wished to make an offer…” So many steps removed from the original conversation, it is unfair to parse the sentence and tax Hayeems with deviating from Soucie’s note.
It makes perfect sense to me that the distinction between Foreht having an offer of his own, and Foreht having an offer from a third party could be submerged in the recording of these discussions, particularly remembering that Soucie knew that Foreht was in fact part of the only “offer” then in the picture. I do not regard this as evidence that Hayeems is “shoehorning” the facts into his theory. Indeed, as at August 25, 1986, Foreht himself was writing to Hayeems of “the third party offer” and denying any connection with the offeror; so why would he have said “my offer” to Hayeems?
The second example is no more convincing. Hayeems differed with a Soucie note of December 9 that cited him as saying that given Levy’s enthusiasm (now that the suspension
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had been lifted), the bank officers would have to make it clear to Levy that the bank would not finance the company further. He told Mr. LeVay that Soucie’s note did not convey the real message from the discussion. Levy understood the bank’s position but in the flush of enthusiasm following the end of the suspension, he wanted the bank to relent. He told Mr. Brown much the same thing. This is hardly a key matter on which the witness is gaining a point by twisting facts; absolutely nothing turned on it. Further, it rings true – Levy did have a rush of enthusiasm – on December 9th he forecast to Soucie he would soon get $50 million in orders!! – and may have felt the bank could be turned. Hayeems may or may not have said what was recorded but in no event does the incident lead me to think he is twisting the matter.
That is not to say that he could not be in error. I thought his efforts to explain some parts of the June 1, 1987 letter a bit strained, and his idea that Bradshaw was closeted behind closed doors in November 1986 was shot down in cross-examination. Bradshaw was out of the country for much of November 1986. However, Bradshaw did confirm that there were an unusual number of closed-door meetings about that time. There were many matters requiring privacy including the tough labour situation: too many employees led to discussions in private about who was to go; and also including the Shieldings matter, although they could discuss that when Hayeems was not there. So while Hayeems may have drawn the faulty conclusion that all these meetings were about Shieldings and were a distraction from work, he was not entirely off base when he referred to closed-door meetings. Nevertheless, I think his evidence in this particular area did show an element of reconstruction.
Also, in connection with this part of the evidence it was argued that Hayeems was evasive, but I do not agree that the 14 pages of transcript cited reveal that at all. At page 4, when asked if he ever went to the directors with his concern about their meetings behind closed doors, he answered: “No, I did not…” and added an explanation. When the subject was raised again a few pages later he said it was self-evident; he did not have to knock them on the head; and finally at p. 13 when asked if he told them in so many words they were neglecting the business, he said “I didn’t say that…” and went on to refer to management committee meetings. These were not evasive responses.
No more do I think I should disbelieve Hayeems because of the conflict between him and Foreht any more than disbelieve Foreht just because there was conflict; the analysis
must run deeper than that, and I have tried to analyze the situation in the narrative part of these reasons. On the whole I felt Hayeems tried to help the court and was a reliable witness.
Kenneth Foreht
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In the narrative portion of these reasons I have commented adversely upon several parts of Foreht’s evidence and I will not repeat the analysis. His testimony included one moment of startling candour when he agreed with the cross-examiner that in his zeal to conclude the Shieldings deal he had forgotten his responsibilities to the company. But it also included repeated episodes of forgetfulness when the going was tough. He had difficulty in trying to explain that while “everyone knew” he would have a personal stake in the purchasing entity, he could not recall any discussion with Levy or Hayeems in which he had expressly said he would have substantial equity. His bizarre defence of his denial of being connected “in any business way” with Shieldings: he would only be connected if they succeeded in buying the business, was an evasion of classic proportions. His evidence that he didn’t want Hayeems out of the negotiations was contradicted by Bradshaw and is inconsistent with his own acts. His evidence that he did not want a receivership is contradicted by several bank memoranda (albeit there is one recording him saying a receivership would be bad for business). Despite multiple records that contradict him, he would not concede that a major objective was a “quick flip” to Shieldings at distress sale prices. His claim that he did not know he would get 51% of the Tecmotiv shares is impossible to credit. His claim that he understood from Davidson that he no longer had duties to the company is inconsistent with all other evidence about Davidson’s briefing of the directors. His evidence about how Godsall got the September 4, 1986 letter from the bank was evasive until he was confronted with his own handwriting on Godsall’s copy. He was several times in great distress in the box before resorting to “not recalling”. I will not multiply examples; the result is that I have concluded that I cannot rely upon his evidence.
Ronald Bradshaw
In the course of the narrative I have several times commented unfavourably on particular portions of Bradshaw’s evidence. He sought to distance himself from events even when he was present: he didn’t know why he and Foreht were going to the bank on August 22nd and didn’t use the trip from Weston Road to the branch to find out; he only had input into
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the sales projections of the Business Plan but admitted he was with Hayeems a lot while he was working on it; on Feb. 3, 1987 he told Hayeems Krestell’s inventory figures were right but at trial would not admit he knew what those figures were and retreated to saying he relied on his knowledge of the general calibre of Krestell’s work; he said Godsall didn’t ask him about inventory or intellectual property figures in the special purpose statement and recanted that when confronted with Godsall’s contrary evidence; he hadn’t spoken, he said, of “contamination” of the company and recanted that when faced with Godsall’s contrary evidence. He went with Krestell to see Godsall on January 15th: “result = 7.2 mil” but said in evidence he didn’t ask Godsall to explain the drop in price from $8.5 to $7.2 million. He was not candid with Hayeems as to “where did Terry get his figures?” or with the bank about several matters at the meeting on August 19, 1986, or with the court about his knowledge of Shieldings’ policy of management shareholdings. There are too many such occasions for me to have confidence in his evidence.
Morton Krestell
Krestell’s evidence was on the whole less central and less controversial than Foreht’s or Bradshaw’s. He said he was unaware of any issue as to equity until June 1987. He was one of the senders of the Feb. 5, 1987 memo to Hayeems which included the statement “We realize we have conflict of interest”, but asserted that he did not in fact feel that he did, as he had no knowledge then of an equity interest and did not think being named a key employee created a conflict. He was not seriously challenged on this evidence as to why he would permit such a statement to go forward if it was untrue. There was conflict between his evidence and Godsall’s evidence and Bradshaw’s diary as to when they first met and conflict as to whether he was ever briefed as to Shieldings’ equity policies. His evidence that the January 2 and 4 meetings were routine discussions of the company’s financial situation is inherently implausible since it provides no reason for three weekend meetings. He went with Bradshaw to meet Godsall on the 15th of January at the meeting as to which Bradshaw noted “Result: 7.2 mil” but said he was not told the result. This seems unlikely but he was not pursued on the point. In my opinion there is not enough here to consider his evidence generally unreliable, but I approach it with some caution.
Terrence Godsall
Mr. Godsall testified in a forceful and plausible manner, portraying himself as simply a purchaser, a careful and successful negotiator, an outsider. On examination this image does not altogether hold up, although he certainly negotiated skilfully.
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It must have been obvious to Godsall that he was receiving confidential information (beyond anything that he was entitled to as a prospective purchaser of assets) when he received a copy of the letter from the bank of September 4th; when he was told in December of the possible purchasers from Montreal; when he was advised in advance of the terms of the October 23rd counter-offer; when he was briefed after the company’s meetings with the bank over the business plan and throughout the fall and winter of 1986-87, and when discussions internal to the company were retailed to him. Although the case against him and Shieldings was not pursued on the basis of breach of any fiduciary duty that might have been imposed upon them by that knowledge, it is not unimportant in reviewing his conduct to observe that he cannot have failed to understand that it was a breach of duty for the directors to give him that information. His willingness to accept those gifts of information and to act upon them, knowing they were tainted, illuminates his standards and is legitimately considered in assessing his overall credibility.
In the narrative I have commented difficulties with his evidence. For example, his evidence as to how open he was about Shieldings’ policy of equity for managers conflicts with the notes of his January 7th comment “no approach yet” to the directors and employees. As I have noted, there clearly had been an “approach” at least to Foreht and Bradshaw. The explanation that no corporate structure was in place is an after-thought and does not justify the statement he made which was deliberately misleading. It was only a few days later that he wrote to Bleiwas referring him to Bradshaw for an explanation of equity expectations.
Another example is his explanation of “perceived degradation of value”, admittedly subjective and unsupported by any analysis, for the drop in price to $3.35 million. It is, as I have noted earlier, inherently implausible and, bearing in mind the flow of data to him from the directors, untrue. His evidence downplaying the importance of the meeting on Sunday, August 24th following the Foreht-Bradshaw meeting at the bank about the business plan was implausible. His explanation of the reason for keeping the August 12th letter secret from Levy was strained and implausible. I have already noted his tendency to minimize his contacts with the directors at the expense of candour and my inability to accept his (and the directors’)
evidence about the meetings of December 18, 1986 and January 2, 3 and 4, 1987. There are other examples in the text of these reasons; I will not repeat them all. I cannot rely upon his evidence.
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Duties of directors
The duty of a director is to manage or supervise the management of the business and affairs of the corporation. In so doing, a director must act honestly and in good faith with a view to the best interests of the corporation.
Alleged breaches of the duty of the directors
The plaintiffs say that prior to the receivership Foreht, Bradshaw and Krestell breached their duty to Levy-Russell as its directors in the following ways (each act also being an overt act in support of the alleged conspiracy):
they undermined and subverted the Business Plan by encouraging the bank to reject it;
they undermined and subverted the negotiations with Shieldings by continuously providing Shieldings with confidential information, including confidential information relating to the pressure being exerted on Levy-Russell by the bank to reduce and retire the bank loan; the value of the company’s assets and the price at which they could be bought; and the existence or absence of competitors to purchase such assets;
they permitted an appearance of the negotiations being at arm’s-length when they were not, owing to the activities described above, thereby giving Shieldings an improper preferred position in the negotiations;
they influenced Shieldings not to make firm commitments;
they did not act honestly in the interest of Levy-Russell in the acts above described.
Undermining the Business Plan
I have already analyzed the facts of the Foreht-Bradshaw visit to the bank and have found that their joint purpose was to scuttle the business plan, trigger a receivership and acquire the assets. It is argued that because of the dire straits the company was in and the legal advice obtained by Foreht, he acted in the best interest of the company.
I agree with the submission of Mr. LeVay that the best interests of the company are not to be equated with the desires of Levy, pure and simple, even though he owned, indirectly, almost all of the shares.
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The “best interests of the company” means the best interests of the shareholders taken as a whole, no one sectional interest being allowed to prevail over the others: Palmer v. Carling O’Keefe Breweries of Canada Ltd. (1989), 67 O.R. (2d) 161, 41 B.L.R. 128, 56 D.L.R. (4th) 128, 32 O.A.C. 113 (Div. Ct.) per Southey J. (at p. 168 O.R.).
I do not accept the proposition that Levy is somehow to be faulted for his insistence that the prices offered by Shieldings in the fall of 1986 were too low; nor is Hayeems as Levy’s trustee to be faulted for seeking to negotiate a higher price, for a higher price would certainly have been in the interests of all shareholders, not merely Levy, had it been achieved.
There is often room for legitimate disagreement as to the correct course for a company to follow; the test is not whether the court would have chosen the course chosen by Foreht, but whether that course was within the range of reason and was adopted honestly and in good faith at the time. Hindsight has no role to play in this assessment.
In Teck Corp. v. Millar (1972), 33 D.L.R. (3d) 288 (B.C. S.C.), Berger J. said [at pp. 315-316]:
I think the Courts should apply the general rule in this way: The directors must act in good faith. Then there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the company’s interests, then there must be reasonable grounds for that belief. If there are not, that will justify a finding that the directors were actuated by an improper purpose.
[557] And at p. 327 (D.L.R.):
So it is necessary, then, to disentangle the directors’ primary motive or purpose from subsidiary ones. I do not think it is necessary to distinguish motive, purpose or object. The question is, what was it the directors had uppermost in their minds?
In 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 at 123 (Ont. Gen. Div.), affirmed (1991), 3 B.L.R. (2d) 113 (Div. Ct.) Farley J., commenting on the above cited passage from Teck, said (at p. 176 B.L.R.):
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This conclusion however does not seem to impart the necessary objectivity that s. 134 OBCA requires. I think it would have been better expressed as “The question is, what was it the directors had uppermost in their minds after a reasonable analysis of the situation.
Applying these principles to the Foreht-Bradshaw visit to the bank regarding the business plan, I rely on, without repeating, my previous findings on the facts.
It seems to me quite unreasonable to suppose that the interests of the company would be best advanced, vis-à-vis a very nervous bank, by showing a split in the management over the business plan. Some attempt to reach an agreed position before acting independently is surely required of any director acting in good faith. Foreht had been offered the chance to discuss the plan with Hayeems, but did not because of the presence of Ed Levy who was out of the company and not entitled to hear such a discussion. Such punctiliousness is in sharp contrast to the swift revelation of confidential data to Godsall. Nor did Foreht, knowing Hayeems was willing to discuss it, seek him out in a more appropriate setting. Foreht consulted two solicitors, Rosenfeld, whose testimony was stipulated; and Slan who did not testify. Certainly a director who acts in accordance with legal advice has a strong case. But the evidence does not disclose that he told either lawyer he was going to the bank behind the back of Hayeems or that he had never discussed these problems with him. Hayeems had been instructed by Levy in his letter of August 22nd, of which Foreht had a copy, that he had full authority to carry on the operations of the company. In my view, Foreht’s failure to contact Hayeems wholly offsets the benefit of the legal advice, particularly when Foreht had the time to tell Godsall all about it. The plan was confidential by its nature, as were the details about the company’s relations with its banker. While general information about the latter became public in mid-summer 1986, the details of the progress being made or not made were confidential and Godsall as an outsider and a potential negotiator for the purchase of assets was a highly inappropriate person to inform.
The evidence rebuts Foreht’s pretence of good faith devotion to the company’s interests. He went to scuttle the plan in order to promote the sale to Shieldings in which he
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had a personal interest. That is what was uppermost, if not exclusively, in his mind. A sale to Shieldings was legitimately one of the possibilities in the best interest of Levy-Russell, but it cannot be argued that such a sale negotiated under the one-sided conditions that would have prevailed if the plan had been rejected would have been a legitimate choice. Indeed, rejection of the plan would likely have led to a receivership. Foreht acted purely out of self-interest.
The attack on the plan failed but it must have hurt the company by displaying the disarray of its management to the bank. Bradshaw was aware of what was going on and failed to take any step to mitigate it. I find however that Krestell was not sufficiently involved in this matter to have breached his duty. He read the aide-memoire but he could not have known from it that Foreht would not advise Hayeems of his intention nor that he would exaggerate the potential loss of employees. Foreht and Bradshaw breached their duty to the company in this instance.
Undermining the Negotiations: August 1986 – April 1987
The illusion of Arm’s Length
Influencing Shieldings’ Strategy
Bad Faith
The evidence establishes a pattern of close collaboration between the directors and Godsall, the intended and actual result of which was to pervert the negotiating process while fostering the illusion that Godsall was an arm’s-length purchaser, when in fact he was aided at every step by the Levy directors acting in bad faith breach of duty. Godsall had stipulated, in the various offers, for the directors’ continuance in office. He conceded that one of his purposes in so doing was so that they could keep him informed so that he in turn could make “informed” offers.
The delivery of the bank’s September 4th letter armed Godsall with vital intelligence as to the pressures upon his negotiating adversary. Godsall conceded that Foreht had also discussed with him the various pressures exerted on Levy-Russell by the bank. This was all in breach of Foreht’s duty as a director. It cannot be saved by any suggestion that it was done in the best interests of the company. Foreht had negotiated many deals. He knew full well that knowing the deadline and the restraints against which Hayeems was working would assist
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Godsall in beating down the price. Even if Foreht honestly thought that a sale to Shieldings was in the best interests of the company, it could not be in those interests to handicap Hayeems in obtaining the best price possible in a true arm’s-length negotiation. A low price was in Foreht’s interests, not in Levy-Russell’s.
As far back as the meeting at the bank on April 23rd, Foreht’s motivation to beat the price down was clearly observed by the bankers. Having reviewed the whole course of events, I find that Soucie read Foreht and Bradshaw perfectly when he wrote:
Foreht and Bradshaw are on a fishing expedition. Their goal is to have the bank appoint a receiver, after which they will make their move.
I also note that the evidence fully supports Foreht’s agreement in cross-examination with counsel’s proposition that in his zeal to conclude a deal with Shieldings he forgot his responsibilities as a director. Many incidents already referred to in the narrative reinforce the view that the directors acted in their own interest to reduce the price. These include the various efforts to limit Hayeems’ scope; to ensure he did not negotiate either with Shieldings or the bank without the directors being present; the persistent pressure on Hayeems and the bank to accept the opening Shieldings’ price without negotiation; the concealment of their interest by denials of conflict and denial of any connection with Shieldings; the advance briefing of Godsall about the October 23rd counter-offer; the constant briefing of Godsall on events in the company, contrasted with an entire failure to pass to
Hayeems any intelligence as to Godsall’s strategy; the failure to brief Hayeems in December on the impact of backdating the “start date”; the flurry of meetings at year-end when the possibility of Montreal buyers appeared, meetings that no one had plausible evidence about, yet, oh no, they were not about Montreal competition; the “inventory dispute”; the raising of the issue of inventory that “Shieldings might not want”; and Foreht’s telling Bazarkewich on March 30th that a fair price would be $18.5 million without telling Bazarkewich and Hayeems of Willis’ willingness to go to $19.5 million. This is not a complete list, merely the highlights. The story of the bad faith pursuit of a low price is writ large throughout the evidence.
Foreht contended on at least one occasion to Hayeems and throughout the trial that he acted to save the company. It was in trouble; it had to be sold; Shieldings was the only
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plausible buyer; it was thus in the interest of Levy-Russell to complete the Shieldings sale. So stated, the argument is plausible. But Foreht had a personal stake in having the sale take place at the lowest possible price. Had he persuaded himself that any sale, regardless of price, was in Levy-Russell’s best interest? Such is the power of self-interest and self-deception that humans are often readily persuaded in such cases, and may come to believe they are acting bona fide. In my view, Foreht’s conduct – particularly the scale of deception adopted both in 1986-87 and at the trial – is not compatible with his having acted in good faith in an honestly mistaken view of his duty. He knew he was doing wrong. In my view, Bradshaw and Krestell also must have been aware that what they were doing, individually and collectively, was wrong.
While the main protagonist was Foreht, Bradshaw was party to many of these events; Krestell to a lesser but still significant number. On his own, Bradshaw briefed Godsall on meetings at the bank: February 3, 1987 and February 5, 1987 are but two examples. Similarly, during the receivership he shared with Godsall the information that the receiver was denying certain data to those bidders who were competitors. He must have realized the assistance these acts gave to Godsall in his negotiations.
Godsall’s letter to Bleiwas shows that Bradshaw knew more about equity than he would admit in evidence. I cannot believe that Krestell attended numerous meetings of the directors and Godsall in ignorance of the stakes for which they were all playing and without adopting an active role in support of the joint enterprise. He helped prepare the $7.2 million offer. I find that Bradshaw and Krestell, as well as Foreht, acted contrary to their duty as directors motivated by hopes of personal gain and not by the best interest of Levy-Russell.
I am satisfied that Bradshaw from August 1986 and Krestell from September-October 1986 were in continuous breach of their duties as directors to act honestly and in good faith with a view to the best interests of Levy-Russell. Their visit to Godsall in January (“Result =
7.2 million”) to help him develop his rationale for a new and lower price illustrates their utter estrangement from their duty to Levy-Russell.
Another allegation is that the directors counselled Godsall not to make firm commitments. Given the knowledge he had from the September 4th letter of the January deadline and the flow of information from the directors as to the lack of progress in finding a
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buyer, an astute businessman like Godsall may well not have needed any further advice: the strategy of playing for time is an obvious one and was clearly adopted by him. That the directors influenced Shieldings’ strategy of open-ended offers seems highly probable not only from specific incidents but also from the nature of the relationship which the evidence demonstrates that they had with Godsall, and I find they did. Supporting Godsall in this strategy could not be, and was not, done in good faith, but rather to drive down the price with a view to personal profit.
Mr. LeVay, for the directors, prepared a chart showing the lapse of time between each Shieldings offer and the response and argued that this showed it was Levy-Russell and not Shieldings that was delaying matters. While it does illustrate that there were some delays created by Levy-Russell, it misses the point. The open-ended nature of Shieldings’ offers, particularly inventory valuation, land rental and the postponement of due diligence (offered in October) to the new year, despite the fact that the largest “open end” was inventory value, were major factors in keeping the negotiations from reaching a definitive stage. It was the flow of information from the directors and the resulting security of knowing there was no serious competition that made this strategy viable and also enabled Godsall to steadily lower his price as the bank deadline approached.
In November, the demand surfaced that the suspension be lifted before Shieldings would move. This position was taken by Shieldings on November 5th following a meeting between Godsall and Foreht on the 3rd that discussed the suspension. The inference which I was asked to draw is that Foreht played a role in Godsall taking that position. Foreht’s notes of November 3rd, however, quote Godsall as emphatic that the suspension must be dealt with. The idea seems to have been Godsall’s. Foreht was in charge of the DLA problem but did not brief Hayeems that this was about to become an issue. I cannot draw the inference that Foreht counselled this particular tactical move. There is however no evidence that he made any effort to dissuade Godsall from this delaying tactic which he would almost certainly have done if he had been representing the company’s interest or if, as he claimed, he was primarily motivated just to get the company sold to save it from receivership.
In summary, the alleged breaches of duty by the directors have been proved except that (a) was not proved against Krestell.
The conspiracy
Law of conspiracy
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Although Mr. Wortzman did not disavow allegations of actual malicious intent to injure the plaintiff, the focus of the plaintiffs’ case is upon the second type of conspiracy described in the leading Canadian case of Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd. (1983), 145 D.L.R. (3d) 385 (S.C.C.) per Estey J. at pp. 398-399 where he said the tort of conspiracy is committed where there is an agreement under which two or more act and [at p. 399]:
(2) where the conduct of the defendants is unlawful, the conduct is directed towards the plaintiff (alone or together with others), and the defendants should know in the circumstances that injury to the plaintiff is likely to and does result.
In this type of conspiracy a constructive intent to injure the plaintiff is derived from the knowledge of the defendants that injury to the plaintiff would ensue. Actual damage must be suffered by the plaintiff.
Acquiescence, knowledge or even approval of the wrongful conduct does not make one a conspirator. An agreement to join concerted action or common design is necessary to support a conspiracy finding, but as such agreements are rarely admitted to, one may be inferred provided that the facts do not fairly admit of any other inference being drawn from them: Sweeney v. Coote, [1907] A.C. 221 (H.L.).
Unlawful conduct in the context of conspiracy includes crime, tort, breach of contract or breach of a statute. Breach of the obligations which directors owe as fiduciaries to the company by both common law and statute is unlawful conduct in this context.
Was there a conspiracy?
The evidence overwhelmingly supports the view, and I find that the directors acted in concert to achieve a mutual objective, the acquisition through Shieldings of the assets of Levy-Russell at a below-market price manipulated by them. Their means were unlawful –breaches of their duty to Levy-Russell – and they knew that damage would be done to the plaintiff. The facts admit of no other inference than that they acted together pursuant to an agreement to do so.
Subject to the question of actual damage to be discussed later, the elements of conspiracy have all been established so far as they are concerned. The remaining question is whether Godsall was a party to this conspiracy.
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The claim against Godsall and Shieldings
In the statement of claim the plaintiffs claimed damages from Godsall and Shieldings “for breach of fiduciary duty” and for “conspiracy in conjunction with” Foreht, Bradshaw and Krestell. The plaintiffs pleaded that the Levy directors in breach of their duty conspired with Shieldings, Godsall and Tecmotiv to purchase the assets of Levy-Russell for their own benefit on terms prejudicial to Levy-Russell; that Shieldings was provided with confidential information which gave Shieldings a preferred position and enabled it to adopt the strategy of making no firm commitment in the negotiations. The particulars assert that the receipt of the confidential information imposed on Shieldings a fiduciary duty not to use this information to the detriment of Levy-Russell. During the receivership, the plaintiffs say that Shieldings acted improperly in dealing with the directors despite knowing of their conflict; asking for and receiving data about competitive bids; and acting through the directors to limit the data available to such competitors. In further answers to particulars the acts alleged as conspiratorial are: accepting from the directors and using confidential information as to the absence of other competitors for the assets; forming a strategy of no commitment in the negotiations until the bank put in a receiver; thereby effecting a purchase at an undervalue as a result of this circumventing of the normal negotiation process.
At the opening of his argument plaintiffs’ counsel confined his claim against Shieldings and Godsall to conspiracy but the breaches of duty by the directors were relied on as unlawful means consciously adopted by the conspirators to effect their objective.
The role of Godsall
I do not subscribe to the theory that a full-blown conspiracy was hatched in the spring of 1986. The evidence shows that Godsall was hot and cold about being involved in acquiring Levy-Russell’s assets until around mid-summer. Thereafter his interest picked up and never wavered. He received confidential information steadily, probably from April 1986, but at least from early August when Foreht reported on the meeting with the bank on July 31. However his being a recipient – and a user – of confidential information does not necessarily lead to an
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inference of a conspiracy. It may be equally consistent with simple acquiescence in knowingly receiving Foreht’s gift of confidential information which it was in Foreht’s own interest to give him. However, Godsall moved swiftly beyond the role of mere recipient of unauthorized confidential information.
In early August he and Foreht were planning their August 12th approach to the bank, in direct contravention of the latter’s expressed wish that approaches be made via Levy. While joining with Godsall to ask the bank to finance their offer is not a breach of any duty on Foreht’s part, it shows that he and Godsall were actively working together. Foreht was not a sort of broker bringing Shieldings and Levy-Russell together, but an active participant in Shieldings’ effort. Even before Shieldings had been identified to Hayeems or Levy as a potential purchaser, Godsall had moved beyond the role of purchaser into the role of surreptitious participant in the affairs of the company. He knew in advance of Foreht’s plan to visit the bank about the business plan, no doubt advised Foreht about it, and met on the Sunday after it happened, a meeting that included a debriefing on the events at the bank. This is not the conduct of an arm’s-length purchaser. The August 26th letter’s reference to “absent degradation of motivation” shows he was fully informed on developments inside the company and was prepared to try to influence them.
The delivery to Godsall of the bank’s September 4th credit extension letter is by itself a most significant event because of the great sensitivity of the information and its correspondingly great value to Godsall in the anticipated negotiations. It may have been a sort of watershed. That letter was so sensitive that they both must have realized, by then at the latest, that Foreht had definitively changed sides. Nothing in the letter is of any value to an asset purchaser in evaluating what he is bidding for. Its sole value is in disclosing the restraints and deadlines under which the vendor must operate, thereby enabling the purchaser to devise a strategy to beat the price down. Combined with the other evidence, especially Foreht’s duplicity regarding his connection with the “third party offer”, this act provides powerful evidence of the existence of an agreement to work jointly to achieve the end of a cheap acquisition at a price based upon deceit rather than negotiation.
By September 18th Godsall’s role had further evolved. Foreht was to meet with Hayeems on the 19th to discuss Shieldings’ offer. As I have earlier found, Godsall and the directors met on the 18th to plan how to persuade Hayeems and Levy to accept their offer.
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Godsall was now actively participating in developing the strategy for his friends within the company to get the offer accepted for their mutual profit without a true negotiation. This meeting was just before the directors presented Hayeems with their demands as to how he conduct the negotiations with Shieldings and any potential competitor. It is very probable that this was also discussed with Godsall. Later, he had from the directors advance notice of the terms of the counter-offer of October 23rd, confidential information given to him by them to further what had become the common design.
November’s events cast an important light on the Godsall-Foreht relationship as evidenced by the latter’s notes. On the 6th: “Hayeems sweating like a pig”; on the 11th Godsall instructs Foreht to call C.I.B.C. and tell them he is in a rage – which Foreht did on the 12th knowing it was false. In my view these episodes, in the context of events both prior and subsequent, illustrate that Godsall and the directors had by October at the latest become partners in a joint enterprise – to beat down the price so that they could jointly acquire the Levy-Russell assets cheaply. Their means was a conscious misuse of their positions as directors; the abuse of confidential information; the concealment of their true relationship from Hayeems and Levy, all in knowing breach of the directors’ duties to Levy-Russell. In short, they had become conspirators. The facts do not admit of any other inference.
The meetings at the turn of the year, and the resulting letter of January 5th, were a second attempt to constrict Hayeems’ ability to do any business without the involvement of Foreht or Bradshaw in order to ensure that they had access to all confidential information of interest to them. Bradshaw, Foreht and possibly Krestell heard, and did not correct, Godsall’s statement to the January 7th negotiating meeting that there had been “no approach yet” on the subject of management equity. They all knew it was false. These incidents illustrate the adherence of Bradshaw and Krestell to the conspiracy. Also illustrative of this adherence is the evidence that Bradshaw and Krestell met with Godsall on January 15th – “result = $7.2 mil”, Bradshaw noted in his diary. They actually helped set the price which they would afterwards urge be accepted. I have already gone into the “inventory dispute” in detail and concluded that the documents support an inference that the directors and Godsall were working against Hayeems in order to drive down the price; clear evidence of a conspiracy. The unhappy episode of Bradshaw and the question of Godsall’s willingness – or not – to negotiate with Hayeems; and the participation by Bradshaw as well as Foreht in the flow of
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information to Godsall further illustrate Bradshaw’s active participation in their scheme. His mind-set is, as I have noted, revealed in his failure to pass on Godsall’s willingness to spend another $200,000 if that would close the deal. Here again, in my opinion, the facts do not permit any reasonable inference other than that Bradshaw and Godsall were co-conspirators.
The conspiracy continued after the receivership began. The narrative is replete with instances where the directors left Davidson uninformed when their duty required them to speak. The sharp drop in Shieldings’ price for the business assets was, in my view, the direct result of information fed to Godsall by the directors who had met Wichart and sized him up, correctly, as about a $3 million bidder.
Summary as to conspiracy
In my view, apart from actual damage, the essential elements of the conspiracy alleged in the particulars and pleadings have been proved. From the facts I have inferred an agreement among Godsall (and therefore Shieldings), Foreht, Bradshaw and Krestell to acquire jointly the assets of Levy-Russell at a bargain price by unlawful means: i.e. the directors’ breaches of duty. This conduct, although intended to profit the conspirators rather than to injure the plaintiff, was nevertheless directed towards the plaintiffs and was such that the conspirators knew that injury to the plaintiffs was bound to result. Injury did result as will be discussed shortly.
What did Hayeems and Levy know?
It was argued that the Foreht-Bradshaw-Krestell conflict of interest – their involvement with Shieldings – was well known to Hayeems and Levy and thus cannot be a breach of duty. They chose, it was said, to keep the three in place in spite of their conflict, because it was in Levy-Russell’s interest to do so. It is therefore not now possible to complain if the directors pursued their own interest.
The evidence establishes that Levy did invite Foreht and Bradshaw, separately, to seek buyers, including the possibility of an employee buy-out. Hayeems knew Foreht was seeking a buyer or a backer: when Shieldings’ first letter arrived he asked Foreht: “Is this one of yours?” Certainly they knew that Foreht had found Shieldings, was keen on doing a Shieldings deal and would very likely be employed in the new company. They knew of the
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bank’s perception of Foreht’s “two hats”. They no doubt expected that Bradshaw, Bleiwas and all the others listed as key employees in the several Shieldings offers would be employed. As to whether Foreht would actually have equity, he was never forthright. He told Hayeems he “hoped” to have equity in September 1986, but he denied in writing to Hayeems having any conflict of interest nor any business connection with the offeror. He could not point to any occasion when he had unequivocally told either Hayeems or Levy that he would be a significant shareholder, even though he knew he would be from relatively early in the discussions with Godsall. Hayeems came to feel that the directors were talking directly to Godsall; that Foreht should be asked – and he did ask him – to distance himself from the negotiations; that he should note in writing to all three (Feb. 4/87) that he had told them that they could be seen to have a conflict of interest between being directors and “…acting on behalf of a buyer who will include you as part of his team”. This language indicates that as late as early February, Hayeems thought of the directors as part of the management team that would work for the buyer, not as the buyers themselves.
Even when, on February 5th, Foreht and Krestell wrote, “We realize that we have conflict of interest”, they did not disclose the nature of their interest, nor were they honest about their own activities. It was simply untrue to claim that they were being very careful in their contacts with Godsall; or that they had “stayed away from discussions of the business prospects” with Godsall, leaving that to Hayeems. This pattern of concealment continued as late as March 10th when Foreht misled Petrie about the scope of his interest in the buyer and the nature of his relations with Godsall. Godsall also contributed to the deception with his statement on January 7th that there had been “no approach yet” on the subject of management shares.
Levy was cross-examined on his knowledge of the Shieldings-directors relationship. He conceded that he knew that Shieldings was an investor that might back the directors but Levy asked Foreht one time if he had any interest and the answer was no. He had no objection in principle to an employee buy-out and he knew that Shieldings was a company that gave shares to its people. At another point his testimony was:
Q. And then there were more negotiations in November and December 1986 with Mr. Hayeems and Shieldings; correct?
A. Correct.
Q. Did you assume the directors – Foreht, Bradshaw, Krestell – were in there too?
A. Of course at that time.
Q. With Shieldings?
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A. At that time, yes.
Q. Anything they knew, Shieldings would know?
A. I would think so.
Q. And that was your assumption at the time?
A. That was one assumption. I had several. The other assumption is that Shieldings never intended to buy unless – there was an old story that I heard that was floating around by one of the officers of the company that: “we’re not going to pay 8 million, 7 million, 9 million, 4 million. When the receiver takes over we’ll buy it for zero”.
On its face that evidence indicates that Levy assumed that the directors were feeding Godsall information, and did nothing to stop it. However, he did not express that view to Hayeems as anything but a possibility and Hayeems told him that Foreht hoped to have equity. Any greater degree of suspicion is inconsistent with the complete openness exhibited by Hayeems who took one or more of the directors to virtually every meeting of any significance, and often briefed them if they had not been there. Although Hayeems’ hands were tied so far as firing them, it is not conceivable that he would have been so open with them if he had shared this alleged opinion of Levy’s. It is significant that in evidence (supra) Levy coupled this assumption with another: that no deal would be made outside of a receivership, and then at zero. That is an assumption that it is most unlikely he actually had at the time, since there is no evidence of the sort of reaction to be expected from a man of his forceful personality had he heard stories like that in 1986. Levy showed a marked tendency in his evidence to project his present hostilities on to past events, as well as an imperfect memory. He was a very angry man in the witness box when cross-examined about the directors’ acts and was prepared to agree to almost anything that showed the three directors in a bad light. I have already indicated that I view Levy’s evidence with caution for these reasons and I think that caution applies whether the evidence is favourable to him or not. He was out of the company in late 1986 and had no direct contact with the directors. Hayeems
was in a better position to assess what was happening. I doubt very much that Levy had this impression at the time in question and I do not accept that evidence.
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When Hayeems was cross-examined by Mr. Brown for the bank, it was put to him that as early as September (1986) he knew that the directors were associated with Shieldings in some way in making offers to the company. He responded:
A. Mr. Brown, I said that the first indication that I had was when the first offer came in, I believe September 23rd where Mr. Foreht said that he may have some equity in the company. That was the first indication, the first smell that created a suspicion in my mind. That’s all.
He then went on to blame the bank for not telling him what it knew. Mr. Brown then asked:
Q. …but there was no question by the time you got to the end of January and February the 5th, in dealing with Shieldings, that the three senior management of Levy-Russell were going to have some association with Shieldings and that they had an interest in that offer being accepted and a deal being concluded. Isn’t that true?
A. Yeah, but that was – when somebody says he hopes to have some equity all right and then when the buyer himself, Shieldings, talks about him being a buyer in his own right, right, what does it convey to anybody? You may have a certain amount of interest. It may be stock options, it may be anything like that. It doesn’t indicate, as we have found out, that the group had – that Foreht had 51 per cent and then he threw a few “bones” to the rest of the people for 15 per cent. That’s a big difference, Mr. Brown.
Hayeems went on to repeat that he suspected in September that the three directors had some interest in Shieldings’ offer, that they were working together with Shieldings to the detriment of the company because they were urging that the offer be accepted in many meetings; and that in February he knew that the directors would have “some kind of interest”.
Mere suspicion by other parties that something is taking place “behind the scenes” does not absolve directors from a duty to disclose. In PWA Corp. v. Gemini Group Automated Distribution Systems Inc. (1993), 101 D.L.R. (4th) 15, 8 B.L.R. (2d) 221 (Ont. Gen. Div.
[Commercial List]), affirmed (1993), 103 D.L.R. (4th) 609, 15 O.R. (3d) 730 (C.A.), a limited partnership (Gemini) had three limited partners, each entitled to three seats on the board. The
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limited partners were at once the main customers, suppliers and creditors of the partnership. PWA and Air Canada, two of the partners, were fierce competitors in the airline business. Gemini operated their joint computerized reservation system. PWA began negotiations with another airline (AMR) looking towards the sale of equity in PWA to AMR and a shifting of the PWA reservations from Gemini to AMR’s system known as Sabre.
A confidentiality agreement bound the negotiators, including PWA’s nominee directors on Gemini’s board, to secrecy. These directors failed to disclose any aspect of the AMR negotiations to the other partners. I will deal with this case more broadly later, but on the present point Griffiths J.A. (Arbour J.A. concurring) said at p. 798 (O.R.):
It was argued that there was no duty of disclosure because at least Air Canada suspected that PWA was negotiating with AMR and might seek to shift hosting to Sabre. In my view, PWA’s nominated directors should not be absolved from the duty to disclose on the assumption that another partner may have suspected the proposed transfer of hosting.
The limited knowledge of Hayeems and the suspicions he harboured did not relieve the directors of their duty to disclose their interest.
I find that although Levy and Hayeems knew Foreht was seeking purchasers or to put together an employee group to participate in a purchase, they did not know, at any material time, that the three directors were in effect partners with Shieldings in the various offers made under Shieldings’ name, nor that Foreht had an understanding with Godsall that he would hold the majority share. More importantly they had no inkling of the scale of the directors’ betrayal of Levy-Russell in their private dealings with Godsall. By keeping the directors in office, Hayeems and Levy did not condone the directors’ breaches of duty of which they were unaware nor relieve them of any aspect of their duties.
There was no fair and full disclosure of the nature and extent of the three directors’ interest in Shieldings’ proposal. They set out to keep it secret and they succeeded. That was a serious breach of their duty to Levy-Russell in itself and in turn made possible their other breaches which depended upon their continuance in office.
Consequences of knowledge of conflict
It was argued that the knowledge of Hayeems and Levy that there was a conflict at all
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whatever the nature and extent of the interest might be – was sufficient to free the directors from their duty to the company. It could not be said, it was argued, that once he knew that any conflict existed, Hayeems could have placed any trust or confidence in the directors. Hence they were no longer fiduciaries. In my view this is a mistaken and pernicious view of the facts and the law. The facts, as I have already found, are that Hayeems did go on relying on the directors to do their duties.
In Gray v. New Augarita Porcupine Mines Ltd., [1952] 3 D.L.R. 1 (P.C.), Gray failed to disclose the true scale of his liabilities to the company while negotiating a settlement with his fellow directors. He defended in part by saying [at p. 15] they knew he was “‘…[not] on the company’s side in that settlement. I was J.J. Gray in that settlement’”. The Judicial Committee rejected that defence. He was bound to disclose. Per Lord Radcliffe at p. 14:
A director who wishes to keep for himself the benefit arising from some deal with his company has to establish that he has satisfied all necessary conditions. The onus is upon him.
And:
His declaration must make his colleagues “fully informed” of the real state of things.
A director’s duties arise both from statute and common law. The statutory duty applicable to the defendant directors is set out in s. 115 of the Business Corporations Act, 1982, S.O. 1982, c. 4 as amended, which was in force at the relevant time. It calls for them to manage or supervise the management of the business and affairs of the corporation. In the present case, the majority shareholder had given Hayeems a mandate which in practical terms gave him a role in management, but the directors’ duties continued. Indeed more than once they backed up demands on Hayeems by reference to their status as directors.
The statutory standard of care is found in s. 134(1) of the same Act:
134(1) Every director and officer of a corporation in exercising his powers and discharging his duties shall,
act honestly and in good faith with a view to the best interests of the corporation; and
exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
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Reference should also be made to s. 132 which requires a director with a material interest in, inter alia, a proposed material transaction with the corporation to disclose:
…in writing …the nature and extent of his interest.
The common law is to the same effect. It is not enough to disclose an interest in general terms; one must state what the interest is: Mercantile Credit Assoc, v. Coleman (1873), L.R. 6 H.L. 189 per Lord Cairns at p. 205.
Section 132 further provides by subs. (7) that if such interest is so disclosed the director is not accountable for profit and the transaction is not liable to be set aside by reason only of the relationship disclosed. By subs. (9) a failure to disclose is grounds for setting aside the transaction and requiring the director to account for profit. Nothing in the Act suggests that by disclosure a director is relieved of his duty to act honestly and in good faith with a view to the best interests of the corporation. Disclosure is part of acting in good faith but it is not the whole scope of that duty.
Are disclosing directors free to act as they please?
Is it enough that everyone knows of the existence of the conflict? Are directors, having made disclosure, or having been found out, then free to act as they please?
The answer is clearly no. Disclosure is but the first step. The director must thereafter continue to place the interests of the corporation ahead of his own. A parallel situation is the nominee director whom “everyone knows” is on the board to represent a certain interest. In Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324, [1958] 3 All E.R. 66 (H.L.), the House of Lords dealt with the duties of directors of a textile corporation who were nominated by a co-operative society shareholder. Per Lord Denning at p. 366-367 (A.C.):
What, then, is the position of the nominee directors here? Under the articles of association of the textile company the co-operative society was entitled to nominate three out of the five directors, and it did so. It nominated three of its own directors and they held office, as the article said, “as nominees” of the co-operative society. These three were, therefore, at one and the same time directors of the cooperative society –
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being three out of 12 of that company – and also directors of the textile company – three out of five there. So long as the interests of all concerned were in harmony, mere was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position… It is plain that, in the circumstances, these three gentlemen could not do their duty by both companies, and they did not do so. They put their duty to the co-operative society above their duty to the textile company in this sense, at least, that they did nothing to defend the interests of the textile company against the conduct of the co-operative society. They probably thought that “as nominees” of the co-operative society their first duty was to the cooperative society. In this they were wrong. By subordinating the interests of the textile company to those of the co-operative society, they conducted the affairs of the textile company in a manner oppressive to the other shareholders.
And in the same case per Lord Keith of Avonholm at p. 361 (A.C.):
On the vital matters affecting the company’s prosperity known to the nominee directors these directors remained silent, concealed the facts from the [respondents] and took no action and gave no advice helpful to the company. As Lord Sorn put it, their conduct as directors was a negative one to “let the company drift towards the rocks.”
And at p. 363:
…I cannot think that where directors, having power to do something to save a Company, lie back and do nothing, they are not conducting the affairs of the company, perhaps foolishly, perhaps negligently, perhaps with some ulterior object in view. They are certainly conducting the affairs of the company in breach of their duty as directors.
The principles of Scottish Co-operative were applied in Ontario by Callaghan C.J.O.C. in PWA Corp. v. Gemini Group Automated Distribution Systems Inc., supra [8 B.L.R. at pp. 265-266], where he held that a director’s duty includes:
…a positive duty to disclose to the corporation facts which impact upon the business of the corporation and to take positive steps to save a company in light of their knowledge of facts which may affect the
company.
and:
A nominee director is not accorded an attenuated standard of loyalty to the corporation.
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and:
Where a director enters into an agreement which imposes upon him or her a duty inconsistent with his or her fiduciary duties to the corporation, the director is in an untenable position of conflict of interest. The PWA nominees to the Board of the General Partner were in this position. They could only have avoided that position by resigning as directors of the General Partner’s Board.
In the Court of Appeal opinion was divided. The majority found [15 O.R. at p. 768] Callaghan C.J.O.C.:
…completely justified in finding a breach of fiduciary duties on the part of the directors representing PWA because they failed to disclose that part of the negotiations with AMR which affected the Gemini Partnership in a vital aspect of its business.
The majority regarded the case as an unusual one in that it comprised three sophisticated commercial corporations, two of which competed in the airline business. Because they were competitors, the directors appointed by each had a duty to disclose subject to a limit. Confidential PWA business need not be disclosed unless it affected Gemini in a vital aspect of its business.
Dubin C.J.O., dissenting in the overall result, addressed this issue at pp. 749 ff. noting that he agreed with the majority that the trial judge’s formulation of the director’s duty was too high “…having regard to the peculiar nature of the Partnership.” He would have gone farther than his colleagues and found no breach of duty because it would have been impossible to separate the information relevant to Gemini from the rest so as to reveal part without revealing the whole.
It is evident, in my reading of the case, that both judgments in the Court of Appeal find the standard of disclosure adopted by Callaghan C.J.O.C. too high only in the highly unusual circumstances of the case. Even in those circumstances the majority found a breach when the information withheld affected the partnership in a vital aspect of its business.
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In the case at bar there are no special circumstances similar to those in Gemini and the information withheld was crucial to Levy-Russell’s chances of successfully negotiating a sale of its business. The standard adopted by Callaghan C.J.O.C., following authority as I have noted, is the standard for the normal case such as the present. It should also be pointed out that in Gemini none of what the PWA nominees did was done for personal profit. They were caught in a conflict of fiduciary duties to others.
Another parallel situation occurs when an agent acts for both vendor and purchaser. That situation was recently before our Court of Appeal in Raso v. Dionigi (1993), 12 O.R. (3d) 580 where the court held that such an agent had duties to both principals and cannot act for both. The “narrow exception to the general rule” of absolute prohibition was referred to at
p. 586 by a quotation from an article by W.F. Foster [“Dual Agency: Its Implications for the Real Estate Brokerage Industry”, Meredith Memorial Lectures, Current Problems in Real Estate (1989), at p. 76] adopted by the court:
“But it is clear from the case law that mere full disclosure in itself is insufficient – an agent, through ‘clear and affirmative proof’, also must establish that the parties to the transaction (‘that is’ in the context of a dual agency, his two principals, the vendor and the purchaser) ‘were at arms length’ and that after receiving the information the principals ‘agreed to adopt what was done’ by the agent or what the agent proposes to do. [Emphasis in 12 O.R.]
In Atkins & Durbow Ltd. v. Bell (1957), 10 D.L.R. (2d) 484 (B.C. C.A.), the plaintiff had accepted the defendant’s services as manager knowing that because of his other commitments conflict was inevitable. Nevertheless the plaintiff was entitled to demand that the defendant, in carrying out his fiduciary duties, would [at p. 491]:
…honestly attempt to carry out the purpose of the agreement and act fairly towards each of them in all matters involving conflict of interest.
In my view, these cases show that disclosure – even the fullest disclosure – does not release a director from his duty of loyalty to the company’s interests and not his own. Nor are these principles confined to the facts of the cases – to the nominee director or the dual agent; rather they apply to the whole range of persons holding directorships.
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Thus, even though it may be well known that directors represent another interest, or have fully disclosed a conflict, their duty to the corporation continues unabated. In my view the law required the Levy directors to continue to act honestly, in good faith and in the best interest of Levy-Russell, and that duty would have continued even if they had told Levy and Hayeems the full truth about their equity arrangements with Shieldings. It would still have been a breach of duty for them, with a view to their own personal profit and not the good of the company, to give Godsall confidential information; to counsel him on how to beat down the price; to undermine Hayeems’ negotiating position; to work to get the bank to put pressure on Hayeems to accept Godsall’s terms without an honest negotiation and so on. The only escape from that duty was resignation.
It was said that there would be few backers for management take-overs if there could not be contact between management and backer with management remaining in place. Put in those terms, that may be so, but that is not this case. If this was a management takeover, where is the full and fair disclosure? where is the press release to the public? or the letter to all shareholders of record? or the withdrawal by management from the vendor’s side of the negotiations? or the open appearance of management on the purchaser’s negotiating team? The views of the commercial world on such matters no doubt vary. In this case Hayeems and Loewen both said things which cast light on the commercial realities of a management buyout. When told that Foreht had hopes for equity, Hayeems told him to distance himself from the negotiations. Loewen’s response to Foreht’s involvement was that he should make his offer from outside the company. The principles upon which I have held that these directors ought to have acted will cast no fear into the lives of honest directors or management purchasers.
Trust and confidence
It was argued that in the absence of the actual placement of trust and confidence in a director, there could be no fiduciary duty upon him or her. This cannot be. In the first place, the Act says nothing to encourage such a notion. Secondly, even if Hayeems and Levy lost trust and confidence in the directors, they are directors of a subsidiary of a public company. What of the other shareholders? The duty is not owed to Levy and Hayeems as individuals, but to Levy-Russell and indirectly to those who invest in the public parent. The lack of confidence of Levy and Hayeems could not relieve the directors of duties owed more broadly.
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Finally, to the extent that the fiduciary nature of director’s duties arises from common law principles, trust and confidence is but one of several possible indicia of a fiduciary duty. The scope for the exercise of a discretion or power so as to affect another’s interests; and the vulnerability of that other to such an exercise are the characteristics of relationships giving rise to fiduciary obligations: Frame v. Smith, 42 D.L.R. (4th) 81, [1987] 2 S.C.R. 99, 9 R.F.L. (3d) 225, per Wilson J. who dissented, in a passage not disapproved by the majority; International Corona Resources Ltd. v. LAC Minerals Ltd. (1989), 61 D.L.R. (4th) 14 (S.C.C.).
In LAC, Sopinka J. observed [at p. 63] that the one indispensable characteristic of such a relationship is the dependency or vulnerability of one party to the other, citing Professor Weinrib’s statement [quoted in Guerin v. R. (1984), 13 D.L.R. (4th) 321 (S.C.C.), at p. 340]:
[the] hallmark of a fiduciary relationship is that the relative legal positions are such that one party is at the mercy of the other’s discretion.
In the present case, whether or not Levy and Hayeems maintained actual confidence in the Levy directors does not alter the underlying position: so long as the directors held that office they were in a position where their access to information within the company and from the company’s bankers and their ability to influence events rendered the company vulnerable to them and to their misuse of their position.
In my view, these principles rendered them fiduciaries of the company regardless of whether some shareholders did not trust them. So by the separate but parallel operation of the Act and of the common law, the Levy directors remained fiduciaries of the company at least until the receivership, to which I will now turn.
The duties of the directors during the receivership
In principle one would expect that the directors of a company in receivership would continue to have the duty to act in the best interest of the company notwithstanding that their powers have largely passed to the receiver. As is discussed later, receivers do not owe a duty to act in the interest of the company: their duty is to maximize recovery of the debt owing to the debentureholder. Thus there is a need for the presence in office of persons having a broader duty than the receiver for the protection of the shareholders and the unsecured creditors, all of whom have an interest in any surplus beyond the claim of the secured party. In Kerr on Receivers (17th ed.), at p. 414:
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The appointment of a receiver by debenture holders has no effect whatsoever upon the position of the main officers of the company, the directors and the secretary; and that is so, whether the receiver is the agent of the debenture holders, or of the company,… The corporate structure of the company remains unimpaired, and although the management and control of the assets comprised in the appointment is thereby taken completely out of the hands of the officers of the company, they remain as such officers, with all the usual statutory duties to discharge.
The leading case in England is Newhart Developments Ltd. v. Co-operative Commercial Bank Ltd., [1978] Q.B. 814 (C.A.) where the defendant bank agreed to finance the plaintiff’s property development and took a debenture. The plaintiff ran into difficulty. The bank withdrew its financial support and appointed a receiver pursuant to the terms of the debenture. The plaintiffs brought a claim against the defendant for breach of contract arising out of the defendant’s withdrawal of financial support. The defendant applied to have the action set aside on the ground that it had been issued without the consent of the receiver. The court held that the receiver’s consent was unnecessary. At pp. 819-820, Shaw L.J. wrote as follows:
It [the receivership] does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge.
There is in the debenture deed itself a provision to the effect that the receiver may carry on the business of the company or concur in carrying on its business, which itself demonstrates that there is not a total extinction of the function of the directors.
And:
…notwithstanding that the debenture holders have got the right to be satisfied out of the assets subject to the charge, other creditors are entitled to expect that those concerned with the management of the company should exercise their best efforts to ensure that, when the time comes, they too will find themselves in the position that there is a fund available to pay them, if not in full, at least something of what they are owed.
The receiver is entitled to ignore the claims of anybody outside the debenture holders. Not so the company: not so therefore, the directors of the company. If there is an asset
which appears to be of value, although the directors cannot deal with it in the sense of disposing of it, they are under a duty to exploit it so as to bring it to a realisation which may be fruitful for all concerned.
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Newhart was applied in Société générale (Canada) v. 743823 Ontario Ltd. (1989), 41
C.P.C. (2d) 286 (Ont. Master) where there was no provision in the debenture which specifically prohibited the officers and directors from initiating or defending lawsuits. Master Clark referred to Newhart and held [at p. 289] that the appointment of a receiver did not deprive the directors of their rights and duties. They had [at p. 290]:
…a continuing obligation to the shareholders and creditors other than the debenture holders, and must continue to manage the company in a prudent manner in their best interests, to the fullest of their power, consistent with the legitimate activities of the receiver;
Similar conclusions were reached in Toronto Dominion Bank v. Fortin, [1978] 2 W.W.R. 761, 26 C.B.R. (N.S.) 168, 85 D.L.R. (3d) 111 (B.C. S.C.); First Investors Corp. v. Prince
Royal Inn Ltd., 60 Alta. L.R. (2d) 269, [1988] 5 W.W.R. 375, 69 C.B.R. (N.S.) 50, (sub nom.
Dworkin, Heumann v. Prince Royal Inn Ltd.) 88 A.R. 372 (C.A.) and Golden West Restaurants Ltd. v. Canadian Imperial Bank of Commerce, [1989] 5 W.W.R. 471, 77 Sask. R. 304, 75 C.B.R. (N.S.) 170 (Q.B.), affirmed [1990] 3 W.W.R. 287, 81 Sask. R. 312, 77 C.B.R.
(N.S.) xxviii (note) (C.A.).
In my view, the law in Ontario is as enunciated by Master Clark in Societe Generale, supra. The Levy directors were under a continuing obligation to the shareholders and unsecured creditors to act honestly and in the best interest of the company. In the receivership, as before, the interest of the company was to attain the best possible price for its assets.
The directors’ breaches of duty during the receivership
In order to assist the receiver to obtain the best available price for the business assets of the company, the directors ought to have briefed Davidson fully on their true views of the values of such assets and the history of the negotiations with Shieldings. Anyone who has read up to this point in these reasons will know already that they utterly failed to do so. They were not honest about their true relationship to Shieldings. Foreht volunteered figures in his
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March 27, 1987 memo that stand in sharp contrast to his real views as expressed in the Tecmotiv interim balance sheet. The Bilz documents were not provided to Davidson and the information that the directors did give him contributed to his approach to the inventory as largely scrap of little value, once again in sharp contrast to the expectations they actually had. Davidson was not briefed on the directors’ expectations for the M41 kit and, quite improperly, was kept ignorant of the Bradshaw letter seeking financing for it. Had they let him know that they felt it had a stand-alone value, it could have featured more prominently in the information package. Had they told him that there had been a recent sale (to Denmark) that would have led to further inquiries. All these matters, if known, would have altered, I think significantly, his impressions of what he was dealing with.
In addition, the flow of information continued unabated from the directors to Godsall, leading, as has already been found, to a sharp drop in the offer from Shieldings to a point just above the known level of the competition from Wichart.
The evidence is overwhelming that the Levy directors were in gross dereliction of their duty during the receivership as before it, all with a view to their personal profit and, I find, in pursuance of the common design they shared with Godsall.
The conduct of the receivership
The plaintiffs criticized the conduct of the receivership on fourteen grounds. Each side called an expert. For the plaintiffs M. Rea Godbold C.A. gave evidence. He is a partner in the Toronto Financial Services Group of the firm of Doane Raymond, a licensed trustee in bankruptcy with 18 years’ experience in insolvency work. For the defendant bank and receiver Robert E. Lowe C.A. testified. He is a partner and Deputy Chairman of the firm Coopers & Lybrand, Chairman of its insolvency arm Coopers & Lybrand Limited and a licensed trustee. He has been with Coopers & Lybrand for 27 years and has extensive experience in receivership work. Both men thus had impressive credentials and much relevant experience. Both saw the maximization of recovery as the receiver’s major objective and acknowledged that much of a receiver’s work involves making judgment calls on the basis of what is known at the time. Mr. Lowe spoke of the receiver owing a duty to both bank and the debtor to market the assets in a commercially reasonable manner. Mr. Godbold affirmed the existence
in most instances of a range of decisions any one of which might reasonably be selected by a receiver.
Powers and duties of receivers
The powers and duties of receivers derive in the first instance from the security instrument under which they act, supplemented by the decided cases. In the present case the debenture provides that the receiver has power to:
3.3(b) carry on or concur in carrying on all or any part of the business of the Company;
and
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(d) sell or concur in selling all or any part of the Charged Premises without notice and in such manner as may seem advisable to the receiver…
The term “Charged Premises” covers the entire security held by the bank, including the floating charge on the company’s undertaking.
Although the debenture provides that the receiver is the agent of the debtor, it is clear that when selling the collateral the receiver is agent for the debenture holder: Peat Marwick Ltd. v. Consumers’ Gas Co. (1980), 35 C.B.R. (N.S.) 1 (Ont. C.A.) at p. 11.
Paragraph 34 of the plaintiffs’ written argument makes clear that their case against the bank and receiver is “founded on the tort of negligence… the failure of the bank and receiver to act in a ‘commercially reasonable’ manner in realizing upon the Bank’s security”. I turn therefore to a review of the law relating to the duties of receivers.
Traditionally, the duty of a receiver selling collateral is primarily to the debentureholders. In Re B. Johnson & Co. (Builders) Ltd., [1955] 1 Ch. 634 (C.A.), Jenkins
L.J. said [at p. 662]:
Again, his power of sale is, in effect, that of a mortgagee, and he therefore commits no breach of duty to the company by a bona fide sale, even though he might have obtained a higher price and even though, from the point of view of the company, as distinct from the debenture holders, the terms might be regarded as disadvantageous.
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The Supreme Court of Canada, per Duff J., in British Columbia Land & Investment Agency v. Ishitaka (1911), 45 S.C.R. 302, held that a mortgagee’s duties to the mortgagor did not include an obligation to take all the measures that a prudent man would take in selling his own property. However, many cases recognized a further duty, short of a general liability for negligence, to take “reasonable precautions to obtain a proper price”. In Kennedy v. De Trafford, [1896] 1 Ch. 762 (Ch.), affirmed [1897] A.C. 180 (H.L.), Lindley L.J. explained this phrase [at p. 772] as not implying liability for negligence, but that the mortgagee must not “fraudulently or wilfully or recklessly” sacrifice the debtor’s interests. In the Lords, the view was expressed that a mortgagee acting in good faith was not liable for negligence in the exercise of his power of sale.
In 1971 in Cuckmere Brick Co. v. Mutual Finance Ltd., [1971] Ch. 949, [1971] 2 All
E.R. 633 (C.A.), the English Court of Appeal revisited these cases. A mortgagee and its auctioneer had acted negligently in failing to advertise that the mortgaged property had a favourable zoning. Salmon, Cross and Cairns L.JJ. all wrote judgments. Each commented on the unsatisfactory state of the authorities and each concluded that a duty of care did exist. Cairns L.J. (All E.R. at p. 653) considered the passages referred to from Kennedy v. De Trafford to have been unnecessary for the decision and preferred earlier decisions favouring a duty of care to obtain a proper price. Cross L.J. also preferred the earlier cases. He pointed out (All E.R. at p. 649) that a mortgagee in possession was undoubtedly liable for loss due to his negligence while in possession. It would, he said, be:
…illogical that the mortgagee’s duty should suddenly change when one comes to the sale itself and that at that stage if only he acts in good faith he is under no liability, however negligent he or his agent may be.
The scope of the duty was discussed by Salmon L.J. commencing at p. 643 All E.R. He noted that a mortgagee is not a trustee for the mortgagor. He can choose the time to sell even though the market is not good; if his interests, as he sees them, conflict with the mortgagor’s, he may prefer his own. Beyond that, the authorities were unsatisfactory. Some suggested that unless he acted in bad faith, the mortgagee was safe; others that, in addition to good faith, the mortgagee:
…is under a duty to take reasonable care to obtain whatever is the true market value of the mortgaged property at the moment he chooses to sell it… The proposition that the mortgagee owes both duties, in my judgment, represents the true view of the law.
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In further analysis he showed that Kennedy v. De Trafford was anomalous; there were earlier authorities in the Privy Council holding a mortgagee chargeable with the full value of property sold at an undervalue for want of due care. Salmon L.J. then concluded (All E.R. at
p. 646) that there was a duty of care:
…to take reasonable precaution to obtain the true market value of the mortgaged property at the date on which he decides to sell it No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.
In Downsview Nominees Ltd. v. First City Corp. Ltd. (1992), 148 N.R. 47 (J.C.P.C.), an appeal from New Zealand, a second debenture holder – First City – put in a receiver but the debtor procured the first debenture holder to assign its security to Downsview. Downsview then put in a receiver, Russell, who engaged the president of the debtor to manage the company and “trade out of difficulty”. Downsview refused First City’s offer to pay out the first debenture. First City sued alleging breach of duty of care in the management of the debtor company by Russell; bad faith in the appointment of Russell by Downsview for the purpose not of enforcing its own security but of frustrating the enforcement of First City’s security; and damages for loss during Russell’s management. At trial it was held that on the application of negligence principles, the receiver owed a duty to take reasonable care in dealing with the assets of the company.
In the Court of Appeal it was accepted that if Russell as receiver owed any duty to a subsequent debenture holder it would be in negligence and the appeal to the Judicial Committee did not challenge these assumptions. The Board, however, raised the issue being “considerably troubled by the approach in the courts below”. The case was then argued on the point. The Board, through Lord Templeman, begins its analysis of the duties of a receiver towards subsequent encumbrancers and the mortgagor, by a reference to basic principles from which flowed two rules:
para. 30:
…first, that powers conferred on a mortgagee must be exercised in
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good faith for the purpose of obtaining repayment and secondly that, subject to the first rule, powers conferred on a mortgagee may be exercised although the consequences may be disadvantageous to the borrower. These principles and rules apply also to a receiver and manager appointed by the mortgagee.
and para. 31:
…The decisions of the receiver and manager whether to continue the business or close down the business and sell assets chosen by him cannot be impeached if those decisions are taken in good faith while protecting the interests of the debenture holder in recovering the monies under the debenture, even though the decisions of the receiver and manager may be disadvantageous to the company.
Lord Templeman continues by quoting with approval passages from Re B. Johnson & Co. including the passage I have quoted earlier. He then addressed the proposition advanced by the courts below that the receiver owed a general duty to debenture holders to take reasonable care in dealing with the assets of the debtor as follows:
para. 36:
The general duty of care said to be owed by a mortgagee to subsequent encumbrancers and the mortgagor in negligence is inconsistent with the right of the mortgagee and the duties which the courts applying equitable principles have imposed on the mortgagee. If a mortgagee enters into possession he is liable to account for rent on the basis of wilful default; he must keep mortgage premises in repair; he is liable for waste. Those duties were imposed to ensure that a mortgagee is diligent in discharging his mortgage and returning the property to the mortgagor. If a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantages to the mortgagor. Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd., [1971] Ch. 949, is Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition. A receiver exercising his power of sale also owes the same specific duties as the mortgagee. But that apart, the general
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duty of a receiver and manager appointed by a debenture holder, as defined by Jenkins L.J., in Re B. Johnson & Co. (Builders) Ltd., [1955] Ch. 634, at 661, leaves no room for the imposition of a general duty to use reasonable care in dealing with the assets of the company. The duties imposed by equity on a mortgagee and on a receiver and manager would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company.
and para. 40:
If the defined equitable duties attaching to mortgagees and to receivers and managers appointed by debenture holders are replaced or supplemented by a liability in negligence the result will be confusion and injustice. A receiver and manager liable in negligence will be tempted to sell assets as speedily as possible for the purpose of repaying the mortgage debt, a decision which, whether negligent or not, does not expose him to a suit for damages but may be disadvantageous to the company. A receiver who is brave enough to manage will run the risk of being sued if the financial position of the company deteriorates, whether that deterioration be due to imperfect knowledge or bad advice or insufficient time or other circumstances. There will always be expert witnesses ready to testify with the benefit of hindsight that they would have acted differently and fared better.
There is thus authority of great persuasive force negating the existence of a general duty of care on the part of a receiver towards the debtor with two exceptions: the equitable obligations of receivers such as waste and repair; and the Cuckmere Brick duty narrowed to this: that if the mortgagee decides to sell he must take reasonable care to obtain a proper price.
The Cuckmere Brick case has found its way into Ontario law. In Hausman v. O’Grady
(1986), 42 D.L.R. (4th) 119 (Ont. H.C.), affirmed (1989), 57 D.L.R. (4th) 480 (Ont. C.A.), it
was adopted by Anderson J. who noted the importance of distinguishing between a failure to take reasonable precautions and a mere error of judgment; and the further need to avoid hindsight. He also cited with approval the statement of Craig J. in Bank of Nova Scotia v. Barnard (1984), 46 O.R. (2d) 409, 9 D.L.R. (4th) 575, 32 R.P.R. 292 (H.C.), where (at p. 420
O.R.) that learned judge said the duty to take reasonable precautions did not mean that the
mortgagee must obtain the true value. In the unreported case of Oak Orchard Developments Ltd. v. Iseman (April 16, 1987), Doc. 5504/82 (Ont. H.C.), Saunders J. elaborated on reasonable precautions as follows:
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The mortgagee selling under a power of sale is under a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. This does not mean that the mortgagee must in fact obtain the true value.
The duty of the mortgagee is only to take reasonable precautions. Perfection is not required. Some latitude is allowed to a mortgagee.
In deciding whether a mortgagee has fallen short of his duty, the facts must be looked at broadly and he will not be adjudged to be in default of his duties unless he is plainly on the wrong side of the line.
The mortgagee is entitled to exercise an accrued power of sale for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting, a higher price could be obtained.
The mortgagee can accept the best price he can obtain in an adverse market provided that none of the adverse factors are due to fault on his part.
Even if the duty to take reasonable precautions is breached, the mortgagor must show that a higher price would have been obtained but for the breach in order to be compensated in damages.
Against this background of principle, I turn now to the plaintiffs’ complaints about the conduct of the receivership.
Allegations against the bank and receiver
Bank’s failure to inform its customer or brief its receiver re conflict of interest
The plaintiffs say that the bank, knowing that the directors and Foreht in particular, had consistently demonstrated an “inability to balance his competing and conflicting interests…”, failed to bring its concerns to the attention of Levy and Hayeems; and failed to brief Peat of those concerns.
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The plaintiffs argue that the bank knew Foreht was not acting as a director should – he was urging the bank to put in a receiver; to, in effect, gang up on Levy; to remove him; to pressure Levy to accept Shieldings’ offer. Counsel points to Soucie’s June 9th note – “Are we being drawn into a conspiracy?” and challenges Soucie’s evidence that that particular concern never came up again. I have already reviewed Foreht’s activities extensively and will not do so again. There is ample evidence that he displayed to the bank his devout interest in getting a Shieldings deal accepted one way or another. The bank was aware of and concerned about Foreht’s “two hats” throughout its 1986 and 1987 dealings with Levy-Russell. The bank denies the existence of any duty upon it to advise a customer of any thoughts it may have as to the customer’s officers potentially being in a conflict of interest. No case was cited to me directly supporting such a duty. The relationship of banker and customer is contractual and normally is best described as that of debtor and creditor. It does not of itself give rise to fiduciary duties and indeed the plaintiffs’ claim against the bank is not founded on such duties, but on negligence. In Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110 (C.A.), Atkin L.J. (at p. 127) set out a careful analysis of the terms to be implied in a banker-customer contract. There is no reference to any duty such as the one alleged. This description of the bank’s duties was supplemented by Atkin L.J. in the later case of Hilton v. Westminster Bank Ltd. (1926), 135 L.T. 358 (C.A.) where he observed at p. 326 that another contractual duty was to exercise reasonable care and skill in performing its banking services. Advising a customer of the possible conflict of interest of an officer or director is not a banking service; nor was it asserted that the bank led Levy or Hayeems to believe that it would give such advice. I am of the view that the bank did not have the duty contended for.
The bank further defends on the basis that in any event Levy and Hayeems knew – in part because of events occurring at meetings with the bankers – that the directors had a conflict of interest. At a meeting on May 5, 1986 Levy spoke of selling the business to Foreht and Bradshaw; in his letter of the 23rd he said he had approached his two most senior executives to have employees and investors take it over; on June 17 in Levy’s presence the bankers asked Bradshaw and Foreht how their plans were coming and were told that it was being worked on. The bankers told Hayeems of Foreht’s visit to attack the business plan; they told Hayeems of their perception that Foreht wore “two hats” and should make his offer from outside the company.
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In my view, if the bankers had a duty to warn Levy and Hayeems that Foreht had a conflict of interest related to the Shieldings offer, they fulfilled it. Theirs is, at best, a much more limited duty than that of the directors themselves who must volunteer the fullest particulars. Once the bankers had given these warnings and the directors were left in place they had no obligation to repeat the warning on every new occasion. From their perspective, their customer knew and was content to handle the situation without removing Foreht or the others.
I turn now to the second part of the first complaint; that the bank failed in its duty to brief its receiver on its concerns about the directors. As to the “two hats” – buyer and seller –Cumming’s notes of March 9 reveal that the receivers were told the board wanted to buy the company. Cumming was also aware of Foreht’s enthusiasm for the Shieldings deal and that he and Bradshaw were working with Shieldings to accomplish it. Soucie also told them that one possible outcome was that management in conjunction with Shieldings might purchase the assets. Foreht told Petrie that the directors would have an interest but it would not be large. Lowe testified that such a situation is a common one and experienced receivers know how to deal with it. Godbold’s testimony was to the same effect. Soucie said he had no reason to think that the directors would mislead the receiver; he had generally received reliable information from them. I accept that evidence; he was not aware of much that is now known. Although at one time concerned about being drawn into a conspiracy, he no longer had that concern. If the reference to the management involvement was, as contended, too low-key to put the receiver on full alert; that at worst is a mere error of judgment, magnified by hindsight, and not negligence. I am satisfied that the bankers adequately briefed the receiver on the conflict issue.
I am also of the opinion that the bank had no legal duty to its customer to brief its receiver in the manner contended for. In the first place, the bank and the receiver are legally, in effect, one entity vis-à-vis the debtor. The receiver is the bank’s agent; if it fails in its duty the bank is liable. However badly briefed, a receiver taking reasonable precautions incurs no liability; however well-briefed, one who does not incurs liability for himself and also for the bank. There is no independent “duty to brief” owed to the plaintiffs.
The bank unreasonably lost the $6.7 million floor
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The plaintiffs urge that the bank’s “directive” to Levy and Hayeems on March 4 and 6, 1987 to seek more than the $6.7 million was “commercially unreasonable” in the circumstances known to the bank. Counsel cites the achievement of getting the floor, the small sum for which it was put at risk, the large differential between that sum and the estimated recovery on a receivership and Levy’s expressed agreement to the floor figure.
I do not think this complaint can succeed. I agree with counsel for the bank that nothing in Dartboard Holdings Ltd. v. Thorne Riddell Inc. (1986), 62 C.B.R. (N.S.) 176 (B.C. S.C.), affirmed (1988), 68 C.B.R. 284 (B.C. C.A.), assists the plaintiffs. That case was decided upon a duty of care established under the B.C. Company Act and not under the common law discussed above. What is commercially reasonable is dependent upon the facts of each case. I do not think that the bank was under any duty in negligence to the plaintiff when suggesting
or directing, as the plaintiffs put it – that a counter-offer be made, but if it was, I do not see the step as commercially unreasonable. It is only with hindsight that the floor price assumes the dimensions accorded to it by the plaintiffs. At the time, it should be recalled, the issue of what rental should be paid for the use of the Weston lands was open, so it could not be said that there was a complete meeting of the minds on a firm deal. Even if the counter-offer was a product of the bank’s desire to recoup some of what it was yielding to Levy on his personal loans, the bank owed no duty to the company which was thereby breached.
The bank’s failure to require Peat to keep Levy informed
The plaintiffs say that Peat should have been told to keep Levy informed because of the bank’s awareness of the conduct of Foreht et al. and the dislocation of Levy from the business. Here again there is no duty on the bank that it has breached. The duty to take reasonable precautions to obtain a proper price would be stretched so as to deprive it of any meaning if it were extended to this conduct. One might also ask why Levy and Hayeems did not take the initiative and call the receiver to keep up to date. As noted earlier, the bank had informed Peat of the conflict potential and in my view that was enough.
Peat’s failure to be cautious vis-à-vis the directors
It was argued that the bank’s failure to express fully its concerns to Peat led to the receiver placing unwarranted reliance on the directors who were able by their influence to accomplish the acquisition of the company’s assets at a fire-sale price. The argument as to
undue reliance on the directors was focused on valuing the inventory; adopting a market strategy that favoured Shieldings by withholding key data from competitors who were also bidders; and permitting the directors to have contact with bidders.
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As to permitting contact with bidders, I accept Davidson’s view that he could not sell someone a business as a going concern without letting the purchaser see the people associated with it. He had no reason to expect active, intentional disloyalty and by seeing every bidder himself, when they came to the plant, he guarded against purchasers having no one but management to discuss matters with. While Cumming thought Davidson might have given Foreht a special caution, Davidson could not recall doing so. He did tell the directors to give information to prospective bidders but not to negotiate or dissuade anyone from bidding. He had no awareness of any breach of these instructions. This was a reasonable decision to take. Lowe confirmed that it is a common occurrence for serious purchasers to meet with senior officers. Even if the receiver had the briefing that the plaintiffs contend for, I do not think it would have been practically possible to prevent director-bidder contact as long as they were running the company.
As to the value of the inventory, I have already noted that Davidson asked for the director’s help in this task and they misled him. In the circumstances, he had no real alternative to reliance upon them for their judgments as to saleability of the inventory in this specialized business.
As to the problem of giving detailed data to competitor-bidders, it seems probable from Cumming’s evidence that the directors raised this issue. However, it is clear from the testimony of both Lowe and Godbold that the protection of confidential data from competitors in a going-concern sale is a common problem. I have already expressed my conclusion that the decision to ask for a deposit from Napco was within the sphere of reasonable choices for the receiver as seen at the time.
It appears from Henry Moed’s evidence that Bradshaw told him of the policy but did not mention the deposit option. Moed did not follow up with the receiver on the point. I cannot lay this at the receiver’s door. Moed had known Bradshaw for 30 years and called him direct. No caution would have prevented Bradshaw from having this discussion. Similarly, Wichart had contacts with Bradshaw and Foreht that enabled them to get a line on his level of interest.
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Foreht had been told by Davidson not to deal with potential purchasers, yet he did so, meeting Wichart twice. I do not think that both were “by chance” as he claimed. No precaution other than clearing Foreht out of the premises (a non-option) would have prevented him intercepting Wichart as he toured the plant.
Lowe pointed out that every bidder had contact with the receiver who kept control of the negotiations. That was a reasonable way to deal with the situation as the receiver saw it at the time.
The impact of Shieldings’ “due diligence”
It was argued that the “playing field” was inherently not level because Shieldings had the advantage of the Bilz work and similar data was denied to other bidders who were competitors. The evidence does not support this view. Napco and SECO/Reomie were offered the same opportunity that Shieldings had: to visit the site and review the inventory records there. What was denied was the chance to take away the computerized version, and that could have been had for the deposit, a reasonable stance, as I have found. There was no policy of denying this kind of data absolutely even to competitors. Shieldings’ advantage came from having done work that others could have done but either chose not to, (Napco and SECO) or were misled on the subject (Moed).
In addition, it must be observed that the receiver inherited a situation in which Shieldings’ work had already been done. I do not know what more the receiver could have done to level the playing field than offer to bidders the opportunity to do the same work.
Peat’s failure to realize the significance of the $6.7 million “benchmark”; and how it related to Shieldings’ $19 million
The plaintiffs argue that the receivers were unaware of the significance of the $6.7 million “benchmark” price of February 25th and because in part, of this ignorance, they failed to request Shieldings to break out the component parts of its $19 million dollar offers of April 1 and 10 immediately, rather than after May 14th. The fact of the $6.7 million price was conveyed to the receiver at the briefing meeting as Rimer’s notes reveal. Its significance was a matter of judgment. At the time, owing to the rent issue, there was no actual firm deal, nor
did one evolve. By the time of the receivership, the focus had shifted to Shieldings’ $19 million all-inclusive offer.
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Davidson on discovery said he was not aware of the $6.7 million floor but at trial said that was an error and he had known of it. That was a somewhat confused part of his evidence. Nevertheless he maintained that he probably had reviewed the Rimer notes at some time after his return from vacation and I think it likely that he did so or was briefed by Rimer. He went on to say that he did not regard it as a benchmark because it was pre-receivership and Shieldings never came in with a firm offer. He assumed they were waiting for a lower price in a receivership.
Cumming did not think it was a firm commitment and in this he was partly right – the rent issue was outstanding – and partly wrong – Godsall did commit to make an offer at not less than $6.7 million. Cumming and Davidson both felt the $19 million offer represented $14 million for Weston Road and $5 million for the business assets, more or less. They had the bank’s valuation of Weston Road at $17-20 million in the long term, but discounted to present value at $14 million, so this was not an unreasonable assessment. Godbold accepted it as a reasonable analysis and Godsall said 14/5 was the split he had in mind at the time although, as I have noted supra, there is evidence that 12 – 6.7 was the working split which only changed to 14:5 because of financing considerations. If that is so, then in effect the floor price was still available within the package.
Davidson explained that when Shieldings’ April 10 offer arrived, they did not have any expectations as to what other offers they might obtain and decided to proceed with testing the market. Later, they found that offers for the land alone were exceeding Shieldings’ all-inclusive proposal. The strategy then evolved to get Shieldings to break out its offer so as to deal with Shieldings on the business and the higher offers on the land.
Cumming said that there was no point in talking to Shieldings about breaking the offer out with the limited knowledge the receiver had in mid-April.
These explanations seem to me to be reasonable business judgments. I acknowledge that if a different assessment had been made of the significance of the $6.7 million price, that could have led to a different decision in mid-April. But although it was of significance,
judgments can legitimately differ on the degree of significance. On my review of the evidence it is not apparent that reasonable people could not have acted as the receivers acted.
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I doubt if there was any serious risk that Shieldings would back away if asked to break out their offer, but that too is a judgment call. It was argued that the failure to get the breakout represented a failure of an opportunity to conclude a sale of the business at $6.7 million. I have serious doubt about this proposition. First, who is to say the break-out that Shieldings would have put forward would have been $6.7 million for the business? It might have been 14/5 or some other figure, depending on Godsall’s view of an appropriate negotiating tactic. Second, what would be the position of the receiver in agreeing to that price without testing the market? So the decision to accept or reject would likely have had to be postponed to May in any event.
The decisive factor is that the receiver was faced with a business judgment and chose a reasonable course of action.
Peat’s failure to obtain appropriate appraisals of the business assets
The plaintiffs assert that the appraisals provided by Maynard’s and LVG do not provide any justification for the acceptance of Shieldings’ $3.35 million offer. On their faces they do not show evidence of careful research. Maynard’s spent some 4 hours on the site, a manifestly inadequate time. While critical of the appraisers selected (none of whom gave evidence) the plaintiffs did not identify appraisers expert in this unique business who could have been employed.
In assessing the reasonableness of obtaining and considering the LVG and Maynard’s reports, it is important to note the purpose for which they were obtained, as set out in the receiver’s first report:
To assess the reasonableness of going concern offers we have endeavoured to estimate the liquidation value of the assets with the assistance of real estate and other appraisers.
Both Godbold and Lowe agreed that this was an appropriate basis of comparison, although Lowe would not have obtained appraisals since he regarded “going to the market” as the best test of value. The appraisers were chosen for their experience in liquidations and
no question exists as to their qualifications in that area. The evidence does not disclose that these reports are below the applicable professional standard for such reports in the circumstances.
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It is true, as Mr. Wortzman submitted, that the appraisers might have done a better job with more information such as the Bilz report and, more importantly, the attachments to it; or the documents attached to the Tecmotiv June 19, 1987 Balance Sheet. But in my view the absence of that data is not due to a failure of the receivers to ask the Levy directors for assistance; rather it is due to the directors’ deliberate concealment from Davidson of their true views as to value. Foreht – and also Bradshaw – told him that the cost of removal would equal or exceed the realizable value of the scrap portion of the inventory. Foreht’s June 19, 1987 Tecmotiv estimated balance sheet estimating scrap recoveries netting $2 million shows just how far from their true opinions those statements were.
In summary, it was not unreasonable for the receiver to have obtained these appraisals for the limited purpose described.
Peat’s failure to analyze the value of the company’s intellectual property
The plaintiffs assert that Davidson failed to realize the value of the M-41 project in particular. They say he should have seen the requirement in the various Shieldings proposals that work on the M-41 continue and realized it must be a project with value. This is casting a heavy burden indeed on the receiver; one that it should not have to bear. Davidson worked with management to develop an understanding of the various assets. As to intellectual property his understanding came from Bradshaw and discussions with the R & D manager and the plant manager. Bradshaw and the other directors never shared with him their views as to the value of the M-41 it even though he had discussions with them about the technology. When shown the Special Purpose Statement, he felt the value shown ($1.5 million) was exaggerated but if those ideas had been expressed to him he would have had reason to pause before selling to Tecmotiv. Here again, Davidson was misled by the directors who failed to brief him on these values. Bradshaw also failed to discuss his letter to Export Development Corp. asking for 7 year funding of $25 million for the Thailand M-41 proposal, a clear breach of his duty to the receiver as his employer and to Levy-Russell, and one calculated to avoid having the issue of the value of the M-41 technology raised. The
references to technology in the information package were conceded to be reasonable by Godbold; it was designed to get people to inquire further; as to competitors they understood the technology already.
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I find no fault with the receiver’s conduct in connection with this issue.
The SECO “turn-off” by Peat
This complaint involves the various exchanges between Messrs. Hodge and Wichart for the SECO/Reomie group and Davidson. I have already dealt with the conflict in evidence between Davidson and Hodge and with the absence of any general policy of denying relevant data to competitors on the site. In my view there was no “turn-off”
While the plaintiffs assert that Davidson “chose” to turn SECO off, no plausible motive for so doing has been suggested.
Davidson’s actions regarding SECO in their various contacts were reasonable. He concluded from these contacts that SECO was the leader of the SECO/Reomie team and SECO had “topped out” at $2.5 million and Reomie at $3 million. Those were judgments that a reasonable person could make on the facts known to Davidson.
No need to sell the business
The plaintiffs argue that the bank and receiver acted unreasonably in selling both the business and the Weston lands when the latter alone would have sufficed to pay, or at least very nearly pay the debt. The business could then have been returned to Levy-Russell either clear or subject to a minimal debt load for which the Bradford lands and the pension surplus would have been ample security. Mr. Wortzman produced an analysis to support this position; Mr. Brown [produced] one to show there would be a shortfall. Little would be gained by detailed review of these figures because the matter falls to be decided upon the reasonableness of the judgment of the receiver at the time.
The plaintiffs argue that with Shieldings’ price for the business approaching liquidation levels and well below the $6.7 million price, it behooved the receiver to focus on the land. Here Mr. Wortzman pressed three points: that Kleinstein having lost his injunction bid on May 11th, the situation was under control; that the market had shown the Weston lands were
worth over $20 million; and that the business was doing better than expected. Thus there was no need to sell the business.
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It must be remembered that Kleinstein had lost an interlocutory skirmish and not the war. His two actions were still alive and even if unmeritorious would take time and money to resolve. If successful the suit would prevent the bank from asserting a priority over the Kleinstein agreement. The second action put in issue the ability of the bank to convey title to the Weston lands free of the Kleinstein agreement. Metrontario’s revised offer of May 21st recognized this by including a requirement for the bank to indemnify the purchaser against loss of the land to Kleinstein. Far from being “under control” the Kleinstein litigation presented a serious problem.
On the good side, the market was showing serious interest in the lands at prices above
$20 million.
Whether the business was doing well under the receivership is a matter of opinion. The two-month surplus was largely made up of non-recurring items and it appears that it was a cash surplus rather than a true operating profit even before debt service. Lowe testified that no cost of materials sold was taken against sales of $2.4 million.
Mr. Brown responded for the receiver on three fronts: a legal answer, a creditor’s answer and a receiver’s answer.
The legal answer put forward is based on two cases already looked at: Cuckmere Brick and Downsview Nominees, from which it is argued that the creditor can choose whether and when to sell even though it is unpropitious for the debtor, the creditor being entitled to prefer his own interest to the interest of the debtor. Of course he must act in good faith in so doing. In my view, that represents the state of the law in Ontario.
The second, or “creditor’s answer” is that the real estate would not have retired the debt. Davidson prepared and Lowe included in his report as appendix B an analysis to show this. In addition to the items considered by Davidson, there ought to be considered a reserve for the Kleinstein litigation and a reserve for the cost of clearing the site in case Levy-Russell did not do so. Godbold agreed that these reserves would be required. On this defence there would be a significant shortfall.
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The plaintiffs’ response is that even if the debt would not be fully retired, it would be backed by ample security. But nothing in the law requires a creditor to accept security and let part of the debt remain unpaid. He is entitled to realize on the security if he wishes even though it would be in the interests of the debtor to hold back.
The third, or “receiver’s answer” is that from his point of view the proposal was unrealistic for a number of reasons.
First, the receiver felt he had an agreement in principle with Shieldings prior to June 1, 1987 when Levy made his request. Cumming testified that as of May 22 they had an agreement in principle with Godsall. He did not know if it was legally binding but it didn’t matter: he didn’t operate that way. His notes show that he told Levy as much on the 22nd. While it is true that there was no deposit and the question of whether the deal would include the land was still outstanding, I do not accept that there could not be the agreement in principle as to the business that Cumming testified to.
On June 1st at 9:50 a.m., Cumming told Levy that nothing was “inked” with Shieldings. Levy denied having this call but I am satisfied that it occurred. Later Cumming spoke to Willis about the land aspect. At 4:15 p.m. Godsall called Cumming who noted: “business deal to go ahead”. At 5:10 p.m. Dixon called Cumming to advise that a letter had been received from Levy. On the basis of this evidence I have no doubt that it was reasonable of Cumming to think he had an agreement in principle with Shieldings, if not on the 22nd then certainly on the 1st after Godsall’s call. While the obligation may or may not have been legally binding, it was not unreasonable for Cumming to feel as he did.
Further, the receiver answers that sale of the land alone presented unacceptable risks. The land offers were subject to conditions relating to soil testing and the Kleinstein litigation. The closing dates were some time off and at least a number of months would pass before the money was in hand. Closing could also be delayed by the conditions. In the meantime, the business would be kept going and no one had come forward to finance that. There was a risk that while they waited to see if the land deal closed, Shieldings’ offer would be lost with its provision for the cost of moving the inventory off the lands. Analyzing the situation, Lowe concluded that it would have been:
…very, very dangerous for the receiver. I would not have contemplated the course of action recommended in this [Levy’s] letter at all.
Lowe went on to testify that the Bradford lands and pension surplus:
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…would not begin to offset the uncertainties surrounding the Kleinstein situation, the moving costs, the conditions in the Metrontario offer and… other creditors… for whom some provision would have had to have been made before the assets could be turned back to the company…
The receiver was not required to run the sort of risks inherent in the request of Levy that the land alone be sold. I find that the receiver exercised reasonable business judgment in making the decision to proceed with the sale of the business in spite of the unexpectedly high bids for the Weston lands. In so doing he breached no duty to the plaintiffs but rather was taking reasonable precautions to preserve what he regarded as the best opportunity for sale of the business assets. He was also, by preserving Shieldings’ obligation to clear the lands, enabling a land sale to be completed with a covenant for vacant possession which would be cost-free to the receiver.
Levy’s June 1st letter
The previous section has dealt with the merits of the request put forward in this letter. The plaintiffs urge that the letter was discussed among the receivers and the bankers, “who chose to arrogantly ignore it”.
Lowe agreed that a timely response would have been a courtesy and perhaps something he would have done but felt the letter did not impose any additional obligation on the bank or the receiver to alter his course of action. The question remained the same: what was commercially reasonable?
There is no legal obligation on a receiver to take the advice of a debtor or even to keep a debtor informed. The debenture in this case included an express right in the receiver to sell the collateral without notice. In Cuckmere Brick, Salmon L.J. (at pp. 640-641 All E.R.) said that the principal of the debtor company…was certainly not entitled to be consulted about the sale…although it would have been courteous to send him the draft particulars.
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The situation is similar here. It was grossly discourteous of the bank (to whom the letter was addressed) not to respond until June 12th, particularly when in the interval it, through its receiver, did the very thing that Levy was asking it not to do. However, neither the bank nor the receiver incurred any legal liability as a result, nor did the letter alter the commercial reasonableness of the decision taken. There was no duty on the receiver to provide the plaintiffs with an opportunity to match Shieldings’ offer. In any event, Levy knew that the process of sale was under way. If he had been able to find a backer, he would have come knocking on the receiver’s door at once with an offer rather than the vague proposals in his June 1st letter.
Failure to analyze the MICC offer
In the narrative portion of these reasons I have already analyzed the evidence as to the MICC offer for both land and business and the withdrawal of the vendor take-back mortgage condition too late to be considered. In those circumstances this complaint cannot succeed.
Was it reasonable to accent Shieldings’ bid over SECO’s?
The plaintiffs argued that, properly analyzed, the SECO bid at $2.5 million for just the inventory and equipment “probably” offered a better net result than Tecmotiv, bearing in mind especially the true value of the receivables purchased by Tecmotiv. The word “probably” in this argument illustrates its fallacy by emphasizing the element of judgment involved in assessing competing bids. As well, it is perhaps useful to recall that SECO’s “bid” was subject to further inspection of the assets. Would SECO have agreed to clear the site as Tecmotiv did?
Godbold agreed that there were risks in holding up acceptance of Shieldings’ offer and re-opening negotiations with another bidder. These included the cost of continuing the business, both possible losses and receiver’s fees, and the risk of a decrease in Shieldings’ offer or its loss altogether. Persons on the scene would be in the best position to make such a judgment. Similarly the judgment would have to be made whether Shieldings could be got to raise its offer without a competing bidder. In all these circumstances, Godbold said that it was within the range of a reasonable judgment for the receiver to take what was available rather than continue to negotiate.
Lowe said that he would have been concerned at the risk of losing the only really serious party, especially one willing to clear the site, thus making the land deal viable. He would not have re-opened negotiations with any other bidder.
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In my view it was clearly an exercise of reasonable commercial judgment for the receiver to prefer Shieldings’ offer as it stood, to a re-opening of negotiations with any other bidder.
The Kleinstein strategy
The evolution of the Kleinstein strategy has already been described. The plaintiffs say that because of the prospect for a surplus it was imperative to include Levy and Hayeems in the strategy discussions; the receiver was playing with the plaintiff’s money. Had Levy been included, they say, perhaps another solution could have been found or direct negotiations conducted between the company and Kleinstein in a factual setting more favourable to the company.
Although neither Levy nor Hayeems was consulted about the strategy, Cumming did have a discussion of these matters prior to issuing the notice of sale with Mr. Ward Passi, counsel to the Trustee. Lowe’s evidence was that with a Trustee in place he would have wanted to talk with him. No detailed evidence was given of the discussion but it is a fair inference that Mr. Passi reported on it to his client and there is no evidence of any complaint being registered by him.
As is shown by cases already referred to, the debtor has no right to be consulted about the sale. But the plaintiffs say that as there was a surplus expected, they should have been involved because it was “the company’s money”. The fallacy of this argument is that it is all the company’s money; that part devoted to repaying the debt no less so than the surplus: Gosling v. Gaskell, [1897] A.C. 575 (H.L.), at p. 583 per Lord Halsbury L.C. The receiver’s duties cannot vary because there is to be a surplus; that would put receivers in an impossible position, for a surplus may be forecast and not materialize or vice versa. What then if the receiver has consulted the debtor, perhaps even acted as the debtor asks and the anticipated surplus vanishes? He is the agent of the debenture holder for the purpose of sale. He cannot be asked to serve a second master because a surplus is expected.
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Finally, in my view, the receiver acted with commercial prudence in making this arrangement. Notwithstanding the bullish tone of the solicitor’s letter sending the notice of sale to Kleinstein, emphasizing the absence of any obligation to honour the original sale, the fact is that Kleinstein’s application for the right to redeem struck at the heart of the receiver’s ability to convey title to Metrontario. The claim for damages also could not be ignored. According to the Trustee’s report:
Two legal opinions indicated a significant likelihood of success of the [Kleinstein] action.
Metrontario appears to have been the proponent of “calling Kleinstein’s bluff” and this is hardly surprising. They could not be expected to pay over $22 million to buy into a lawsuit.
Nor was the arrangement unfair to Levy. If the company had redeemed the debenture, it would have been bound by the original Kleinstein deal which gave it $10.5 million down and 30% of any profit, which, using $22.5 million as the ultimate price, adds $6.75 million. From this must be deducted the cost of clearing the land (assuming the receiver had not sold the business to Tecmotiv) estimated at $.5 to $1.5 million. Levy-Russell obtained several million dollars more by the scheme adopted than would have been received under the original deal; the Trustee avoided the Kleinstein claim for damages; Metrontario had the certainty that it required; and no one had a law-suit. Although Godbold made a stab at it, no plausible alternative approach was suggested in evidence or in argument.
Summary of conclusions on the conduct of the receivership
None of the allegations of negligence, commercial unreasonableness and failure to take reasonable precautions to obtain a proper price have been made out. The action must therefore be dismissed against the bank and the receiver.
Fair Market Value I: the process of valuation and hindsight
The use of hindsight in the valuation process requires some consideration, particularly since the temptation is so great when, as here, the genuine expectations of the purchasers of the business being valued have been so far off the mark. In Domglas Inc. v. Jarislowsky, Fraser & Co., [1980] C.S. 925, 13 B.L.R. 135 (Que.), affirmed (1982), 138 D.L.R. (3d) 521
(Que. C.A.), the issue was what was “a fair value” for the shares of Domglas owned by certain
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shareholders dissenting from an amalgamation. The valuation date was April 27, 1978 and the trial judge admitted evidence of the actual financial results of Domglas for calendar 1978 as relevant to measure the reasonableness of the projections of profit used as part of the valuation process. He drew the distinction between such a limited use and the trap of using hindsight to bolster (or, I would add, attack) a valuation on a basis that could not properly have been made at the relevant time. The Quebec Court of Appeal agreed with the trial judge’s reasons on this point.
The limited use of the evidence of the subsequent financial results is illustrated by the fact that the trial judge did not use that evidence at all in his actual valuation. In it he used known earnings for the last full 12 months before valuation day i.e. the 12 months ending March 31, 1978; known earnings for the 12 months ending April 30, 1978 being the 12 months including valuation day; and the earnings as projected before valuation day for the whole of 1978. He assigned different weighting to each period in arriving at the value. Hence no weight was given to the actual results for 1978 in the process.
Their use was purely to test the reasonableness of the projected 1978 earnings. He did not admit the 1979 earnings, even for this limited purpose. The 1979 projections were in evidence but were not used due to the inherent difficulty of projecting beyond the near term. It is obvious that the line between using the subsequent information to build up the value and using it to test the assumptions on which the value is based is a narrow one and readily crossed. It is important not to cross it, for the authorities reviewed in the trial judgment at pp. 942-944 (C.S.) strongly support the view that hindsight appraisals are unacceptable; the wisdom provided by subsequent events neither known nor anticipated at valuation day is to be firmly rejected.
The present case is quite different from Domglas, where the evidence admitted was the complete results of the very year in which the valuation date fell. Here I am invited to have regard for the ultimate failure of the Tecmotiv business three years after the transaction, after a move to a different site, and under market conditions which admittedly were not foreseen in 1987 by the purchasers, who were among the most experienced people in the world in their business. It would be contrary to the authorities and wrong in principle to accept so broad a use of hindsight, for that would saddle the plaintiffs with the results of the multitude of business decisions made by the purchasers after the purchase. The optimism of the
purchasers is obvious from the record. If their optimism, in no way created by the plaintiffs, proved ill-founded, that cannot be visited upon the plaintiffs.
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The fair market value of the Levy-Russell business in the spring of 1987 must be decided upon the facts available and the opinions held at the time. Only a very limited use of hindsight is allowable even for the purpose of testing the reasonableness of assumptions made in the valuation process. One example that illustrates what can and cannot be done is Mr. Douglas’ evaluation of the Levy-Russell technology as having no value. This conclusion was largely based on the lack of sales during the life of Tecmotiv. The purchasers valued it at
$1.5 million. Fresh from a sale to Denmark of M-41 kits and with a history of CD 850 sales, no one involved in the company believed that the technology added nothing to the value of the company in the eyes of a purchaser. Douglas’ conclusion could only be reached by resort to events in the future and totally unexpected in June 1987. That is hindsight. It may well be appropriate to consider the level of sales in the balance of 1987 or perhaps for the 12 months after the purchase, as a check upon the reasonableness of the sales projections underlying the purchasers’ values and, finding no M-41 sales, to take a discount, but that process could not properly lead, in this case at least, to a reduction to zero.
The valuation and thus the damages in this case fall to be decided primarily on the basis of the facts available and the opinions actually held at the time. Hindsight evidence is of limited value.
On the other hand foresight, projections and expectations are legitimately considered in the process. In Brunelle v. Minister of National Revenue, [1977] C.T.C. 2506, the chairman of the Tax Review Board, after rejecting hindsight, continued (at pp. 2511-2512):
…foresight or expectancy based on the potential of the company, the plans of the company, groundwork for increased earnings already laid down but not reflected in the company’s books, or any factors which existed and were demonstrable as having existed on Valuation Day and which could affect favourably or unfavourably the company’s normal projection of future earnings should… also be taken into account in arriving at a fair market value of the shares at that date.
I am conscious that in relying upon some of the material available from Tecmotiv in the valuation process, the rule against hindsight is at risk since some of the documents were
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prepared much later than June 10, 1987. In some, such as the June 19th estimated balance sheet, no information is reflected that was not known at June 10th. Others such as the financial statements, present the information as at an earlier date than the date of their preparation and must be used with caution.
Another risk to be avoided in the use of Tecmotiv documents is the automatic assumption that the assets of Levy-Russell were worth as much in that company’s hands as Tecmotiv’s principals believed them to be in its hands. Divorced from the tarnished Levy-Russell name and on a new site they could well have a different value. Nevertheless, these documents are of value to the extent that they reflect the optimistic views that their authors brought to the transaction when they purchased the assets. After all, in deciding to bid, the expectations of the purchasing group as to what they could do with the assets once under their control was surely the governing factor. They were not interested in purchasing at a price reflecting value to Levy-Russell but at one reflecting value to themselves. It is not hindsight or otherwise impermissible to rely to this extent upon subsequently created documents that cast light upon attitudes at the relevant time.
The expert valuators I: Mr. Douglas for the defence
I have already had occasion to reject, for reasons set out elsewhere, certain of Mr. Douglas’ conclusions. I turn now to a general consideration of his evidence. He is a partner in Deloitte Touche. He is clearly a highly qualified accountant with experience in audit work, insolvency and, since 1984, in valuations and forensic accounting. He performed a valuation of the Levy-Russell business looking at it as of February 27, 1987 and June 10, 1987. He concluded the fair market value of the business as a going concern was:
Feb. 27, 1987 – from $2.2 million to $4.8 million June 10, 1987 – from $2.05 million to $3.55 million.
In reaching these conclusions he used a going-concern approach which “assumes a continuing business enterprise with a potential for economic future earnings”. Within the going-concern approach, one can adopt one of two principal approaches: capitalization of maintainable earnings; or net tangible asset value. Of these possibilities he selected the latter, being of the view that there were too many uncertainties about the company’s
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prospects to enable him to identify a level of “maintainable earnings”; that the historical business was unviable; and that there were left “some speculative niche opportunities” related in particular to the CD 850 transmission and M-41 conversion kit. Having selected the net tangible assets approach, he proceeded to value the assets. Despite its name, this approach does require the valuation of intangibles. As we have seen, for reasons I do not accept, he valued them at zero. His other valuations as at June 10, 1987 included: (1 have added additional data for comparison.)
Douglas
Book Low High (thousands)
Tecmotiv (Cdn. GAAP)
Special Purpose (note 2)
Accts. Rec. | 1,653 | 915 | 1,300 | 915 | 915 |
Inv. | 12,700 | 3,000 | 6,000 | 3,874 | 7,679 |
Fixed Assets | n.a. | 550 | 700 | -- | 829 |
The valuation of accounts receivable does not account for the collection of $1,638,975 of these receivables between April 3, 1987 and the valuation date – June 10, 1987, as shown by Exhibit 5-1 to the Receiver’s report of June 30, 1987. It is not hindsight to use the real figure when it is in fact known as of the valuation date. I agree with Mr. Witkin’s comment that it makes no sense to use an estimated figure.
The inventory figures are heavily influenced by Douglas’ views of the lack of value in the “yard” inventory as explained at pp. 31-32 of his report. The prudent buyer would value the non-yard inventory at close to the market values estimated in June 1987 – i.e. at $2.999 million (report, p. 31) and the range for the yard is from zero to $3 million. Douglas notes that the upper end of this range (i.e. $3 million in the yard), “…is generally consistent with the latest indications of interest from Shieldings prior to February 27, 1987”. Despite this fact, on page 39 of the report he proposes that the “lack of serious interested buyers during the receivership and the impact of the receivership” would lead to an overall value for the business in the $1 million to $2.5 million range before adjusting for the $1.054 million in liabilities not assumed by Tecmotiv.
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I agree with Witkin’s assessment that this inventory analysis is “fancy footwork”. A downward adjustment for lack of buyers may be fair, but equally an upward adjustment for the known views of the only serious buyer is called for in my view. In a market where Shieldings was the only serious purchaser, which is an underlying theme of Douglas’ evidence – he saw no evidence of any other – Shieldings’ perception of what is valuable cannot be overlooked, not by a valuator who is seeking to test the market value of the business in that particular market and not by me. To take a sharp cut in inventory valuation flies in the teeth of the evidence that Godsall and the Levy directors thought it had serious value, a good deal of which could be quickly realized, as Godsall told Belcher in his May 22nd letter. The June 19, 1987 Estimated Balance Sheet (note 2) forecast net scrap recoveries of $2 million and further value of $2 million in the yard, plus $2.7 million in non-yard inventory. Mr. Douglas’ report is unhelpful because it is out of touch with the actual evidence.
I was unimpressed by Mr. Douglas in the witness box. Again and again he dodged questions in cross-examination; added extraneous matter to his answers to score a point; or changed the subject. For example when asked whether certain documents showed the directors and Godsall had a high level of confidence in the M-41 project, he did not answer but referred to his own research instead. When brought back to the point he still would not answer as to their level of confidence, but instead said a purchaser would assess the achievability of those expectations. When it was put to him that these men were the purchaser he changed the subject again, referring to the documents as being projections and not orders. Indeed, he never did answer the question he was asked. I infer that the reason for this was that he conceived that the straight answer would harm the defendants’ case as indeed it would have.
On another occasion he was asked if he had been told that, while the $6.7 million floor price was in effect, Godsall had told Bradshaw he was willing to add $200,000 more or less to close the gap with the bank. He said he had not. It was then put to him that Shieldings’ willingness in March to pay nearly $7 million for the inventory and fixed assets was something of importance of which he was unaware. He answered by referring to his knowledge that Godsall was at the same time expressing concern about possible reduction in the inventory value. This was argumentative and not at all what had been asked and I felt it necessary to caution him. I refer also to his conclusion that Levy-Russell’s October 1987 retroactive
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inventory write-down was somehow evidence that it had been known all along that the inventory was over-valued. The note explaining this write-down informs the reader that: “…inventories have been written down to the value based on realization subsequent to the date of the financial statements”. This clearly is no admission of previous overvaluation in the present circumstances where it is alleged that proper value was not received on the realization. His eagerness to score points off the cross-examiner; the specific matters to which I have referred; his failure to discuss the letter to Belcher with Godsall or the appraiser’s reports with them or with the receiver; the weaknesses in his briefing which were exposed in cross-examination; and above all what I judged to be a lack of candour when dealing with difficult points, have all led me to conclude that he was not a disinterested expert upon whom I could rely.
The expert valuators II: Mr. Witkin for the plaintiff
Mr. Witkin, C.A., is a partner in BDO Dunwoody Mallette of Toronto. He has lengthy experience in the audit of businesses including manufacturers, scrap dealers, metal fabricators and the like. He has extensive experience in mergers, acquisitions and valuations. He is clearly a highly qualified person in these areas. Like Mr. Douglas, he felt Levy-Russell should be valued as a going concern. However, within that approach, where Douglas selected the net tangible asset approach, Witkin selected the capitalization of earnings approach. This involves establishing “a level of maintainable after-tax earnings which are the net earnings from normal operations that can reasonably be expected to be maintainable in the future”. These earnings are then capitalized at an appropriate rate to provide a value.
Mr. Witkin reviewed the Shieldings negotiations and concluded that, although no transaction was consummated until after the receivership, these negotiations “provide some indication as to what a willing buyer was prepared to pay for the assets”.
In determining the maintainable income stream, Witkin reviewed the 1977-87 period. He adjusted reported earnings in order to exclude items not related to the value of the business as such, thereby excluding service of long-term debt; fees paid to the parent company in excess of reasonable charges related to the auto parts business; the inventory write-down made post-sale and back-dated to 1986 which reflected the result of the receiver’s
sale; and property costs in excess of those needed for the auto parts division. He added in management costs at $500,000 per annum based on discussions with Levy and Hayeems.
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Mr. Witkin continued by analyzing the company’s sales performance, noting profits (adjusted both to 1987 dollars and by the adjustments noted above) in the $5.1 million to $9.1 million range in 1979-82. The first suspension began in April 1983 and there was a 30% drop in sales and an adjusted loss of $52,000. Sales dropped a further 30% in 1984 but the adjusted income returned to a profit of $2.35 million. The first suspension was lifted in January 1985 and sales for that year increased 25%. Profit remained stable at an adjusted figure of $2.26 million. The 9 months ending September 30, 1986 produced an adjusted operating loss of $1.129 million and the year ending September 30, 1987 a loss of $66,000. Of course, for the last half of 1987 there was no Levy-Russell auto parts business.
Because of the lifting of the suspension in late 1986, Mr. Witkin opined that the company as at June 10, 1987, was in a position to resume U.S. government work “which may well have seen the company return to pre-suspension sales and profit levels”. As well, he saw additional value in the M-41 program, a point of view shared, he noted, by the ultimate purchaser, Tecmotiv.
To establish the level of future maintainable earnings, a purchaser would consider the record. Specifically Mr. Witkin thought a buyer would consider 1980-82 as representing pre-suspension experience; 1983-84 as representing the suspension period; and 1985 as a post-suspension period. He did not include 1986 because of bank intervention in that year. (This became a point of attack in cross-examination, as might be expected). The result was an average earnings for the sample period, after 47% tax, of $2.626 million. As an alternative, a weighted average giving twice the weight to 1984 and 1985, the most recent years, produced after-tax income of $2.274 million.
Mr. Witkin then capitalized this income stream at 16%-18%. In June 1987 Canada T-bills earned over 8% and Canada bonds over 9%. Hence risk-free returns were 5% after tax. Allowing for the business risk and the degree of probability of achieving the forecast earnings, he came to his 16%-18%. The 18% figure translates into a value of 5.5 times earnings and 16% into 6.25 times earnings. By comparison, in June 1987 the Toronto Stock Exchange price/earnings ratio was 20.95.
These calculations led to a fair market value as a going concern of $14.2 to $14.5 million for the operating assets – prepaids, receivables, inventory, fixed assets and goodwill.
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To test this value, Mr. Witkin did further work. He observed that Tecmotiv valued these same assets at $11.94 million on its August 31, 1987 Special Purpose Statement. He noted that the receivables were understated at $915,000 and restated them to actual collections at
$1.7 million. He noted that Tecmotiv’s special purpose statement (note 2) valued inventory at
$7.679 million at June 10/87; that Bilz had ranged from $4.7 to $5.5 million and $12.1 million realizable over 12 months. (This figure was actually Levy-Russell management’s estimate recorded by Bilz in his report). The $12.1 million realization would, he reasoned, using Levy-Russell’s historical 35% gross profit margin, imply an inventory value of $7.86 million. Finally, Arthur Anderson had signed the special purpose statement as “presenting fairly” the assets and liabilities of Tecmotiv, and he had reviewed their working papers. He had concluded that the fair value of the inventory was found in the special purpose statement and not in the Canadian GAAP one. This analysis supported his view that a fair inventory value at June 10, 1987 was $6.95 million (after adjusting for inventory dedicated to a specific sale for which the cash was also shown in the accounts).
This analysis of assets showed that the tangible asset base of the company was some
$11.2 million, a high proportion of the overall value of $14 million, a fact which reduced the risk that the fair value was less than the $14 million. The difference between these sums is the goodwill of the company, which in part is the technology valued by Tecmotiv at $1.5 million and by Witkin as possibly up to $2.7 million.
For trial purposes Mr. Witkin prepared an alternative valuation using the same methodology but different sample periods as follows:
Earnings Value (millions)
A. Per report using 1980-1985 – 6 years: $2.275 to
$2.626
$14.219 to
$14.574
B. using 1980-1986 – 7 years: $2.22 to
$1.748
$11.113 to
$12.321
C. using 1981-1986 – 6 years: $1.335 to
$1.727
$8.344 to
$9.585
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By way of further comparison, Witkin looked at the actual negotiations between Hayeems and Godsall. The February 25, 1987 position of Shieldings was the “floor price” of
$6.7 million for fixed assets, inventory and intangibles. Plugging this sum into the June 10, 1987 figures for the other assets:
Fixed assets, inventory, | $6.7 | |
intangibles: | .935 | |
Cash | .915 | |
Receivables | .081 | |
Prepaid expenses | 8.631 | million |
Mr. Witkin remarks: |
Although this purchase was not consummated, it does provide an indication of the value of the operation under near liquidation circumstances.
Finally, Witkin addressed the further alternative of valuing at liquidation values. He felt that as between a forced liquidation with immediate cessation of business on the one hand, and an orderly liquidation over a reasonable period of time, the latter was called for. The cash surplus of $290,000 earned in two months showed:
…there was no need to rush the receivership. Nevertheless, the receiver sold the assets for $3,350,000 after only two months into the receivership.
To calculate orderly liquidation value, he began with the fair market asset values and deducted receivership costs; costs of moving inventory to another site and goodwill since he did not anticipate anyone would pay for goodwill in a liquidation. Here is his table:
Going concern asset values | (millions): |
Cash and prepaids | $1.017 |
Accounts receivable | $1.702 |
Fixed assets | .815 |
Inventory | 6.950 |
Less:
Receivership costs .215
Moving costs .5
$10.484
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.715
Orderly liquidation value $ 9.769
Mr. Witkin had reviewed the Deloitte Touche report prepared by Mr. Douglas and was critical of several aspects of it. He saw the net tangible asset approach as appropriate for a holding company, or where liquidation is contemplated, but not for Levy-Russell which had a long earnings history. He felt that any non-recurring sales such as those to South Africa via Israel in 1981-82 were small and their impact would be minimal averaged over several years on an after-tax basis. Whereas Douglas viewed the orders on hand as evidence of a decline in the company, Witkin took a more positive view, noting that orders on hand exceeded $7 million; that the suspension had just been lifted and that fact had not yet been reflected in the accounts, and that the company’s tight credit position inhibited its ability to finance large orders. He opined that a buyer would anticipate a rebound with the lifting of the suspension.
After reviewing the way in which Douglas had handled accounts receivable, inventory, fixed assets and intangibles he expressed the view that Douglas’ approach was tantamount to a forced sale valuation. Finally, he noted that Tecmotiv as purchaser had done its own valuation at note 2 of the Special Purpose Statement. If one took the sale price and added the “purchase discrepancy”:
price $3.35 million
purchase discrepancy $6.134
Asset value: $9.484 million
In effect this is a net tangible asset approach which also includes a reduction for liabilities assumed. He noted the close parallel between this figure and his own “orderly liquidation” figure of $9.769 million.
In cross-examination Mr. Witkin conceded that in no year since 1982 had Levy-Russell’s earnings reached $4.6 million, the average of his high and low maintainable
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earnings figures and that a purchaser would give more weight to recent years than to more distant ones. Other factors of importance to a buyer were current profit or loss position and the reasons behind it; consistency of recent returns; whether current results are on budget; the nature of the product and its likelihood of continuing acceptance in the market; inventory turnover; and possibly the identity of past customers to predict future sales; whether the business was cyclical in nature. He had not considered many of these factors. He was cross-examined closely about the potential for sales of the M-41 kit and resisted the suggestion that such sales, apart from the one to Denmark, were “speculative”, saying that with the advice the company had that its product was the best and with thousands of tanks that could be retrofitted, he was not sure that word was proper. The purchasers – Tecmotiv – were longstanding Levy-Russell employees who knew the potential. He had not made any “hindsight inquiries” as to whether any more M-41 kit sales were ever made. On the matter of Morris Levy’s willingness to sell at $8.8 million in the fall of 1986, Mr. Witkin observed that the degree of willingness was suspect; he initially refused and was under bank pressure. As to the receivership and the pending used materials charges, the purchaser would be free of those matters and the seller would make that point in the discussions; hence the price should not be thereby reduced. Nevertheless, he said, his valuation recognized these factors to the extent that they reduced actual historical earnings.
Dealing with the price/earnings multiple, he noted that a discount of 1/3 from the public market would be a normal one. (The TSE was at 20 + which would imply 13-14 but he actually used 5.5 – 6.5). As well, he said, some of the negative factors put to him were offset by the low amount for goodwill – only 1.3 years after-tax earnings whereas 2 or 3 years is not unusual.
To Mr. Murphy, for the bank, he reiterated the suggestion that if there was to be a liquidation, it should have been an orderly one over 6-12 months. He conceded, however, that there would be ongoing receivers’ fees and possibly legal fees during that period. However, he also noted that the receiver had disbursed some $289,000 for pre-receivership matters, which he questioned.
He was asked about the use of appraisals for the yard inventory and replied that typically they came in at auction values and not orderly liquidation values. In this case he pointed out the great disparity between the appraisal reports and the arrangement made by
Tecmotiv to sell just the scrap for two million dollars. He said he placed very little reliance on Maynard’s or LVG’s appraisals, preferring to rely on management as more knowledgeable.
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It was argued that Mr. Witkin’s approach of a capitalized income stream was not considered by any of the persons actually involved in the negotiations. That is so, but that does not exclude the approach being of assistance to the Court, if only as a check against other valuations. It was also argued that the many factors not considered by him, plus his reliance on the Special Purpose Statement, invalidated Witkin’s valuation. I do not agree; the various factors not considered give rise to a sense of caution but the focus on the Special Purpose Statement is dead right. I agree with his view that it is in that statement (and I would add as verified by the letter of May 22, 1987 and the unaudited June 19th statement), that one finds what the purchasers’ real thoughts of value were.
In my view the Douglas approach of net tangible asset value comes closer in principle to the way in which the parties most concerned approached value at the relevant time. However, as noted, I cannot accept his application of that approach. The Witkin maintainable earnings approach is useful, with the adjustments I have noted, but there is much to be said for the view that his figures, exceeding as they do the company’s actual recent performance, would be less than persuasive to a purchaser in the real world. I find myself unable to accept the evidence of either valuator without reservation but I regard Mr. Witkin as the more reliable witness.
It was argued that Witkin’s analysis depended upon the 1983 loss being related to the first suspension and that the evidence showed the first suspension really only affected the results of 1984. I think that the important point in the analysis was that there were historical grounds for expecting a rebound in sales and profits after the lifting of the second suspension as there had been after the lifting of the first and thus grounds for expecting a return to profitability in 1987 and beyond.
I found Mr. Witkin straightforward and candid without evident partisanship. The gist of his evidence survived able and thorough cross-examination although I do agree that his period should be 1981-86 rather than 1980-85. Much more than Mr. Douglas, he resisted the temptation to employ hindsight when the issue must be addressed from the perspective of
mid-1987. I prefer his evidence to that of Mr. Douglas but I have reservations about both of them.
Findings as to fair market value
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In the table below I have collected several of the approaches referred to in evidence to the value of Levy-Russell’s business assets on June 10, 1987. I recognize that each is not necessarily fully comparable to any other. Some are net of various levels of expenses; Douglas’ use of $1.5 million moving costs has not been adjusted to Tecmotiv’s figure of
$500,000 or vice versa; I have not attempted to be my own accountant/valuator but I have made some adjustments on lines suggested in evidence. The effort here is not to reach a precise figure, but to obtain a feel for the general level of value indicated when the various approaches are compared. The comparison is not perfect; nor is it to be taken literally. I regard it, however, as a useful global exercise.
Examples 1 and 2 begin with Mr. Douglas’ low end value of $1.0 million, plus $1.05 million for liabilities not assumed, for a value of $2.05 million. I have added back three items upon which I disagree with his view. He included $3 million for inventory but it all in effect disappeared in his adjustments. Conservatively, I have left those adjustments alone and have begun at $2.05 million; hence I have added only the fair inventory value in excess of $3 million.
I have not made additional adjustments at this point for the fact of the receivership. It is conventional wisdom that a receiver will get less than a free seller would. But it is not always so, and it seems to me that much depends upon the market in which the sale takes place. When Peat was appointed receiver, Cumming went at once to see Godsall so that he would not be put off by the receivership and to see if he could get the price improved. He did not assume the price was automatically in free fall and neither will I. In another part of these reasons, I will take into account the very special conditions that would surround any actual sale. Considering the global and inherently imprecise nature of the exercise, I do not regard the difference between April and June values as precluding comparison.
Various approaches to value, spring 1987: ($ millions)
1. Douglas low value adjusted: 2.05
add excess collected receivables + .740
add intangibles +1.5
increase inventory (3 mill) to Special Purpose
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level (7.679) +4.679
8.969
Douglas low value adjusted as above but
use June 19/87 statement inventory (6.7) 7.99
(Note that 1. and 2. are net of certain liabilities assumed).
Special Purpose Statement (Managements views)
Price 3.35
Purchase discrepancy 6.13
9.48
(Note that this is net of liabilities assumed of $2.45).
Witkin – earnings: (1981-1986: 6 yrs)
low 8.344
high 9.585
median 8.964
Witkin – orderly liquidation 9.769
less additional receiver’s expense – say
$500,000 -.5
9.269
6. Godsall floor price (adjusted by Witkin)
Fixed assets, inventory, intangibles: $6.7 Add: cash .935
receivables .915
prepaid expenses .081
8.631
This figure could be further adjusted to reflect the actual collected receivables as follows:
8.631
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add excess receivables .740 9.371
But that would be offset by the assumed liabilities of the receiver of some $815,000. It should also be noted that Godsall told Bradshaw he would go another $200,000 or so to close the deal. Those factors would give $8.75 million. He was reluctant to take on the receivables/payables, but if he did not, they would benefit the Receiver and are fairly included in the calculation of value.
I do not accept the argument of Mr. Spence for Shieldings that because no one else was interested, whatever price Shieldings chose to offer was necessarily fair market value. The conspiracy makes such a finding unconscionable. Nevertheless, it is an important factor in considering fair market value that the receiver tested the market and no one else evinced a serious interest in buying the business as a going concern. The Montreal interest dissipated rapidly in early 1987. Mr. Levy could find no one. The other potential buyers in the receivership were interested in plucking some assets at bargain prices. I am not persuaded by the evidence that any of them was likely to make an offer approaching the level being discussed with Shieldings in January – March 1987. Certainly none of them so testified. But Godsall saw a value that others may not have seen. It follows from this that any inquiry into fair market value must take into account the views of Godsall and the Levy directors as to value as a test of other valuations. Their views are best expressed in the Special Purpose Statement and in the adjusted floor price.
Net of liabilities and rounded, the figures are: (millions)
Floor price (adjusted) $8.75
Special Purpose 9.5
It is true that the floor price was a February 25th price contingent upon prompt acceptance. Arguably it should be adjusted for any pre-receivership changes in inventory balances. The inventory records in evidence cease at February 27, 1987. The March 27, 1987 accounts receivable listings show only $153,000 in March billings outstanding. It is likely that this represents the bulk of March billings. Cost of sales postings to inventory in March
would thus not likely be a large adjustment and the other evidence as to the buyers’ perception of value shows that it is not significant in the overall picture.
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The other figures in the table above show a tendency to converge at the $8-$9 million range. The Witkin earnings approach median is $8,964 million and my adjusted Douglas tangible assets figure is $8,969. I draw some comfort in my task from these convergences. However, valuation is not mathematics, but judgment; mine, based upon all the evidence, is that the fair market value of the Levy-Russell business, exclusive of payables/receivables, in the spring of 1987 was between $8 and $9 million, which l fix at $8.5 million.
Damages I: The law
The measure of damages in a conspiracy is that loss which the acts of the defendants in support of the conspiracy actually caused to the plaintiffs: Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., [1983] 1 S.C.R. 452, 145 D.L.R. (3d) 385.
The compensation for a breach of a fiduciary duty to act honestly and in good faith is the actual loss caused to the plaintiffs by the breach: Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534, 85 D.L.R. (4th) 129. In Canson the Court divided on the appropriate limiting principles. La Forest J., writing for four (of eight) judges, held that common law concepts such as remoteness and mitigation, had, through the fusion of the common law and equity, come to be applied in equitable cases. There was a distinction between cases where the fiduciary controlled property and those where he was obliged to perform a duty. In the former, restitution was the norm; in the latter disgorgement of profit if any; but otherwise compensation should be by analogy to tort. There was no reason, apart from particular policy considerations related to specific causes of action, why the same basic claim should give rise to different redress if framed in equity than at common law. Common sense and reasonableness were central to both common law and equity. Damages equivalent to those for deceit were sufficient in the case.
Stevenson J. agreed in large measure. He did not find the fusion of law and equity a persuasive element in the case and certainly not as introducing the law of contributory negligence to the law of fiduciaries, the beneficiary being under no duty to the trustee or fiduciary. He preferred to approach the matter as one where a court might find some losses to be caused by a plaintiff rather than a defendant and so be too remote. Damages in a
compensation claim may not always be the same as in an action for deceit or negligence:
Nocton v. Lord Ashburton, [1914] A.C. 932 (H.L.), per Viscount Haldane L.C. at p. 958.
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McLachlin J., writing for herself and two of her colleagues, concurred in the result. She reached this conclusion via equity and without resort to the common law, holding that it was not appropriate to measure damages for breach of fiduciary duty by analogy to tort or contract. Fiduciary obligations were trust-like, involving power, superior information and control in the fiduciary and vulnerability in the beneficiary which may justify more stringent remedies than for negligence or breach of contract. Thus foreseeability of loss does not enter into the calculation of compensation for breach of fiduciary duty. However liability is not unlimited. The major limit is the need for a link between the breach and the loss; hence losses flowing from the plaintiff’s unreasonable acts, “[where] in any true sense [the plaintiff can] be said to have been the author of his own misfortune”, are not compensable: Doyle v. Olby (Ironmongers) Ltd., [1969] 2 Q.B. 158 (C.A.), at p. 167.
The question of foreseeability was not an issue in the argument before me; nor were the specifically common law notions of contributory negligence or failure to mitigate raised. The focus of the damages argument on behalf of the directors, Godsall and Shieldings, was causation. It was said that Levy, by his illegal acts and refusal to accede to Shieldings’ offers, was the author of his own misfortune; and that the breaches of duty did not cause the loss; that was inevitable as the company was doomed. All of the judges in both LaFarge and in Canson stressed causation and that is the most important factor argued in this case.
Damages II: The cause of the loss
The plaintiffs say that their loss is the difference between the fair market value of the business assets of Levy-Russell and the actual net price obtained for them by the receiver. This is the measure regardless of which of the defendants is liable. This approach presupposes that there would have been a sale at fair market value but for the conspiracy or the breaches of duty alleged against the bank and the receiver.
The defendant directors, Godsall and Shieldings, argue that Levy-Russell was already doomed in April, 1986, by circumstances having nothing to do with them. They were not responsible for the criminal acts, the loss of experienced people as a result, the two suspensions, the bad publicity, the loss of customers, especially the United States and South
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Africa, nor for the aging of the inventory and the changing nature of the business. I accept that they bore no responsibility for these adverse factors, although the changing nature of the business did not become apparent to anyone involved in the company until long after the Tecmotiv purchase and played no role in the events which concern us. The argument continues that there was no investor or buyer other than Shieldings, despite every effort. Shieldings’ offers were not accepted in spite of their efforts and the receivership was thus unavoidable. There can be no liability on them for the act of the receiver in selling at a price which he regarded as reasonable without relying on them.
The directors also argue that there was in any event no loss because the receiver sold the assets at their fair market value or at least at a commercially reasonable price.
As is apparent from the earlier parts of these reasons, I do not accept many of the underlying assumptions on which these arguments rest. The receiver’s view of the reasonableness of the Tecmotiv bid was hopelessly skewed by the directors’ breaches of their duty, owed to Levy-Russell, to brief him. The entire bargaining process between Hayeems and Godsall was likewise skewed by the directors’ breaches, particularly in giving Godsall information about the banking problems of the company and the absence of competitors, the two factors that made the conspirators’ strategy viable.
The effect of the conspiracy
The plaintiffs must show that, but for the acts done in furtherance of the conspiracy, events would, on the balance of probabilities, have turned out more favourably for them. In this case that means that they would have realized a better price for the assets in the receivership or that a sale at a better price would have been consummated without a receivership.
Shieldings’ first offer was at $8.0 million in September. Ordinarily one would see a pattern of one or more exchanges of offer and counter-offer and, if a deal was made, a final price somewhat in excess of the opening offer. It is trite that few offerors open with their highest price. Here we see instead a different pattern even though Hayeems attempted to negotiate in the normal way. Two points were made by the defendants to explain this pattern.
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The first was that the negotiations dragged on and the company steadily became less valuable. The company was to some extent living off its inventory, but the point is nevertheless off the mark. By fixing an inventory valuation date in September or October Godsall recaptured any reduced inventory for Shieldings while at the same time he reduced the offer price from which the calculation began. The lifting of the suspension arguably increased the value of the business in December, several months into the negotiations.
The second was the general claim that Godsall’s perception of the value of the assets degraded. I have rejected this explanation already. It is inconsistent with several key bits of evidence including his letter to Belcher and his enthusiasm over the future of the transmission business with the main competitor out of the manufacturing picture. He told Belcher in May that he thought that it could have been a good deal at $8 million.
The defendants blame the plaintiffs for having an exaggerated view of the value of the company, and Levy for wanting to get something for himself, either a pension or relief from his personal loans, or both. As to the first, no doubt in the summer of 1986 Levy was talking about sums that were in excess of the probable value of the assets and much in excess of the sums that Foreht thought reasonable. But, as I have pointed out, Levy could be negotiated with when one tried. The October counter-offer was reduced from the numbers of the summer. The November 5th term sheet essentially accepted that Shieldings’ offer was in the reasonable range; it contemplated a price increase, excluded Bradford and gave no moving costs offset to the rent, but it was by no means objectionable as being out of touch with real values. When Godsall responded to Hayeems’ letter of November 10th enclosing the term sheet, his only specific complaints about its contents related to items 1 and 5 so far as they dealt with the treatment of work in process. When they met again on November 28th the resulting term sheet differed from that of November 5th only in respect of the treatment of work in process. Price, land rental and valuation date were all the same as had been agreed at the November 5th meeting. I do not agree that the plaintiffs had an exaggerated notion of the value of the company which interfered with a reasonable negotiation. On the contrary, it was Godsall’s bad faith change of position in his letter of December 9th that knocked the agreement of November 28th off the rails. That pattern of events has been analyzed earlier. It shows, in my view, a resolve on the part of Shieldings to keep matters open as long as possible. Failure to close with Hayeems was part of the scheme.
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As to Levy wanting Shieldings to include a pension for him, this notion, raised in the counter-offer, soon disappeared in the discussions of November 5th. He did then ask the bank to fund it but that did not cause any delay or disrupt the negotiations. His loan problems were not actually settled until February but the fact was, as revealed in the internal bank memos, that the bankers realized that they could not expect to recover those loans from Levy personally. His assets were largely in his wife’s name, his personal ability to pay was linked to the value of the Seaway shares and the bankers had long since concluded that their real security was the Weston Road land. In my view the bankers would have settled his loans, as they did, as soon as they were satisfied that they no longer needed the leverage to ensure that Levy cooperated in the sale of the company. No substantial delay was actually caused by these issues, nor can the failure to make a deal be attributed to them.
I am satisfied, on the whole evidence, that but for the acts of the conspirators in furtherance of the conspiracy, there would have been a sale consummated to Shieldings without a receivership. As noted, one could readily see a deal in the area slightly above the September offer price of $8 million subject to inventory adjustment. If matters had not gone smoothly, the $6.7 million floor price gives an indication of what Shieldings’ perception was. The decision was taken in the bank to accept but to make one more effort to obtain more. Even then, had Bradshaw not dropped the ball by failing to pass on Godsall’s willingness to move a couple of hundred thousand to close the deal, it is highly probable the deal would have been done. By then, Godsall was aware of the revised inventory figures, as at October 31, 1986. Even knowing them and with his inside knowledge about the absence of competitors and the enormous pressure from the bank, he was willing to make that deal at perhaps $6.9 million. Had he truly been at arm’s length a deal at a much larger figure would have been a very probable outcome.
Such a deal would not necessarily have been at fair market value. Even without his access to inside information, Godsall had enough knowledge from the Rosenfeld memo, his visit to the bank on April 11, the 1985 Annual Report and his knowledge from Bilz of the uncertainties inherent in Levy-Russell’s inventory valuation system, to have been a cautious buyer and to make an educated guess that time might work for him. He might have deduced that a sale was necessary for Hayeems and driven a tough bargain. Hayeems would have had a tough time and been under great pressure to make sure the deal did not get away while
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working against a deadline. These are not the market conditions envisaged in the classic reference to a willing seller. Nevertheless, had there been no conspiracy and had the true scope of his predicament not been betrayed to Godsall, Hayeems would, I find, have been able to reach a deal at about $7.5 million for the business assets other than receivables/payables based on inventory valuation as at the agreement date. In my view the operative reason why no such deal was made was the conspiracy and the associated breaches of duty by the directors.
Had the receivership taken place for any reason, I am satisfied that but for the acts of the conspirators in furtherance of the conspiracy the sale price of the business assets would have been substantially greater than was realized. The directors would have fully briefed Davidson on their views of the value of the inventory, the M-41 and the CD 850. The evidence is that this information would have altered Davidson’s perception of what he was dealing with. He was understandably cautious as to whether the information would have actually enabled him to improve upon the price offered by Shieldings, but he would have tried. He had not had the advantage of hearing all the evidence. Having done so, I am of the view that there is no doubt that Shieldings’ price was fixed with reference to the known competition and the understanding that Godsall and the directors had of Davidson’s imperfect state of knowledge of what he was selling. Without that inside information Godsall would have based his bid on the more normal considerations of the value he attributed to the assets and the need to beat possible competition. Godsall’s reference in his letter to Belcher to his willingness to pay another $500,000 is not conclusive. People in genuine negotiations often pay more than they planned at the outset. As well, that comment was made in the context of Godsall’s inside knowledge without which the situation would have been very different. Even accepting that the fact of a receivership could have had an adverse effect on price, I am of the opinion that a price in the order of $6.7 million would have been a very probable outcome at that time. This is above his April breakdown of the business portion of the $19 million combined offer, but there was evidence that that breakdown was in part driven by the fact that financing for the land had been arranged at $14 million. But for that the business assets would have been in his higher proportion of 12 – 6.7.
It is true, as was argued, that no other bid in the receivership came close to $6 million but no one else had the combination of information, hands-on expertise and optimism that the
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Shieldings-directors group had in relation to this business. Even if one else wanted it as a going-concern, that group did and their perspective of value is clear in the evidence. The operative reason why no such bid was made was the acts done in furtherance of the conspiracy as already outlined.
Based on the foregoing analysis, the plaintiffs’ damages are the difference between the price which Hayeems would most likely have obtained in an untainted negotiation and the price actually obtained in the receivership.
I have found that Hayeems would have achieved a sale of the assets, excluding payables/receivables at around $7.5 million. The purchaser also would have undertaken to clear the lands. Since that obligation was undertaken by Tecmotiv, it can be omitted from both sides of the equation, as can rent for the Weston lands. Tecmotiv paid $3.35 million for the business assets including receivables and $290,000 in cash but assumed the receiver’s obligations. The amount paid for the business assets which Hayeems had for sale was therefore:
Price: | $3,350,000 | |
Add: | 815,000 | (receiver’s commitments) |
Less: | 290,000 | (cash received on closing) |
Less: | 1,636,000 | (receivables as collected) (1) |
Net Price: | 2,239,000 |
Note: (1) as already discussed it is legitimate to use this figure as it was largely known to the parties in June when they made their deal.
The other side of the equation is the Hypothetical Sale Price of $7.5 million.
The damages for conspiracy and the compensation for breach of fiduciary duty are thus:
H.P.S. $7.5 million
Less: Tecmotiv Price $2.239 million
Damages $5,261 million
Does the rise in land value offset the low business price?
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The rise in value of the Weston lands could not have been taken advantage of by the company outside of receivership as it had sold the lands in a deal that saw the lion’s share of any increase go to Kleinstein. As soon as the receiver took over, given the bank’s presumed priority over Kleinstein, the possibility emerged that the bank could sell the lands at a greater price to someone else. In essence, the leverage of the bank’s claim to priority was used to increase the price, although the mechanism was somewhat more complex and Kleinstein turned out to be the purchaser. So the company got a windfall – its debt to the bank was more fully covered by the land and a surplus was created.
It was argued that this land windfall must be brought into account and that it offsets any possible loss on the business. I do not agree. The windfall did not arise because the business was sold at an undervalue. There was no nexus between the two deals such that an increase in one was bound to result in a decrease in the other; nor were the lands and business sold as a package with in effect a discount for taking both. The only link between the two was the limited-time requirement for the continued presence of the business upon the lands, or from Shieldings’ point of view, the need to move the business. But that was not a factor introduced by the new higher-priced land offer; rather moving the business had been part of the reality of any business deal from the start. I am of the view that the higher price obtained for the land is not so related to the sale of the business as to require a set-off.
Responsibility for the damages
These damages are the joint and several responsibility of all of the human conspirators and of Shieldings which is vicariously responsible for the acts of Godsall performed in the course of his employment. It was suggested that as Godsall at all times acted in his capacity as an officer of Shieldings and the benefits of his acts accrued to it and not to him, he should not be found personally liable. It would be incongruous to find that he had actively participated in the conspiracy, yet exculpate him personally. The situation is not analogous to that of the officer who takes a good faith corporate decision not to perform a contract or the like, where, at least ordinarily, there is no personal liability.
I am conscious that the evidence against Krestell is less direct and more inferential than that against the others and that I have found him not involved in one aspect – the bank visit. I do not think that it is feasible to attempt to reflect this in the damages. No argument
was presented to support any difference in treatment among the directors and I will not differentiate.
Punitive damages
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Punitive damages are sought against all defendants except the bank and the receiver. The function of punitive damages is to mark the outrage of the court at malicious, high-handed, abusive or reprehensible conduct on the part of a defendant. They are designed to punish conduct deserving of punishment. They are not compensatory in nature. It was argued that there could be no punitive damages in a case founded in equity such as a claim for breach of fiduciary duty: Fern Brand Waxes Ltd. v. Pearl, [1972] 3 O.R. 829, 29 D.L.R. (3d) 662 (C.A.); First City Development Corp. v. Durham (Regional Municipality) (1989), 67 O.R. (2d) 665 (H.C.) at p. 702 ff.; Guerin v. R. (1984), 13 D.L.R. (4th) 321 (S.C.C.). The proposition is put too broadly in my opinion, but I need not resolve the issue because the causes of action proved include the tort of conspiracy as to which punitive damages could undoubtedly be awarded. The fact that the acts done in furtherance of the conspiracy were, in the case of the directors, breaches of fiduciary duty, does not prevent the award of punitive damages: Vorvis
v. Insurance Corp. of British Columbia (1989), 58 D.L.R. (4th) 193 (S.C.C.) at p. 205 ff. per McIntyre J. and the cases there cited.
Subsequent conduct can be considered by the court in assessing damages, including aggravated and punitive damages: Robitaille v. Vancouver Hockey Club Ltd. (1981), 124
D.L.R. (3d) 228 (B.C. C.A.) at p. 248 ff.; both in mitigation and in aggravation of the damages:
Slater v. Watts (1911), 6 B.C.R. 36 (C.A.) at p. 43.
The conduct of the directors and Godsall as described in these reasons demands consideration of punitive damages. As to the liability of Shieldings for punitive damages, Waddams: Law of Damages, 2nd ed., suggests at para. 11.430 that in principle such an award can only be justified where the corporation can be held criminally responsible, although in practice awards have been made against corporations for the acts of employees when the corporation is liable for the compensatory damages as is the case here. Godsall was one of the directing minds of Shieldings although not the most senior official and if there is to be an award of punitive damages, it should I think be a single sum against them jointly.
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In coming to an amount, there are several factors which are discussed in Waddams, op. cit., para. 11.280 ff. The award should be moderate; it may be geared to exceed the defendant’s probable profit; it must be proportionate to the situation as a whole; it should take into account the means of the defendant (para. 11.310); the adequacy of the compensatory damages as a deterrent must be considered before any additional sum is added (para. 11.360); and events and conduct right up to trial may be considered (para. 11.460).
It was argued that punitive damages should be substantial; the defendants had obtained by deceit property worth millions more than they had paid for it. That was indeed the case in June 1987 but events have already seen to the elimination of that profit. Shieldings has lost somewhere between $9 and $10 million; the directors lost their anticipated profits and their employment. The compensatory damages will come on top of these existing losses as will (in all probability) the costs of this lengthy litigation and (again probably) pre-judgment interest upon sums which they have not in fact had in hand. There is no evidence as to the individual means of the defendants, but it is fair to assume that the sums involved will be burdensome, at least to the individuals.
Bearing all of these factors in mind, I am of the opinion that the compensatory damages will, in these circumstances, accomplish any necessary deterrence or punishment. I decline to award punitive damages.
Disposition
The action is dismissed against Canadian Imperial Bank of Commerce and Peat Marwick Limited. Judgment will issue against all other defendants for $5,261,000.
Costs and interest may be spoken to by appointment. [804] De advocatis nihil nisi bonum
I acknowledge with gratitude the depth of preparation, the skill and grace of presentation and the civilized and professional approach of all counsel throughout the trial.
Action allowed in part.
Barry S. Wortzman, Q.C., and Warren S. Rapoport, for plaintiffs.
Peter Atkinson and W.B. McDiarmid, for Tecmotiv, Shieldings and Godsall, defendants.
Paul LeVay and Christopher Wirth, for Foreht, Bradshaw and Krestell, defendants.
D.J.M. Brown, Q.C., and Karen Lovell, for C.I.B.C. and Peat Marwick, defendants.
May 30, 1994. Additional reasons.
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In my Reasons herein, released April 5, 1994, I found that the action should be dismissed against the C.I.B.C. and Peat Marwick (“the Bank”) but that the defendants Foreht, Krestell and Bradshaw (“the directors”) and the defendants Shieldings, Godsall and Tecmotiv (“Shieldings”) were liable for damages to the plaintiffs for conspiracy and, in the case of the directors, for breach of fiduciary duty. Damages were assessed in excess of five million dollars. The parties have now presented their respective positions as to the costs and the award and calculation of pre-judgment interest.
The costs of the plaintiffs
The plaintiffs ask for solicitor-and-client costs. They say that the findings of conspiracy, breach of fiduciary duty and deceit made against the unsuccessful defendants provide a principled basis for such an award. They refer to Maximilian v. M. Rash & Co. (1987), 62 O.R. (2d) 206 (Dist. Ct.), where solicitor-and-client costs were awarded where the plaintiff was the victim of a breach of trust; and to Claiborne Industries Ltd. v. National Bank of Canada (1989), 69 O.R. (2d) 65 (C.A.) where such costs were awarded against a bank which had been found liable for conspiracy and breach of trust. At p. 109 Carthy J.A. said:
Having now found that the Bank did conspire with Black throughout and did profit from its conduct, I find that this is an appropriate case for solicitor-and-client costs to be awarded to the plaintiffs through to the end of trial.
The plaintiffs also submit that the failure of the defendants to make any offer of settlement, despite the plaintiffs’ approaches, is a further basis for the award sought.
The defendants argue that there is no reason to deviate from the normal party-and-party award which:
…strikes a proper balance as to the burden of costs which should be borne by the winner without putting litigation beyond the reach of the loser.
[810] Foulis v. Robinson (1978), 21 O.R. (2d) 769, 92 D.L.R. (3d) 134, 8 C.P.C. 198 (C.A.) at
p. 776 [O.R.] per Dubin J.A. They also refer to Isaacs v. MHG International Ltd. (1984), 45
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O.R. (2d) 693, 4 C.C.E.L. 197, 7 D.L.R. (4th) 570, 3 O.A.C. 301 where the court said at p. 695 O.R.:
An award of costs on a solicitor-and-client basis is ordered only in rare and exceptional cases to mark the court’s disapproval of the parties’ conduct in the litigation.
The defendants stress the phrase of this statement and submit that neither the way the action was conducted, nor the lack of an offer support the award sought. As to the offer, the plaintiffs also made no formal offer and the court in Foulis, supra, made it clear that there is no obligation to settle; one can put the opponent to proof provided there is no use of the judicial system to harass or any other abuse of the process (p. 776 O.R.). There was nothing in the conduct of the litigation by counsel to warrant such an award, quite the contrary, as I pointed out in my reasons. However, I did have occasion to comment in those reasons on the scale of deceit practiced both during the events and during the trial by certain defendants and I think that I can properly take that conduct into account in the costs context.
In my opinion, the defendants are stating the principle too narrowly. Neither Foulis, supra, nor Isaacs, supra, were conspiracy or fraud cases, whereas the two authorities relied on by the plaintiffs, Maximilian, supra, and Claiborne, supra, did involve those forms of conduct and that seems to me to be why the two lines of cases come to differing results. In Mortimer v. Cameron (1994), 17 O.R. (3d) 1 (C.A.), a personal injury case, the trial judge properly awarded solicitor-and-client costs after the date of an offer, but was held to have erred in holding that he might have done so under the discretion found in r. 49.13. The court held that, apart from cases where the rule is complied with, R. 49 did not effect a fundamental change in the traditional approach to costs and went on to review the guiding principles. On the point of interest in this case, the court referred to a passage in Orkin, The Law of Costs, 2nd ed. (1993), pp. 2-91 to 2-92 which “admirably reviewed” the law (at p. 23 O.R.):
“Costs on the solicitor-and-client scale should not be awarded unless special grounds exist to justify a departure from the usual scale.”
and:
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“An award of costs on the solicitor-and-client scale, it has been said, is ordered only in rare and exceptional cases to mark the court’s disapproval of the conduct of a party in the litigation. The principle guiding the decision to award solicitor-and-client costs has been enunciated thus:
‘[S]olicitor-and-client costs should not be awarded unless there is some form of reprehensible conduct, either in the circumstances giving rise to the cause of action, or in the proceedings, which makes such costs desirable as a form of chastisement.’”
As I have noted above, there was such conduct at the trial of this case on the part of certain defendants and certainly the circumstances giving rise to the action were reprehensible. This is thus a case which falls within the relevant principles. The defendants, however, submit that I should refuse to award the higher scale of costs for the same reasons that led me to decline to award punitive damages: the losses experienced by the defendants in the failure of Tecmotiv, both of capital and employment; the burden of so substantial a judgment; the burden of costs; and the burden of pre-judgment interest, all of which will accomplish any necessary deterrence or punishment. This reasoning is, however, somewhat circular since the prospect of being urged to award solicitor-and-client costs was one of the factors behind the decision not to award punitive damages. All factors considered, I think it is a case which calls for solicitor-and-client costs throughout and I so direct.
The costs of the Bank
The Bank has been successful in defeating the claim of the plaintiffs. In the ordinary course it should receive party-and-party costs throughout. It asks for those up until the date of an offer it made to the plaintiffs which was not accepted, and for solicitor-and-client costs thereafter. The offer was made by letter of September 21, 1990 from counsel for the Bank to counsel for the plaintiffs. In a separate action, # 45083/90, brought in 1990, the Bank claimed from Morris Levy and his holding company, Peplevy Corporation, some $520,721 plus interest from November 30, 1989 for money loaned to them and outstanding. The Bank’s offer in the action before me was as follows:
The Bank would be prepared to settle the above-noted action [i.e. Canadian Imperial Bank of Commerce et al. ats Levy-Russell et al.] on payment to the plaintiffs of
$520,000, on condition that, on or before the completion of any such settlement, Morris
P. Levy and Peplevy Corporation would pay their indebtedness to the Bank as claimed in Action No. 45083/90. Such a settlement would require the release of all parties in the above-noted action.
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This offer was not accepted, and I do not see how it could have been. In essence the Bank proposed that Mr. Levy gain the personal advantage of release from his debt by causing Levy-Russell to settle its claim for an equivalent amount. Levy-Russell was, through Levy Industries, its co-plaintiff, the subsidiary of a publicly traded company in which Mr. Levy held most, but not all, of the shares and was an officer. The offer put him in a position of conflict of interest. Further, the requirement for the “…release of all parties in the above-noted [Levy-Russell] action” appears to require the plaintiffs to release the other defendants as well as the Bank and its receiver. It may mean, alternatively, that those defendants would release the Bank, but this seems unlikely since none of them had made any claim against the Bank. It is the Bank’s letter and to the extent it is ambiguous, it must be read against the Bank. So read, it requires the plaintiffs to release a claim on which they have received a $5 million judgment for $500,000.
Finally, there is no authority in R. 49 for the award of solicitor-and-client costs to a defendant. This was recognized by the Bank, which submitted that I should follow the lead given in S & A Strasser Ltd. v. Richmond Hill (Town) (1990), 1 O.R. (3d) 243 (C.A.), at p. 245, where one defendant offered $30,000 to settle prior to trial. The action was dismissed and the trial judge awarded that defendant solicitor-and-client costs throughout. The plaintiff appealed, arguing that R. 49 did not authorize such an award. The Court of Appeal agreed but noted that r. 57.01(1) left no doubt as to the ambit of discretion. It permitted the court, in awarding costs, to have regard to, inter alia, “…any offer to settle made in writing…” The court concluded that, although the case was not one in which solicitor-and-client costs could be awarded on the general principles exemplified by Foulis, supra, still there was reason for giving the defendant a bonus for making an offer and the higher scale following the date of the offer was appropriate. Acknowledging that the discretion exists, I am nevertheless of the opinion that I should not make such an award for the reasons set out above as to the nature and wording of the offer. The costs of the Bank are to be calculated on the party-and-party basis to the extent that they are to be borne by the plaintiffs. I turn now to the question of who ought to pay them.
Who should pay the Bank’s costs?
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The assets of Levy-Russell were sold by the Bank’s receiver to Levy-Russell’s directors at a very substantial under-value. The plaintiffs did not know who to blame. They sued them all. In so doing they were entirely reasonable. Indeed it is almost unthinkable that they would have omitted any of the named defendants. If it alone had been sued, the Bank would have been hard-pressed to explain its receiver’s conduct and to meet the test of having taken reasonable care to obtain a proper price. It sold for a little over two million dollars what was worth more than seven. It was rescued from this problem by the fact that the plaintiffs proved that the Bank was, like themselves, a victim of the conspiracy of the directors and Shieldings. The conspirators effectively concealed the true worth of the company from the Bank by deceit. The Bank took no step in the trial to assist the plaintiffs in proving this deceit. It maintained throughout that its receiver had obtained fair market value, a point on which it was decisively defeated. In my view the Bank only succeeded against the plaintiffs because the plaintiffs succeeded against the other defendants. In these circumstances, equity and fairness demand that the conspirators and not the plaintiffs be responsible for the Bank’s costs.
The defendants all maintain that neither a “Bullock” nor a “Sanderson” order is appropriate. Under the former, the plaintiff would be liable to pay the Bank’s costs and recover them from the other defendants; under the latter the Bank would have to look directly to the other defendants for payment. It is thus a question of who ought to bear the risk that the directors and Shieldings may not be able to pay. There were two orders for security for costs obtained by the defendants under which the plaintiffs posted letters of credit totalling
$600,000. I interpret those orders as making the whole sum available, pro rata, to whichever defendants might turn out to be successful. Under a Bullock order, but not under a Sanderson order, this sum would be available to the Bank.
I was referred to many cases: Dellelce Construction & Equipment v. Portec Inc. (1990), 73 O.R. (2d) 396 (H.C.) and re costs at p. 440; Scarboro (Scarborough) Golf & Country Club Ltd. v. Scarborough (City) (1986), 32 D.L.R. (4th) 732 (Ont. H.C.); Voest-Alpine Canada Corp.
v. Pan Ocean Shipping Co. (1991), 50 C.P.C. (2d) 308 (B.C. S.C.); Walker v. Murray (1978), 9 C.P.C. 78 (Ont. H.C.); W.H. Bosley & Co. v. Marathon Realty Co. (1982), 39 O.R. (2d) 144 (H.C.); Rowe v. Investors Syndicate Ltd, (1984), 46 C.P.C. 209 (Ont. H.C.); Imperial Salmon
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House Ltd. v. Krdzalic (1983), 37 C.P.C. 152 (B.C. S.C.); Upper Lakes Shipping Ltd. v. St. Lawrence Cement Inc. (1988), 41 C.P.C. (2d) 318 (Ont. H.C.); Amcap Enterprises Ltd. v. Perini, [1993] O.J. No. 3352 (Gen. Div.). None of these cases involved a fact situation similar to the present case; each illustrates the great extent to which the exercise of the discretion is governed by the actual facts before the court; none lays down any absolute rule. Some of the cases say that Bullock orders are inappropriate where the causes of action alleged against the two defendants were independent. One such case is Bosley, supra, where Hughes J. examined [at p. 148] the English origins of these orders and adopted a statement to that effect from the decision of the English Court of Appeal in Mulready v. J.H. & W. Bell Ltd., [1953] 2 All E.R. 215 at p. 219 where the court said that a Bullock order was not appropriate where:
“…a plaintiff is alleging perfectly independent causes of action against two defendants where the breaches of duty alleged are in no way connected the one with the other.”
However, the cited passage, found in full at p. 147 of Bosley, begins with the following:
“A Bullock order is appropriate where a plaintiff is in doubt as to which of two persons is responsible for the act or acts of negligence which caused his injury, the most common instance being, of course, where a third person is injured in a collision between two vehicles and where the accident is, therefore, caused by the negligence of one or the other, or both.”
This passage is no doubt the basis for the statement in Orkin, op. cit. at p. 2-26.2 which is referred to in Dellelce, supra, as the basic rule (at p. 442):
“Such an order, known as a ‘Bullock’ order, is appropriate where a plaintiff is in doubt as to which of two persons is responsible for the act that caused the injury. It is not, however, appropriate where a plaintiff alleges independent causes of action against two defendants.”
In my opinion the case at bar fits within the first and not the second part of the principle. The plaintiffs did not, and could not, know which of the several defendants were responsible for the sale of their assets at an undervalue until the evidence had been explored at the trial. It is too formalist to say that the situation is governed by the differing legal foundations of the claims against the various defendants and I do not read any of the cited
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cases as laying down such a hard and fast rule. The matter is in the end one of discretion and the legal form of the action is but one of many factors to be weighed. In my opinion, at least a Bullock order is demanded by the facts of this case when viewed in the light of the principles discussed above.
A Sanderson order may be made where no equitable considerations militate against it; the unsuccessful defendants do not appear to be impecunious; and the plaintiff acted reasonably in joining the successful defendant: Watson v. Holyoake (1986), 15 C.P.C. (2d) 262 (Ont. H.C.) at p. 269. In that case, as here, the position of the successful defendant only became clear as a result of the full trial and a Sanderson order was made.
The Bank submits that, if any order is to be made, it should be a Bullock and not a Sanderson order. It acknowledges that the decision is a practical and equitable one as to the risk of non-payment by the unsuccessful defendants. As a generality, it asserts that equity usually dictates that the plaintiff, who brought the defendant into court, should bear that risk. In my view, for the reasons already discussed, any such prima facie result is entirely displaced on these facts.
The Bank further submits that the equities favour it because, with the other defendants, it obtained orders for security for its costs. A Sanderson order would deprive it of that security. In Wellington v. Odium (1971), 19 D.L.R. (3d) 121 (N.S. T.D.) the loss of the protection of such security was a factor considered by Dubinsky J. in the exercise of his discretion. There the successful defendant was let out of the action when it was shown that his vehicle was being operated without his consent at the time that the other defendant drove it into the plaintiff’s vehicle. The successful defendant was thus entirely uninvolved and, having protected himself by obtaining security, should not be deprived of that protection. As I read the case, this lack of involvement was a factor in the decision to make a Bullock and not a Sanderson order. I accept that the existence of the security is a factor to be weighed, but on the facts before me equity favours the risk of non-payment being borne by the Bank. It was not uninvolved. It sold the plaintiffs’ assets at a gross undervalue. It is the fortunate beneficiary of the plaintiffs’ success in proving their case against the other defendants thereby exculpating the Bank on a basis it was unwilling to assert on its own behalf. The existence of the security does not outweigh the unfairness to the plaintiffs if they are made to bear the
Bank’s costs. There is no evidence that the directors and Shieldings are unable to bear these costs and impecuniosity was not an issue, but if it was, my opinion would be the same.
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The Bank did not ask for solicitor-and client costs against its co-defendants and accordingly the award will be on the party-and-party basis.
Certain defendants argued that I should make no order releasing the security for costs because of the possibility of an appeal. I think I should make all the orders that flow from my disposition of the case and leave questions of a stay to the operation of the Rules and the discretion of the Court of Appeal.
Summary of costs disposition
For these reasons, the plaintiffs will have solicitor-and-client costs throughout from the unsuccessful defendants. The Bank will have party-and-party costs throughout from the unsuccessful defendants. The security for costs will be released to the plaintiffs.
Pre-judgment interest: Date of commencement
The parties are agreed that because the cause of action arose before October 23, 1989, the Courts of Justice Act, 1984 applies. By s. 138 the plaintiffs are entitled to prejudgment interest from the date that they gave notice in writing of their claim to the unsuccessful defendants. That date was June 10, 1988. Both the 1984 Act and the present Act contain provisions empowering the court to exercise a discretion as to both the rate at which, and the period for which, such interest is allowed.
The plaintiffs ask me to exercise the discretion and allow interest from the date at which they ought to have obtained the sale proceeds. In my reasons I found that it was probable that, but for the conspiracy, there would have been a sale of the business without a receivership. I also found that the fair value in all the circumstances, the Hypothetical Sale Price, was $7.5 million. The plaintiffs say that a reasonable inference is that such a sale would have taken place at or near the end of January 1987, about the time that the Bank’s deadline for the refinancing of the Levy-Russell account expired and interest should begin then. They cite Chang v. Simplex Textiles Ltd. (1985), 7 O.A.C. 137, a wrongful dismissal action where the claim related to money that the plaintiff would have received beginning in March 1979 but notice was not given until January 4, 1980. The trial judge exercised the
discretion and awarded interest from March 1979 and the Court of Appeal upheld the decision, saying that it was more just than the rule.
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The defendants argue that the funds from such a sale would have gone to the Bank and not to Levy-Russell. However, to the extent that is true, Levy-Russell’s liability for further interest to the Bank would have been reduced if the sale had been, as the plaintiffs submit, without a receivership.
The defendants also submit that the evidence showed that Mr. Levy had retained Mr. Foreht to assist him in some personal litigation with a Mr. Solomon and that this litigation was resolved just before the notice was given in June 1988. They propose the inference that Mr. Levy delayed the giving of notice until he no longer needed Mr. Foreht and say that it would be inequitable to exercise my discretion in the plaintiff’s favour in these circumstances. Mr. Levy was cross-examined by counsel for the directors and admitted the involvement of Foreht in the Solomon litigation. Ex. 9 is Foreht’s account rendered to Mr. Levy’s counsel in that action for fees for attending meetings in September 1987 and late February 1988. Mr. Levy said the Solomon action was settled just before he started this action. He was not questioned as to whether he had delayed the giving of the notice because of Foreht’s involvement in the Solomon action and for that reason I am reluctant to draw the inference contended for. Nevertheless, the delay from July 1987, when he and Hayeems discovered the terms of the sale to Tecmotiv and realized how unfair they were, until June 1988 was not explained by Mr. Levy. In the circumstances, this is not a case where it would be fair to allow prejudgment interest on a basis more favourable to the plaintiff’s than the usual starting point.
Pre-judgment interest: Rate
All parties agree that the appropriate interest rate under the Courts of Justice Act, 1984, s. 138, is 10%. Both the 1984 and the current Acts contain a discretion, as noted above, which I am urged to exercise. The plaintiffs say that the trend is away from awarding the fixed rate and toward awarding an average rate where the case has extended over a significant period and where rates have fluctuated. They say that 10% is lower than the average rate which is closer to 11%, a difference by their calculation of some $200,000 on the facts of this case. They rely on Spencer v. Rosati (1985), 50 O.R. (2d) 661 (C.A.) where the court noted the developing practice of averaging rates while refusing to lay down an ironclad
rule as to how to do it. The defendants agree that there should be averaging. They point to the 1989 amendments to the definition of the rate as evidencing a policy of greater accuracy in reflecting the real world of rates.
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Where the parties differ is in how the averaging should be done. The plaintiffs say that, as the cause of action arose before October 23, 1989, the rates to be averaged are those set out in Table 1 which appears in both Ontario Annual Practice (Carthy et al.) and Ontario Civil Practice (Watson et al.) immediately before s. 128 of the Courts of Justice Act. Table 1 is calculated in accordance with the 1984 Act and Table 2, which appears with it, is in accordance with the 1989 Act. The defendants say that in order to be consistent with the legislative policy of the 1989 Act, more closely reflecting the real world, the rates should come from Table 1 only until the fourth quarter of 1989 when the amendment was made, and thereafter from Table 2.
As was pointed out by Doherty J.A. in Graham v. Rourke (1990), 75 O.R. (2d) 622 (C.A.) at p. 628, the Act is premised upon a specified rate subject to a judicial discretion and not upon an average rate. The specified rate here is 10%. The rate urged by the plaintiffs, assuming a June 1988 start, is 10.913%; that urged by the defendants is 9.73%. Is one of these rates so clearly superior to the others as to call for the intervention of a judicial discretion in order to achieve fairness? I think not. Each of them is simply the application of a formula designed to approximate fair compensation for the loss of the use of the money during the relevant period. What the plaintiffs would actually have earned with the fund in hand is unknowable, and within the narrow range at issue here, one of these approximations is as fair as any other. To put it another way, none of the parties has met the burden of showing that justice requires a different rate than the 10% arrived at by the application of the specific rate.
The plaintiffs raised a further point, arguing that their proposed higher rate was more appropriate because of the defendants’ conduct. They noted that in Graham, supra, Doherty J.A. said that while interest was not a form of punishment, but part of the compensation, it was still in order for the judge to have regard to conduct as a factor in setting the rate. I do not think that the considerations as to overall fairness set out above should be displaced by yet another appeal to the defendants’ conduct, which has already been taken into account in full measure.
Summary as to pre-judgment interest
1994 * 7538 (ON SC)
The plaintiffs will have pre-judgment interest at 10% per annum from June 10, 1988.
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