McAteer v. Devoncroft Developments Ltd.

McAteer v. Devoncroft Developments Limited 2001 ABQB 917

Date: 20011107

Action Nos. 9201-19685, 9201-19753, 9701-04270 & 9901-00905

IN THE COURT OF QUEEN'S BENCH OF ALBERTA

JUDICIAL DISTRICT OF CALGARY

BETWEEN:

PAUL McATEER and KINGSWOOD GOLF & COUNTRY CLUB DEVELOPMENTS

CORPORATION, KINGSWOOD GOLF & COUNTRY CLUB DEVELOPMENTS LIMITED

PARTNERSHIP, KINGSWOOD GOLF & COUNTRY CLUB LTD. and KINGSWOOD GOLF

& COUNTRY CLUB LIMITED PARTNERSHIP

Plaintiffs

- and -

DEVONCROFT DEVELOPMENTS LIMITED, MARTHA G. BILLES, NEWMAT DRILLING

(WESTERN) LTD. and MARTHA G. BILLES, J. MICHAEL LAVERY, and KENNETH W.

MANN as TRUSTEES of the “MURIEL G. BILLES ESTATE TRUST FOR OWEN G.

BILLES”, the said MURIEL G. BILLES ESTATE TRUST FOR

OWEN G. BILLES, and OWEN G. BILLES

Defendants

- and -

TAYLOR McCAFFREY, and BENNETT JONES

Third Parties

AND BETWEEN:

MARTHA G. BILLES, NEWMAT DRILLING (WESTERN) LTD. and

MARTHA G. BILLES, J. MICHAEL LAVERY, and KENNETH W. MANN

as TRUSTEES of the “MURIEL G. BILLES ESTATE TRUST FOR OWEN G. BILLES”

and the said MURIEL G. BILLES ESTATE TRUST, and OWEN BILLES

Plaintiffs by Counterclaim

-ii-

- and -

PAUL McATEER

Defendant by Counterclaim

AND BETWEEN:

PAMELA MASON AS TRUSTEE FOR CATHERINE ANNE McATEER,

PAUL WILLIAM McATEER, and SARAH ELIZABETH McATEER,

PAUL WILLIAM McATEER, a minor, by his next friend PAMELA MASON,

SARAH ELIZABETH McATEER, a minor, by her next friend PAMELA MASON and

CATHERINE ANNE McATEER

Plaintiffs

- and -

MARTHA G. BILLES, PAUL MURRAY McATEER,NEWMAT DRILLING

(WESTERN) LTD., MARTHA G. BILLES, J. MICHAEL LAVERY and

KENNETH W. MANN as trustees of the “MURIEL G. BILLES ESTATE TRUST FOR OWEN

G. BILLES”, and OWEN G. BILLES,

Defendants

- and -

TAYLOR McCAFFREY, BENNETT JONES and PAUL McATEER

Third Parties

AND BETWEEN:

PAMELA McATEER as trustee for Paul McAteer Junior,

Catherine McAteer and Sarah McAteer

Applicants

-iii-

- and -

MARTHA G. BILLES, NEWMAT DRILLINGS (WESTERN) LTD.,

MARTHA G. BILLES, J. MICHAEL LAVERY and KENNETH W. MANN,

(in trust for The Muriel G. Billes Estate Trust for Owen G. Billes) and

DEVONCROFT DEVELOPMENTS LTD.

Respondents

AND BETWEEN:

PAMELA MASON, in the name of and on behalf of

DEVONCROFT DEVELOPMENTS LIMITED

Plaintiff

Defendants

Third Parties

- and -

MARTHA G. BILLES and PAUL McATEER

- and -

TAYLOR McCAFFREY, BENNETT JONES and PAUL McATEER

_______________________________________________________

REASONS FOR JUDGMENT

of the

HONOURABLE MR. JUSTICE JOHN D. ROOKE

_______________________________________________________

-iv-

APPEARANCES¹:

L.P. Lannan

for McAteer, Kingswood et al

J.E. Davison, Q.C.

for Mason et al

J.T. Eamon, M.L. Froese & W.E. Code, Q.C.

for Billes, Trust, Newmat et al

G.F. Scott, Q.C.

for Bennett Jones Verchere

C.J. Cichy

for Taylor McCaffrey

TABLE OF CONTENTS

I.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1

EVIDENCE/FACTS, ISSUES AND PARTIES/WITNESSES . . . . . . . . . . . . . . . . Page 2

II.

A.

B.

C.

General Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4

Litigation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 12

Parties/Witnesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 14

III.

IV.

SUMMARY OF THE JUDGMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 15

STATUS OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 15

A.

B.

McAteer, Kingswood Group and Unsecured Creditors . . . . . . . . . . . . . . . Page 15

Other Status Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 15

V.

CREDIBILITY AND ANCILLARY FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . Page 16

A.

B.

C.

Billes v. Mason . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 17

Billes Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 20

Billes v. McAteer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 21

1.

McAteer’s Knowledge of Billes’ Interest . . . . . . . . . . . . . . . . . . . Page 21

1

It is to be noted that Counsel for all parties, except the Third Parties, represented several individual

or corporate parties. However, for ease of reference herein, they will be described as Counsel for

their primary clients, as I have perceived it.

-v-

2.

McAteer’s Undertaking to Billes to Provide Disclosure to Mason

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 22

Officer’s Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 24

Construction Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 26

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 27

3.

4.

5.

D.

E.

F.

Billes v. Marshall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 27

Sali & Billes v. McAteer & Mason . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 28

Lavery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 29

Newal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 29

G.

VI.

FACTUAL FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 29

A.

The Personal Relationship Between McAteer and Billes . . . . . . . . . . . . . Page 30

1.

2.

Termination of Relationship Led to Ignoring DDL and its Shareholders

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 30

Did Billes’ Vindictiveness on Breakup Result in Calling of Loans

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 30

Role of Golf Dome Construction . . . . . . . . . . . . . . . . . . . . . . . . . . Page 35

Impasse, not Vindictiveness, Doomed DDL . . . . . . . . . . . . . . . . . Page 36

Loans in the Best Interests of DDL . . . . . . . . . . . . . . . . . . . . . . . . Page 37

Personal Relationship not Relevant to Third Parties . . . . . . . . . . . Page 37

3.

4.

5.

6.

B.

C.

Provision of Legal Services by McAteer . . . . . . . . . . . . . . . . . . . . . . . . . . Page 37

Interim Collateral Agreement Pending Long Term Financing - The “Alleged

Agreement” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 39

Billes’ Interest in the Lenders, McAteer’s Knowledge Thereof and Their Roles in

Approving the Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 42

D.

1.

McAteer’s Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 43

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 44

a.

The Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 44

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 44

i.

ii.

Billes’ Actual Interest . . . . . . . . . . . . . . . . . . . . . . Page 44

McAteer’s Knowledge . . . . . . . . . . . . . . . . . . . . . . Page 46

b.

Newmat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 46

i.

ii.

Billes’ Actual Interest . . . . . . . . . . . . . . . . . . . . . . Page 46

McAteer’s Knowledge . . . . . . . . . . . . . . . . . . . . . . Page 46

2.

3.

4.

Effect of McAteer’s Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . Page 47

Billes’ Role in the Approval of the Loans . . . . . . . . . . . . . . . . . . . Page 48

The Role of the Officers Certificates . . . . . . . . . . . . . . . . . . . . . . . Page 49

E.

F.

Entities to Which the Loans Were Advanced . . . . . . . . . . . . . . . . . . . . . . Page 51

1.

2.

3.

4.

Trust Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 51

Newmat Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 52

Manner of the Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 52

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 53

Disposition of the Devoncroft and Kingwood Entities . . . . . . . . . . . . . . . Page 53

-vi-

G.

Personal Benefits Resulting From the Loans . . . . . . . . . . . . . . . . . . . . . . . Page 54

1.

2.

Newmat - The $200,000 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 54

The Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 56

H.

I.

J.

Did TM Act for Newmat? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 57

The Role of Billes in Relation to Devoncroft . . . . . . . . . . . . . . . . . . . . . . Page 60

The Proposed Loan from Household Trust . . . . . . . . . . . . . . . . . . . . . . . . Page 62

Other Factual Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 63

K.

1.

Adverse Inference for Not Calling Gary Curtis as a Witness . . . . Page 63

VII. ONUS OF PROOF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 63

A.

B.

Disclosure of Conflict of Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 64

Would DDL have Proceeded with the Loan Transaction If There Had Been

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 67

Realization of Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 68

Solicitors’ Negligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 68

The Oppression Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 69

C.

D.

E.

VIII. KEY ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 69

IX.

DISCLOSURE OF INTEREST, VALIDITY OF LOANS AND RESULTING

CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 69

A.

B.

C.

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 71

The USA and the ABCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 71

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 74

1.

Billes’ Obligation to Disclose . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 74

a.

b.

Under the USA and the ABCA . . . . . . . . . . . . . . . . . . . . . . Page 74

At Common Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 79

2.

3.

4.

Actual Disclosure Provided . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 80

Effect of Oral Disclosure to McAteer . . . . . . . . . . . . . . . . . . . . . . Page 81

Conclusion on Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 83

D.

E.

Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 83

Reasonable and Fair Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 85

1.

2.

3.

4.

5% Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 87

$200,000 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 88

Reasonableness and Earnings to Mason . . . . . . . . . . . . . . . . . . . . Page 88

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 89

F.

G.

Conclusion on Compliance with Section 115(7) . . . . . . . . . . . . . . . . . . . . Page 89

Validity of the Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 89

1.

2.

Loans Valid Due to Lenders Lack of Knowledge of Breach . . . . . Page 89

Remedy under Section 115(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 91

F.

Other Available Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 93

1. The Oppression Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 93

a.

b.

History and Purpose of the Remedy . . . . . . . . . . . . . . . . . Page 94

The Scope of the Oppression Remedy . . . . . . . . . . . . . . . . Page 95

-vii-

c.

Statutory Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 96

i.

ii.

iii.

Unfairness and Reasonable Expectations . . . . . . . Page 96

The Three Grounds of Prohibited Conduct . . . . . . Page 99

Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 100

d.

e.

f.

Summary of Oppression Principles . . . . . . . . . . . . . . . . . Page 101

Application of the Remedy in other Cases . . . . . . . . . . . Page 101

Application of the Remedy to the Case at Bar . . . . . . . . . Page 105

i.

ii.

Billes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 105

McAteer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 109

g.

Form of Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 110

2.

3.

Constructive Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 111

Breach of Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 115

I.

Relief to Mason . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 119

1.

2.

Declarations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 119

Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 119

Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 122

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 122

a.

i.

Siebert’s Evidence . . . . . . . . . . . . . . . . . . . . . . . . Page 122

Cristall’s Evidence . . . . . . . . . . . . . . . . . . . . . . . . Page 124

Arguments and Analysis . . . . . . . . . . . . . . . . . . . Page 125

Conclusion on Fair Value . . . . . . . . . . . . . . . . . . Page 131

ii.

iii.

iv.

b.

c.

Punitive Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 132

Flow of Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 132

J.

Consequences to Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 132

1.

2.

3.

4.

To the Trust, Newmat and DDL . . . . . . . . . . . . . . . . . . . . . . . . . Page 132

Security Granted by Kingswood Entities . . . . . . . . . . . . . . . . . . . Page 133

BJ and TM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 133

McAteer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 134

K.

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 134

X.

THE McATEER/KINGSWOOD ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 135

A.

B.

The Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 135

The Billes/Newmat Counterclaim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 135

1.

2.

The Billes Counterclaim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 136

Newmat Counterclaim - McAteer Guarantee . . . . . . . . . . . . . . . Page 136

XI.

ENFORCEMENT AND REALIZATION OF SECURITY . . . . . . . . . . . . . . . . Page 138

A.

B.

Enforceability - Interest Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 138

Enforceability - Failure to Obtain Market Value . . . . . . . . . . . . . . . . . . . Page 140

1.

2.

3.

4.

5.

Disposition of HAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 143

Disposition of the Golf Dome . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 144

Disposition of the Golf Course . . . . . . . . . . . . . . . . . . . . . . . . . . Page 146

Cooke Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 149

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 152

Page 1

C.

Res Judicata and the Manitoba Litigation . . . . . . . . . . . . . . . . . . . . . . . . Page 152

XII

THIRD PARTY CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 156

A. Third Party Claims - Liability of Counsel (McAteer, BJ & TM) . . . . . . Page 156

1.

2.

McAteer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 157

BJ & TM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 161

a.

b.

BJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 162

TM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 166

3.

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 172

XIII. THE DERIVATIVE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 173

A.

B.

C.

D.

E.

Limitations Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 173

$200,000 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 177

Other Breaches Alleged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 178

Conclusion On Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 180

Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 180

XIV. OTHER ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 181

XV. INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 181

XVI. COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 181

XVII. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 182

APPENDIX I

APPENDIX II

REASONS FOR JUDGMENT OF THE

HONOURABLE MR. JUSTICE JOHN D. ROOKE

I.

INTRODUCTION

[1]

This case has all of the trappings of a great novel - a loving family corporation

developing a golf course and residential project, the introduction of a wealthy female investor,

a family broken apart by an affair between the investor and the husband/father, a marriage

proposal and cohabitation of the ex-husband and the investor, a divorce, high finance, empire

building, corporate intrigue, lack of business and personal faith, termination of the personal

relationship and engagement, insolvency, receivership/bankruptcy, and ultimately litigation.

However, the factual and legal issues in these consolidated actions are much more mundane

Page 2

than most of that. They concern duties of directors and shareholders, the validity of loan

security, the causes of default and insolvency, the ability to execute on the loan security, and

the resulting consequences. There are many pieces to the litigation puzzle.

[2]

The story evolves around the shareholdings and assets of a company known as

Devoncroft Developments Limited (“DDL” or “Devoncroft”²). The primary projects of DDL

were the development of an 18 hole golf course at LaSalle, Manitoba, a 172 residential lot

subdivision around the golf course, the construction and operation of a golf dome (the “Golf

Dome”) in Winnipeg, Manitoba, and an apartment complex in Red Deer, Alberta.

[3]

DDL³owned 100% of the partnership units in a limited partnership, Kingswood Golf &

Country Club Developments Limited Partnership (“KDLP” or “Developments LP”), formed in

1987 (Exhibit 2⁴) which owned the back 9 holes (the “back 9") of a golf course, known as the

Kingswood Golf & Country Club (KGC), and 89 residential lots, at LaSalle, Manitoba (near

Winnipeg), and the Golf Dome. DDL also owned 50% of the partnership units in a limited

partnership, Kingswood Golf & Country Club Limited Partnership (“KCLP” or “Club LP”),

also formed in 1987 (Exhibit 3), which owned the front 9 of KGC (and had a licence from

KDLP to operate the back 9) and lands which subsequently became 83 residential lots (for a

172 total). Those partnerships were managed respectively by the General Partners, Kingswood

Golf & Country Club Developments Corporation (“KD”, or “Developments”, or, as General

Partner, “KDGP” or “Developments GP”), and Kingswood Golf & Country Club Ltd. (“KC”,

or “Club”, or, as General Partner, “KCGP” or “Club GP”)(collectively all were known as the

“Kingswood Group” or the “Kingswood Entities”). Paul McAteer (“McAteer”)⁵owned 100%

of the shares of KDGP and KCGP. Others owned the remaining 50% of the units of KCLP.

[4]

Substantially unrelated to the main issues in this litigation, DDL also owned 50% of the

shares of a company called Home at Last Ltd. (“HAL”), which owned a 32 unit apartment

building in Red Deer, Alberta, known as “Sunnybrook Courts”. DDL, during part of the

2

There are so many different entities in this case that it was prudent to have a common “List of

Acronyms and Definitions” agreed to by all parties (Exhibit 305). I will generally follow those and

add more. Indeed, for consistency I shall also substitute them for the fuller names used in quotes

from Counsel.

3

There are a number of transactions over time leading to the resulting ownership outlined in this

paragraph, the details of which are on the record. However, as with numerous pieces of evidence

relating to the Kingswood Entities, and others -- I find they need not be referenced in any detail in

these Reasons.

4

When reference is made to an exhibit it is often not just referenced to the exhibit itself, but also the

oral testimony respecting it, which is of relevance.

5

To save space and to maximize consistency, I have used the last names only of the parties and the

witnesses in both my reasons and in quotations from Counsel. Additionally, the use of the names

of the parties may include Counsel on their behalf - e.g., “McAteer argued”, rather than “Counsel

for McAteer argued”.

Page 3

relevant times, also owned a participation profit interest (flowing from a consulting contract

negotiated between Martha G. Billes (“Billes”) and McAteer - Exhibit 308) in the development

of 3 subdivided lots known as Lands End⁶in North Saanich, on Vancouver Island.

[5]

Much of the ownership structure (at the time of the subsequent receivership of DDL) is

set out in the Organization Chart of Related Entities (Exhibits 183 and 186 (internal exhibit 3

of the latter)). Additionally, the ownership of some of the entities related to Billes in 1994

(albeit changing over time) was set out in Exhibit 247.

II.

EVIDENCE/FACTS, ISSUES AND PARTIES/WITNESSES

[6]

The evidence in this case, both orally and by exhibits, was substantial. The Agreed

Statement of Facts (Exhibit 283), attached as Appendix I hereto, was 12 pages. There were 481

exhibits entered. The transcript of the proceedings was over 3,200 pages in length.

Additionally, a consolidation of the written arguments of Counsel was approximately 350

pages in length (without footnotes and other supporting references), and over 100 authorities

were submitted.

[7]

Many of the facts that result from that evidence are not in dispute. However, while

most of the evidence (and resulting facts) was very helpful in providing a detailed background

for the litigation, I find that much of it was not specifically germane to the issues before me,

the findings and conclusions to which I have arrived, or the decisions I have made. Indeed, one

of the difficult tasks in preparing these Reasons has been to separate out the evidence and facts

that are truly necessary for the Judgment, from those that only constitute background, or have

more peripheral relevance. Moreover, some pieces of evidence (and resulting facts) relate to

issues that are alive in the pleadings but do not need to be considered in light of the

conclusions to which I have come. In the result, I have generally tried to limit these Reasons

only to the evidence and facts necessary to the Judgment, and the reader’s understanding of it.

[8]

It is difficult to discuss the issues until the facts are known. However, it is equally

difficult to understand the relevance of the facts until the issues are stated. In an effort to

organize the evidence and facts that I find relevant and material to the decisions I have made, I

will proceed to: state the principle issues; outline the general facts; set out the litigation issues

in more detail; and chronicle the more detailed evidence and facts that relate to both, and

analyse same. While I will attempt to leave the majority of my findings until later in these

Reasons, some will be highlighted early in these Reasons or recorded as the events unfold.

[9]

With this understanding, the principal issues (which I will describe below in more

detail) include:

6

Or Landsend, or Land’s End - various spellings were used in the documentation; I will use the

spelling from Exhibit 308.

Page 4

(a) did Billes have a duty to disclose (primarily to Pamela Mason (“Mason”), but also

to McAteer), and, if so, did she disclose, her interest in the Muriel G. Billes Estate

Trust for Owen G. Billes (“Estate Trust” or “Trust”) and Newmat Drilling (Western)

Ltd. (“Newmat”) (collectively the “Lenders”), each of which loaned funds (“Trust

Loan” and “Newmat Loan”) (collectively, the “Loans”), at her behest, to DDL;

(b) is McAteer implicated in any failure by Billes to make adequate disclosure;

(c) if she failed to disclose, are the Loans to DDL enforceable;

(d) was Billes and/or McAteer guilty of oppression vis-à-vis Mason;

(e) was DDL disadvantaged by the actions of Billes and/or McAteer such that DDL is

entitled to relief against them;

(f) if Billes is liable on any of these matters, does she have a right to claim therefor

against McAteer, or Counsel who prepared the loans, Bennett Jones Verchere (“Bennett

Jones” or “BJ”) or Taylor McCaffrey (“Taylor McCaffrey” or “TM”)(the latter two,

collectively the “Third Parties”, although McAteer is also a third party in all three of

the actions);

(g) does McAteer have any liability to Mason;

(h) is McAteer liable under his guarantee to Newmat (“McAteer Guarantee”); and

(i) what, if any, remedies are appropriate.

This is merely a thumbnail sketch of some of the more major issues which are considered in

the Reasons that follow.

[10] This process has been greatly assisted by Counsel agreeing, after consultation, to

follow a single outline for written argument (“Outline for Argument”)(Exhibit M), which I will

in large part attempt to follow in these Reasons. In that outline issues were posed in the form

of questions to which Counsel responded. In these Reasons, I will, from time to time, set out

the way in which an issue was articulated. I should note that similarly worded issues were

stated separately as to the Trust Loan and the Newmat Loan. However, the parties often

responded to the issues related to the Trust Loan, and merely referred the reader back to those

arguments when addressing the Newmat Loan, except when there was a material difference.

These Reasons have adopted that format. In some cases, however, the issues have been

combined in a different order to avoid repetition. In others, the issues have not been addressed

as they were not considered by Counsel to merit any, or any new, response. Accordingly, I

have not addressed every issue set out in the original Outline for Argument.

A.

General Facts

[11] In the Outline for Argument, Counsel were asked to focus, as I will attempt to do, on

the “chronological dates and events that are key to some finding of fact that is pertinent to an

argument being made”, as opposed to those which merely provide background or a historical

narrative. The material that relates to these latter matters can still be found in the Agreed

Statement of Facts and elsewhere on the record.

Page 5

[12] The Agreed Statement of Facts and Documents (Exhibit 283) identifies the various

players (including those active in the issues herein and others), and the basics of the

transactions and actions taken relevant to this litigation. It also sets out other transactions and

actions that, while not specifically germane to the issues herein, form further background. The

Agreed Statement of Facts (modified in some respects to conform to the terminology used in

these Reasons) is appended as Appendix I. However, it may be helpful to restate the essence of

the relevant, general facts in narrative form.

[13] From November 1987, the McAteer/Mason family owned DDL. In 1990, they sought

an investor to inject funds into DDL to allow it to continue its development of the Kingswood

golf and residential project. McAteer was introduced to Billes in January 1990, and relatively

shortly thereafter, she invested in DDL. Her investment was based on a written proposal by

McAteer, dated February 5, 1990. That document consists of over 140 pages of proposal,

financial information, projections, asset summaries, sales brochures, appraisals (as at 1987),

McAteer’s resumé, and corporate records (Exhibit 10). Prior to investing, Billes consulted with

Michael Lavery (“Lavery”), a partner in the chartered accounting firm of Deloitte & Touche

(“Deloittes”), who conducted the “due diligence” on behalf of and on the instructions of Billes.

On April 23, 1990, Billes invested $750,000 into DDL and in return became a 50%

shareholder, with McAteer holding 10% and Mason holding 40%, in trust for Paul McAteer

Junior, Catherine McAteer and Sarah McAteer (the “McAteer/Mason children”). Billes and

McAteer became the sole directors and officers. This investment and purchase of shares was

pursuant to an agreement between the parties, dated March 1, 1990, which also reflected the

way in which McAteer would operate within DDL thereafter (Exhibits 12, 12A (also 278) and

13A).

[14] As part of the Billes investment, the three shareholders and DDL entered into an

Unanimous Shareholders Agreement (“USA”)(part of Exhibit 9, and Exhibit 13), the relevant

terms of which will be delineated in more detail infra, but which provided, inter alia

:

(a) unanimous consent of the directors for any indebtedness of more than $500,000 in

the aggregate;

(b) disclosure in writing of the nature and extent of any material interest a director held

in any entity which was a party to a proposed material contract with DDL;

(c) directors abstain from voting to approve a contract in which that director had a

material interest;

(d) a contract in which there was any material interest was neither void nor voidable by

reason of such a relationship, if the director disclosed the interest as required and the

contract was approved by the directors or shareholders as required and it was

reasonable to DDL at the time; and

(e) if, due to the conflict of interest, 50% of the directors were disqualified from voting,

the matter would be decided by a resolution of the shareholders.

Billes had advice from Lavery with respect to the USA, as well as independent counsel prior to

its execution.

Page 6

[15] In July 1990, the financial position of Developments LP improved by $934,000, by a

write-down of that amount on the $1,330,000 so called “MECI loan” from MECI Properties,

the payout of the difference of which was financed through a loan known as the McLarty Loan

(Exhibits 14, 15, and 37B).

[16] An affair between McAteer and Billes was disclosed to Mason on October 23, 1990,

and McAteer and Mason separated. A formal separation agreement, which was prepared by

BJ, was executed on December 21, 1990 (Exhibit 28). McAteer and Mason were divorced on

January 29, 1991.

[17] McAteer and Billes bought a home (the “Wolfe Street property”) together in Calgary

and on November 24, 1990 commenced cohabitation. On December 23, 1990, Billes and

McAteer entered into a “Domestic Agreement” (Exhibit 21), in which McAteer acknowledged

that Billes “had made full disclosure of her financial circumstances”. McAteer confirmed this

at trial during cross-examination (“cross”) by Billes’ Counsel, although he denied it in

examination-in-chief (“chief”).

[18] In the fall of 1990, McAteer was attempting to secure additional financing for the

purposes of developing the back 9 and the Phase II residential development lands of the

Kingswood Entities at La Salle. McAteer asked Billes to introduce him to various bankers for

this purpose and Billes did so.

[19] During this time Mason and Billes met privately on two occasions, and with McAteer

on at least two other occasions, at which Billes alleges DDL business was discussed. Billes

testified that during these conversations she disclosed her involvement in the Trust and

Newmat to Mason and Mason approved. Conversely, Mason says Billes’ interests and

involvement in the Trust and Newmat were never disclosed to her verbally or in writing, until

over a year after the execution of the Loans, namely on or after October 9, 1992.

[20] The first of these meetings between Billes and Mason was on December 1, 1990, when

Billes and Mason met for lunch at the Westin Hotel in Calgary. Billes, in cross, recalled this

meeting being in November, but did not dispute the December date. Mason testified that no

DDL business was discussed at that lunch. Rather, the only purpose and subject of discussion

concerned how they would handle Christmas with the Mason/McAteer children.

[21] Billes lent $54,000 to DDL on February 4, 1991 (Exhibit 288). There was written

disclosure of Billes’ interest and written consent was provided by Mason and McAteer. This

disclosure and consent is significant, because Billes indicated that her Winnipeg lawyer, Mr.

Lawrence Steinberg (“Steinberg”), told her she needed it in order to comply with the terms of

the USA. This demonstrates her knowledge of the necessity for disclosure and consent in

circumstances where she had an interest in a loan to DDL.

[22] Billes, Lavery and Kenneth W. Mann (“Mann”), were the Trustees of the Trust, which

was created by Billes’ mother’s (Muriel G. Billes) Will (Exhibit 1), for the benefit of Billes’

Page 7

son, Owen Billes. None of the Trustees had any beneficial interest in the Trust, and Billes was

not entitled to any compensation as a Trustee (Exhibit 6). In exchange for security, and under

documentation (Exhibits 37, 472 and 473) dated March 21, 1991, prepared by BJ, the Trust

loaned and fully advanced $1,200,000 to DDL (the Trust Loan). The purpose of the Trust Loan

was to enable KDLP to complete the development of the back 9 holes.

[23] The closing documentation for the Trust Loan included an Officer’s Certificate

(Exhibits 36, 37 and 39) dated March 21, 1991, wherein McAteer certified that there was no

USA preventing the transaction and that all internal documentation by DDL was in order (see

below for more detail).

[24] A certified copy of a director’s resolution dated March 21, 1991, was executed by

McAteer (Exhibits 36 and 37), certifying that a resolution authorizing the borrowing had been

passed by the directors of DDL on March 21, 1991. However, there was, in evidence, no

actual, executed directors’ or shareholders’ resolution to that effect. Additionally, both Billes

and McAteer signed a technically accurate, but misleading, Certificate of Incumbency (Exhibit

37, Tab 23) which provided that:

There has been no change made in the Articles of Incorporation or By-Laws of

the Corporation thereof which would affect the borrowing power of or the

powers to grant security by the Corporation...

It is misleading because, as they both knew, the USA provided (in article 9.02) that there could

be no borrowing in excess of $500,000 in the aggregate without the unanimous approval of the

directors.

[25] The Partnership Units in the Kingswood Entities held by DDL were pledged to the

Trust as part of the Trust Loan security (Exhibit 37, Tab 4).

[26] While she did not initially recall it when asked in cross, Mason’s diary recorded that on

March 26, 1991, McAteer and Billes attended at Mason’s home “for tea”. Mason did not recall

any DDL business being discussed on that occasion. McAteer testified that no business was

discussed. Billes testified in chief that McAteer would often bring her and Mason “up-to-date

on business activities over a cup of tea”, but that she had no recollection of that date. However,

a short time later while still in chief, she was quite definite and specific that the Trust Loan

was discussed on that occasion and that Mason was “pleased”.

[27]

Billes testified that she and McAteer had a discussion about the Trust Loan with

Mason in Mason’s home when McAteer was doing some renovations, but no date was

specified. Mason testified that such renovations had begun in 1990 and continued into 1991,

but she had no recollection of any such discussion.

[28] On April 18, 1991, Developments Corp. entered into an agreement to purchase a Golf

Dome “skin” package for $600,000 (Exhibit 330). Developments Corp. also continued with

Page 8

steps to negotiate for land and took other steps which resulted in additional costs of $180,000

being incurred to April 30, 1991 (Exhibit 333, page 10 and Exhibit 47a). The Golf Dome went

into operation in Winnipeg, in December 1991.

[29] On April 23, 1991 (a month after the Trust Loan execution), Mason and Billes had

lunch at the “Dock” restaurant in Glenmore Landing, in Calgary. Mason testified that

absolutely no DDL business was discussed. Rather, the discussion related to the upcoming

summer plans whereby the Mason/McAteer children would travel to Billes’ cottage in Ontario.

The latter was corroborated by Mason’s diary entry (Exhibit 289). Billes, on the other hand,

testified that she and Mason discussed the Trust Loan and the fact that it had been completed

to finance the golf course development. Billes also gave evidence that she told Mason that,

unlike the February 4, 1991 loan, there was no need for Mason’s approval because Billes had

no interest in the Estate. However, as will be seen infra, this differs from her claim that she

did not want to discuss it with Mason.

[30] Newmat was a company in which Billes was one of three directors (but not an officer)

and owned 49% of the shares through her 100% owned and directed company, Marlore

Enterprises Ltd. (“Marlore”). At Billes’ behest, Newmat, in exchange for security (including

the McAteer Guarantee by McAteer - Exhibit 63) and under documentation dated October 10,

1991, prepared by TM, loaned and fully advanced $2,100,000 to DDL (the Newmat Loan).

Those funds were borrowed by Newmat from the Province of Alberta Treasury Branches

(“ATB”)(Exhibit 60), and, from Newmat’s side, were authorized by, inter alia, the consent of

the shareholders of Newmat on October 8, 1991 (Exhibit 369), and directors’ resolutions

(Exhibits 61 and 62). The supporting documentation was prepared by Newmat’s Counsel,

Charles Spence, with the firm Miles Davison McCarthy.

[31] As part of the negotiations leading up to the Newmat Loan, its face amount was

increased by $200,000 from that originally intended. The additional $200,000 loaned (the

“$200,000 Loan”) was paid to McAteer in reduction of his DDL shareholder's loan and in

settlement of McAteer's ownership claim in the Wolfe Street property. Accordingly, Billes

released her security against McAteer's shareholder's loan (Exhibits70, 71, 377, and 455) on

October 31, 1991. McAteer moved out of the Wolfe Street property to Winnipeg to devote full

time and attention to the DDL/Kingswood business interests.

[32] In the Newmat Loan (as in the Trust Loan), McAteer executed for Counsel, on January

6, 1992, an Officer’s Certificate (Exhibit 77) on behalf of DDL. The Officer’s Certificates in

both the Trust Loan and the Newmat Loan provided, inter alia, in paragraph 5 (of each⁷):

7

In identical wording, except that the Trust Loan Officer’s Certificate uses the word “Company”

and “We” in paragraph 4, and the Newmat Loan uses “Corporation” and “I” in paragraph 4.

Indeed, David Marshall, Counsel at TM who prepared the document for the Newmat Loan,

testified he had received a copy of Exhibit 39 from Wayne Whitlock at BJ, who prepared the

document for the Trust Loan, and it was used as a precedent for Exhibit 77.

Page 9

The Company/Corporation is not bound by any provision in its articles or by-

laws or by any unanimous shareholder agreement which would in any way

hinder or restrict the powers of the Company/Corporation or the officers of the

Company/Corporation to authorize, execute and deliver the Debenture or which

would hinder or restrict the Company/Corporation from performing its

obligations hereunder.

[33] Also on January 6, 1992, McAteer executed a certified copy of a Resolution of

Directors (Exhibit 76), certifying that such a resolution had been passed by the directors of

DDL on October 10, 1991 (an executed copy by each of McAteer and Billes appears in Exhibit

306).

[34] The McAteer Guarantee executed on October 10, 1991 by McAteer in favour of

Newmat (Exhibit 63)⁸was for the sum of $1,950,000 plus interest as set forth in the Newmat

Loan Agreement (Exhibit 67). The Loan Agreement provided for interest at the ATB Prime

Rate on commercial loans, plus 2 ½ %, compounded annually.

[35] In 1992, the financial situation of DDL and the Kingswood Entities deteriorated,

prompting McAteer to seek a reduction in interest rates on the Trust Loan (Exhibit 85a) and

from other secured creditors ( e.g. Exhibit 355 regarding the Tess McLarty Debenture).

[36] In July 1992, the McAteer/Billes personal relationship formally ended, having been

under strain since September 1991. McAteer testified that their plans for marriage and

engagement were terminated at about that time, but Billes testified that it really ended in

March, 1991. There was significant tension between the two thereafter: see, inter alia, Exhibits

107, 109, 114, 116 - 119, 124, 130, 135 and 309. In fact, McAteer noted in a September 16,

1992 letter to Larry Newel (“Newel”), President of Newmat (Exhibit 127), “you are probably

aware that the lines of communication are still down between Martha and myself”. In his letter

of September 29, 1992 to Rob Desbarats (“Desbarats”) (Exhibit 134), McAteer indicated

further that he had made seven proposals for resolution of the impasse between him and Billes

between March 24, 1992 and July 30, 1992, but had no “specific acknowledgement or

response” from Billes (see also references to this in TM’s letter of October 5, 1992 - Exhibit

136). In the September 29 letter he also raised the issue of Billes’ conflicts.

[37] In the period from August 1 to October 13, 1992, it appears that Len Sali, Q.C. (“Sali”),

a partner at BJ, was retained by Billes, and possibly one or more of the Trust, Newmat and

Owen Billes, in connection with the Loans. He and Billes met with McAteer and Mason on

October 9, 1992. This meeting and its significance will be discussed infra

.

[38] During this period McAteer continued to try to find a solution to the cash problem that

DDL was experiencing. His attempts included his November 12, 1992 proposal (Exhibit 145)

8

This Guarantee is relevant to the Newmat counterclaim against McAteer. No evidence or

argument in defence of it (directly) was raised before the Court.

Page 10

for a shareholders meeting for December 4, 1992 “to attempt to remedy the current financial

problems”.

[39]

The Lenders demanded their loans (and guarantees) on, inter alia, November 17

(Exhibit 152, seeking interest of $104,278, under the Newmat Loan) and November 23, 1992

(Exhibit 167 as to $1,278,571 owing under the Trust Loan, Exhibits 168 and 169 as to

$2,204,424 owing under the Newmat Loan, Exhibit 170 as to $2,054,423 under the McAteer

Guarantee of the Newmat Loan, and Exhibit 171 as to $1,574,140 owing under the mortgage

by Developments G.P. to 2809291 Manitoba Ltd (“280"), flowing from default of the Newmat

Loan).

[40] With respect to the action by Mason, in the name of DDL (the “Derivative Action”)

(Action No. 9901-00905), the parties agreed on a deemed action date of November 24, 1998.

Consequently, any allegations based on facts occurring before November 24, 1992, would be

barred by any applicable six year limitation period.

[41] DDL was placed in receivership by the Lenders on November 27, 1992 (Exhibits 173

and 176 as to the Trust, and Exhibit 177 as to Newmat), and Sill Streuber Fisk Inc. (“Sill”) was

appointed as a private receiver and manager pursuant to the Lenders’ security.

[42] Other security was enforced, including: Royal Bank (balance of the Phase I residential

lots); McLarty ($500,000 - Exhibits 17 and 25); Harry Enns (back 9); and Owen Billes

($175,000 on the Phase II Development Lands - Exhibits 20 and 441), transferred to the Estate

Trust in 1994 (Exhibit 368). Of particular interest, Harry Enns enforced his security on the

back 9 of KGC which was sold to a third party by auction pursuant to mortgage proceedings in

Manitoba. Subsequent negotiations led to Billes related entities purchasing the back 9 from the

third party, thus consolidating the 18 holes.

[43] On November 30, 1992, the first action (“McAteer/Kingswood Action”) in this

litigation was commenced by McAteer and the Kingswood Entities.

[44] On December 5, 1992, a Stand Still Agreement was signed (Exhibit 179) and Sill was

instructed to prepare a business report. Sill delivered interim reports on December 18, 1992

(Exhibit 180) and February 4, 1993 (Exhibit 181), and its formal Business Report on March

31, 1993 (Exhibit 186).

[45] On April 19, 1993, Notices of Intention to Enforce Security were issued under the

Lenders’ Loans (Exhibits 188-190).

[46] Kingswood Club LP, Club GP, Developments LP and Developments GP gave Notice

of Intention to Make a Proposal in bankruptcy on May 3, 1993 (Exhibit 196). Peat Marwick

Thorne Inc. (“KPMG”) was appointed interim receiver by the Court of Queen’s Bench of

Manitoba on May 7, 1993 (Exhibit 202) and Receiver and Manager on May 28, 1993 (Exhibits

211, 214 and 215). KPMG was also appointed receiver under the Trust Loan debenture on

Page 11

May 28, 1993 (Exhibits 206 and 211). All voluntarily assigned themselves into bankruptcy on

May 19, 1993, effective May 3, 1993, with Ernst & Young as Trustee (Exhibits 212 and 213).

No formal proposals to address financial or operational conditions were ever received from

any source.

[47] On December 10, 1993, the Lenders (Exhibit 226) advised Mason and McAteer that

HAL had been struck from the Corporate Record in 1992 (Exhibit 175⁹), was suffering

financial losses and was in need of funds. The Lenders proposed to purchase DDL's 50%

holding in HAL for $7,500 if Mason and McAteer did not wish to purchase same (Exhibits 226

and 226A). Mason and McAteer did not respond to this offer.

[48] In December 1993 and January 1994, real estate appraisals were obtained which valued

the Golf Dome at between $629,000 - 650,000.

[49] On January 24, 1994, the assets of KCLP secured to the Trust, being the front 9, were

foreclosed to the Trust by the Order of Justice Wright of the Manitoba Court of Queen’s Bench

(Exhibit 244). The Order provided that the foreclosure satisfied the entirety of the debt owing

by DDL to the Trust. Mason unsuccessfully sought a stay of the application. McAteer

unsuccessfully requested the Court to reconsider its decision, and an appeal of this Order by

McAteer was subsequently abandoned (Exhibits 244, 249 and 253).

[50] On March 18, 1994, the Lenders provided notice to Mason and McAteer with respect to

the sale of the Golf Dome (Exhibit 269).

[51] Between March 25 and November 1, 1994, various transactions took place that flow

from the execution on the Lenders’ security, including the following (largely as described by

Mason):

(a) March 25, 1994 - 3038319 Manitoba Ltd. (“303"), a wholly owned

subsidiary of Albikin Management Inc. (“Albikin” - solely owned by the Martha

Billes Family Trust, and directed and operated by Billes, Newel and Owen

Billes until January 31, 1994, when Owen Billes remained the sole director -

Exhibit 365), purchased the Golf Dome from Newmat nominee, 2809291

Manitoba Ltd. (“280"), for $648,000 (Exhibit 246);

(b) May 1, 1994 - the Trust purchased the Owen Billes mortgage from Developments

Corp. for $175,000 (Exhibit 368);

(c) June 14, 1994 - 3138993 Manitoba Ltd. (“313"), a wholly owned subsidiary of the

Trust (directors being Billes, Owen Billes and Newel - Exhibit 442), entered into an

agreement with 3111296 Manitoba Ltd. (“311" - owned by Gary and Wayne Curtis

(“the Curtises”)) to sell the front 9 and back 9 of the Kingswood Golf Course for

$1,225,000.00 - the transaction closed September 15, 1994 (Exhibits 268 and 366);

9

HAL was subsequently revived in November 1993 (Exhibit 225).

Page 12

(d) October 24, 1994 - Owen Billes became, and Billes resigned as, a director of Billog

Corporation Ltd. ("Billog") (Exhibit 364);

(e) October 24, 1994 - Newmat and Billog entered into an agreement whereby Newmat

funded $7,500 to Billog to purchase the HAL shares from Sill, as Receiver Manager of

DDL, and agreed to make ongoing advances as necessary. Billog and Newmat agreed

to split the sale proceeds 60% to Newmat and 40% to Billog (Exhibit 424);

(f) October 25, 1994 - DDL (by Sill) sold Billog all DDL’s shares in HAL plus all

amounts owing to DDL by HAL for $7,500.00 (Exhibit 267 - also Exhibit L); and

(g) November 1, 1994 - Newmat and 303 entered into an agreement whereby Newmat

agreed to provide consulting services to 303 in respect of the Golf Dome, the

agreement being retroactive to November 1, 1993 (Exhibit 426).

[52] DDL was struck by the Registrar of Corporations in November 1994, and revived

formally on January 19, 1999, for the purposes of this litigation. It was never placed into

bankruptcy.

[53] As at January 16, 1995, all of the assets of DDL had been the subject of disposition

(Exhibit 271).

[54] In August 1995, HAL's property in Red Deer was sold for a total price of

$1,050,000.00 (Exhibits 343 and 350). The net sale proceeds of $99,667 (Exhibit 424) were

distributed amongst HAL shareholders, including Billog. Newmat and Billog subsequently

entered into a further agreement on April 14, 1997, whereby Newmat agreed to manage funds

received by Billog from the sale of HAL (Exhibit 425).

B.

Litigation Issues

[55] The plethora of facts alleged in the pleadings, many of which are diametrically

opposed, present a complex matrix of issues. The Record, amended to April 17, 2000 (Exhibit

285), consists of some 30 separate, relevant pleadings and documents. In this section I have

attempted to summarize, albeit with the broadest of brushes, the primary issues.

[56] The first action in this consolidated litigation, the McAteer/Kingswood Action (Action

No. 9201-19685), was brought by McAteer and the Kingswood Entities against DDL, Billes,

Newmat, the Trust and Owen Billes (the latter four, or Billes, or any one or more of them also

being referenced herein as “Billes et al.¹⁰). The McAteer/Kingswood Action alleged, inter alia,

that Billes, being a director, officer and shareholder of DDL, was also a director, shareholder

(through Marlore) and an officer and the controlling mind of Newmat. It alleged further that

Billes was a Trustee, and the controlling mind of the Trust. The Plaintiffs claimed that,

contrary to the USA and the Alberta Business Corporations Act, S.A. 1981, c. B-15 (the

“ABCA”), Billes failed to disclose her interest in the Loans. It also alleged that Billes and

10

Where I merely make reference to “Billes”, when the reference should be to “Billes et al.”, the

former should be interpreted to include the latter.

Page 13

Newmat, for improper purposes, induced the Plaintiffs not to proceed with a loan from

Household Trust, but to proceed with the Newmat Loan. On those bases, the Plaintiffs sought,

inter alia, a declaration that the Loans be set aside, damages in the amount of $10,000,000 and

punitive damages of $1,000,000.

[57] By way of counterclaim in the McAteer/Kingswood Action, (“the Billes/Newmat

Counterclaim”), Billes et al. alleged that McAteer provided legal advice to Billes in respect of

the Loans, and, accordingly, had a duty to ensure they were in accordance with the law. The

Plaintiffs by Counterclaim alleged that the Loans were binding obligations. They claimed

alternatively that, if the Loans were found to be invalid, losses would be suffered in excess of

$5,000,000, plus interest and realization costs, and, accordingly, claimed damages therefor.

Newmat alleged McAteer executed a Guarantee for the Newmat Loan in the amount of

$1,950,000 plus interest, and sought $2,054,424 plus interest after November 23, 1992.

[58] In Action No. 9201-19753, commenced by way of Originating Notice of Motion,

Mason, as trustee for the Mason/McAteer children, sought relief against Billes, Newmat, the

Trust, and DDL. The Action alleged that Billes was a beneficial 50% shareholder and a

director of Newmat and controlled the Trust. She alleged further that, contrary to the USA,

Billes caused Newmat and the Trust to take security over the assets of DDL and the

Kingswood Entities, in a way that was in breach of her fiduciary duties and oppressive to

Mason, and sought, inter alia, leave to bring an action on behalf of DDL (the Derivative

Action) and an order directing a trial of the issue of whether any security granted by DDL to

Newmat and the Trust was valid. As the allegations in this Originating Notice of Motion are

similar to the issues in the Mason Action, and the Derivative Action (as defined, infra), I shall

deal with them in those actions.

[59] Mason, as trustee and next friend for the Mason/McAteer children, commenced Action

No. 9701-04270 (“the Mason Action”), against Billes, McAteer, Newmat, the Trust and Owen

Billes, in which she alleged, inter alia, that: Billes executed documentation for the Trust and

Newmat Loans without declaring her interest as required by the USA and the ABCA; McAteer

executed false Officer’s Certificates for the Loans and permitted DDL to enter into the Loans

contrary to the USA; Billes caused the assets realized from DDL in the enforcement of the

Loans security to be sold at below fair market value and in a commercially unreasonable

manner; Billes and McAteer breached their contractual, legal and fiduciary duties to the

Plaintiffs; and the acts and omissions of McAteer and Billes were oppressive, unfairly

prejudicial, or unfairly disregarded the interest of the Plaintiffs. On that footing, Mason sought

an order for compensatory damages suffered due to the oppressive and prejudicial actions,

including general and punitive damages of $10,000,000 and $1,000,000 respectively, and costs

on a solicitor-client basis. Billes et al. pled, inter alia, that this action had been brought out of

time and that the issues dealing with the enforceability and validity of the Loans were, because

of the Manitoba Foreclosure, res judicata

.

[60] The Derivative Action of Mason, in the name and on behalf of DDL, in Action No.

9901-00905, permitted by and under the terms of the Case Management Order of McIntyre J.

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of January 15, 1999, alleged against Billes and McAteer, inter alia, that they, as directors and

officers of DDL: breached their contractual, legal and fiduciary duties to DDL to act honestly,

in good faith and in the best interests of DDL; failed to comply with the provisions of the USA

and the ABCA; and failed to manage the affairs of DDL prudently and thereby protect its

interests. As a result of the alleged breaches, DDL claimed damages, including general and

punitive damages of $10,000,000 and $1,000,000 respectively, costs on a solicitor-client basis,

and an order that any amount adjudged payable by the Defendants be paid to Mason in trust for

the Mason/McAteer children. Billes et al. raised limitation and res judicata defences.

[61] Billes et al. named BJ, TM and McAteer as Third Parties in all three actions.

Indemnity or contribution against the Third Parties was sought in the event that any of the

claims against Billes et al. were successful.

[62] By Orders dated October 17, 1997 and May 12, 1999, the Case Management Justice,

McIntyre J., ordered that all the actions be tried together. The Record for these actions and the

pleadings that remain, following numerous discontinuances of other parties, are identified in

Exhibit 285.

[63] Thus, the issues between the parties include, in a broad sense: a determination of the

validity of the Loans in view of the alleged failure of Billes to disclose her interest in the Trust

and Newmat; the complicity, if any, of McAteer in Billes’ failure to disclose and the liability

(if any) to which this subjects him vis-à-vis Mason and/or Billes; whether Billes and McAteer

are guilty of breach of contractual, legal or fiduciary duties to DDL and Mason, and whether

their conduct is oppressive to Mason; the liability of McAteer to Newmat under the Newmat

Loan; the liabilities of BJ and TM if the Loans are invalid; and the remedies that follow from

any liability.

C.

Parties/Witnesses

[64] A number of the original parties have disappeared through the course of the litigation.

The parties that remain are Billes, McAteer (and the Kingswood Entities), DDL (although

represented by Counsel only in the Derivative Action), Mason (as trustee for the

Mason/McAteer children), the Trust, Newmat, Owen Billes, BJ and TM. Witnesses that are

also parties were limited to Billes, McAteer, Mason and Owen Billes. Witnesses who appeared

in representative capacities on behalf of parties included: Lavery and Mann, on behalf of the

Trust (Lavery also testified in his role as an advisor to Billes); Newel, on behalf of Newmat;

David Marshall (“Marshall”), Barrister and Solicitor, on behalf of TM; and Wayne Whitlock

(“Whitlock”), Barrister and Solicitor, on behalf of BJ.

[65] Other ordinary witnesses (in order of appearance), who were neither parties nor specific

representatives of parties, and how they fit into the story (in a general sense), are set out in

Appendix II.

Page 15

[66] Expert witnesses (in order of appearance) who appeared at the request of parties with

specific expertise and for specified purposes¹¹, and who provided expert reports (some of

which are identified below) are also set out in Appendix II.

III.

SUMMARY OF THE JUDGMENT

[67] The actions of all Plaintiffs in this case, and the actions by Defendants against Third

Parties, are dismissed with costs, except for the Mason Action, the Newmat Counterclaim and

Billes’ Third Party claim against McAteer in the Mason Action, all to the extent hereinafter

delineated.

[68] Specifically, in the Mason Action, Mason shall have judgment, based on the oppression

remedy, for $440,000, plus interest from March 21, 1991, and solicitor-client costs, jointly and

severally against Billes personally and McAteer personally, but not as against the Trust, or

Newmat.

[69] In the Third Party claim against McAteer in the Mason Action, Billes shall have, as

against McAteer, indemnification for the judgment against her in favour of Mason for

$440,000, plus interest from March 21, 1991, and solicitor-client costs. Additionally, Newmat

shall have judgment under the McAteer Guarantee for $1,950,000, less any credits due, plus

interest from November 23, 1992, and costs, against McAteer.

IV.

STATUS OF THE PARTIES

A. McAteer, Kingswood Group and Unsecured Creditors

[70] In respect of the McAteer/Kingswood Action, an Order was issued by the Manitoba

Queen’s Bench in Bankruptcy (Exhibits 258 and 310) on April 6, 1994, authorizing McAteer

to continue prosecuting the litigation on behalf of the Kingswood Entities and their unsecured

creditors in the McAteer/Kingswood Action (a list of such unsecured creditors is attached to

Exhibit 310). McAteer testified he served the unsecured creditors with an information circular

including the Order and other relevant documents (Exhibit 310). However, in order for the

unsecured creditors to participate in the litigation they were required to agree within 7 days of

service to contribute (pro rata to their claim) to the expense and risk of the proceedings. No

creditor unrelated to McAteer has taken such steps. Consequently, any unsecured creditors are

not parties to the McAteer/Kingswood Action, or this litigation.

[71] Even if unsecured creditors, other than McAteer, had been participating under the

aforementioned Order, they would have no higher rights than the Kingswood Entities and

11

The primary purpose of their attendance is listed in Appendix II, although some also provided

rebuttal evidence to other expert witnesses.

Page 16

would be subject to all the same defences. Thus, on the decision I have made, they would be

entitled to no relief.

B.

Other Status Issues

[72] Mason has status to bring the Mason Action on behalf of the Mason/McAteer Children.

Additionally, Mason, was also granted authority to commence and prosecute the Derivative

Action on behalf of DDL, pursuant to the Order of McIntyre J., dated January 15, 1999

(Exhibit 8). In accordance with that Order, she is entitled to, and liable for, any costs granted to

or against the Plaintiff, DDL, such costs to be in the discretion of myself, as the Trial Justice.

V.

CREDIBILITY AND ANCILLARY FINDINGS

[73] In coming to my decision in this litigation, I have come to certain conclusions

regarding credibility, some of which will be more relevant to factual findings and the result,

than others. The parties addressed this topic under the Outline of Argument heading of

“Credibility” in response to the question “What considerations should be taken into account on

conflicts of evidence (between Billes and McAteer, Billes and Mason, and others) in the

context of credibility?”

[74] Before assigning specific individual credibility, I must first note that no witness

appeared to have perfect recollection. In that regard, I accept the applicability of Billes’

reference to Virtue J’s. statement in Colborne Capital Corp. v. 542775 Alberta Ltd. (1995), 30

Alta. L.R. (3d) 127 at 182 (Q.B.) (varied for other reasons at 69 Alta. L.R. (3d) 265 (C.A.)):

It would be surprising if, in a matter as complex and detailed as this, a witness

had perfect recall not only for every event, but for the precise date and sequence

of its occurrence.

The alleged conflicts and contradictions in the evidence were often on small, collateral points.

Given that this trial occurred 10 years after Billes became an investor in DDL, it would not be

surprising if many of these contradictions were the result of innocent mistakes in memory. In

the result, the conflicts are not always as serious as argued and many of the inconsistencies are

relatively inconsequential, or on minor matters.

[75]

Further, as noted by BJ:

(a) there is obvious and understandable rancour amongst and between McAteer,

Mason, and Billes and to varying degrees their memories and testimony are likely

affected by deep personal feelings;

(b) each of McAteer, Mason and Billes, have considerable self-interest in the

outcome of the litigation, both personally and financially, and it is reasonable to

assume that elements of their testimony, to varying degrees, are influenced by this

self-interest; and

Page 17

(c) some evidence, although not capable of being specifically refuted, appears to

offend common sense as to what might be expected of the parties in the

circumstances at the time. The Court should utilize considerations of common

sense and normal expectations to assist it in deciding amongst conflicting evidence.

I generally agree with these observations, subject to what follows.

[76] The following are indicia that have assisted me in making certain findings of

credibility, which in turn, have helped me to make other findings of fact, where the evidence

conflicts. I will describe the more important findings in this regard. However, before I do so

there are three realities that I wish to raise. One is that findings of credibility and findings of

fact are often interwoven, and, accordingly, in determining credibility, I will set out some

incidental findings of fact. The second reality is that credibility must be considered in the

context of the whole of these Reasons, because the conflicts may be more relevant and

apparent when all of these Reasons have been read, and the issues and the substantive findings

are made. Finally, on most findings in these Reasons where there is a conflict, I have not

ignored statements by witnesses to the contrary, but rather have accepted the ones that

constitute my findings.

A.

Billes v. Mason

[77] The main area of difference between the evidence of Mason and Billes is as to whether

Billes provided information to Mason in respect of her interests vis-à-vis the Loans. In this

regard, where the evidence of Billes and Mason conflicts, I prefer Mason’s evidence for a

number of reasons. The most important of these reasons is that I found Mason more candid

than Billes, and less motivated by the results sought.

[78] Additionally, Mason made some notes of her and Billes’ conversation in some

instances, which, generally tend to corroborate her evidence. One such entry related to the

“Dock” lunch on April 23, 1991 (Exhibit 289) in relation to which Billes testified, but I do not

accept, the Trust Loan was discussed. Even if that were the case, any oral disclosure made on

that occasion would have been a month after the Trust Loan and, therefore, too late in any

event. Mason’s diary tends to corroborate her evidence in that it references discussions relating

to personal, not business, matters. Mason acknowledged that the entries were sketchy and that

she had not made notes of some other significant items, such as the closing of the original

investment by Billes on April 23, 1990, or the meeting with Sali on October 9, 1992, or her

discussions with McAteer in August 1992 about the bank line of credit. Billes gave no

evidence of making notes of any such meetings.

[79] Further, Billes’ evidence was, from time to time, in conflict with her own previous

testimony, and often less compelling than that of Mason. For example, as to the March 26,

1991 tea at Mason’s house, Billes testified in chief that she had no recollection of that date.

However, a short time later while still in chief, following a coffee break, she was quite definite

Page 18

and specific that the Trust Loan was discussed on that occasion and that Mason was “pleased”.

Billes’ change in recollection within a few minutes denotes a lack of credibility.

[80] There was also an entry in Mason’s diary concerning when the two had “tea” with

McAteer which indicates that this occurred on March 26, 1991. Mason did not recall what was

discussed on that occasion, but testified that it was not a business meeting. I would again note

that even if there had been any disclosure made to Mason on that occasion it occurred five

days after the Trust Loan and was too late to be legally effective.

[81] In any event, I accept the evidence, corroborated by Mason’s diary, that Mason met

(informally over tea) with McAteer and Billes at her home on March 26, 1991, a few days after

the Trust Loan was executed on March 21, 1991.

[82] Also of note was Billes’ argument that in March 1991, Billes and McAteer “discussed

consent to the Trust loan with Mason, who consented”. However, Billes also argued that

“McAteer assured [Billes that] Mason had consented...” I find the latter to be a curious

argument if Billes was in fact present when Mason “consented”. Mason and McAteer deny

both of these allegations, but there is no corroborating evidence in either direction by which to

test the testimony of the parties on the point.

[83] Additionally, Billes testified that in October 1991, she attended at Mason's home on

one or two occasions and “made certain Mason was aware of the Newmat loan”. She also

stated that McAteer told her that he had told Mason about this loan. However, Mason and

McAteer both deny that Mason was told of the Loans.

[84] Another example of inconsistency in Billes’ evidence concerned the $54,000.00 loan

made on February 4, 1991. In chief, Billes gave evidence that she discussed the loan with

Mason when they had lunch at the Westin some weeks after the consent to the loan (Exhibit

288) was signed. However, in cross, Billes gave evidence that the lunch at the Westin took

place on December 1, 1990, some two months before the transaction. Mason says there was no

discussion with Billes about this matter at any time. Rather her evidence is that the consent

documentation was brought to her by McAteer, at Billes’ request, and that McAteer explained

that her signature was required pursuant to the USA, and Mason agreed and signed it.

Common sense dictates that Billes’ evidence is incorrect in this regard as this was apparently a

matter that arose and was dealt with quickly. The likelihood that it was discussed 2 months

before the need arose defies common sense and credibility.

[85] At the October 9, 1992, meeting with Sali, Mason denied any prior knowledge of the

Loans. Interestingly, rather than confronting Mason, as would be expected if indeed Billes had

previously discussed the Loans with her, in apparent response to this lack of knowledge, Billes

provided her with documentation relating to the Loans (the specifics of which are not clear on

the record) saying words to the effect: “Here, take these ... papers; and perhaps when you've

had a chance to read them, you will understand why I'm so concerned”. Contrary to the

evidence of Billes that Mason previously knew of at least the Trust Loan, this statement tends

Page 19

to corroborate Mason’s evidence that she did not have any such knowledge and Billes knew it.

Otherwise, there would be little or no need for Billes to have provided the documentation. In

her letter of October 12, 1992 (Exhibit 137) that followed this meeting, Mason makes

reference to her “need to know the exact nature of these transactions, Martha’s interest in

them”. She also stated “I wonder why it is only now that I’m learning about all this debt ...

when ... [the USA] states very clearly that my consent was needed before the transactions

could even be made” [Emphasis added]. This expressed lack of knowledge, although

opportune in timing from Mason’s perspective, is consistent with Mason’s testimony, but

inconsistent with Billes’ evidence that she had previously explained the Loans to Mason.

Moreover, Mason’s position is corroborated by Sali’s letter of October 13, 1992 to TM

(Exhibit 138), wherein Sali stated “It appears that [Mason] was almost completely unaware of

the financial difficulties being experienced by the various business entities...”.

[86] However, Billes, and the Third Parties, argue that, given the contact between McAteer,

Mason and Billes, it is hard to believe that Mason did not know of the Loans and would not

have consented to them if asked. BJ, relying on probabilities and common sense, not evidence,

put it this way:

Given the extent of her children's continued ownership interest in DDL and her

not infrequent contact with McAteer, and to a lesser degree Billes, it is

improbable that she would be unaware of the fact that ... Billes, in one form or

another, was lending money to support DDL and the Kingswood entities. She

knew that DDL needed financing to pursue its plans and it offends common

sense to believe that she either would not have known of the Trust Loan or

would not have willingly consented to it had she been advised.

[87] In response to these arguments, it is not in dispute that Mason knew DDL needed

external financing. Nor is it disputed by Mason that, from time to time, McAteer (on one or

two occasions with Billes) provided her with general oral information as to progress of, and

some of the difficulties with, continued financing for the projects. Finally, it is not disputed

that Mason wanted DDL to be a success.

[88] I find that any information provided to Mason was, as Mason described in written

argument,“in effect passing comments as McAteer and/or Billes [were] picking up or dropping

off children. No meetings [were] held for the purpose of discussing DDL business”. Mason’s

evidence was that any such “conversations were very cursory” and “always given to me in

passing”, and “there was no specific information given to me at any time in any business sense

whatsoever”. I accept this evidence. It is also apparent that, as the McAteer/Billes personal

relationship soured, McAteer disclosed to Mason some information about his concerns over

what he thought was Billes’ interference in Royal Bank banking issues in August 1992, about

which McAteer wrote to Billes on August 9, 1992 (Exhibit 116).

[89] Also, as alluded to above, the timing of the discussions are relevant as most were after

the Loans were made on March 21, 1991 (e.g. the tea on March 26, 1991) and October 10,

Page 20

1991. Even if I accepted that Mason was generally agreeable to further financing for DDL,

that, in itself, would not be conclusive of any issue herein. Further, had I found that Mason

knew of the existence of the Trust Loan during tea on March 26, 1991, which I do not, it would

not be relevant to the findings I have to make. In other words, if there was a discussion after

the fact concerning Billes’ interest or that the transaction had required Mason’s consent as a

shareholder, it would not assist Billes as I find that consent was never obtained or waived by

Mason, nor did she ratify the Loan. Even if there were oral discussions about progress or the

mention of a Loan, which I do not find, that is not the same as disclosure of Billes’ interests,

and Mason’s shareholder approval, which were both required in writing by the USA.

[90] In the result, as to these meetings between Mason and Billes prior to October 9, 1992, I

find that there were no discussions between them wherein Billes provided Mason with any,

and certainly not full and fair, disclosure, oral or written, concerning her relationship to the

Trust or Newmat. I find further that Mason did not waive any right to disclosure or any other

rights afforded to her under the USA between Billes, McAteer, herself, and DDL.

B.

Billes Generally

[91] As to Billes’ credibility generally, BJ argued that Billes’ confidence in her testimony

exceeded the accuracy of her recall of details and that the Court should exercise care in relying

on her details of specific events. I believe this is good advice. BJ also argued that, “[w]hile this

is not to suggest that the general nature of the evidence was not credible”, Billes had a

“noticeable tendency to take a series of conversations or events and testify about them as a

single event or conversation with a degree of certainty that was not warranted.” I agree.

[92] Billes’ testimony also conflicted internally. One example of this was when Billes, in

cross, denied that she thought of herself as a “venture capitalist”, despite that she had described

herself as such during examinations-for-discovery (“discovery”). When this apparent

contradiction was put to her in cross at trial she stated that she had enjoyed “adventure as a

capitalist”. This play on words was an obvious effort to avoid an admission of what she had

said on discovery. While an unimportant and collateral point at first blush, it is another

example where her evidence was incredible. Moreover, her twist of phrase may well have been

motivated by the knowledge that something may turn on it - specifically a finding of fiduciary

duty on Billes as a lender: see reference to “...Lender involvement in management of the

borrower’s business, as sometimes practised by ‘venture capitalists’”, in Canadian Bank of

Commerce (C.I.B.C.) v. De-Jai Holdings Inc., [1993] O.J. No. 640 (Gen. Div.), online: QL

(OJ), aff’d [1997] O.J. No. 1672 (C.A.), online: QL (OJ).

[93] I note as well Billes’ attempts in oral testimony to deflect an issue and thereby

contradict positions she took earlier. A case in point is the issue regarding the $200,000 Loan

(discussed in more detail infra). In argument, Billes summarized her evidence that, inter alia

,

“The increase in the Newmat loan from $1,900,000 to $2,100,000 was to replenish DDL to

fund the obligation to pay $5,000/month to McAteer.” However, as Mason pointed out, this is

contradicted by documentary evidence in Exhibits 67 and 377. Moreover, Billes contradicts it

Page 21

herself in her letter to McAteer in July 1992 (Exhibit 107) when she said:“DDL is carrying the

debt related to the $200,000 payment to you, created when you moved out of 2229".

and a special relationship that grew from that and their personal relationship.

C.

Billes v. McAteer

[94] Notwithstanding the observations regarding Billes in the last two sections, where there

are conflicts between Billes’ and McAteer’s evidence, I generally prefer the evidence of Billes.

As an overview, I would note that much of their testimony was in accord. However, McAteer

tended to demonstrate a bravado of confidence in chief, testifying as to copious, intricate

details that Billes could not match. Billes’ evidence, on the other hand, was much more general

on the conflicting matters that are really in issue. Nonetheless, with some exceptions, I find

Billes’ evidence on the whole to be more credible than that of McAteer.

[95]

While over inclusive on detail and confident in his chief, McAteer’s testimony in

cross, at times could most generously be described as equivocal. His answers on cross were

often ambiguous or unclear, giving the impression of attempting to avoid a direct answer, even

to the extent of misleading or hedging. A number of examples were provided in written

argument by Billes of the differences between McAteer’s emphatic statements in chief, and

their dilution on cross, where he, more often than in chief, retreated to use of the less positive

“I believe”, or “to the best of my recollection”, etc.. There were also inconsistences between

his evidence at trial and his discovery evidence. Some of his evidence was simply incredible,

improbable or unbelievable - particularly on those occasions where he tried to explain why he

had signed the Officer’s Certificates. On those occasions his answers were misleading at best.

[96] The most germane conflicts between Billes and McAteer related to: (1) his knowledge

of the extent of her interest in the Trust and Newmat; (2) whether he had agreed with Billes to

advise Mason of the conflict and obtain her consent; (3) whether he had read and knew that the

Officer’s Certificates were false; and (4) whether there was a condition precedent to calling the

Trust Loan.

1.

McAteer’s Knowledge of Billes’ Interest

[97] McAteer and Mason argued that Billes did not disclose in writing her conflict in

accordance with the USA and section 115(1) of the ABCA. I find that to be true. McAteer

argued further that any disclosure Billes made to him in this regard was misleading and

insufficient, such that he was unable to make a decision as to her conflict. I find that to be

untrue. He submits further that he relied on this lack of disclosure when he signed the

Officer’s Certificate in relation to the Trust Loan. Although I will deal with McAteer’s

agreement to disclose Billes’ interest in the Trust and Newmat to Mason in this section, I will

deal with McAteer’s knowledge of that interest and his ability to provide Mason with

disclosure in the following section which deals with “Factual Findings”.

Page 22

[98] Billes’ financial disclosure to McAteer was specifically acknowledged by him, in

writing, by the terms of the December 23, 1990 Domestic Contract between them (Exhibit 21,

clause 16(c)). Moreover, Billes gave evidence (Transcript page 1583 et seq) about her

disclosure and the documentation made available to him, relative to that disclosure. Although

McAteer admitted this acknowledgement was true in cross, he argued about what it meant. In

any event, this admission, in the face of other denials, further diminishes his credibility.

2.

McAteer’s Undertaking to Billes to Provide Disclosure to Mason

[99] McAteer denies he represented to Billes that he would or did provide written disclosure

of Billes’ interest to Mason or obtain Mason’s consent. I do not accept that evidence.

[100] Conversely, Billes testified that she did make full and fair disclosure to McAteer and

asked him to ensure that the matter was properly addressed by way of the required written

disclosure and consent by Mason, and the appropriate minutes relative thereto. She testified

that McAteer undertook to do so. She argued, relying on ABCA, sections 20(a)(b), 20(5), and

F.W. Wegenast, The Law of Canadian Companies (Toronto: Carswell, 1979) at 437-438, that

McAteer was legally obligated to maintain the required directors’ and shareholders’ minutes in

any event, as a result of his position as a lawyer, President and Secretary of DDL, and holder

of its minute book. Accordingly, Billes argues that she complied with the USA and section

115.

[101] As to McAteer’s undertaking to Billes to disclose her interest to Mason and to obtain

the necessary consents from Mason, the confirmation that he had done so and Billes’ reliance

on that undertaking, I prefer Billes’ evidence for a number of reasons.

[102] First, while Billes learned specifically from Steinberg of the need for consent from

Mason in February 1991, at the time of the $54,000 loan, it was McAteer who obtained

Mason’s signature. This is reasonable, having regard to the apparent continued cordial

Mason/McAteer relationship as parents of their children, notwithstanding their divorce.

[103] As to obtaining Mason’s signature in relation to the $54,000 loan, and the need for

Mason’s acknowledgment of disclosure and consent to the Loans, Billes testified:

At that time when I met with Mason she was upset that in the past I had asked

for her sign-off on the $54,000 lot purchase loan which had come a month or so

before the estate loan, and when we started talking about assurances regarding

the estate trust loan that she felt -- she was upset that I was asking for her

signature. She said we're in this together, there's no need for a signature so that

I did not ask her for a signature on that loan. I did not ask her for a signature on

this loan.

Page 23

I did ask McAteer to make sure that there were minutes in the DDL

closing book at the time ...of the estate loan and he assured me that there would

be; that the shareholders had concurred at an ad hoc gathering of the

shareholders at DDL. So I didn't want to enter that arena again on the signature

side even though I knew there was possibly a conflict here, so I had it dealt with

again by the lawyers and I only spoke verbally with Mason. [Emphasis added.]

[104] I do not accept Billes’ evidence that she spoke to Mason about any of these loans or

asked for her signature. Rather, I find that it was McAteer who obtained Mason’s signature in

relation to the $54,000 loan and Billes neither discussed that loan nor the Trust or Newmat

Loans with Mason. I find further that Mason was not upset about signing off on the $54,000

loan - she never gave any hint in her testimony to this effect, and I do not believe such a

suggestion was ever put to her in cross. Accordingly, I do not accept Billes’ evidence that the

reason she did not ask Mason for her signature on the Loans was because Mason was upset. I

am not certain whether by using the term “ad hoc” she means “round robin” or the normal

meaning of the phrase. In any event, I do not find that there was any “ad hoc” meeting of or

signature by the shareholders, although I accept that is what McAteer may have told her.

[105] Second, by the process relating to the $54,000 loan, Billes knew of her obligations with

respect to conflict of interest. Billes testified that (in relation to the Newmat Loan specifically)

she “made sure that McAteer knew that I expected he would communicate with his wife”.

When she was asked how she made sure of this she said “Well I spoke verbally with him”. She

went on to add that “I instructed someone and, again, I'm not sure who I spoke to directly that I

wanted full and ample disclosure in every sense possible legally...”. She also stated that the

Officer’s Certificate that had been used in the Trust Loan to address her concerns had been

provided to TM. While Billes, it appears, had discussions with Steinberg about these matters

going back to the $54,000 loan, I do not accept the inference in her evidence that she instructed

anyone other than McAteer to provide disclosure to Mason and obtain her consent.

[106] Not only did Billes have no reason to conceal her interest in the Lenders or the Loans

or their details, she should have known - indeed, her admissions (see emphasized passages

above and below) suggest that she did know - that not to do so could put the validly of the

Loans, their documentation and security in jeopardy. She had no motivation to do that, and,

indeed, her motivation would have been to the contrary.

[107] Third, the relationship between Billes and Mason was not hostile - they met alone for

lunch on at least 2 occasions, they spent Christmas together in 1990, and it appears Billes was

at her home with McAteer on a number of occasions to pick up or drop off the children, and at

least once for “tea”. However, even if the relationship was less that a warm one, logic would

argue that someone as shrewd as Billes would know that, if there was a problem getting

Mason’s consent, it was better to deal with it then, rather than later, when the Loans might be

at risk. Moreover, remembering that (1) in the original share acquisition by Billes, McAteer

obtained $200,000 which was used to pay off an obligation he had to Mason, and (2) $200,000

extra was borrowed in the Newmat Loan to provide a benefit directly to Billes and McAteer, it

Page 24

was presumably just as easy to increase the amount of either Loan, if monetary consideration

was reasonably necessary to obtain Mason’s consent, or to buy her out.

[108] Fourth, Billes’ testimony that she relied on McAteer’s Officer’s Certificates as some

evidence that he had done what he represented, is corroborative of her testimony that such an

undertaking and representations had been made by McAteer. Later in these Reasons, I address

in more detail how Billes may rely on these Officer’s Certificates.

[109] In the result, I find that McAteer undertook to Billes to make full and proper disclosure

of Billes’ interests to Mason in a manner that would satisfy the USA and the ABCA. Although I

do not find any specific request by Billes that disclosure be documented in the minutes, I do

find that she left the handling of the matter to McAteer. The performance of this undertaking

would have required written disclosure, most likely in an appropriate shareholders’ resolution

providing Billes’ disclosure and refusal to participate in the decision, and Mason’s and

McAteer’s approval to the Loans. The disclosure of this oral information, placed in writing,

properly documented and approval of the Loans executed by Mason and McAteer, would have

met all the requirements of disclosure to Mason, McAteer and DDL under the USA and at law.

I find that is what McAteer undertook to do and represented he had done. In reality, however,

he failed to do so.

3.

Officer’s Certificates

[110] As will be seen in greater detail infra, much of the controversy concerns McAteer’s

certification in paragraph 5 of Officer’s Certificates for each Loan (Exhibits 36, 37, 39 and 77)

to the effect that DDL was not bound by any provision in any unanimous shareholder

agreement which would in any way hinder or restrict the powers of DDL, or the officers of

DDL, to authorize, execute and deliver the security for the Loans or which would hinder or

restrict DDL from performing its obligations thereunder. These Officer’s Certificates, I find,

were relied upon by the solicitors preparing the Loans’ security in the context of the indoor

management rule, the Lenders and Billes in the context of confirming McAteer’s

representation to her that he had disclosed her interest in writing to Mason and obtained her

consent.

[111] McAteer testified in chief that he did not read the Officer’s Certificates (and in cross

that he did not “believe” he had read them), and that he was unaware of and did not know that

an “error” was contained therein before he signed them. I do not accept that evidence as

credible for a number of reasons.

[112] First, one starts with the usual presumption that one who signs a formal document is

bound by it regardless of whether or not he or she has read it: L’Estrange v. F. Graucob Ltd.

[1934] 2 K.B. 394 at 406-407 (C.A.). In L’Estrange the Court, per Maugham J., noted two

exceptions to this rule, one where the document was signed in circumstances which made it

not the act of the signor and the other, where the agreement was induced by fraud or

,

misrepresentation. A third exception was introduced by the Ontario Court of Appeal in Tilden

Page 25

Rent-a-Car v. Glendenning (1978), 83 D.L.R. (3d) 400 (Ont. C.A.) where the Court determined

that where the party seeking to enforce the document knew or had reason to know of the

other’s mistake as to its terms, those terms should not be enforced. The third exception has

been given a mixed reception by our Court of Appeal: Budget-Rent-a-Car of Edmonton Ltd. v.

University of Toronto, [1995] A.J. No. 126 (C.A.), online: QL (AJ); and American Express

Canada Inc. v. International Warranty Co., [1994] A.J. No. 101 (C.A.), online: QL (AJ). As

none of those exceptions apply in the present case, McAteer is presumed to be bound by the

Officer’s Certificates.

[113] Second, in the context of credibility, McAteer acknowledged prior to trial that he would

not normally sign such certificates without reading them, although he testified to the contrary

at trial.

[114] Third, one looks at the knowledge that McAteer, in his particular circumstances, would

have regarding the importance of such certificates. McAteer, by his own admission, was an

experienced corporate officer and solicitor, who had specialized for some years in real estate

development and was (or had been) a member of three provincial Law Societies (Exhibit 10).

He testified that he had “signed hundreds, if not thousands, of officers certificates”. Even

without reading the Officer’s Certificates, he acknowledged that he knew that:

(a) such certificates “frequently, indeed almost inevitably, include a covenant

saying that there is ... no impediment to the borrower giving effect to this

transaction”;

(b) “the lawyers preparing [the security] and the lenders who were advancing money on

[the security] relied, in turn, on the signature of the officer of the company signing this

certificate....”;

(c) the “certificates were executed for the purpose of accurately depicting a certain state

of affairs of the corporation....”; and

(d) “the USA had implications to the borrowing”, but, in each case he, never told the

Lenders’ Counsel of its existence.

[115] These Certificates were short, simple, and easy to understand - especially for a solicitor

of McAteer’s experience. As such, he would, and indeed his testimony demonstrated that he

did, understand the importance of ensuring the statements were true. He would also have

known that the Lenders and their Counsel would be relying on the Certificates as evidence of

compliance with internal procedures.

[116] Fourth, there was internal conflict in his cross as to whether he received the Officer’s

Certificate for the Trust Loan prior to closing. On one occasion he said he “believed” he did,

and on another he denied it, although on discovery he acknowledged that he had. Even if his

lack of recall of reviewing a copy of the Certificates for each Loan prior to execution were

credible, each Certificate was, in fact, signed at a law office in the presence of Counsel.

Page 26

[117] Fifth, in his discovery he admitted that he had read the Certificates, and at trial he

stated that he “presumably” had read through them, even though on the latter occasion he tried

to qualify that answer by saying that he had reviewed the “blacklining” only.

[118] What actually happened? As to the Trust Loan, Whitlock’s evidence, which I accept,

and which he specifically confirmed in writing on the date in question (Exhibit 470), was that

the Officer’s Certificate was specifically reviewed with McAteer and Lavery on March 13,

1991. As to the Newmat Loan, Marshall used the Officer’s Certificate from the Trust Loan as a

precedent because he felt he could rely upon it. Additionally, he testified, and I accept, that he

“walked through” the Newmat Loan’s Officer's Certificate with McAteer, told him it was

based upon the documentation for the Trust Loan, that he was sure that McAteer reviewed the

document and that he signed it in Marshall’s presence.

[119] As such, I find that McAteer read the Officer’s Certificates, and that, when he signed

them, he knew specifically what they represented. All of this is significant in itself in this

litigation, but it also demonstrates a general lack of credibility on McAteer’s part.

4

.

Construction Mortgage Loan

[120] It was alleged by McAteer that, in the $1,000,000 construction mortgage loan between

DDL and Club LP and Club Ltd., it had been agreed (“the Alleged Agreement”) that the loan

would not be enforced until the earliest of either long term financing being secured or

September 1993.

[121] I will address the substance regarding the Alleged Agreement placing a limitation on

the realization of the construction mortgage loan below. However, the issue is also relevant to

credibility.

[122] The credibility issue relates to what I find to be the inconsistency between McAteer’s

chief and cross on the issue. In chief, he testified that to the best of his recollection, the

Alleged Agreement was the missing Schedule "A" to the Club GP resolution authorizing the

construction mortgage (Exhibit 37, Item 19). On cross he was much less definitive, stating

alternatively that: (1) he thought it could be but he didn't know; (2) he was not sure; (3) it

possibly never existed; and (4) it could have been, or may have been, or he was not certain.

[123] McAteer also made other inconsistent statements about the Alleged Agreement. In

chief, he testified that he believed he and Billes signed it prior to March 21, 1991, but in cross

he was uncertain whether Billes signed it. On discovery, he had conceded that it was possible

that nobody else signed it.

[124] McAteer’s inconsistent evidence indicated a lack of credibility and clearly had an effect

on my findings in relation to this issue. This is discussed together with the other evidence in

this regard later in these Reasons.

Page 27

5.

Conclusion

[125] Billes referenced other incidents of alleged lack of credibility of McAteer (in testimony

or conflicting documents he prepared, signed and/or certified). I need not comment on those, in

light of my substantive findings. All of the conflicts and inconsistencies in McAteer’s

evidence, both as compared to other witnesses and within his own testimony at trial and on

discovery, his serious lack of candour on many points, and my finding that many of his

assertions were improbable or unbelievable, persuade me that, on crucial points where there is

a conflict with his evidence, McAteer’s evidence ought to be regarded with great suspicion.

[126] I need not determine McAteer’s motivation for his lack of credibility on such important

issues. However, I would note the threat he made in a letter to Mason, dated January 25, 1994,

following the loss of the foreclosure action in Winnipeg (Exhibit 319) that: “I will continue as

a thorn in their side every step they take to force them to the table”. In my view this statement

also reduces his credibility in these proceedings.

D.

Billes v. Marshall

[127] TM in argument¹²acknowledged that there might be a credibility issue between Billes

and Marshall on the issue of disclosure of facts which might have raised a need for TM to

assess a corporate conflict issue. TM argued, relying upon the support of the evidence of

Newel and Lavery, that Marshall's evidence was clear that at no material time was TM ever

told that: (1) DDL was subject to the USA; (2) Marlore existed; or (3) Billes/Marlore

controlled Newmat.

[128] TM also noted that Billes gave evidence that she relied on McAteer and the lawyers in

the context of the conflict of interest, that she "knew [ Marshall] knew" about the conflict

issue, and that Billes "certainly made sure that [her] shareholdings through Marlore were

noted".

[129] I find there is no evidence that Billes directly advised TM of any of the facts that would

give rise to a potential conflict issue. To the contrary, while she was aware of the conflict

issue, she appears to have left the matter with others to address the issue - as TM argued, she

"washed her hands of the deal" . On this issue I am also mindful of the contradictions in

Billes’ testimony, as set out supra. I note specifically that Billes' evidence relating to time,

place and substance are contradicted by the documents prepared prior to this litigation,

whereas the evidence of Marshall is supported by the documents.

[130] As a result, I find that where the evidence between Marshall and Billes conflict, the

evidence of Marshall ought to be accepted.

12

All references to the written argument of TM exclude the extensive (but helpful) footnote

references, unless otherwise noted.

Page 28

E.

Sali & Billes v. McAteer & Mason

[131] Mason and McAteer testified at trial, and McAteer provided evidence by affidavit

(Exhibit 118, paragraph 15), that Sali produced an estoppel certificate at the October 9, 1992,

meeting between Sali, Billes, Mason, and McAteer. Sali and Billes deny this. Mason described

it in her October 12, 1992, letter to McAteer (Exhibit 137) in these terms:

Sali has unequivocally stated that the basis for any proposal ... would be

contingent on my agreeing to waive certain remedies related to apparent

irregularities in the assumption and disclosure of third party debt on the part of

Billes. (I quote Sali, “if you won’t agree to that, then we have nothing to talk

about”).

McAteer supported this in his letter to Desbarats at BJ on October 19, 1992 (Exhibit 139).

[132] I find that no actual estoppel certificate was provided on October 9, 1992 - although

one was provided later on November 5, 1992 (Exhibit 143). I find further, however, that what

would constitute estoppel was discussed, and that Sali made it clear that there would be no

accommodation by the Lenders without an acknowledgment that the Loans and security were

validly in place - that is, he demanded an estoppel. The result is the same, only the certificate is

missing.

[133] Sali essentially confirmed this conclusion in his letter to Darcy McCaffrey

(“McCaffrey”) of TM of October 13, 1992 (Exhibit 138 - which he testified to as being a true

and correct representation of the meeting of October 9th), with Billes’ concurrence, where he

stated:

I have seen references in documents created by McAteer to Billes being his

“financial partner”, suggestions that the security may not be valid and

enforceable, Billes being in conflict with her “fiduciary obligations”...

... I asked of him a rather basic confirmation, as a condition of extending time,

namely that he unequivocally confirm that insofar as he is concerned, the loan

agreements and security arrangements would not in any way be challenged by

him or under his direction in the event that the time accorded to him did not

produce the desired result. He refused, at which time I advised that if that was

his position ... we had nothing further to talk about.

Sali made a similar admission in his letter of November 18, 1992, to TM where he stated:

McAteer will also recall that in our meeting of October 9^thpast, I told him in

fairly straightforward terms that the first matter to be addressed in any such

proposal [an asset split] would be to deal with the satisfaction of the creditor

claims.

Page 29

As for the Officer’s Certificate that was forwarded to you [November 5, 1992 -

Exhibit 143], you may recall it was prepared in the context of ensuring that if

the extensions being sought by McAteer were granted that there would not be

any later contest as to the validity or enforceability of the security documents.

[134] In the result, on the issue of a demand of estoppel, although I accept the evidence of

Sali and Billes that there was no actual certificate produced, I accept the substance of evidence

of Mason and McAteer over that of Sali and Billes.

F.

Lavery

[135] McAteer, in written argument, said this of Lavery: “... Lavery provided evidence in a

candid manner. ... Lavery was a believable witness.” I agree, but that does not necessarily

mean that his evidence was reliable. I believe that everything Lavery testified to was to the

best of his recollection and he was trying to recall accurately. Moreover, on general matters, I

generally accept his evidence. However, I find his ability to recollect details, independent of

confirming documentation, deplorable. This may well be excusable in light of the passage of

time, and I refer again to the words of Virtue J. (supra). Nevertheless, in the result, I have

found I have had to be very careful with accepting his testimony on such details without

independent verification.

G.

Newal

[136] McAteer, in written argument, said this of Newal: “...Newal was also a credible

witness. He presented his best recollection and did not invoke the “it was so long ago”

statement when questioned about any significant event.” I agree.

VI.

FACTUAL FINDINGS

[137] In the process of arriving at the within Judgment, in addition to the factual findings

buried in the previous sections on credibility, I have made a number of other findings that are

relevant to the ultimate conclusions to which I have arrived. Some of these findings may

become more clear as these Reasons develop.

[138] The issues relevant to these findings were expressed in the Outline for Argument as

“Consequential factual conclusions that flow from the evidence (what follows appear to be

some prime factual issues - there may be others).”

A.

The Personal Relationship Between McAteer and Billes

[139] The Outline for Argument expressed the issue in this fashion:

Does anything turn on the personal relationship (or its break-up) of McAteer

and Billes (e.g. the allegation in para. 16 of the Statement of Claim in the

Page 30

derivative action and in para. 17(a), (b), and (e) of the McAteer/Kingswood

Action)? If so, why? If not, why not? What was the result? Are any of the

results allegedly attributed to this relationship due to other factors? What are the

consequences vis-à-vis these actions, in terms of liabilities and remedies?

[140] I find that the personal relationship between Billes and McAteer, and its demise, had

very little, if any, legal relevance to any of the issues in this litigation. There were a number of

allegations back and forth between the antagonists, wherein they pointed to a number of

alleged facts in support. As these Reasons progress there may be more facts found which relate

to the relationship, but the following are some summary conclusions and some reasons in

support.

1.

Termination of Relationship Led to Ignoring DDL and its

Shareholders

[141] Mason contended that, following the termination of the McAteer and Billes personal

relationship, it was clear that the two no longer wished to do business together and that they

ignored the interests of the other shareholders and DDL. I agree that it became increasingly

clear as time went on that McAteer and Billes did not want to do business together. Although

McAteer wanted Billes to continue providing funds, Billes was increasingly concerned about

his management. Regarding Mason’s latter allegation, while there was some considerable

dedication by McAteer and Billes to DDL’s interests until the Golf Dome opened, it waned

thereafter and they forgot the other shareholder (Mason) much earlier.

2.

Did Billes’ Vindictiveness on Breakup Result in Calling of Loans

[142] Mason and McAteer allege that the termination of the personal relationship between

Billes and McAteer was an important factor in the eventual demise of DDL. They argue that

the evidence demonstrates that Billes wanted to “get even” with McAteer for the breakdown of

the relationship and that was what motivated the demand of the Loans at that particular time. I

disagree. I find that the Loans were not called as a result of the end of McAteer’s personal

relationship with Billes.

[143] In response to the allegation in para. 16 of the Statement of Claim in the Derivative

Action and in para. 17(a), (b), and (e) of the McAteer Action, I find that it was not the breakup

of the personal relationship between Billes and McAteer that prompted Billes to cause, or be

involved in, demanding payment on the Trust Loan or the Newmat Loan, placing DDL into

receivership, or leading to conditions that put the Kingswood Entities into bankruptcy.

Moreover, I find that none of Billes, Lavery, Mann or Newal conspired or acted to further any

bitter or vengeful motivation on Billes’ part (nor do I find there was any such motivation).

Rather, I find that the Lenders made their decisions to advance, call and recover the Loans,

based on proper considerations.

Page 31

[144] Specifically, I find that the reasons for calling the Loans included, but may not be

limited to¹³:

(a) non-payment of the Loans, and the inability to pay these and other loans,

after February 1992, without cash, investments, concessions (such as interest

reductions - Exhibits 120, 121 and 441 (internal exhibits C and D)), new loans

(or advances) by entities connected with Billes¹⁴, or further third party

investment. Despite a number of proposals for resolution, there was no solution

forthcoming¹⁵, as McAteer explained in testimony in discussion of, inter alia

,

Exhibit 88);

(b) cost over-runs on the Golf Dome of $400,000 from the original $1,500,000

projected (Exhibit 50);

(c) McAteer’s inattention to management issues, while refusing to remove

himself from management (inter alia, Exhibit 116, wherein he refused Billes’

proposal to take over the operation of the assets), but allegedly seeking double¹⁶

the originally agreed compensation (Exhibits 104, 106 and 109, which stated

that they had agreed that April 1, 1992 would be the date for compensation at a

market rate, and that his market value was considerably higher, but that his draw

(net) would stay at $5.000). As to this, Billes said “it was a surprise to me that

McAteer was taking a raise in July of 1992 when DDL had no positive cash

flow, in fact it was taking money from DDL and not paying accounts as they

became due”. Billes stated further that she did not agree with the amount of

$10,000, and that the Newmat Loan had provided funds to compensate him on

the same basis as before, namely repayment of his shareholders loans;

(d) non-compliance with loan covenants, including further advances obtained or

sought from the TD and Royal Bank (inter alia: Exhibit 37, Tab 22; Exhibit

114; and Exhibit 187);

(e) McAteer appropriated money for himself personally from the TM trust

account (Exhibit 186, p. 25);

(f) dismissal of the Chief Financial Officer, George Harms (“Harms”), whom

Billes and Newel trusted to provide honest accounting and information;

13

Also see Exhibit 100 of June 1992, where McAteer himself analysized historically “Where did we

fall down? However, in the same month (Exhibit 101) he concluded “all appears well”, in spite of

numerous problems which he discussed.

14

See, among other references, Exhibits: 85a - 89; 99; 110; 111; 120; 121; 321. Albikin injected

approximately $250,000 during the period under the Stand Still Agreement to cover immediate

payables.

15

See, among other references, Exhibits: 107; 119; 119A; 122; 125; 128; 129; 131; 136; 141; 145;

and 150.

16

McAteer explained this in chief as a gross amount of $10,000, to generate a net $5,000 after tax,

consistent with the agreement he said he had with Billes. Ultimately it was settled at $7,500 gross.

Page 32

(g) inability to sell lots and thereby generate cash flow (see Exhibit 101), and

lack of any other apparent sources of cash:

(i) attempts to obtain financing from the CIBC in October 1990 (Exhibit 24)

were declined;

(ii) an introduction to the Royal Bank in late 1990 (inter alia, Exhibit 26) did

not garner any interest or the proposals were unacceptable. In one instance,

while Billes was prepared in principle to provide a guarantee as requested

(Exhibits 48 and 50) and her ability to cover the amount in question was

provided (Exhibit 49), she did not approve of the proposal. In another case, the

amounts were too small and she was not prepared to give a guarantee (Exhibit

54);

(iii) discussions later in 1991 with the Bank of Montreal (Exhibits 50 (card on

first page) and 51), Canada Trust and the Maple Leaf Fund (Exhibit 18) did not

work out;

(iv) a commitment letter by Household Finance later in 1991 (Exhibits 53, 54

and 307) was not acceptable as it provided for insufficient funds and required a

guarantee that Billes was not prepared to give;

(v) the proposed limited partnership with the Security Trading Group for the

purpose of obtaining syndication-type financing (Exhibits 95 & 142a) did not

proceed; and

(vi) the relationship between McAteer and Billes had deteriorated such that

possible interest by Husky Oil, Lux Construction Inc., Markum Golf and Fox

Hollow Golf Dome did not materialize, and there were no attempts at financing

after November 27, 1992;

(h) the Trust and Newmat Loans were not only in arrears, but their validity was

being challenged by Mason and McAteer;

(i) the need for funding to meet other cash flow problems, which in May 1992 reached

a gross of in excess of $170,000 (Exhibit 321). In response, $60,000 was advanced by

Albikin in June 1992 (Exhibit 99 - memorandum of agreement but no other loan or

security documentation) and another $550,000 was requested in July 1992 (Exhibit

111);

(j) continuing deficit in income in HAL (Exhibit 102); and

(k) a genuine lack of faith, trust, and confidence by Billes, the Lenders, and their

principals, in any improvement in the financial and operating conditions of DDL

and the Kingswood Entities, under McAteer’s management. This was seen in

the Sill Report (Exhibit 186) and the evidence of Ian Best (“Best”) and Jay

Mustapha (“Mustapha”). This is supported by the fact that McAteer proposed no

new and/or realistically effective solutions to solve the problems being faced,

and no proposals in Bankruptcy were made by McAteer regarding the

Kingswood Entities. In this regard, BJ argued, that McAteer’s “dream for the

success of the DDL/Kingswood entities far exceeded his ability to manage the

entities through periods of business adversity”. I agree. Also, both Billes and

Lavery wanted McAteer out of DDL (Exhibit 107 and the evidence of both) and

McAteer refused to leave (Exhibit 109). Evidence that supported this lack of

Page 33

confidence included the practice, testified to by Harms, of the directions by

McAteer to shuffle money among related entities. Additionally, McAteer was

not actively present much of the time, projections were often inflated to look

optimistic, accounting records were incomplete and the ability to service the

debt was never clearly in hand.

[145] In elaboration and support of these reasons for calling the Loans, Lavery testified that

in July 1992 he had concerns about:

(a) interest payments not being made;

(b) lot sales declining sharply;

(c) the lack of time that McAteer was spending on DDL/Kingswood projects -

including diverting his attention to new Golf Dome projects rather than concentration

on the profitability of the projects they had in place;

(d) the increase of the Royal Bank line of credit without the approval of the Trust in

accordance with its security documentation;

(e) cash flow being a significant problem for DDL (McAteer acknowledged that this

was a constant battle for a development company - that was the nature of the business);

(f) HAL was having problems with staff supervision, damaged suites and an inability to

rent them and was experiencing financial difficulties in not being able to service its

mortgage; and

(g) there was clearly a loss of confidence between the partners, McAteer and Billes

(Exhibits 123, 123e, 123i).

[146] In argument Billes emphasized these points and others from Lavery’s testimony and

concluded the point by noting that:

As a trustee, [Lavery] was in agreement to demand the Trust loan. His reasons

are set out at pp. 1397 - 1399¹⁷. He reviewed the Sill Report. His conclusions

are at pp. 1399 - 1400. By May 1993¹⁸, he had personally lost confidence in

McAteer's devotion to the day-to-day management (see 1400 - 1402).

[147] Billes argued¹⁸that the Sill Report (Exhibit 186) caused her to conclude that:

(a) the management was not effective;

(b) there were no accounting controls in place that could be relied upon;

(c) records and accounting were not up to date;

17

Referencing the trial transcript.

18

Sic - I believe he may have meant May 1992, because by May 1993 the security was under

receivership, and litigation had commenced.

Page 34

(d) McAteer should have been relinquishing his position in the companies; and

(e) $800,000 to $1 million, she was “appalled to learn”, would be required to

meet current liabilities and payables, excluding any principal payments on long-

term debt.

Based on those conclusions Billes was willing to consider a proposal, within certain

parameters: payout the secured creditors or, if they were to proceed, management was not to

include McAteer.

[148] The evidence of Best and Mustapha was supportive of these conclusions, while

referencing still other or related concerns, including:

(a) lack of financial and management controls;

(b) there were many errors in the accounting records;

(c) proper personnel management procedures were not in place; McAteer was often

absent from giving instructions or direction;

(d) there was little activity in lot sales, but McAteer rejected marketing plan initiatives

to stimulate sales;

(e) when there were lot sales there was noncompliance of net sales payments to the

Royal Bank;

(e) HAL was a non-performing asset that was in very poor condition and was

continuing to deteriorate;

(f) tax returns were not current; and

(g) the debt/equity ratio of all the entities combined was 56:1; i.e., $56 in debt for every

$1 of equity.

[149] Neither Lender was prepared to convert its debt into equity, which is understandable in

the circumstances, especially with almost $1,000,000 in payables outstanding. The Lenders

could not reasonably be expected to extend more time or provide more funds in all the

circumstances.

[150] Generally, I agree with the above submissions.

[151] Billes argued further that, after August, 1992, there were no reasonable steps that she

could have taken as a director of DDL, as DDL and the Kingswood entities were hopelessly

insolvent. On that basis she argued that her obligations as a director were to act primarily with

due regard to the interests of the creditors. As authority for that proposition she relied on:

Kinsela and another v. Russell Kinsela Property Ltd. (In. Liq.) (1986), 4 N.S.W.L.R. 722

(C.A.); Walker v. Wimborne (1976), 137 C.L.R. 1 (Aus. H.C.); Nicholson v. Permakraft (N.Z.)

Ltd., [1985] 1 N.Z.L.R. 242 (C.A.); The Clarkson Co. Ltd. v. Shaheen 660 F. 2d 506 (1981, Cir.

2); West Mercia Safetywear Ltd. v. Dodd, [1988] B.C.L.C. 250 (Eng. C.A.); Colborne (Q.B.).

On the facts of this case, I am not satisfied that, in effect, abandoning DDL in favour of the

creditors was her primary obligation. Moreover, this is not a principle that seems to be well

developed in Canada. However, the whole discussion, considering that she was personally a

Page 35

creditor (the Trust) and a director of another creditor (Newmat), reconfirms her conflict in this

case.

3.

Role of Golf Dome Construction

[152] Mason argued under this heading that “the reason DDL [was] in financial difficulty

[was] as a result of McAteer's and Billes' decision to proceed with the Golf Dome construction

which had the effect of consuming financial resources and taking attention away from the real

estate and golf course development”. I believe this deserves a comment. I find that this is

substantially true in the result, notwithstanding sound intent. However, it is not causally related

to the breakdown of McAteer and Billes’ personal relationship.

[153] Factually, I find that the intent of the Golf Dome was sincere. It provided a facility

within Winnipeg to keep golf alive during the winter months when the golf course was closed

and dormant. During the winter season, it utilized existing personnel to continue the marketing

of golf products, while promoting the Kingswood golf course and development. This appears

to have been McAteer’s idea based on Golf Dome projects in other cities. It appears that he

convinced Billes that it was a good idea and she obtained the Newmat Loan to support it.

However, the cost of the facility, as compared to immediate benefits (that is, net cash flow),

and the preoccupation of McAteer with the development of other domes, at the expense of

attention to the development of the golf course and its residential lots, put a double strain on

the available financial resources. DDL and the Kingswood Entities were unable to recover

from those strains, without the further injection of funds to cover the short term, which were

not forthcoming. I refer to the short term because, while Best (Exhibit 186, p. 57) found that

profits were at the break even level or below in 1992, he also found that there was “potential

for significant future profit and cash flow inherent in the operations of the Golf Dome and the

Kingswood golf club....”.

[154] In any event, to the extent that it is a criticism of management decision making, it is not

actionable: see discussion under the Derivative Action, infra

.

4. Impasse, not Vindictiveness, Doomed DDL

[155] The problem at DDL was not only financial. There was also the problem of having

someone with the ability and willingness to effectively manage the project to achieve this.

Billes was not confident that McAteer was willing or able to do so. He appeared to be wishing

to spend more and more money on developing golf domes in other centres than concentrating

on making these existing projects successful. However, despite all of Billes’ concerns after

March 1992, I find it interesting to note that in Exhibit 89, Billes also promotes further

investment in a Toronto dome and ends by stating: “We have an excellent team and a fine

record in Winnipeg. We can all be very proud of the DDL/Kingswood success!” Nevertheless,

Billes asked McAteer to leave management and he refused. Billes’ testimony indicated that she

and the Lenders felt, quite correctly in my view, that they could not legally move McAteer out

under the existing corporate structure. It appeared to be the view of Sill that, had McAteer and

Page 36

Billes been able to come to a mutual agreement regarding competent third party management,

the project may well have continued on to ultimate success.

[156] While the Court is not a business failure pathologist, this last comment points to yet

another reason, in addition to the host of others set out supra, for the ultimate collapse of DDL.

Mason argued that Billes was a scorned woman “with the intention to ‘get even’ with

McAteer”. She argued further that “[t]he perfect plan of revenge would be to take the

Kingswood projects away from McAteer. Ultimately, as a result of the disposition of the

assets, Billes achieved that goal, while retaining ownership of all of the assets except the

Kingswood real estate.” McAteer supported Mason’s arguments, and argued further that

Billes’ conduct was “vindictive” in her “squeeze play” to remove McAteer from management,

and that she “is a person who must have control”. I do not accept these arguments,

notwithstanding that there is some evidence (e.g. Exhibits 309 and 107) which may tend to

indicate that this was the case. Although DDL was very weakened by the factors identified

above that caused the Lenders to proceed to realize on their security, I find, based largely on

the evidence of Sill, that it was not revenge, but rather an impasse between two head strong

individuals that caused the ultimate downfall of DDL. In the end, Billes and McAteer were not

prepared to put the interests of all the shareholders of DDL ahead of their personal

stubbornness for “control”and that ultimately doomed DDL and the Kingswood Entities.

[157] The evidence in support of this conclusion is succinctly stated in the Sill Business

Report issued during the Stand Still Agreement (Exhibit 186, at 57), where Best writes:

Unless the shareholder dispute is satisfactorily resolved soon, the continued

normal operation of the Related Entities, for an extended period of time, is

doubtful. ... Failure to resolve the dispute could result in prolonged litigation

and possible actions initiated by secured and unsecured creditors, as well as

other parties, resulting in further disruptions. ... Taken to the extreme, continued

disruptions could result in the distress disposal of some or all of the companies'

property and assets which would likely result in significant financial losses to

creditors, investors, and shareholders. [Emphasis added.]

The “extreme” manifested itself, as he warned.

[158] While I agree with Mason that the “break-up of the relationship between Billes and

McAteer is at the heart of this dispute”, it is only in the sense that it led to the impasse and not

because it led to a unilateral act of revenge by Billes. Both McAteer and Billes are responsible

for the impasse. The innocent party in the whole mess was Mason, who was the only

shareholder without knowledge of Billes’ conflict and whose shareholders interests were

ignored.

5.

Loans in the Best Interests of DDL

Page 37

[159] While this will be addressed in more detail, infra, rather than the Loans being part of

some self-motivated Machiavellian plan by Billes to acquire control of DDL and the

Kingswood Entities, I find that the Loans were made because they (except for the $200,000

Loan) were believed by both McAteer and Billes to be in the legitimate best interests of DDL.

Specifically, except for the $200,000 Loan, it is clear to me that McAteer believed the Loans

were in the best interests of DDL, or he would not have proposed and followed through with,

such financing. Indeed, he was specifically asked at trial in the context of the Trust Loan and

agreed that the Loan was in DDL’s best interests. The same conclusion follows for the

Newmat Loan. Moreover, the evidence demonstrates that McAteer was unable to secure any

other suitable financing.

6.

Personal Relationship not Relevant to Third Parties

[160] BJ observed that “any wrongful act (to use a legally neutral phrase) arising out of the

personal relationship cannot trigger any indemnity claim against these Third Parties”. Without

a full explanation of what is meant by “wrongful act” this is difficult to determine. However,

without trying to consider numerous possible hypotheticals, on the facts of this case and the

issues as alleged, I agree. Moreover, the Third Parties, BJ and TM, had no role in the

breakdown of the relationship, although I find that the adversarial aggressiveness of Sali did

anything but try to find a meaningful compromise.

B.

Provision of Legal Services by McAteer

[161] The Outline for Argument on this topic asked:

Did McAteer provide legal services to Billes (or related entities)? If so, in what

capacity and did any duties arise as a result in terms of other matters? What

evidence supports that conclusion? What relevance does such advice have to

any decisions the Court has to make in these proceedings?

[162] I find that McAteer provided no legal services to Billes or to the Lenders in relation to

the Loans, but did provide corporate secretary/corporate governance services to DDL,

including those relevant to the Loans. I will elaborate.

[163] Billes submitted that McAteer purported to provide legal services to her, to DDL and to

Kingswood relating to the Loans. In that regard, Billes submitted that she relied on McAteer,

as a lawyer, to ensure that all legal requirements with respect to the Loans were met. I find

this to be untrue. In particular, Billes stated that she asked McAteer to ensure that the other

shareholder, Mason, was in agreement and that he reported that he had done so. I find this to

be true, but not in any role as legal counsel.

[164] I find, on the evidence, that McAteer, although then a lawyer and member of the Law

Societies of Alberta, Manitoba and British Columbia (not practising in the latter two - Exhibit

22), did not purport to act as Billes’ legal counsel in relation to the Loans. Vis-à-vis DDL,

Page 38

McAteer’s role was as a shareholder, officer and director of DDL. Moreover, vis-à-vis Counsel

for the Lenders, with his legal training and experience, in his capacity as an officer of DDL, he

did perform some corporate secretarial functions. His business relationship with Billes was as

a fellow shareholder, director and officer of DDL and a special relationship that grew from that

- their personal relationship. However, in his undertaking to Billes that he would advise Mason

of Billes’ interests in the Lenders and obtain Mason’s consent, and his representation that he

had done so, I find he was only acting in his personal capacity, having regard to his personal

relationship to Mason and Billes. As to legal advice for the Loans, independent Counsel were

retained on both the Trust Loan (BJ) and the Newmat Loan (TM).

[165] Billes testified that McAteer provided legal services to the Lands End project. DDL did

have a contract to provide management, marketing and development services to the latter in

consideration of a participating interest (Exhibit 308). However, there was no reference to the

provision of legal services except that McAteer was to hire such services. In Exhibit 40,

McAteer billed $10,000 for “services”(paid by Exhibit 44), but there is no reference in either

to “legal” fees, or “legal” services or him performing the “services” as a lawyer. Even if he did

provide legal services, which I do not find, that is not relevant to anything I have to decide

herein, especially since the Billes company involved in the Lands End project (328690 British

Columbia Limited) is not a party to these actions. However, and more importantly, there is no

evidence that McAteer provided legal services or billed therefor, to any other Billes related

entities involved in the Loans. Nor is there any evidence that McAteer provided any such

services to Billes directly relative to any matter in dispute in these actions. Billes’ evidence

was that she was relying on Whitlock in the Trust Loan and Marshall in the Newmat Loan. She

also received advice periodically from other counsel including, Michael Robison at McCarthy

Tetrault, Steinberg, Rita Guthrie at McKimmie Mathews and possibly others.

[166] Kingswood Development paid McAteer $10,000 on April 23, 1991 for what the cheque

said, in McAteer’s writing, was “Legal fees 1990/91" (Exhibit 43). When challenged on it in

cross, he claimed that it was a cheque to pay his taxes, explaining that “[b]ecause of the

accounting coding in the Kingswood accounting records, they have to be accounted for as legal

fees”. He denied he ever provided legal services to either DDL or Billes, and that legal advice

was always provided by outside counsel. While this accounting procedure has a suspicious

appearance, I am satisfied that it was a way of getting money out of Kingswood for personal

purposes (personal taxes), rather than payment for legal services. In any event, this is not

determinative of anything I have to decide, even if it were for legal services, because there is

no evidence of any link to Billes.

[167] McAteer did admit that he provided “counsel to DDL and the Kingswood entities from

time to time”. However, I understood that to mean general advice, not legal advice. Such

would be expected from a director and officer, and in those roles one would not expect him to

ignore his legal knowledge and experience. That is different than acting as counsel. On the

evidence, it appeared that, aside from advice qua director, officer and shareholder, any services

that McAteer provided were in the nature of a corporate secretary to, or for the corporate

governance of, DDL and the Kingswood entities.

Page 39

[168] As noted here and elsewhere in these Reasons, I accept Billes’ evidence that she relied

on McAteer with respect to disclosing in writing her interests in the Lenders to Mason, and in

obtaining Mason’s shareholder’s consent to the Loans. I also accept that he had reported to her

that he had done so. However, I do not find that she relied on McAteer as legal counsel.

[169] BJ argued:

McAteer was counsel to DDL in respect to the Trust Loan (Whitlock's

testimony), and these Third Parties were entitled to rely on the factual

statements and Officer’s Certificate of McAteer to the same effect as though it

were a solicitor's opinion from the borrower. McAteer's background and role

are relevant to the reasonableness of Whitlock's reliance. No evidence was

adduced to question Whitlock's judgment in relying on McAteer in the totality

of the circumstances.

I agree with BJ’s (and TM’s) entitlement to rely upon the Officer’s Certificate(s), but I find it

does so with McAteer in the capacity of an officer, not as counsel, although, again, his legal

background and experience rightly gave an even greater confidence in reliance on his

certification.

C.

Interim Collateral Agreement Pending Long Term Financing - The “Alleged

Agreement”

[170] In the Outline for Argument, the issue was expressed thus:

Was there an agreement collateral to the Trust Loan and/or the Newmat Loan

whereby the parties agreed that there would not be a demand or payment of

interest or principal until permanent long term financing had been secured, or

until the occurrence of some other event? If so, what were the terms and what

evidence supports/detracts from such a claim?

[171] Mason submitted that there was evidence of a collateral agreement (the Alleged

Agreement) between Club LP and Club Ltd. on the one hand and DDL or Devoncroft

(Winnipeg) Ltd.¹⁹(“Devoncroft (Winnipeg)”, or “DDL (Winnipeg)”, or “DDLW”) on the

other hand, to the effect that DDL and/or DDLW would not call the $1,000,000.00 mortgage

owed by Club LP and Club Ltd. until permanent long term financing had been secured or until

September 1993²⁰. Mason argued that evidence of this Alleged Agreement was contained in

19

A Manitoba corporation, for which (while there is some conflicting evidence) McAteer, at all

material times, was sole officer and director.

20

Note from Exhibit 37, Tab 10, that September 3, 1993 was the date for the principle payment

under the mortgage.

Page 40

the financial statements, particularly, Note 4 (Exhibits 46(a) and 93). McAteer testified that

this understanding was also reduced to writing and signed by the Curtises, Ben Smirnov

(“Smirnov”) and himself, however, this document was not produced in evidence.

[172] The DDLW mortgage was assigned to DDL and further assigned by DDL to the Trust

as part of the Trust Loan security (Exhibit 37, Tabs 6 and 7). The effect of this argument, as I

understand it, is that, if found to be factual, the Trust would be bound by this restriction on the

security it accepted, and as a result could not have legally proceeded to realize on the

Kingswood security (including the Manitoba foreclosure) until the contingent term had been

met.

[173] Billes and Lavery denied the existence of the Alleged Agreement. In the alternative,

Billes argued that the Lenders or Billes were never privy to any such Alleged Agreement, and

accordingly it could not affect the Lenders. In the further alternative, Billes argued that

McAteer and Mason were estopped from alleging or relying upon such an agreement in

opposition to the enforceability of the Loans, as a result of the Manitoba foreclosure

proceeding. In that regard Billes relied on Argentia Beach (Summer Village) v. Warshawski

(1990), 105 A.R. 35 (C.A.); 420093 B.C. Ltd. v. Bank of Montreal (1995), 174 A.R. 214 (C.A.);

Roenisch v. Roenisch (1991), 123 A.R. 303 (Q.B.), 115 A.R. 255 (C.A.); Morguard Investments

Ltd. v. De Savoye, [1990] 3, S.C.R. 1077; Malik v. Principal Savings & Trust Co. (1985), 63

A.R. 109 (Q.B.); Royal Bank v. LRSCO Investments Ltd. (1994), 18 Alta. L.R. (3d) 148 (C.A.)

refused leave to appeal (1994), Alta. L.R. (3d) xxxix (S.C.C.); G.S. Bower, A.K. Turner and

K.R. Handley, The Doctrine of Res Adjudicata, 3^rded. by K.R. Handley (London:

Butterworths,1996); Solomon v. Smith, [1988] 1 W.W.R. 410 (Man. C.A.); Wavel Ventures

Corp. v. Constantini (1996), 193 A.R. 81 (C.A.), [1999] S.C.C.A. No. 279; and Bjarnarsen v.

Manitoba, [1988] 1 W.W.R. 422 (Man. C.A.). As a result of my findings which follow, I do

not need to consider these alternative arguments.

[174] McAteer testified in chief as to why such an Alleged Agreement had been made and

reduced to writing. His evidence was that the Alleged Agreement formed the missing Schedule

“A” to the Club GP resolution authorizing the construction mortgage (Exhibit 37, Item 19).

There is reference to it in Note 4 to the financial statements of Club LP as at April 30, 1991

(Exhibits 46a, 90c, 91 and 93), prepared by Deloittes. McAteer says the Note was prepared by

him and Lavery. The Note is then repeated in the 1992 statements by Mustapha. The Note

states “The construction mortgage [of $425,000] payable to [DDL] ... is secured by the golf

course and is due on demand. [DDL] has agreed that payment will not be demanded until long-

term financing is secured”. McAteer further testified that he was unable to find a copy of the

Alleged Agreement after the receivership but that copies were kept by DDL at Wolfe Street

(Billes’ residence) in Calgary, one by Larry Braun (accountant at Deloittes reporting to

Lavery) (“Braun”) and one in the DDL files in the Golf Dome at the time of receivership

(which documents he testified he lost access to on the receivership).

[175] The mortgage shown at $425,000 in the 1991 financial statements (Exhibit 46c) was

increased to $1,000,000 by the mortgage between Club Ltd. to DDL Winnipeg, dated February

22, 1991 (Exhibit 32) and shown in the 1992 financial statements (Exhibits 90c, 91 and 93).

Page 41

The latter funds were obtained from the Trust Loan. The mortgage was assigned by DDLW to

DDL to the Trust.

[176] As to the Alleged Agreement:

(a) it was not produced in evidence;

(b) it is not referenced in any pleading;

(c) all the evidence was to the effect that no one (including Billes, Lavery, Richard

Hester (“Hester”), Braun, Harms, Mustapha, Best, Newel and Owen Billes), other than

possibly McAteer, had seen such a document or reference to it on any of their files (the

Curtises and Smirnov were not called to testify);

(d) McAteer very much equivocated on his previous chief when he was crossed on it,

acknowledging that he was not sure if it was the missing Schedule “A” (see discussion

under credibility supra);

(e) Lavery denied being the author of the Note to the financial statements;

(f) Lavery’s associates in Winnipeg and Calgary, Hester (engagement partner for the

Kingswood entities) testified that Note 4 was inserted based on information from

McAteer, or Harms;

(g) Harms testified that he did not provide any advice to anyone at Deloittes with

respect to the final sentence of Note 4, nor hear or participate in any discussion as to

the existence of such an agreement;

(h) Mustapha testified that: McAteer gave him a copy of the prior year's financial

statements prepared by Deloittes; he reviewed the Notes; he had discussions about the

Alleged Agreement on two occasions with the limited partners, the Curtises, in the

presence of McAteer; he could not confirm or deny the Alleged Agreement; and

McAteer represented the existence of the Note and, thus, it was included; and

(i) Best was not advised by any party about the Alleged Agreement, nor did he remove

any documents from the Golf Dome or books and records relative thereto.

[177] More detailed evidence and argument denying the existence of the Alleged Agreement

rests on the Court record. Moreover, the Manitoba Court of Queen’s Bench, in denying

McAteer a rehearing (requested February 18, 1994 - Exhibit 249) to stay the foreclosure of the

front 9 by the Trust, noted in the rejection letter of March 2, 1994 (Exhibit 253) that “If there

was an agreement that no action would be taken on the security there is nothing in the material

filed to suggest this”.

[178] I find, on the skimpy evidence in support, and the overwhelming evidence to the

contrary, that the Alleged Agreement restricting the enforcement of the Trust Loan to

September 1993 never existed. The only evidence of any such agreement was from McAteer.

That evidence is not supported by any document or corroborative testimony at trial, and,

indeed, is contradicted by the construction loan documentation itself (see the other Schedules

to the Club GP Resolution in Exhibit 37, Item 19, such as the promissory note and the terms of

the appended unsigned construction mortgage, particularly para. 13 thereof.) Moreover, it is

inconsistent with the proposed amendments sought in August 1992 (Exhibit 121). For these

Page 42

reasons, in combination with my findings regarding McAteer’s credibility generally, I find

McAteer’s evidence in this regard to be less than compelling.

[179] Further, even if such an Alleged Agreement existed, it would be insufficient to bind

Newmat or the Trust, without it being referenced in documentation that was brought to their

attention prior to the Loans, or specifically agreed to by them. There is no evidence that any

such steps were taken.

[180] The result of finding no such Alleged Agreement is that the Lenders were not

precluded for this reason from proceeding to realize on their security as they did.

D.

Billes’ Interest in the Lenders, McAteer’s Knowledge Thereof and Their

Roles in Approving the Loans

[181] The issue in question here was framed in the Outline for Argument as such:

Is there some interest of Billes’ of relevance to the Trust Loan or Newmat Loan

that is now known and on the record, which McAteer was not aware of prior to

the execution of those loans? If so, what was it and what effect does it have?

I have concluded that the answer to the first question is “No”. Thus, I need not answer the

second question.

[182] While this section was limited to McAteer’s knowledge of Billes’ interests, I have

found that not only did he have knowledge, but he assumed a role in disclosing that interest to

Mason and obtaining her consent. I find further, that he then assured Billes that he had done

so. Therefore, I will expand this section to provide some of the factual basis for these

conclusions.

[183] Specifically, having considered the evidence, I find that:

(a) Billes did make full oral disclosure to McAteer of her financial

circumstances prior to the respective Trust and Newmat loans. Specifically;

(i) McAteer knew that Billes had de facto control of the Trust (in fact Lavery

testified that he told him as much); and

(ii) McAteer knew, prior to the Newmat Loan closing, that Billes, through

Marlore, had a 49% interest in Newmat and was a director. Indeed, McAteer

also thought she was an officer, as he admitted on cross, although that was not

the case;

(b) McAteer undertook to Billes to notify Mason in writing as to Billes’ interest and to

obtain the necessary written consents from Mason to the respective Trust and Newmat

Loans and to otherwise ensure that the disclosure met the requirements of the USA and

ABCA. Billes relied upon McAteer to fulfill that undertaking and, although he failed to

do so, he represented to her that he had; and

Page 43

(c) McAteer did read and was aware of the contents of the Officer’s Certificates

(Exhibits 36, 37, 39 and 77) before he signed those documents, and knew that

they were false. Nevertheless, he allowed them to be relied upon by BJ, TM, the

Lenders and Billes.

The following section will expand on these conclusions.

1.

McAteer’s Knowledge

[184] McAteer argues that any disclosure Billes provided to him regarding her interest in the

Trust and Newmat was insufficient and misleading. Thus, he argues that he was unable to

determine if Billes was in a conflict position and/or that he could not provide Mason with full

and fair disclosure. McAteer also suggests that the rule suppressio veri applies such that if the

alleged suppression of the truth, in this case Billes’ control of the Trust, can be proven, then

the Loans must be set aside.

[185] To determine what McAteer’s knowledge of Billes’ interests was, it is first necessary to

understand what those interests actually were. That is easy for Newmat, but not so easy for the

Trust.

a.

The Trust

i. Billes’ Actual Interest

[186] McAteer in argument acknowledged that:

Billes made disclosure to McAteer that she was one of three trustees for the

Trust, but added that she did not control the Trust. Lavery confirmed this

information to McAteer. ... Because Billes added the qualifier “did not control”

the Trust any disclosure was not sufficient as she, at the very least, mislead

21

McAteer and minimized her interest and control of the Trust. (Suppressio veri

)

[187] As a trust is not a legal entity, Billes, as a Trustee of the Trust, was in effect one of

three “principals” constituting the Trust. In addition, I find that Billes did not have legal

control, but rather enjoyed de facto control, or was the “directing mind” or the “controlling

mind”, of the Trust. I come to this conclusion for several reasons, notwithstanding that Billes

21

Meaning “misrepresentation” - literally “suppression of the truth”.

Page 44

took no personal benefit from the Trust, either through the terms of the Will setting it up, or by

way of compensation for her duties as a Trustee (nor did the other Trustees).

[188] First, it was a trust set up by Billes’ mother’s Will, for Billes’ son, Owen (Exhibit 1).

[189] Second, when Billes’ mother died on August 13, 1979 (Exhibit 6), the original Trustees

were Billes and her two brothers. However, on December 31, 1989, on the resignation of her

two brothers, Billes, as the remaining Trustee, appointed Lavery and Mann as replacement

Trustees (Exhibit 11). Lavery, was otherwise retained by her as her accountant and financial

advisor. Mann, was a Canadian Tire dealer in Toronto, whom Billes met with frequently on

other matters. While the extent of Billes’ interest in Canadian Tire was not introduced into

evidence, it is not disputed that Billes had a significant, perhaps controlling interest in that

corporation. Accordingly, she was in a position of some business “authority” to each of the

other Trustees. Moreover, it is clear to me from the testimony of Mann that, although he talked

occasionally with Lavery by telephone (alone or with Billes), his main contact with the Trust

was Billes. Additionally, Mann, while maintaining that Billes never gave him any directions,

acknowledged that he never made a decision that was contrary to Billes’ wishes regarding the

Trust.

[190] Third, Lavery testified that he told McAteer that Billes “was in effect the central mind

and management”, and the “controlling mind” of the Trust. Moreover, albeit after the

placement of the Trust Loan, Lavery also confirmed that he understood that Billes had made a

decision to defer the collection of interest on the Trust Loan during the summer of 1992,

without consulting him as a Trustee.

[191] From this evidence, I find that Billes was the de facto “chair” of the three Trustees and

that she also had de facto control of the Trust.

[192] There is legal support for the relevance of de facto control. In the opinion letter of

Coopers & Lybrand (Exhibit 247), introduced for another purpose, the author noted that:

The courts have also held that in certain cases, excessive and/or constant

advantage, authority or influence can constitute de facto control which may result

in bringing both parties into a non-arm’s length relationship.

The wording used by the author in this tax opinion closely resembles the wording used by the

Canada Customs and Revenue Agency in paragraph 18 of Interpretation Bulletin IT-419R:

The courts have also held, in certain cases, that excessive or constant advantage,

authority or influence can constitute de facto control (i.e., effective without legal

control). This situation can bring parties into a non-arm’s length relationship....

IT-419R has been referred to by the Tax Court of Canada, when addressing the question of

whether a transaction was completed at arm’s length, on a number of occasions, including: Craig

Brothers Ltd. v. Canada (Minister of National Revenue - M.N.R.), [1996] T.C.J. No. 226, online:

Page 45

QL (TCJ); Freedman Holdings Inc. v. Her Majesty the Queen (1996), 96 D.T.C. 1447 (T.C.C.),

online: QL (TCJ) [1996] T.C.J. No. 514; and Normand v. Canada (Minister of National

Revenue - M.N.R.), [2000] T.C.J. No. 351, (T.C.C.), online: QL (TCJ). In Robson Leather Co.

v. Canada (Minister of National Revenue - M.N.R.) (1977), 77 D.T.C. 5106 (Fed. C.A.) the

Federal Court of Appeal determined that a shareholder who could exert pressure, to have his will

prevail in the running of a business, had de facto control.

[193] The existence of de facto control has also been considered in situations outside of the

realm of income tax. For example, in Re. A. Zimet Ltd. et al.; J. Friedman Receivers and

Trustee et al. (Trustee in Bankruptcy) v. Woodbine Summit Ltd. (1985), 31 B.L.R. 277 at 302

(Ont. S.C.H.C.J.), aff’d (1987), 64 C.B.R. (NS) 89 (Ont. C.A.), Sutherland, J. stated:

De facto control is not necessarily dependent upon share ownership or upon

powers derived from share ownership. It can arise as a result of family or personal

influence of a benign sort or, on the other hand, from fear of reprisals, or from

extortion or blackmail, among other causes ... De facto control could arise from

many things, including extraneous factors and is in that sense an open-ended

concept.

[194] I find that Lavery and Mann were technically independent Trustees. However, having

regard to: the source of the trust (Billes’ mother); the beneficiary of the trust (Billes’ son); the

relationship of both of the Trustees to Billes; their appointment and the manner in which the

Trust operated; I find that their independence was limited. While Lavery or Mann would have

made suggestions and given advice with regard to the Trust, I believe on all reasonable

“commercial” transactions, such as I find the Trust Loan to have been, neither would have

disagreed with any of Billes’ decisions regarding the Trust that were not illegal. Mann, the barest

trustee among the three, made this quite clear in his testimony.

ii.

McAteer’s Knowledge

[195] I have discussed McAteer’s knowledge of Billes’ interest in the Lenders in the context of

credibility supra, noting his acknowledgment in the December 23, 1990 Domestic Contract

between them (Exhibit 21), Billes’ evidence regarding that disclosure and the documentation

made available to him in conjunction therewith.

[196] I find that, prior to the Trust Loan, McAteer was not only aware that Billes was a Trustee

to the Trust, but, that she exercised de facto control of the Trust.

b.

Newmat

i. Billes’ Actual Interest

[197] Billes owned a 49% interest in Newmat, through Marlore, and was also a director.

Page 46

ii.

McAteer’s Knowledge

[198] I find that, prior to the Newmat Loan, McAteer was aware of the precise nature of this

interest, although he was also of the erroneous belief that Billes was also an officer. He stated

that he understood the interest to be in the nature of a “carve out”, such that Billes’ income from

Newmat would be sheltered against losses carried forward. However, whatever the

characterization of the interest and Billes’ intent, I find that McAteer was aware of Billes’ true

interest in Newmat.

[199] As to his specific knowledge of Billes’ interest in Newmat, my findings are based on his

evidence at trial, in particular his cross by Billes and TM. This includes his acknowledgement

that a memorandum setting out her share interest was in his hand writing (Exhibit 316). His

evidence was that he wrote it “just before the loan [from] Newmat - early October [1991]”. I

accept this evidence, noting that it contradicts a statement in his affidavit of December 2, 1992

(Exhibit 318 - specifically paragraph 11), which stated:

I do not recall ever being advised prior to or at the time of the Newmat Financing,

in any fashion whatsoever, that Billes had an interest in Newmat. All that she

disclosed was that she had a tax related arrangement which flowed income

through Newmat to utilize tax losses. I have subsequently learned through

corporate searches that Billes has a 49% shareholding interest (through a

company called Marlore Enterprises Ltd. wholly owned by her) in Newmat.

I find this sworn statement, which was intended to be relied upon by the Court, to be false

regarding his knowledge at the time of the Newmat Loan.

[200] McAteer also admitted, in cross by TM, his specific knowledge of the details of Billes’

interest prior to the execution of the Newmat Loan, “but the 49 percent was a result of a tax

flow-through arrangement”. I also come to this conclusion of his knowledge, notwithstanding

McAteer’s attempt to limit the interest to a “carve out” or “tax flow-through arrangement”. In

that regard, I do not challenge his recollection of the conversation between him and Lavery

(Exhibit 325), his characterization of the interest as a “carve out”, or that Billes exercised no

management or control over Newmat. However, the characterization of the investment, and

Billes’ intent in investing in Newmat, are irrelevant. What is relevant is the fact that Billes

owned (through Marlore) 49% of Newmat’s shares and was a director of Newmat, and McAteer

knew it. That was sufficient to give her a conflict, without her owning 50+% or exercising

management prerogatives. His characterization of the investment as a “carve out” was merely an

unsuccessful attempt to limit or screen his knowledge of Billes’ interest at the relevant time of

the Loan.

2.

Effect of McAteer’s Knowledge

[201] BJ argued that “nothing turns on a finding that McAteer was unaware of some material

interest”. I need not respond to that argument in light of my finding that he was aware.

Page 47

However, had I found that he was unaware of some material interest, I agree with BJ, as it

relates to Billes’ liability to Mason, although it may have made Billes liable to McAteer.

Nevertheless, having regard to my finding that McAteer knew of Billes’ interests and

undertook to pass the disclosure on to Mason, and obtain her consent to the Loans, it does

affect McAteer’s liability to Billes for his failure to fulfill that undertaking. McAteer’s liability

in that regard will be discussed later in this judgement.

[202] As McAteer was aware of the extent of Billes’ interest in both Newmat and the Trust,

he was able to provide Mason with adequate disclosure of those interests, as I find he

undertook to do. If he had advised Mason as to his knowledge of Billes’ interests in those

entities, it would have amounted to full disclosure, and, if disclosed in writing, would have met

the requirements of the USA and the ABCA. There would have remained the requirement of

Mason’s written consent as a shareholder; however, I find McAteer also undertook to fulfill

that requirement and failed to do so.

[203] Because McAteer did not make proper written disclosure and get the approval of

Mason as he agreed with Billes to do, I find that no disclosure of Billes’ interests was

provided, as required, to Mason, and her consent to the Loans with that knowledge was not

obtained.

3.

Billes’ Role in the Approval of the Loans

[204] The evidence is that neither Billes nor any shareholder of DDL ever executed a

shareholders resolution approving the Loans, nor did any of them get notice of such a meeting.

However, while McAteer certified that Billes executed a directors’ resolution of DDL for the

Trust Loan (Exhibits 36 and 37), there is no evidence of the actual execution of such a

resolution. She did execute a DDL directors’ resolution for the Newmat Loan, although she

says it was executed much later than its date of October 10, 1991 (Exhibits 61, 62 and 306).

[205] In each of the Trust and Newmat Loans it was in issue whether Billes had any authority

to execute either type of resolution due to her alleged conflict of interest. I find that she did not

have such authority under the USA, unless she specifically abstained from voting on the

approval of the Loans.

[206] McAteer, in paragraph 12 of an affidavit dated December 2, 1992 in the

McAteer/Kingswood Action ( Exhibit 318), complained that Billes voted in favour of the Loans,

contrary to the USA. However, I find it does not lie in his mouth to so complain because at the

same time I find that he knew of her interest, and was providing the corporate secretarial services

that prepared the very directors’ resolutions he asked her to execute.

[207] I find that the DDL directors’ resolutions authorizing the Loans are inconsistent with the

knowledge McAteer had of Billes’ interest and the requirements of the USA. Nevertheless, there

are resolutions executed, or certified as having been executed, by both him and Billes with

respect to the Newmat Loan only (Exhibits 36, 37 and 306). However, Billes believed that

Page 48

McAteer had taken the appropriate steps to comply with the USA and the ABCA. Accordingly, I

find she did not know of the breach of the USA.

[208] Mason also argued that Billes knew that she had not signed a shareholders' resolution on

behalf of DDL approving either the Trust Loan or the Newmat Loan and that Billes would have

known that no meeting had been called to seek approval of either of the Loans. While

substantially correct in terms of Billes’ entitlement to notice, the reasoning is fallacious because

Billes could not have legally signed the shareholders’ resolution, except one that noted her

interest and her non-participation in the decision (which would have been the proper form to

solve all the conflict problems).

[209] However, one must look at the issue from the perspective of Billes as well. A

shareholders’ resolution could have been signed by Mason to provide consent, without notice or

signature by Billes, and, Billes, relying on McAteer’s undertaking, and assurances that he had

obtained Mason’s consent, would have had no reason to check further. It also explains Billes’

belief in the content of the Officer’s Certificates. Although the Officer’s Certificates do not

provide her protection under the indoor management rule as a director of DDL vis-à-vis Mason,

they do in her capacity as a Lender (the Trust) or associated with a Lender (Newmat). In other

words, they assist in understanding why she did not enquire further and why she did not know of

the breach of the USA. I will explain in more detail infra.

[210] This whole debate about Billes’ execution of resolutions to approve the Loans was an

effort by McAteer to counter the suggestion that McAteer undertook to provide disclosure to and

obtain consent from Mason, and to have the Court conclude that Billes merely did not believe

she had a conflict, or chose not to deal with it. I reject these suggestions; rather the evidence in

this regard corroborates her testimony regarding McAteer’s undertaking and representations on

the point.

[211] Billes was a sophisticated business person who had several years experience acting as a

director of public companies, and was well aware of the duties of a director, and the

obligations to disclose a conflict of interest (and how to do so) and the potential consequences

of non-disclosure. Additionally, she had actual knowledge of the terms of the USA and her

conflict of interest situation - explained to Billes by her counsel, Rita Guthrie, prior to

execution April 23, 1990. She also knew from the $54,000 loan transaction in February 1991

that Mason’s shareholder consent was necessary when there was a loan from an entity in which

she was interested and that McAteer had secured it on that occasion. Billes would have known

that she had not signed a shareholders’ resolution on behalf of DDL approving either of the

Loans and that no shareholders’ meeting had been called to seek the approval of those Loans.

However, it was reasonable for her to assume that, because of her conflict, and McAteer’s

undertaking to get Mason’s shareholder’s consent, Billes’ signature thereon was not necessary

and that McAteer had done all that was necessary in terms of her disclosure requirements.

4.

The Role of the Officers Certificates

Page 49

[212] In the Officer’s Certificates executed by McAteer for both Loans, more details of which

will be provided infra, he certified, in substantially identical language, that there was no

impediment to DDL borrowing from the Lenders and granting security for the Loans.

[213] I find that these certifications were, to McAteer’s knowledge, absolutely false, as there

had been neither written disclosure nor shareholder consent by Mason in accordance with the

USA and the ABCA. Indeed, he admitted they were false at trial, but merely claimed that there

was a “mistake”.

[214] During the same time as the execution of the Officer’s Certificates, I find that Billes

genuinely believed that written disclosure had been made to Mason of her interests in the

Lenders, and Mason had consented to the Loans. Therefore, Billes argued that she could rely on

the Officer’s Certificates executed by McAteer.

[215] It is important to understand what use Billes may make of the Officer’s Certificates. The

intent and operation of the “indoor management rule”, discussed infra, is, in the simplest of

terms, that parties without knowledge of irregularity regarding the management of a corporation,

need not make inquiries as to whether all necessary internal approvals within the corporation for

a transaction are in place and in order: K.P. McGuinness, The Law and Practice of Canadian

Business Corporations (Toronto: Butterworths, 1999) at 241-243, 257-258; J.H. McKnight

Construction Co. v. Vansickler, [1915] 24 D.L.R. 298, at 299-300 (S.C.C.); Bank of Nova Scotia

v. Leblanc, [1954] 2 D.L.R. 579 (N.B.S.C. A.D.); and Gray v. Yellowknife Gold Mines Limited

and Bear Exploration and Radium Limited (No.1), [1945] O.R. 688. (Ont. H.C.J.), varied (1947),

O.R. 928, at 937 (C.A.). Officer’s Certificates are merely a further protection for third parties,

signifying that they have been assured that internal approvals are in order. Therefore, the

Officer’s Certificates may be relied upon by Counsel preparing the Loans.

[216] However, F. Iacobucci, M.L. Pilkington & J.R.S. Prichard, in Canadian Business

Corporations (Agincourt: Canada Law Book Limited, 1977), at 104-106, and Dickerson et al., in

R.W.V. Dickerson, J.L. Howard, L. Getz, Proposals for a New Business Corporations Law for

Canada, Vol. 1, Commentary (Ottawa: Information Canada, 1971), Vol. 1 at 28-29; Vol. 2 at

15, provide that section 18 of the CBCA (identical in the ABCA), has expanded the protection of

the indoor management rule to include persons other than those dealing with a company who are

considered outsiders. Accordingly, neither the Trust nor Newmat is precluded from relying on

section 18 because of Billes’ involvement with them as a Trustee and director/shareholder

respectively.

[217] However, Mason notes the concluding words of section 18 of the ABCA, which read

"…..unless the person has, or by virtue of his position with or relationship to the corporation

ought to have, knowledge of those facts at the relevant time". She argued that, as Billes knew,

or ought to have known, that articles. 9.02 and 10.10 of the USA (discussed in more detail

infra) were clearly a “hindrance” or “restriction” on the powers of DDL and its officers, Billes

was unable to rely on either section 18 of the ABCA or the Officer’s Certificates.

Page 50

[218] Billes did have knowledge of the restrictions and requirements in the USA, but had the

assurance of McAteer that he had met them. As to the content of the specific Officer’s

Certificates and Billes’ actions in relation to them, Billes testified that she saw the Officer’s

Certificates and read them at the closing of the Trust Loan and Newmat Loans. While at first

blush she may have considered their content to be erroneous having regard to her knowledge

and their wording, she had no knowledge that McAteer had not met his undertaking to her.

When specifically asked about what her thoughts were when she read Article 5, she said:

“Well, the thought was that any provisions of that USA which might hinder had been

appropriately dealt with so that there is no hindrance existing at the time of the signing”.

[219] To be more specific, it appears that Billes, believing McAteer had disclosed Billes’

interest to Mason and obtained Mason’s written consent, and both had otherwise executed the

necessary internal corporate documents, had no reason for concern, because the consents did not

need to be part of the closing documentation for the Loans. Indeed, thinking he had done so,

Billes herself relied on the Officer’s Certificates executed by McAteer as further confirmation

that he had fulfilled his undertaking to her. In this latter regard, Billes argued that, as it related

to the Trust Loan in March 1991, “McAteer assured her that Mason had consented and the

appropriate resolution would be placed in the DDL Minute Book”. Moreover, there is specific

evidence that Billes was relying on the Officer’s Certificate - she testified that she had Whitlock

call Steinberg and as a result the Officer’s Certificate was prepared. Further, Whitlock made

reference to it at the closing, “satisfying [her] concern”. As to the Newmat Loan, Billes’ reliance

upon the Officer’s Certificate is seen in the following passage from her cross by TM:

I was informed on a phone call that there would be appropriate terms in the

documents relative to the Officers' Certificate that would cover off any concerns

that I and Newel might have had about any real or perceived conflict. [Emphasis

added.]

Thus I find that Billes did not have, nor should she ought to have had, knowledge of the

internal irregularities. Accordingly, I find that no knowledge was imported to the Lenders via

Billes.

E.

Entities to Which the Loans Were Advanced

[220] The issue in question was stated in the Outline for Argument thus: “Are there factual

issues as to which entity the advance of the funds under the Lenders’ Loans were made? If so,

what other issues (if any) follow? What is the effect?”

1.

Trust Loan

[221] The Trust loan funds of $1.2 million were advanced directly by the Trust to DDL, and

deposited to DDL’s bank account (Exhibit 41) on February 22, 1991 ($175,000) and March 22,

1991 ($1,025,000).

Page 51

[222] The intended flow of those proceeds from DDL ($400,000 to Club LP and $800,000 to

Developments LP), and the security the Trust held, is set out in Exhibit 37, Tab 1. By way of

bank transfer $100,000 was advanced by DDL to Club LP on February 22, 1991 (Exhibit 38). In

fact, the lion’s share was advanced by DDL to Developments LP on March 22, 1991, $800,000

under a cheque signed by both McAteer and Billes, and $200,000 under a bank transfer (Exhibit

38). McAteer attempted to provide the rationale for this flow of proceeds using the “Kingswood

Cash Flow Including Accrued Payables” chart (Exhibit 29). This chart showed advances by

Developments LP to Club LP over time to May 1992, apparently based on the construction of

the back 9, which Club LP operated on a licence from Developments LP. However, that

explanation shed little clear light on the subject, other than to form an alleged support for

McAteer’s testimony that the funds were “ultimately” advanced to Club LP and Developments

LP as intended. As part of the security, DDL assigned the Club LP mortgage to the Trust

,

through transfers from DDLW to DDL (Exhibits 31 and 37, Tabs 7 - 10).

[223] Billes says $1 million was advanced under the mortgage, but Mason argued that Exhibit

37, Tab 1, indicates that only $100,000 was advanced.

[224] It is clear that the Trust Loan was made directly to DDL, and that the entire $1.2 million

was advanced directly to DDL. DDL in turn advanced $1 million to Developments LP and

$100,000 to Club LP. DDL provided the necessary security, including the assignment of a Club

LP mortgage for the face sum of $1 million. However, I find that the fact that the ultimate

realization by the Trust on the Loan came from that source (the $1 million construction

mortgage) does not create a legal issue as to the advance of funds between the Trust and DDL.

What issues there may be, if any between DDL and Club LP, is of no interest to the Trust once it

made the advance to DDL . Nevertheless, it appears that Mason is correct in noting that $1

million of the proceeds from DDL were initially advanced to Developments LP, and only

$100,000 to Club LP, whereas Club LP granted the assignment of the mortgage and was to

receive $1 million. While it would have been better for McAteer to have proved by

documentation, rather than declaration relying on Exhibit 29, the actual advances from

Developments LP to Club LP (McAteer testified it was from DDL to Club LP, but it clearly was

through Developments LP), that is the only evidence as to whether the funds were ultimately

advanced to Club LP. Mason presented no evidence to the contrary. Moreover, as noted, this

would appear to be an internal matter between DDL and the Kingswood Entities, not a matter

about which the Trust should concern itself at this stage, especially since it was not raised (or not

raised successfully) in the Manitoba foreclosure proceedings.

2.

Newmat Loan

[225] As to the $2,100,000 Newmat Loan, funds were advanced directly by Newmat partly to

DDL ($1,200,000) and partly to Kingswood Developments ($900,000), as per Exhibit 382. The

latter entity was a party to the Loan Agreement and provided a guarantee and mortgage security

collateral thereto.

3.

Manner of the Advances

Page 52

[226] In addition to the entities to whom the Loans were advanced, the manner of the advances

is of interest.

[227] BJ’s written argument pointed out, as it related to the Trust Loan, that: none of the

monies were advanced through BJ; $163,000 was advanced on February 21, 1991 (Exhibits 38

and 41) before BJ prepared any security documentation; $1,000,000 was advanced on March

22nd, 1991, preceding security registrations in Manitoba; and these advances were made without

the benefit of any opinion from BJ as to the extent and enforceability of the security.

[228] Similarly, TM’s written argument pointed out, as it related to the Newmat Loan, that the

funds were advanced directly by Newmat to DDL and at no time did funds pass through TM's

account.

[229] Each argued, in different ways, that the funds were advanced in reliance of the

relationship between the parties, they were not dependent upon either any security

documentation prepared or registered, or opinions rendered by Counsel. All of this was in

support of alternative arguments to the effect that, even if Counsel were implicated in failing to

protect the Lenders from Billes’ conflicting interests, the Lenders advanced the funds in any

event of the perfection of the security for the Loans or the reliance on Counsel.

[230] None of the advances were made until on or after the date the Loan agreements were

executed - on February 22, 1991 as to the Trust and on October 10, 1991 as to Newmat.

Nonetheless, some or all of the funds were advanced prior to execution and/or registration of

security documentation and reporting by BJ and TM. However, as I have found infra that BJ and

TM have no liability in the context of Billes’ conflict, these findings are superfluous to the

result.

4.

Conclusion

[231] Returning to the main issue, McAteer argued that “no consequences flow from the party

to which funds were advanced.” I agree, because the debtor, DDL, was the party to whom the

Lender advanced the funds. That the debtor provided security through the transfer of a mortgage

or other security from another entity is of no consequence to the Lender in the circumstances of

this case. The issue of consideration is between DDL and the other entity.

[232] Billes argued that the security was enforceable, even if the principle debt was invalid,

which was denied. There are no issues of fact or law in respect of this issue and, in any event,

none were pled.

[233] Mason argued that if the principle debt is unenforceable, then the collateral security may

likewise be unenforceable. However, as I have found the principle debts from the Loans valid,

the issue of enforceability does not arise.

Page 53

[234] In the result, I find that there are no meaningful legal issues relative to advances which

adversely affects the decisions I have made herein.

F.

Disposition of the Devoncroft and Kingwood Entities

[235] The issue under this heading appeared in the Outline of Argument in the following way:

What was the realized value (post receivership/bankruptcy) on the disposition of

assets of DDL and the Kingswood entities which are in issue? What are those

issues? How do they relate to the decisions that will have to be made in

connection with the larger issues which arise in these proceedings? How do they

relate to appraised values?

However, I have chosen to deal with this issue infra, under “Enforcement and Realization of

Security”.

G.

Personal Benefits Resulting From the Loans

1. Newmat - The $200,000 Loan

[236] The issue was expressed in the outline for argument in this fashion:

What personal benefits (if any) did McAteer and/or Billes obtain from the

Newmat Loan? What evidence supports that finding? What issues arise and how

should they be determined in light of that evidence.

[237] The cost to construct the Golf Dome was approximately $1.9 million. Consequently, the

amount of the Newmat Loan was to be $1.9 million. However, the Loan was increased to $2.1

million, by the addition of what I have referenced as the “$200,000 Loan”.

[238] The benefits to both McAteer and Billes of the $200,000 Loan are seen dramatically in

Section 3.02(d) of the Newmat Loan Agreement (Exhibit 67) which provided that the loan

advances were to include: “(d) $200,000.00, to be advanced to Martha Billes in partial

satisfaction of amounts owed to her by McAteer and to reduce the amount owed to McAteer

by the borrower”. Further, Section 7.02(j) of the Newmat Loan Agreement (Exhibit 67)

specifically prohibited the advance of funds to any officer, director, or shareholder of DDL,

except for the $200,000.00 to be advanced to Martha Billes under Section 3.02(d) and except

for a monthly draw of $5,000.00 to McAteer (Exhibit 9, p. 27) against amounts owed to him

by the borrower²². The $200,000 is also an exception (apparently without the consent of the

22

During the hearing there arose an issue about McAteer’s wish in late 1991 or early 1992 to

increase this draw to $10,000 - see, for example, McAteer’s letter to Billes on July 10, 1992

(Exhibit 90). There was a lot of discussion about this. The general sentiment was that this was

another reason for the Lenders to call the Loans. Billes argued that it was expected his salary

Page 54

Trust, providing further evidence of my finding of Billes’ de facto control) to Section 5(f) of

the Trust Debenture (Exhibit 36), which prohibits DDL from reducing shareholders loans at a

rate in excess of $5,000.00 per month without the consent of the Trust. While Billes argued

that the funds were, in fact, advanced to DDL and Kingswood first (Exhibit 382), I find that

this does not change the substance of the intent and purpose, or ultimate use and effect of the

transaction.

[239] Further, Exhibit 377, a letter dated October 10, 1991 from McCarthy Tetrault to Billes,

references the increase in the Newmat loan, being $200,000 to permit a repayment to Billes of

a $200,000 non-recourse debt from McAteer.

[240] Schematically, as I understand the transactions, they looked something like this:

(a) DDL owed McAteer in excess of $200,000 in shareholders loans;

(b) DDL borrowed an extra $200,000 from Newmat, and paid it to McAteer to reduce

the shareholder loan account by $200,000;

(c) McAteer used the funds to pay Billes the $200,000 (roughly) he owed her as his

share of the acquisition cost of the Wolfe Street property, which she advanced to him

when it was jointly purchased;

(d) Billes paid McAteer the $200,000 (roughly) and McAteer transferred to Billes his

interest in the Wolfe Street home; and

(e) McAteer kept the $200,000 and Billes kept the Wolfe Street property in sole

ownership.

[241] Ultimately, McAteer received the benefit of the additional $200,000.00 by way of a

reduction of his non-interest bearing, unsecured, shareholder’s loan due to him from DDL.

Mason argued that this was to DDL’s detriment because it changed his remaining shareholder’s

loan into a secured, interest bearing debt by DDL to Newmat. Mason argued that the purpose of

the $200,000 Loan was to resolve the dispute between McAteer and Billes with respect to the

Wolfe Street property. She pointed out that Billes had held an assignment of McAteer’s

shareholder’s loan for his one half interest in that property, and Billes, in turn, received

McAteer’s transfer to provide her sole ownership of the property. This was essentially agreed to

by McAteer (Exhibit 109). Mason argued that neither McAteer nor Billes gave any consideration

to the best interests of DDL vis-à-vis these transactions, nor shared the benefits, or granted any

equivalent benefits, with or to Mason, the other shareholder. This, Mason argued, in itself, and in

combination with Billes’ lack of disclosure and the failure to obtain the necessary shareholders’

would stay at $5,000 per month as a return on his shareholder loan. McAteer argued that such an

increase was always intended and a bargain. He further argued that it was $10,000 gross, with an

intent at $5,000 net after tax, and ultimately he settled for $7,500 gross. I have referenced this

elsewhere in these Reasons, but find that, except in the context referenced, it has no great

relevance or materiality to the issues I have to decide and, therefore, I will not further recount the

evidence or arguments, or make definitive findings in that regard.

Page 55

approval, constitutes oppression as well as providing grounds for the Derivative Action, both as

discussed below.

[242] The issue ultimately therefore is whether these actions by McAteer and Billes constituted

evidence of oppression against the remaining shareholder, Mason, and whether they were in the

best interests of DDL (the Derivative Action). I agree with Mason on both arguments.

[243] McAteer argued that this was money owing to McAteer by DDL in any event, but

concedes that it was “a more rapid payment than may have been contemplated”. However, in my

view this is part of the problem, having regard to DDL’s fortunes at the time.

[244] In my view both McAteer and Billes received a personal benefit from the $200,000 Loan

and DDL suffered a corresponding detriment as a result of the conversion of a non-interest

bearing, unsecured debt to a secured, interest bearing debt. In my view, this transaction clearly

indicates that Billes and McAteer were treating the assets of DDL as though they were their own

personal assets. Moreover the last $100,000.00 of this loan was advanced less than two months

prior to McAteer’s letter on behalf of DDL requesting a reduction in interest and citing difficulty

in payment. This would indicate that it was not in DDL’s interests to be repaying non-interest

bearing shareholder loans when it must have been obvious that DDL was in serious financial

trouble. It is certainly indicative that no regard was given to Mason’s interest in the Wolfe Street

transaction. This will be a basis for consideration under the oppression remedy and in the

Derivative Action.

2.

The Trust

[245] The issue was not expressed in relation to the Trust Loan. However, Billes argued that

“Mason received a benefit from the Trust loan, being the discharge of the $200,000 security in

favour of Royal Bank on her personal residence”. Mason replied:

The proceeds from the Trust loan were used partially to reduce corporate debt and

not to benefit Mason. Pursuant to the provisions of paragraph 8.03 of the

Separation Agreement between Mason and McAteer (Exhibit 28), McAteer had

an obligation to discharge the security on Mason's personal residence. There is

no evidence that Mason had knowledge of the source of funds used to discharge

this obligation nor was she cross-examined at trial on this matter. It is

respectfully submitted that if there was a benefit attributable to the use of these

funds, then it is a benefit attributable to McAteer in the sense that it enabled him

to meet a personal obligation.

I agree with the effect of this response. There was no payment to Mason, but merely a payment

to the Royal Bank, through McAteer, which allowed the security on the Mason residence to be

removed. At worst, no one can complain because all the shareholders of DDL agreed - Mason

indirectly by the Separation Agreement, without her specific knowledge of the source or manner

of the removal of the security, and McAteer and Billes by the use of the funds to pay down the

Page 56

Royal Bank, which also accomplished McAteer’s covenant to Mason. This was neither a cost to

DDL nor a prejudice to any shareholder and is therefore not relevant to the Derivative Action or

the oppression remedy.

H.

Did TM Act for Newmat?

[246] The issue was stated in the Outline for Argument in these terms:

What entity did Taylor McCaffrey act for on the Newmat Loan? If more than one

entity, what entities, when did they act, and for what purpose(s)? Who retained

Taylor McCaffrey in relation to the Newmat loan? What were they retained to

do? How are the answers to these issues relevant to their liability (if at all)?

[247] The short answer is I find that, even though it may also have acted for the borrower DDL

in some senses, TM primarily acted as Counsel for Newmat on the Newmat Loan. In that regard

it acted for the purpose of: documenting the transaction, documenting the security, attending to

execution of same, registering the security and reporting that the security documentation

evidencing the transaction had been validly registered. The only aspects of a “normal”

transaction that I find were missing are that TM had no responsibility for handling advances of

the Loan, nor was it asked to provide an opinion as to whether the Loan documentation and

security was legal, binding and enforceable. However, I find that the retainer was such that, had

there been any knowledge that the latter did not apply, there was a duty to disclose it. I believe

that this is descriptive of the responsibility (or “retainer”) that TM had vis-à-vis Newmat: Spence

v. Bell (1982), 39 A.R. 239 at 245 (C.A.); and Smith v. McInnis, [1978] 2 S.C.R. 1357 at 1360-

61, (sub nom. Webb Real Estate Ltd. v. McInnis, also Patterson Smith Matthews & Grant v.

McInnis Meehan & Tramble). Moreover, I find that TM satisfied this responsibility.

[248] While the majority of the evidence Marshall gave on behalf of TM was credible, the

position that he took with respect to whether TM acted for the Newmat interests on the Newmat

Loan was incredible.

[249] I accept the evidence of Marshall that: it was McAteer who contacted TM to “put

together paper for a new loan transaction”, or to “paper the transaction”; he received some

instructions from McAteer; and the account for legal services was sent to DDL; TM provided no

opinion concerning the security, nor was such an opinion ever requested; and no loan funds ever

passed through TM’s account. However, I find that TM was retained, perhaps in addition to

representing the interests of the borrower, DDL, to represent the interests of the lender, Newmat,

in the Newmat Loan.

[250] While TM received some instructions from McAteer, as McAteer had drafted the

proposal which was (generally) acceptable as the Loan, I find that TM also received significant

instructions from Newal, Lavery, on Billes’ behalf, and, to a much lesser extent, Billes herself.

Page 57

In preparing the final draft documentation and last minute changes prior to execution, Marshall

acknowledged that (Exhibits 372-3).

[251] However, it is most significant, in my view, that the reporting on the execution of the

Loan and registration of security was proposed to be (Exhibits 374 and 375), and was, together

with the originals of the security documents, to Newmat (Exhibits 85, 375, 376, and 460 -462).

This is as it should have been as Counsel was retained to protect the interests of the lender,

notwithstanding that copies of the closing documents and report are also generally provided to

the borrower (Exhibit 327).

[252] In addition, Marshall, inter alia: incorporated a Manitoba numbered company (2809291

Manitoba Ltd.) on behalf of Newmat; acted for Newmat and the numbered company 280 in

preparing an agreement of trust; acted for Newmat and 280 in registering their security; signed

the security registration documentation as solicitor on behalf of Newmat (Exhibit 468);

registered a caveat for 280, describing himself as solicitor and agent for 280 (Exhibit 467); acted

as attorney for service for 280 (Exhibit 380); and reported to Newmat on February 24, April 15

and May 11, 1992 (including Exhibit 85), advising Newmat the Golf Dome mortgage represents

a first registered charge. Indeed in Exhibit 85, while it may have been a “boilerplate” type of

wording, as Marshall testified on cross by Billes, Marshall does thank Newmat “for allowing us

to attend to this on your behalf”.

[253] While DDL was billed for the legal services (Exhibit 327), that is not unusual. Indeed, as

Lavery noted in his evidence, it is commonplace for the borrower to pay the legal fees of the

lender on commercial loans, as was provided in this case under the terms of the Loan Agreement

(Exhibit 67, paragraph 7.01(c).

[254] Billes argued, and I agree with the following comments:

... Marshall acted for Newmat and 280, on aspects of the transaction beyond mere

document preparation; that Marshall made recommendations as to who should

hold the security documentation, made applications for the necessary orders to

register the security on farmland, attended to the registration on behalf of Newmat

or 280, and provided reports of his activities to Newmat; ... It is not accurate to

say that he was merely retained solely by DDL or only to prepare documentation.

[255] TM was clearly retained to protect the interests of Newmat and to make sure that the loan

documentation and security protected Newmat in the transaction. TM and Marshall should have

acknowledged this responsibility, and Marshall lost credibility in not doing so. It is fortunate for

Marshall and TM that there is little else in conflict for which I need to weigh his credibility. This

lack of credibility does not affect my finding that Marshall lacked knowledge of the nature of

Billes’ interest in Newmat and of the terms of the USA, such that Newmat can, based on the

Officer’s Certificate, take advantage of the indoor management rule.

Page 58

[256] TM argued that: “[a]t no time did the TM retainer include making inquiries into the role,

status, or knowledge of the DDL directors much less the shareholders of DDL.” I find that, but

for the right to rely upon the indoor management rule, having regard to the fact that the retainer

was unlimited, it did include such matters. However, TM met this obligation by reliance on that

rule.

[257] TM argued that:

TM viewed their retainer to include registrations required in relation to the

documents. This included acting for 280 and Newmat for the limited purpose of

effecting the registrations. This limited purpose retainer was not uncommon in

Manitoba in order to effect registrations.

Billes argued as to this contention that:

... while the writings do pertain primarily to security registration, the retainer was

creating and confirming the validity of the loan documentation or at least the

security.

It was TM's responsibility, if it believed it was dealing with an

unrepresented person, to make that clear. It is submitted that the same obligation

applies to a lawyer who undertakes a limited retainer, at least in circumstances

where the client may believe that the retainer is wider. TM acted for Newmat,

and took no steps to advise Newmat of any limited retainer or to advise Newmat

that it should obtain counsel.

[258] I have determined that TM acted for the Newmat interests and that ends the issue.

However, had I not so determined, I agree with Billes that there would have been a duty on TM

to advise Newmat of its belief in a limited retainer, such that TM would be estopped from

denying that they had acted on a full retainer, or alternatively, might well have been found

negligent in not doing so. While it might well have been the practice in Manitoba to act on

registration only when it was clear to all that this was all that was being done (although no

Manitoba legal expert was called to so testify), I do not accept, on the evidence before me, that

such a practice in Manitoba was applicable to the circumstances of this case.

[259] I find further, supported by the evidence of Newell, that Spence was only retained

regarding the loan from the ATB to Newmat (Exhibit 60) and for the authorizing resolutions on

the Newmat side of the loan, and not in respect of the Newmat Loan to DDL itself. As such, he

was concerned about the conflict issue in the ATB loan to Newmat and not in the Newmat Loan

to DDL. Accordingly, he discussed it with Billes and made certain that there was no problem.

Spence had no duty to satisfy himself as to DDL’s conflicts as I find and as Lavery believed,

Spence was not acting for Newmat with respect to the Newmat Loan. Nor was he responsible for

obtaining security from DDL. He was, as it relates to the Newmat Loan, only acting on the

Page 59

“corporate governance” from Newmat’s perspective. In effect, he was acting for ATB interests

regarding the ATB loan to Newmat.

[260] I find that the duty to protect the Newmat interests under the Newmat Loan was TM’s,

and was met by their reliance on the indoor management rule, including reliance on the Officer’s

Certificate. The discussion of the problem of conflicts on October 2, 1991 by Spence with Billes

as between ATB and Newmat, should have alerted her to a problem as between Newmat and

DDL. However, she had no reason for concern in this regard as McAteer represented that he was

looking after any issues of conflict. In any event she spoke with Marshall on or about October 4,

1991, and, I accept his evidence that she did not raise the issue with him.

I.

The Role of Billes in Relation to Devoncroft

[261] The issue was expressed in the outline for argument in this fashion:

“Was Ms. Billes brought into DDL as a "financial partner"? Did she agree to take

on any specific responsibilities relating to financing of DDL, or the Kingswood

Entities”?

I find that the answers are “Yes” and “No”, with an appropriate understanding of what “financial

partner” means.

[262] McAteer and Mason gave evidence that they understood that Billes was brought in as a

“financial partner”. In July 1992, after the personal relationship was at an end and the business

relationship in serious trouble, McAteer defined what he meant by this status (Exhibit 109):

At least from my perspective it is fair to say that financial partners would

be expected within the industry to assist the business by:

- Assisting with Bank financing

- Arranging outside financing and partners as required to fund

commitments we, as directors, made

- Being the lender of last resort

- Providing the cash safety net

In the same document McAteer alleged that Billes worked against, and had not met the

expectations due, DDL:

As lender of last resort you have involved outside consultants which have

negotiated high premium rates, charged very high fees and provided terms which

were harsh and in one case illegal and unenforceable under the laws of Canada.

Except with respect to the advances from Albikin, you personally, have

not loaned DDL money as a safety net in sufficient amounts to prevent defaults

on key loans within DDL. Also, we have failed to pay our key suppliers in some

cases on accounts 9 months in arrears because of a lack of adequate financing.

Page 60

You have referred to Albikin as a crutch. A financial partner is exactly

that, a lender of last resort and a crutch when times are difficult.

[263] As the evidence of Harms indicates, McAteer was quite cavalier about Billes’ “financial

partner” role. Mason went further, arguing:

McAteer's evidence is that Billes was brought in as a financial partner. Mason

had a similar understanding. The evidence of Billes is that she was expected to

make contacts with financial institutions in an attempt to gain financing for DDL.

It is not in dispute, that some financial institutions were prepared to grant

financing only on the strength of personal guarantees from Billes and McAteer.

Billes refused to provide a personal guarantee and thus financing was not

received. It is open to the Court to determine it was impliedly understood that

Billes, as a financial partner or as a director, would provide her personal

guarantee to ensure that DDL was able to obtain financing to implement the

business plan developed by DDL's directors.

McAteer was less specific, implying that, by her actions, Billes agreed to provide funding as

necessary, quoting her letter (Exhibit 55) of September 22, 1991, where she stated: “I am

prepared to have the funding provided to see the dream realized”.

[264] Billes replied:

Billes was brought into the relationship under the terms of the written

agreement (Exhibit 11²³). She had no legal obligations beyond that. Billes was

investing funds and McAteer was responsible for the operations. There may have

been an expectation by McAteer and Mason, to provide further funds from time to

time. This does not equate to an obligation on Billes to do so.

... There is no evidence before the Court that provision of guarantees was

ever discussed in the formation of the initial investment.

Later in argument, Billes added:

... that the submissions of Mason ... in this regard amount to the proposition that

Billes was under some type of obligation to continue as a financial crutch to DDL,

when neither Mason nor McAteer were able or willing to put any further financial

support into these companies. No such obligation exists.

I agree, and would go farther, namely, that I do not recall any evidence of Billes ever agreeing to

grant personal guarantees at anytime, although McAteer sought this when it was suggested by

23

Sic - I believe Exhibit 12A was what was intended.

Page 61

potential lenders from time to time. Her comments in her letter of September 22, 1991, I find

were limited to the loan then under discussion, which manifested itself in the Newmat Loan.

[265] Regardless of McAteer’s or Mason’s terminology or expectations, or the ability of

McAteer to convince Billes to provide funds, as Billes did (indirectly) in the Lenders’ Loans,

and directly in smaller amounts on other occasions, I do not find that the fact Billes was brought

in as a “financial partner” translated into any agreement or legal obligation on Billes to continue

to provide funds to DDL. Nor is there evidence that Billes agreed to provide personal guarantees

or any other assurance that DDL would be able to obtain financing on an ongoing basis. Indeed,

I find that she specifically did not.

J.

The Proposed Loan from Household Trust

[266] The issue was expressed in the Outline for Argument in these terms:

Did Billes induce McAteer, DDL or the Kingswood entities not to proceed with

the loan from Household Trust for any of the improper purposes alleged? What

evidence supports/detracts from that conclusion and what, if anything, turns on it?

[267] McAteer submitted that the proposed loan from Household Trust (Exhibit 307) would

have been used to pay out the Trust Loan sufficiently to allow the Trust to readvance the funds

for use on the Golf Dome. However, Billes rejected the proposed Household Trust loan and

offered to loan funds through Albikin, later changed to Newmat. McAteer claimed that Billes

had improper motives for rejecting the Household loan and that her true motivation was to gain

control of DDL and Kingswood.

[268] Billes contended that the Household loan was proposed to Kingswood, not DDL, and that

she had no authority to prevent the loan. Moreover, it was argued that she expressed her

disagreement due to a number of unreasonable terms, including that: the Trust Loan security be

subordinated; Billes would have had to provide a guarantee; the amount of $700,000 was

insufficient to pay out the Trust Loan or to finance the Dome; and it required a $100,000 letter of

credit from Kingswood, which was unlikely to be obtained. Accordingly, it is argued that there is

no foundation to McAteer’s claim. I accept and agree with Billes’ submissions in this regard, and

accordingly find that Billes did not induce McAteer, DDL or the Kingswood entities not to

proceed with the loan from Household Trust for any of the improper purposes alleged.

K.

Other Factual Issues

[269] The parties were invited to address other factual issues. Some of them have been dealt

with directly or indirectly elsewhere in these Reasons. I find it unnecessary to address the others

except one, although I do not believe it is a “show stopper”.

1.

Adverse Inference for Not Calling Gary Curtis as a Witness

Page 62

[270] Gary Curtis might have been able to provide valuable evidence regarding, inter alia, the

Alleged Agreement. Namely, he may have been able to shed light on whether there was a

limitation on the ability to enforce security on the $1,000,000 construction mortgage. In this

regard, Billes argued:

McAteer submits that an adverse inference should be drawn from the fact

that Billes et al. did not call Curtis as a witness. The witness list was for

scheduling purposes only and specifically stated that listing a witness on the

schedule did not imply any obligation to call that witness. In earlier versions of

the witness schedule, Gary Curtis was shown as a witness to be called by

McAteer and by the Billes’ defendants. Neither decided to call him.

The witness was available to any party and in such circumstances no

adverse inference can be drawn against any party: Sopinka et al., The Law of

Evidence in Canada, 2nd ed. (Toronto: Butterworths, 1999) at para. 6.321. See

also MacMaster (Litigation Guardian of) v. York (Regional Municipality) (1997),

42 M.P.L.R. (2d) 90 at 96 - 98 (Ont. G.D.), aff’d trial judgment with respect to

costs [2000] O.J. No. 2941 (C.A.) for a review of a number of authorities.

I agree, but would add that the inference in law exists only when, to use the words of E.

Macdonald J. in MacMaster, the witness is one “who was particularly and uniquely available to

that party”. I find that Gary Curtis was available to be called by any party.

VII. ONUS OF PROOF

[271] In the Outline for Argument, the Court acknowledged the general rule regarding onus

and asked Counsel to make submissions on any special considerations in that regard.

Specifically, the issue was stated thus:

“The general rule [that] the one who asserts must prove on a

balance of probabilities is not in issue. However, the parties

should address any special considerations that are specific to the

matters in issue.”

[272] As postulated, while the general principle is not in issue, the onus of proof in relation to a

number of specific issues raised herein requires additional consideration. Those issues include:

(a) was disclosure of Billes’ interest in the Lenders made to DDL’s shareholders;

(b) would the DDL shareholders have approved the Loans had appropriate disclosure

been made;

(c) were reasonable steps taken to obtain fair market value for the DDL/ Kingswood

assets; and

(d) is an oppression remedy appropriate?

Page 63

Disclosure of Conflict of Interests

A.

[273] I find that what constitutes adequate disclosure will depend in each case upon the nature

of the agreement proposed and the context in which it arises. However, it will generally require

full information of the real state of things: Gray v. New Augarita Porcupines Mines Ltd., [1952]

3 D.L.R. 1 (P.C.). The disclosure must be more than merely that there is an interest; it should

include what the interest is and how far it goes: Imperial Mercantile Credit Ass'n v. Coleman

(1873), L.R. 6 H.L. 189, at 201 (H.L.).

[274] The issue of which party has the burden of proof in relation to whether adequate

disclosure has been made is not as simple a question.

[275] McAteer and Mason cited Charles Baker Ltd. v. Baker & Baker, [1954] O.R. 418 (C.A.)

and Gray v. New Augarita, as authority for the submission that Billes carries the burden of

establishing that the transaction was a righteous one.

[276] In Baker, the Court was dealing with a breach of fiduciary duty in the context of an

employment relationship. There the company took the position that the defendant employee

had secured a profit by entering into a transaction which he had learned of as an agent of the

company, a transaction which the company argued it would have taken advantage of itself had

it been aware of all of the material circumstances.

[277] In Baker, the Court of Appeal held, at 429, that the issue was whether:

...an agent of the appellant company and therefore in a fiduciary relationship to

it, entered, in the course of his agency, into a transaction in which there was

utilized the position and knowledge possessed in virtue of the agency, and

whether the transaction resulted in a profit to the agent.

The Court held further, at 432:

The onus is upon the agent to prove that the transaction was entered into after

full and fair disclosure of all material circumstances ... The burden of proof that

the transaction was a righteous one rests upon the agent, who is bound to

produce clear affirmative proof that the parties were at arm’s length, that the

principal had the fullest information upon all material facts, and that having this

information he agreed to adopt what was done.

[278] McAteer also relied on Gray v. New Augarita in support of his submission that Billes

has the onus in relation to this issue. Gray held that a director who wishes to keep the benefit

of some transaction involving the corporation has the onus to establish that he has satisfied all

the necessary conditions.

Page 64

[279] However, D. Peterson, Shareholder Remedies in Canada, (Looseleaf) (Vancouver:

Butterworths, 1989), stated, at para. 13.9, that Gray does not relate to the onus of proof at the

time of an application to set an interested contract aside. Rather, it is a statement relating to the

duty to ensure compliance with the self interested contract rules at the time such a contract is

entered into.

[280] Although contrary to her position, Mason also cited D. Peterson at para. 13.9, where,

later in that paragraph he states:

Unless provided otherwise, it is presumed that a civil standard of

proof is required, with the onus of proof on the corporation or

shareholder to set aside the interested contract. The applicant

seeking such an order must therefor provide, on the balance of

probabilities, that a director or officer is interested in a contract

which is “material” and has failed to do any one of (a) disclose

his or her interests as required by the section; (b) obtain approval

of the directors or shareholders, as the case may be; or (c)

establish that the contract was reasonable and fair to the

corporation at the time it was approved. [Emphasis added.]

[281] Billes submitted that the onus here is the same as it would be in any case where the

borrower disavows a loan - it is on the plaintiff. She relied on Teck Corporation Ltd. v. Millar

(1972), 33 D.L.R. (3d) 288 (B.C.S.C.) as authority for that proposition. That case states simply

that the onus is on the plaintiff to demonstrate that the directors failed to act in good faith by

showing that they had no reasonable grounds for believing that a particular action was not in

the best interests of the company. Given that we are here dealing specifically with an interested

transaction and the violation of both the ABCA and the USA, I find that case to be of limited

assistance. Billes submitted further that that onus obliges McAteer and Mason to demonstrate

that:

(a) there was non-compliance with the ABCA or the USA;

(b) if there was non-compliance, it affects agreements, undertakings or security

provided by DDL or the Kingswood entities; and

(c) each lender is a person who has or ought to have knowledge that any USA has not

been complied with or that a person held out as a director, officer or agent has no

authority to exercise the powers and perform the duties that the director, officer or

agent might reasonably be expected to exercise or perform (ABCA, Section 18;

Corporations Act (Manitoba), Section 18).

I note that no authority was provided by Billes in this regard.

[282] Billes argued that the authorities submitted by Mason and McAteer were

distinguishable from the present case on the basis that the Lenders were distinct entities from

Billes as a result of the separate entity principle. She relied on Bank of Montreal v. Canadian

Page 65

Westgrowth Ltd. (1990), 102 A.R. 391 (Q.B. - Brennan J.), aff’d (1992), 135 A.R. 49 (C.A.)

and Cunningham v. Hamilton (1995), 169 A.R. 32 (C.A.), as authority for the separate entity

principle. In essence, she submitted that as she was not a party to the Loans, she obtained no

personal benefit from the Loans. She stated further that it is only the independent Lenders,

whom Billes argued she did not control, that wish to keep the benefit. On that basis, Billes

submitted that the onuses of proof submitted by McAteer and Mason have no application to the

present circumstances.

[283] In addition to the authorities cited by the parties, the issue of onus has also been

considered by Moore C.J. in Imperial Trust Co. and Taylor Assets (Dominion) Ltd. v. Canbra

Foods Ltd. (1987), 78 A.R. 267 (Alta. Q.B.). In that case the Plaintiff sought court approval of

an arrangement under section 186 of the ABCA. The arrangement concerned a proposed

transaction wherein six members of the Canbra management wished to acquire the shares of

the majority shareholder of Canbra. At a board of directors’ meeting a resolution was

introduced to put the Plan of Arrangement to the shareholders. The two interested directors

voted in favour of the resolution and the other three directors present at the meeting, who were

outside directors, abstained from voting.

[284] In considering whether full, fair and plain disclosure was made, Moore C.J. found that,

although the interested directors had disclosed their interests in the transaction, they had failed

to provide adequate disclosure in relation to the material financial information. He specifically

stated that such disclosure was included in the duty to make full, fair and plain disclosure and,

accordingly, the disclosure to the shareholders was inadequate. He stated further that the

directors’ disclosure of their material interest did not excuse the financial disclosure.

[285] On the issue of onus, the Court stated that the onus was on the interested directors, as

the Group forcibly taking the shares of the minority, to satisfy the Court that the circular was

fair. Thus, Imperial, would seem to suggest that the onus, in the present case, would be on

Billes, as the interested director.

[286] I note that the case law appears to be consistent with the views of H. Sutherland, Fraser

and Stewart: Company Law of Canada, 6^thed. (Toronto: Carswell, 1993), where he states at

page 428:

The onus lies on the director to show that he has complied with the [the full

disclosure] conditions of such a by-law or article...

[287] I agree with D. Peterson that the onus consists of demonstrating that a director or

officer is interested in a contract which is “material” and has failed to do any one of: (a)

disclose his or her interests as required by the section; (b) obtain approval of the directors or

shareholders, as the case may be; or (c) establish that the contract was reasonable and fair to

the corporation at the time it was approved. This is consistent with the language of section115

of the ABCA

.

Page 66

[288] With respect to who bears that onus, there is a clear disagreement among the

authorities. While the case law appears to suggest that the onus is on the directors, D.

Peterson’s view is that it remains on the applicant, unless provided otherwise. See also:

Denman v. The Clover Bar Coal Company (1913), 48 C.R. 318.

[289] In the circumstances, it is not necessary for me to finally determine the issue as I find,

on the evidence, that Billes has failed to show that the statutory requirements were fulfilled

and Mason has demonstrated that they were not. Accordingly, it would not matter which party

bore the onus in the current circumstances as the result would have been the same in either

case. Therefore, I leave resolution of who hears the onus to another case.

B.

Would DDL have Proceeded with the Loan Transaction If There Had Been

Disclosure

[290] Mason argued that the onus was on Billes and McAteer to prove that, even with the

disclosure of material facts, the shareholders would have proceeded with the Loan transactions

and that more than mere speculation is required. In that regard she relies on Commerce Capital

Trust Co. v. Berk (1989), 68 O.R. (2d) 257, at 260-62 (Ont. C.A.), varied (1989), 69 O.R. (2d)

735 (C.A.).

[291] Berk is factually distinguishable from the case at hand as it deals with a lawyer’s failure

to disclose material facts to a client, but this does not change the principle. In any event, relying

on speculation, rather than proof on a balance of probabilities, is clearly inappropriate. The entire

civil justice system is premised on a balance of probabilities burden of proof. There is no reason

why speculation would be sufficient in relation to this particular allegation.

[292] Therefore, the onus is, as is generally the case, on the party asserting to prove. The

standard of proof in this regard is on a balance of probabilities.

C.

Realization of Fair Market Value

[293] As to the realization of the debtor’s property by a creditor, it is necessary to review the

conduct of the disposition. Where the creditor and subsequent purchaser are somehow related,

the creditor has a heavy onus to satisfy the Court that the disposition was made in good faith

and that the creditor took all the necessary steps to obtain the best price that was reasonably

obtainable at the time: F. Bennett, “Creditors' Duty of Care On Realization”, in LSUC Special

Lectures, 1988: Rights and Remedies in the Law of Creditor & Debtor, 247 at 253-58, 271-83,

relying upon, inter alia, Cuckmere Brick Co. and another v. Mutual Finance Ltd., [1971] 2 All

E.R. 633 (C.A.), Bank of Montreal v. Petronech (1984), 52 C.B.R. (N.S.) 17 (Alta. Q.B.), and

Tse Kwong Lam v. Wong Chit Sen and others, [1983] 3 All E.R. 54 (P.C.). Bennett, at 273 - 83,

also lists numerous factors that may be taken into consideration to determine whether

reasonable precautions were taken to obtain true market value.

D.

Solicitors’ Negligence

Page 67

[294] With respect to the third party claims against BJ and TM, the onus is on Billes and the

other named Defendants to show that the lawyers failed to live up to the standard of care

expected of a reasonably competent solicitor in the circumstances. The claimants have the

onus of demonstrating the standard and a non-compliance with the standard. This is usually

established through an expert, although none were called by the claimants in this case.

[295] More specifically, the onus is to establish that the lawyers, knowing of a real or alleged

material interest or potentially problematic provisions of a USA, failed to warn the Lenders of

the risk involved, and that had the Lenders been properly warned or advised of the risk, they

would probably have taken a different course of action. However, the application of the

standard is relatively lax and any uncertainty must be construed against the solicitors.

Ultimately, the issue is not whether the lawyers make a mistake, but whether or not they were

negligent: Major

285614 Alberta Ltd and Maplesden. v. Burnet, Duckworth & Palmer, and Spackman (1993),

139 A.R. 31 at 35-39 (Q.B. - Russell J.); Central Trust . Rafuse, [1986] 2 S.C.R. 147 at 207-

214, varied [1988] 1 S.C.R. 1206; and Schloss v. Knaut (1979), 107 A.R. 96 at 97 (C.A.). As

v. Buchanan (1975), 9 O.R. (2d) 491 at 514 (Ont. H.C. - Goodman J.);

v

no “absolute liability” is sought to be imposed, TM’s reliance on Midland Bank P.L.C.

Messrs Cox McQueen, [1999] E.W.J. No. 103, (C.A.), online: QL (EWS) need not be

discussed.

v.

[296] BJ also argued that the claimants against the third parties have the additional onus of

proving that any loss was a direct and foreseeable consequence of any breach of duty of the

third parties. In light of my findings, I need not address this issue.

E.

The Oppression Remedy

[297] Under the oppression remedy, the onus is on Mason to prove that the acts of Billes,

and/or McAteer, were oppressive, unfairly prejudicial, or unfairly disregarded her shareholder

interest. The standard of proof is on a balance of probabilities: Wind Ridge Farms v. Quadra

Group Investments Ltd. (1999), 180 Sask.R. 231 (C.A.); D. Peterson, at paragraph 18.18 and

cases cited at footnote 2 thereof.

[298] Given the weight of authority to the effect that the onus is on the applicant, I am

compelled to apply that onus in the case at hand. I would note, however, that D. Peterson

suggests, at para. 18.19, that it would be sensible to place a prima facie onus on the applicant,

such that, once a prima facie case is made out, the onus would shift to the alleged oppressor.

He states that support for this proposition appears in both English and Canadian Courts. In

terms of Canadian cases he cites only: Brant Investments Inc.

v. KeepRite Inc. (1991), 3 O.R.

(3d) 289 (C.A.) where he stated that the Court expressed support for this proposition in obiter

,

;

Re Bury and Bell Gouinlock Ltd. (1984), 48 O.R. (2d) 57, at 59 (H.C.J.), stayed pending appeal

(1984), 48 O.R. (2d) 374 (H.C.J.), aff’d on appeal (1985), 49 O.R. (2d) 91; and Re. Abraham

Page 68

and Inter Wide Investments Ltd. (1985), 51 O.R. (2d) 460 (H.C.J.), varied (1988), 66 O.R. (2d)

684 (H.C.J.).

VIII. KEY ISSUES

[299] The Outline for Argument posed a detailed series of questions under various scenarios

relating to the allegations of conflict and disclosure under the USA, ABCA and at common law,

relative to the validity of the Loans. The considerations were to be separately addressed in

relation to the Trust Loan and the Newmat Loan, but often the focus was first on the Trust

Loan, with only incremental arguments in relation to the Newmat Loan.

[300] The key issues in this litigation parallel the various actions: the McAteer/Kingswood and

Mason Actions challenge the validity of the Loans; the Mason Action also alleges oppression by

McAteer and Billes against Mason; and the Derivative Action claims breaches of fiduciary and

legal duties by McAteer and Billes to DDL, including failure to act honestly and in good faith

with a view to the best interests of DDL.

IX.

DISCLOSURE OF INTEREST, VALIDITY OF LOANS AND RESULTING

CONSEQUENCES

[301] The primary focus of the McAteer/Kingswood and Mason Actions is on the obligation

of Billes under the USA, the ABCA and at common law, to disclose her interest in the Trust

and Newmat Loans, whether she fulfilled those obligations and the appropriate consequences

of any failure to disclose. This latter consideration concerns the validity of the Loans and the

security, the terms of any remedy to which Mason or McAteer may be entitled as shareholders,

and the liability (if any) of the Third Parties. There are a host of other issues, but this section

will focus on those primary issues.

[302] As above, similar issues arise in relation to the Trust and Newmat Loans. Accordingly,

much of the analysis focuses on the issues without distinction between the Loans, except

where the facts necessitate separate consideration.

[303] The Outline of Argument, modified to combine both Loans, reads:

A.

Trust and Newmat Loans - Conflict/Disclosure

1.

Did Billes have a legal obligation to disclose her relationship to the

Trust/Newmat? Why/why not? As to Newmat, if so, what aspect - her

directorship? shareholding through Marlore? Both?

a.

b.

c.

Under the USA

By Statute

At Common Law

Page 69

2.

3.

If 1. is affirmative, did Billes disclose her relationship as required? Did

Billes disclose her relationship, but not as required?

a.

b.

c.

Under the USA

By Statute

At Common Law

If 2. is negative, is Billes’ failure to disclose her relationship as required,

excused or does the Court have a discretion to provide a remedy? If so,

why or by what reason(s) (in fact or law)?

4.

5.

If 2. is positive, or if that requirement is excused under 3., is the security

still invalid due to a lack of shareholder approval?

If 3. is negative, or 4. is positive, what are the consequences (and why) to:

a.

b.

c.

The Trust, Newmat & DDL

Security granted by Kingswood Entities

BJ and TM

i.

If there are consequences to BJ or TM, is any failure by BJ

or TM excused, or are they liable to Billes et al and thereby

responsible to contribute (in whole or part) to any damages

payable to any other party? If so, why (in fact or law)?

d.

Others

6.

Does a remedy(ies) follow from the above? If a remedy(ies) results from

the above, what is/are the appropriate remedy(ies), what finding of

liability, and why? How are they to be assessed/distributed?

B.

Trust/Newmat Loan - Other Validity Issues?

1.

2.

Is there any other reason why the Trust or Newmat Loans may be invalid?

If the answer to 1. is positive or negative, what are the consequences to the

various parties?

3.

Are there any issues relating to the fairness and reasonableness of the

Trust or Newmat Loans to DDL? If so, what are they, and what relevance

do they have to the validity of the loan or otherwise?

I do not intend to proceed in lock step with this Outline, but will provide answers to these issues

in this section.

Page 70

A.

Executive Summary

[304] Before getting into the analysis, I will review the position of Mason and summarize the

result to which I have come. McAteer and Mason argued that the Loans were invalid and void

or voidable. I do not agree. Mason argued throughout that it would be appropriate to rectify all

liabilities under the oppression remedy, and that Billes, McAteer, the Trust and Newmat ought

to be directly jointly and severally liable to compensate her in an amount equal to the loss of

the value of her shares in DDL at the time of the oppressive conduct. While I do not agree with

the allegations of liability against the Trust and Newmat, for reasons that will be apparent later

in these Reasons, I otherwise agree. That is, I find the Trust and Newmat Loans are not invalid,

and that it would be appropriate to rectify all liabilities under the oppression remedy with

Billes and McAteer jointly and severally liable to compensate Mason in an amount equal to the

loss of the value of her shares in DDL at February 22, 1991.

B.

The USA and the ABCA

[305] The analysis should start with the provisions of the USA and the ABCA. The relevant

portions of the USA (Exhibit 13) read:

9.02 Corporate Borrowing.

Except with the unanimous consent of the Board of Directors:

(I) The corporation shall not be entitled to borrow or become indebted (excluding

trade payables and obligations under operating leases) to any Person or Persons in

an aggregate amount outstanding at any one time in excess of five hundred

thousand dollars ($500,000.00); and

. . .

10.10 Conflict of Interest

(a) A Director or officer of the Corporation who:

(i) is a party to a material contract or proposed material contract with the

Corporation;

(ii) is a director, officer or employee of or has a material interest in any

Person who is a party to a material contract or proposed material contract

with the Corporation...

shall disclose the nature and extent of his interest at the time and in the manner

provided in respect of material contracts in the Act. . . .No such Director of the

Corporation shall vote on any resolution to approve a contract referred to in

paragraphs (i) or (ii) above. . .

Page 71

(b) If a material contract is made between the Corporation and one or more of its

Directors or officers, or between the Corporation and other Person of which a

Director or officer of the Corporation is a director, officer or employee or in

which he has a material interest, (i) the contract is neither void nor voidable by

reason only of that relationship . . . if the Director or officer disclosed his interest

in accordance with the provisions of the Act and the contract was approved by the

Directors or the Shareholders as may be required and it was reasonable and fair to

the Corporation at the time it was approved.

(c) Notwithstanding anything else herein contained, if in connection with any

matter fifty per cent (50%) or more of the Directors are disqualified from voting

on such matter as a result of the provisions of this section or the Act, such matter

shall be referred to and decided by a resolution of the Shareholders. [Emphasis

added.]

[306] The portions of the ABCA, relevant to conflict of interest include:

115(1) A director or officer of a corporation who

(a) is a party to a material contract or proposed material contract with the

corporation, or

(b) is a director or an officer of or has a material interest in any person who is a

party to a material contract or proposed material contract with the corporation,

shall disclose in writing to the corporation or request to have entered in the

minutes of meetings of directors the nature and extent of his interest...

...

(7) If a material contract is made between a corporation and one or more of its

directors or officers, or between a corporation and another person of which a

director or officer of the corporation is a director or officer or in which he has a

material interest,

(a) the contract is neither void nor voidable by reason only of that relationship...

...if the director or officer disclosed his interest in accordance with subsection (2),

(2.1), (3), (4) or (6), as the case may be, and the contract was approved by the

directors or the shareholders and it was reasonable and fair to the corporation at

the time it was approved.

Page 72

(8) If a director or officer of a corporation fails to disclose his interest in a

material contract . . .the Court may, . . . set aside the contract on any terms it

thinks fit.

(9) This section is subject to any unanimous shareholders agreement. [Emphasis

added.]

[307] The portions of the ABCA relevant to oppression include:

234(1) A complainant may apply to the Court for an order under this section.

(2) If, on an application under subsection (1), the Court is satisfied that in respect of a

corporation or any of its affiliates

(a) any act or omission of the corporation or any of its affiliates effects a result,

(b) the business or affairs of the corporation or any of its affiliates are or have

been carried on or conducted in a manner, or

(c) the powers of the directors of the corporation or any of its affiliates are or

have been exercised in a manner

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any

security holder, creditor, director or officer, the Court may make an order to rectify the

matters complained of. [Emphasis added.]

C.

Disclosure

1. Billes’ Obligation to Disclose

a. Under the USA and the ABCA

[308] Article 10.10 of the USA states that a conflict of interest arises where a director or an

officer is a party to a material contract or a proposed material contract. Where a conflict arises

the USA requires that the director or the officer disclose his or her interest, in writing or request

to have entered in the minutes of a directors meeting the nature and extent of that interest. This

manner of disclosure is from s.115 of the ABCA which was incorporated into the USA by

reference. Further, where 50% of the directors are disqualified from voting on such a matter, it

will be referred to and decided by a resolution of the shareholders. In this case Billes represented

50% of the directors of DDL.

[309] Professor B.L. Welling in Corporate Law in Canada: The Governing Principles, 2^nded.

(Vancouver: Butterworths, 1991), discussed the issue of what interests are "material". At 452 –

453, he stated:

Page 73

. . . it seems clear that the statute also addresses the problem of a

director or officer who has no monetary interest in a person on the

other side, yet who is likely to have an emotional involvement.

Thus, a deal in which the corporation is negotiating with a close

relative, or even a close personal friend, of one of the directors or

officers ought to be suspect. ...one can assume that the courts will

address their attention to the blood relation question... the only

question will be to what degree of relationship the section extends.

The answer is once again, subsumed under the requirement that the

interest itself be “material”.

What is meant by "material".... In the context of conflict of

interest contracts, the meaning of "material contract" and "material

interest" is conditioned by the purpose behind the section. The

purpose is to identify those negotiations in which a corporate

manager's ability to bargain effectively on behalf of the

corporation may be inhibited by some interest he has in the other

side. Any personal relationship or monetary interest he may have

in the other side that might be thought to be an inhibiting factor is

a material interest if disclosure of the relationship or interest might

be relevant to the corporate decision whether to involve the

particular manager in the negotiations. Whether to participate in a

proposed contract is a corporate decision and the corporation is

entitled to full disclosure from its fiduciaries of all facts that might

affect that decision. This point is reflected in a 1952 judgment...

[Gray]. [Emphasis added.]

[310] D. Peterson, in Shareholder Remedies in Canada (supra), also discussed the meaning of

"material". At paragraph 13.15 he wrote:

... the meaning of material is important in determining whether compliance with

[the statute] is required where the director has an interest in some other person

that is contracting with the corporation. As working rules to determine whether or

not a material interest exists, it is submitted that an assessment of control and

benefit ought to be made. If the director or officer has the ability to cause the

person in question to enter into the contract with the corporation, the director has

a "material interest" in the transaction. The conflict of interest is clear and the

nature of the circumstances must be disclosed. [Emphasis added.]

[311] Given my finding that Billes exercised de facto control over the Trust and that her son

was the beneficiary thereof, I find that Billes had a material interest in the Trust Loan despite the

fact that she did not have a personal, financial interest in the Trust. Perhaps even more important,

Page 74

as one of three legal entities constituting the Trust, she is “a party” to the Trust Loan under

section 115(1)(a).

[312] Additionally, there is the requirement to disclose under article 10:10(a)(ii) of the USA

where one is a “director, officer, or employee” of, in this case, a Lender, as Billes was a director

of Newmat - see also section 115(1)(b).

[313] However, Billes argued that there is very little authority on the subject of whether a

trustee who does not have a beneficial interest in the trust is subject to the requirements of

section 115. Billes further argued, relying on Dimo Holdings Ltd. v. H. Jager Developments Inc.

(1998), 43 B.L.R. 123 (Alta. Q.B. - Fruman J.), that:

It is further our submission that the section was directed at a

material beneficial interest or an interest in which an individual

could exercise discretion or control so as to affect the financial

outcome. It is a question of fact in each case.

...

In this case, Billes was merely one of three trustees. She did not

control the other trustees. She had no beneficial interest in the

trust assets. It is submitted that her interest was not within the

meaning of Section 115 of the ABCA or the identical provisions of

the USA.

[314] As above, I have found that Billes was one of three principals constituting the Trust and

exercised de facto control of the Trust, thereby distinguishing Dimo. In that case, the party who

was a director of the borrower, was merely the spouse of the person who was the sole

shareholder, officer and shareholder of the lender.

[315] However, even if Billes was not a principal of the Trust and even had I not found that

Billes exercised de facto control of the Trust, the disclosure requirements would have been

applicable in any event. I base this conclusion on the fact that the function of a trustee is similar

to that of a director. In other words, the Trust is not a legal entity, the legal entity is the 3

individuals who were trustees of the Trust. Accordingly, it was Billes, as Trustee, who was a

party to, or a party interested in, a material contract in the Trust Loan and s.115(1) of the ABCA

and thus, the USA, required that she disclose the nature and extent of that interest in writing.

[316] As to the Newmat Loan, Billes, through her 100% owned corporation Marlore, owned

49% of Newmat which, although insufficient to give her control of Newmat, constitutes a

monetary interest which, together with her position as a director (the latter being sufficient by

itself under section 115(1)(b), constituted a “material interest”. Similarly, under 10:10(a)(ii) of

the USA, her being a director is sufficient to require disclosure.

Page 75

[317] Billes, acknowledged in her written argument (in another context) that being a director

of Newmat “placed ... Billes squarely within Section 115 ... and Art. 10.10(a)(ii)”. Additionally,

Billes acknowledged:

No issue is taken that because Billes was a Newmat director, she had a legal

obligation to disclose to DDL her relationship to Newmat pursuant to Section 115

of the ABCA insofar as the transaction concerns DDL. It is submitted that the fact

that the ownership interest was indirectly held through Marlore (solely owned and

controlled by Ms. Billes) is inconsequential...

[318] Accordingly, the disclosure requirements of the ABCA and the USA were also

applicable to the Newmat Loan.

[319] There is further evidence to corroborate that Billes had a material and conflicting interest.

Following the Loans, on October 9, 1992, Billes met (alone as it relates to the Lenders) with

Sali, who was the Counsel representing her interests, and McAteer and Mason. This was not a

meeting between DDL shareholders (although they were such - Sali calling it an “informational

meeting”), but, from what I find to be its adversarial tone and content, it was in fact a meeting

between DDL, represented by Mason and McAteer on the one hand, and Billes, on behalf of the

Lenders, on the other. I accept the evidence of Mason that Sali advised that he was representing

Billes and the Billes related entities, including the Lenders, without necessarily accepting

Mason’s categorization of them (especially as to Newmat) as the “Billes controlled entities”.

[320] While Billes insisted that Sali was not representing the Trust or Newmat, to be clear this

meeting was not called by Sali and Billes to discuss the internal operation of DDL. Rather, I find

that its primary purpose was to determine, from the Lenders’ perspective, how the Loans would

be brought current and into good standing. In this regard, on August 10, 1992, in first referencing

the retainer of Sali and a possible meeting, Billes stated (Exhibit 117) “I ask that you be prepared

to address how you propose to deal with the secured creditors, particularly in the case of current

defaults”. She also testified, in relation to this letter:

Sali was instructed to be dealing with McAteer about addressing how to proceed,

how to deal with the secured creditors, the defaulting interest. We had agreed to

accrue interest for several months. This was coming to the end of the

several-month period.

[321] In his correspondence, Sali also made it clear that his interest was not just personal to

Billes. In his letter to TM²⁴on August 28, 1992 (Exhibit 122) he referred to “the position of the

major creditors” [the Lenders] and that McAteer needed to “follow through on his convictions or

face the consequences of prudent business decisions on the part of Billes and the major creditors

which I advised would likely be forthcoming”. I have come to this conclusion as to the purpose

24

At this time, D’Arcy McCaffrey of TM was providing advice to McAteer on behalf of the

Kingswood Group (see Exhibit 128) and was involved in communication with Sali in this regard.

Page 76

of the meeting on the above evidence, notwithstanding that Sali’s letter to TM on September 10,

1992 (Exhibit 125) was more neutral in tone in that he merely makes reference to his “review of

matters on behalf of Billes” and requests a general meeting of shareholders in early October

(Exhibit 129 sets such a meeting for October 9, 1992, and Exhibit 131 provides a proposed

agenda).

[322] I find that, whether formally authorized by the Lenders or not, Billes was clearly at that

meeting for the primary purpose of representing the Lenders interests. The proposal (“Basic

Term Sheet”)²⁵prepared by Sali at the time (Exhibit 119A) corroborates this view, especially

having regard to the words “all debt (principal and interest) owing to ‘Martha’s Group’”.

[323] Additional corroborative evidence is contained in the letter (Exhibit 138), which Sali

testified to as being a true and correct representation of the meeting of October 9th, written to

McCaffrey on October 13, 1992, with Billes’ concurrence. In that letter he wrote:

...there are a number of fundamental business issues which need to be addressed

immediately, most notably, the manner in which existing debts and obligations

are made current and dealt with in a current fashion in the future.

...

... Paul must understand that under no circumstances are Martha or the secured

creditors to be taken as having agreed to do so [grant extensions on Loan and

interest payments] or having waived any rights to which they are otherwise

entitled. This brings me to the point at which the discussions terminated, by me

advising Paul that it appeared that we did not have anything more to talk about.

... there is a substantial amount of secured debt owing to “Billes related”

parties, namely Newmat Drilling, the Billes Estate, and the Trust....

Only later in his letter did he refer to the possibility of the secured creditors retaining

independent legal advice to realize their security. This indicates clearly that at the time of the

letter and, therefore, the October 9^thmeeting, Sali was representing not only “Martha”, but also

the “secured creditors” or “Billes related parties”. Certainly this was the interpretation of

Mr.Trawick (then Counsel to Mason) when he responded to Desbarats on November 18, 1992

(Exhibit 158).

[324] Sali also noted that “there is a substantial amount of secured debt owing to “Billes

related” parties, namely Newmat ... and the Trust”. He further confirmed in testimony that when

McAteer requested an extension of time for payment, he responded at the meeting with words to

the effect:

25

McAteer rejected a proposed shotgun buy-sell in favour of a buy out by him or an asset split

(Exhibits 128 and 135).

Page 77

... certainly if you want any kind of an extension of time you would have to

provide some kind of an acknowledgment that there would be no challenge to the

loan arrangements or security or nor would you be contending things such as

other relationships or the like.

... So I raised that as a proposal to McAteer and Mason. McAteer responded by

saying he wouldn't. And quite frankly, that was a bit of a surprise to me. But

having regard to his response, my reaction was, well, if that's the case I don't think

we have much to talk about. And shortly thereafter, the meeting closed.

[325] Billes’ conflict of interest between DDL, the Trust and Newmat is recognized in the

letter of response of Mr. Shortt, then Counsel to DDL (forced to cease acting on November 30,

1992 (Exhibit 174) due to the receivership), when he responded to the demand on the Loans on

November 25, 1992 to Pitblado (Exhibit 172):

It is shocking to us that a director of DDL [Billes] whose fiduciary and statutory

duties require her to act in the best interests of DDL would elect to put “her

security” first to the prejudice of DDL, its shareholders, creditors and partners...

[326] Despite the application of the conflict and the applicability of the disclosure

requirements, Billes argued, that her interest was:

... not required to be disclosed again in October, 1991, when McAteer was aware

of the nature and role of Marlore as a result of the financial disclosure which

Billes had made to him pursuant to the terms of Exhibit 21[the Domestic

Agreement].

[327] Without getting into the precise timing of McAteer’s knowledge of Billes’ interest in

Newmat (discussed supra), much of the “damage” (I use the word in a literal, not legal sense

here) was done as a result of the failure of Billes to disclose and get the consent of Mason on the

Trust Loan. Therefore, the failure to do likewise with the Newmat Loan is really a matter of

“over-kill”. The failure is the same, the breach of the statute and the USA the same, and the

cause of action the same. All that is different is the measure of damages (here, in a legal sense).

In the result, I find that Mason is entitled to the same declaration and judgment under the

oppression remedy for Billes’ breach of the USA and statute as to both the Trust and Newmat

Loans, but is only entitled to one set of damages, namely the value of her shares at the time of

the first infringing transaction which is also when they were at their highest value, namely, at the

time of the Trust Loan.

b.

At Common Law

[328] The general rule of equity is that anyone who has a duty of a fiduciary nature to perform is

prohibited from entering into engagements in which he or she has or can have a personal interest

conflicting with the interest of those who he or she is bound to protect.

Page 78

[329] Mason referenced D. Peterson, in Shareholder Remedies in Canada (supra), who

summarized the common law on interested transactions at para. 13.1 as follows:

...The common law on interested transactions has been summarized as follows:

To prevent abuse of directors' fiduciary position, the courts developed a

strict rule that contracts of a corporation in which one of its directors had a

personal interest, whether pecuniary or non-pecuniary, were voidable at the

option of the corporation (North West Transportation Co. v. Beatty (1887),

12 App. Cas. 589 (J.C.P.C.); Aberdeen Railway v. Blaikie (1854), 2 Eq.

Rep. 1281) and that the interested director was liable to account for any

profits received (Transvaal Lands Co. v. New Belgium (Transvaal) Land &

Development Co., [1914] 2 Ch. 488 (C.A.)). The strict common law rule

could be avoided only if the company's constitution permitted such

contracts (Imperial Mercantile Credit Assoc. v. Coleman (1871), L.R. 6 Ch.

App. 558 at p. 567, revd on other grounds (1873), L.R. 6 H.L. 189; Roray

v. Howe Sound (1915), 22 D.L.R.. 855 (B.C.C.A.); and Huggard v.

Prudential Life Ins. Co., [1924] 1 W.W.R. 642 (Man. C.A.)) or if the

shareholders ratified the contract (A.-G. Can. v. Standard Trust Co. of New

York, [1911] A.C. 498 (P.C.); Northwest Transportation Co. v. Beatty,

supra, footnote [313]). [Emphasis added by Mason.]

In addition to the above, Billes cites Bamford v. Bamford, [1969] 1 All E.R. 969 (C.A.) as further

authority for the proposition that a voidable contract may be ratified by the shareholders.

[330] Mason, relied on M.V. Ellis, Corporate & Commercial Fiduciary Duties (Scarborough:

Carswell, 1995), at 15-5, which cited Kellock J. in Zwicker v. Stanbury, [1953] 2 S.C.R. 438

where at 440 he adopted the words of Viscount Sankey in Regal (Hastings) Ltd. v. Gulliver,

[1942] 1 All E.R. 378 at 381 (H.L.) as follows:

... the general rule of equity is that no one who has duties of a fiduciary nature to

perform is allowed to enter into engagements in which he has or can have a

personal interest conflicting with the interest of those who he is bound to protect.

Later at 15-22 Ellis stated:

The law countenances, to a very limited degree, a director's gain through conflict

of interest only where: 1. the director fully discloses the conflict...

[331] At common law, Billes, as a director and 50% shareholder of DDL, was required to fully

and fairly disclose her interest in the Lenders. However, as disclosure was required by both

contract through the USA, and statute, little reliance need be placed on the common law.

Page 79

2.

Actual Disclosure Provided

[332] As set out at section 115(7) a material contract transaction may stand so long as: (1) the

director or officer provided adequate disclosure; (2) the contract was approved by the directors or

shareholders; and (3) it was fair and reasonable to the corporation at the time it was approved.

What follows is a consideration of those factors.

[333] There is no evidence to indicate that Billes disclosed her interest in writing as required by

the USA and the ABCA. Unlike the USA and the ABCA, there is no requirement at common law

that disclosure be in writing. In any event, I find as a fact that Billes’ interest was not disclosed

orally or in writing to Mason by Billes, McAteer or anyone else.

[334] The evidence disclosed that Billes orally informed McAteer that she was a Trustee in

relation to the Trust and that he knew that she had de facto control of the Trust. McAteer knew

she was a director and shareholder (through Marlore) of Newmat. McAteer was also provided

with written disclosure in relation to Billes’ interest in Newmat as a result of the Domestic

Agreement.

3.

Effect of Oral Disclosure to McAteer

[335] I have found that all of Billes’ interests in the Trust and Newmat were disclosed to, and/or

learned by, McAteer, meeting the disclosure requirements at common law.

[336] As set out above, I accept Billes’ evidence that McAteer undertook to advise Mason of

Billes’ interest in the Lenders and to obtain Mason’s consent to the Loans in a manner that would

satisfy the disclosure requirements. Had he done so by recording Billes’ interests in the directors

minutes or otherwise in writing, that would have been valid notice to him, and through him, to

DDL. However, it would not have been sufficient in relation to Mason without having been

brought to her attention. None of this happened.

[337] I find that oral disclosure by Billes to McAteer, without more, is not notice to DDL, and,

most importantly, certainly not notice to Mason as required under the USA and the ABCA.

[338] Billes also argued, specifically in response to issues relating to the Newmat Loan, but

equally applicable to the Trust Loan, that:

. . . Billes disclosed to McAteer her interest in Newmat.

Although Billes did not disclose in writing, she asked and reasonably expected

that McAteer see to the appropriate resolution of the issue. Billes therefore

satisfied the second branch of section 115(1) of the ABCA

.

[339] The “second branch” of section 115(1), of course, relates to the interested party’s “...

request to have entered in the minutes of meetings of directors the nature and extent of his

Page 80

interest...”. Thus, the argument goes, that by requesting McAteer to do so, and obtaining his

undertaking in that regard, and his later representation that he had done so, Billes ought to be

exonerated. Nevertheless, later in the same argument Billes equivocates with respect to the

specificity of such a request:

... Whether or not Billes specifically requested that her interest be entered in the

minutes, as opposed to merely advising McAteer (the lawyer) of her interest, is

inconsequential.

[340] As noted supra, I do not find any basis for liability against McAteer as a lawyer.

Therefore any liability flowing to McAteer must be based on some other duty.

[341] Billes submitted further that she discharged her obligation to disclose by leaving the

matter in McAteer’s hands. She stated that at the time she made the request of McAteer she

believed him to be a trusted corporate officer and had no reason to believe that he would not

fulfill her request. She argued that she was entitled to rely on McAteer in that regard and having

done so she was absolved of any liability vis-a-vis Mason. In that regard, she relied on Blair v.

Consolidated Enfield Corp., [1995] 4 S.C.R. 5, where at paragraph 69, Iacobucci J, writing for the

Court, stated:

I should also mention that section 135(4) codifies the anterior common law

director duties of care, in which a director would be absolved of liability if he or

she relied upon the work of an official of the company (in the present appeal,

corporate counsel) if such work is properly left to that official and, in the absence

of grounds for suspicion, the director is justified in trusting that official to perform

the duty: Re City Equitable Fire Insurance Co., [1925] Ch. 407, per Romer J.,

aff’d [1925] Ch. 500 (C.A.). Consequently, the director will be held liable for the

misdeeds of officials of the company only if they have been personally negligent

or if they have acted unreasonably in relying on an official whose honesty or

competence they have reason to suspect.

[342] City Equitable Fire Insurance, was a negligence action. It held, inter alia, that:

In respect of all duties that, having regard to the exigencies of business, and the

articles of association, may properly be left to some other official, a director is, in

the absence of grounds for suspicion, justified in trusting that official to perform

such duties honestly.

[343] In my view Billes’ actions were reasonable in the sense that she had no reason to doubt

McAteer’s honesty and competence at the time she made her request of him. However, even

though McAteer undertook the task and represented he had accomplished it, Billes cannot avoid

liability to Mason in the present circumstances.

Page 81

[344] I find in this case that McAteer, while indeed an officer and director of DDL, had not

undertaken the task qua officer or director of DDL. He had no obligation vis-à-vis Billes or DDL

to do so in those capacities, nor did he do so in such capacities. I find he did so merely in a

personal capacity, having regard to the personal relationship between him, Billes and Mason.

This is clearly distinguishable from Blair where the Court found (headnote and paras. 39-42) that

Blair was involved in his capacity as a director/chairman of the corporation, not in his personal

capacity. Therefore, these authorities do not assist Billes.

[345] Where the authorities are applicable to a duty undertaken qua company official (not here),

in my view the proposition that a director will have satisfied his or her duty of care and fiduciary

duties by relying on what appear to be trusted company officials is eminently reasonable. It

simply would not be viable for a director to perform all of the duties associated with a

corporation. Nor, would it be feasible to require a director to follow up and ensure that every duty

delegated was properly and adequately performed. Simply put, delegation is demanded by the

exigencies of business, particularly in large and complex corporations. That proposition does not,

however, allow a director to avoid his or her statutory duties under section 115 ABCA nor does it

apply to the liability of shareholders who are party to a USA.

[346] In the present case, the USA incorporated the disclosure provisions of the ABCA and adds

further requirements. Thus, the parties have contractual duties to one another. In my view there is

nothing in Blair or City Equitable Fire that relieves a party of its contractual obligations under a

USA.

[347] Further, a USA, by its nature, confirms and/or augments the rights, powers, and duties of

directors and makes them applicable, as a matter of contract, to shareholders as parties to the

USA. At the same time, the parties to the USA incur all of the associated liabilities. Thus, Billes’

failure to disclose exposes her to liability vis-a-vis Mason not only as a director but also under the

USA in Billes’ capacity as a shareholder.

[348] Accordingly, Billes was under both a statutory and a contractual duty to fulfill the

disclosure requirements as a director and shareholder. There is nothing in either Blair or City

Equitable Fire that would absolve Billes of her statutory duty set out at section 115, or of her

contractual liability, to Mason.

4.

Conclusion on Disclosure

[349] In conclusion, I find that Billes, in her capacities as principal of the Trust, as de facto

controlling Trustee to the Trust, and as a 49% shareholder and director of Newmat, had a material

interest in the Loans. While it is trite to say so, I find further that the Loans were material

contracts, having an impact on the value of DDL. As such, Billes was in a conflict situation vis-à-

vis DDL, and had a duty to disclose her interest in writing under the USA and the ABCA. No

written disclosure was made by Billes to Mason. Accordingly, Billes failed to fulfill the first

requirement under section 115(7) of the ABCA

.

Page 82

D.

Shareholder Approval

[350] By reason of her conflict, pursuant to the provisions of section 10.10(a) of the USA,

Billes was precluded from voting on any resolution to approve the Loans. Since Billes could

not vote on any such directors’ resolutions, the unanimous consent of the board of directors

could not be obtained under section 9.02 of the USA. Accordingly, by section 10.10(c) of the

USA, the matter had to be referred to and decided by the shareholders. The evidence in this

case establishes that there was no such referral and no shareholders’ resolution was obtained.

Accordingly, prima facie, the second prerequisite set forth in section 115(7) of the ABCA

(approval by shareholders) was not met.

[351] Billes argued on several occasions that there was shareholder approval to the Loans -

specifically:

In any event, if shareholder approval was required under Article 9, it was

provided through the shareholders' agreement that the loan would be made.

Further, it is submitted that there was shareholder approval with respect to the

particular loan, which satisfied the requirements of Article 10.10.

Shareholders' meetings need not be formal, nor called with notice. If the

shareholders are present and agree to deal with shareholders' matters, there is a

shareholders' meeting.

Eisenberg (formerly Walton) v. Bank of Nova Scotia and Ridout, [1965] S.C.R. 681

I do not challenge the accuracy of the above authority. However, I find that there was never any

meeting of shareholders called, nor any shareholders resolution passed, nor did Mason, as a

40% shareholder, ever approve the transactions.

[352] There is another aspect of approval to consider. The USA provided (in article 9.02,

supra) that there could be no borrowing in excess of $500,000 in the aggregate without the

unanimous approval of the directors. While McAteer and Billes purported to approve the Loans,

there is no specific mention in the certified directors’ resolution for the Trust Loan (Exhibits 36

and 37) or the Newmat Loan (Exhibits 76 and 306) of approval of the aggregate of loans over

$500,000. It was argued that not only was there no approval of the Loans by the shareholders as

required, but, in that Billes was disqualified as a director from approving the Loans, there was a

requirement of shareholder approval under article 9.02 as well. There was no shareholder

approval of either.

[353] Billes argued that article 9.02(i) was inapplicable. In that regard, she referred to the

Consolidated Pro Forma Balance Sheet (Exhibit 15) in that, in addition to the shareholders loans

of $381,079, once the first McLarty loan in the amount of $400,000 was made in June, 1990, or

the Directors resolved to issue debt to the Murrays for $375,000 on July 3, 1990 (Exhibit 303),

DDL became indebted in an aggregate amount exceeding $500,000. Thus, Billes contended that

Page 83

there was no requirement in the USA for further consent when the additional Loan debt was

incurred.

[354] I do not accept that argument. In my view the purpose of the provision was, on any

specific proposed transaction, to have the directors apprised of and to give consideration to the

aggregate amounts of loans made. I believe that this is implied in the phrase “outstanding at any

one time”, the time being each time the aggregate was increased above $500,000. As such, I find

that unanimous consent of the directors was required. However, I agree with the substance of

Billes’ argument that, if such approval was necessary:

Billes was competent, whether or not she had a material interest in a proposed

lender, to provide any additional consent required under Article 9.02. The

decision to permit the company to become indebted beyond $500,000 is a matter

which is distinct from the approval of any particular loan, and as such is not a

matter within Article 10.10(c).

[355] Such could be accomplished by a directors’ resolution noting the approval of the Loan by

the shareholders, and then providing approval of the aggregate under article 9.02. It follows that I

do not agree with Mason that an approval under article 9.02 was required by the shareholders in

the circumstances or that Billes could not have approved a properly worded directors’ resolution

for DDL to borrow over $500,000. However, I agree with the implied argument that Billes could

not approve of such an aggregate only by approving a specific Loan in which she had an interest.

In any event, there was no directors resolution to increase the aggregate amount of debt, and

because Billes was not legally capable of approving the Loans, a purported approval of the Loans

could not be substituted for approval under article 9.02.

[356] In conclusion, I find that there was no approval of the Loans, including the specific

transactions or the aggregate, and therefore the requirement of the second branch of section

115(7) was not satisfied.

E.

Reasonable and Fair Contract

[357] The third requirement under section 115(7) is that the transaction was reasonable and fair

to the corporation at the time of approval. I find that, as between DDL and the Lenders, the

Lenders’ Loans were reasonable and fair to DDL at the time of approval. I find that they were

also reasonable and fair internally within DDL, except for the non-disclosure to and non-

approval by Mason, and except for the additional $200,000 Loan under the Newmat Loan.

[358] Mason relied on D. Peterson, Shareholder Remedies in Canada, as to the issue of

reasonableness and fairness, including the following references in paras. 13.29 and 13.31:

13.29 To avoid having a material interest contract set aside, it must be

"reasonable and fair to the corporation at the time it was approved. ... Of course,

what is "reasonable and fair" depends on the circumstances of each case. Under

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the CBCA-type legislation, the fairness and reasonableness of the interested

transaction is with respect to the corporation only. In Rooney v. Cree Lake

Resources Corp. (1998), 70 O.T.C. 241 (Gen. Div.), Dilks J. commented as

follows:

In determining whether a particular contract is reasonable and fair to the

corporation, one must examine all the surrounding circumstances

including the purpose of the agreement and its possible ramifications for

the corporation. It need not be either fair or reasonable to the director. It

is his fiduciary duty to the corporation which requires it to be reasonable

and fair to the corporation.

What is reasonable and fair changes over time as well, but the provisions limit

the time frame to the time at which the interested transaction is approved.

…

13.31 A question may arise as to the best way to avoid an interested contract

from being attacked on the grounds of reasonableness and fairness. In Summa

Corp. v. Trans World Airlines Inc. [(1988), 540 A. (2d) 403 (Del. Supr.)], the test

for a reasonable or fair contract was stated to be a "transaction that would have

recommended itself to an independent board of directors that was acting in good

faith and had the best interests of the corporation in mind." It would seem,

therefore, that the presence of a sound, independent board is the best precaution

when approving interested contracts. [Emphasis added by Mason.]

[359] McAteer argued “We anticipate the Billes defendants will argue the loans were

reasonable and fair on their terms. While we advance no argument, we do not agree”, and went

on to argue that the issue was the validity of the Loans, not their reasonableness and fairness. It

is not surprising that McAteer did not challenge the reasonableness and fairness of the Loans, as

it was in general, if not completely, his proposals which were accepted by the Lenders.

[360] Moreover, the terms of the Newmat Loan (inter alia, Exhibit 324) were more

favourable than those proposed by Household Trust (Exhibit 307) (being considered at the time

of the Newmat Loan) and it appeared that no other lenders were willing to lend funds. McAteer

himself acknowledged in cross that, after he considered “all the options”, “it was a reasonable

option under the circumstances” for DDL to enter into the Newmat loan.

[361] In support of reasonableness and fairness Billes argued, inter alia, that Cristall's

evidence was that the terms of the Loans were reasonable and fair, and indeed very favourable

to the borrower. She also pointed out that the Plaintiffs did not adduce any expert evidence to

the contrary.

Page 85

[362] BJ said this about the reasonableness and fairness of the Trust Loan, as it relates to

DDL:

... the Trust Loan was shown to be in the best interest of DDL and was made on

reasonable terms. Indeed, the evidence is that the interest charged on the Trust

Loan was less than that being charged by DDLW to Kingswood on the Mortgage

which was ultimately foreclosed. On the totality of the evidence, there can be no

suggestion that the Trust Loan was other than fair and reasonable and necessary

to DDL. There is no equitable or fairness imperative to set it aside.

[363] I agree, but add that the result is also the same for both Loans - their terms were

reasonable and fair to DDL at the time it was executed, subject to three considerations.

1.

5% Bonus

[364] Mason argued:

... that the Trust loan was not reasonable and fair to DDL. In particular, the

provision which provided for a forfeiture of a 5% interest in the Golf Club

Partnership on default [see Exhibit 37²⁶] is unfair to DDL.

[365] As to the issue of the 5% bonus transfer of Club LP partnership units on default of the

Trust Loan, which received very little consideration during the trial, there are three issues: who

proposed it; is it unreasonable and/or unfair; and what are the consequences if it was unreasonable

and/or unfair.

[366] McAteer said he found the 5% bonus transfer of Club LP partnership units “offensive”

and claimed it was unenforceable as a “penalty” (see Exhibit 149, dated November 16, 1992).

Yet, he drafted the Draft Commitment Letter for the Loan (Exhibit 29 and Exhibit 361) in which

this provision was contained and he approved the Loan with the provision therein. He said the

provision was contained in the Draft “as a result of negotiations with Michael Lavery on behalf of

the Trust and lender”, and that there were no further negotiations available on this point.

[367] Billes argued McAteer proposed the term. She argued that her and Lavery’s evidence

established that “Exhibit 361 was the first proposal provided by McAteer to Billes on February

14, 1991 and that McAteer initially proposed the penalty on default”, which she then discussed

with Lavery on February 15^th.

[368] Billes did not defend the substance of the provision, but merely argued:

26

See also Exhibit 29, last clause of the February 11, 1991 Draft Commitment Letter from the Trust

to DDL.

Page 86

If the forfeiture provision in the Trust loan is found not to be fair or reasonable,

then the same can be severed, and in any event the same had no bearing upon the

events in question, and bore no relationship to DDL’s inability to repay or to the

enforcement of the security.

I agree.

[369] No independent expert was called to testify that the provision was unreasonable, and

Cristall, without addressing the provision itself, provided evidence in a broad sense that the

terms of the Loans were reasonable and fair. Therefore, on the uncontradicted evidence one

would have to conclude that this term was reasonable and fair. However, even if it were not

reasonable and fair, it would not make a difference, because, as Billes argued, it is severable.

Even more importantly, no one on behalf of the Trust is trying to enforce the provision in these

proceedings nor have they on the evidence done so outside the proceeding and, accordingly,

nothing of substance turns on it.

2.

$200,000 Loan

[370] Mason argued that the $200,000.00 Loan advanced to reduce McAteer’s shareholder’s

loan and to provide funds to resolve issues between him and Billes, was unfair and

unreasonable to DDL.

[371] This argument is accurate in one sense, but is “turned on its head” in another. Internally

within DDL, was it reasonable and fair for DDL to be borrowing for this reason, at the request

of McAteer and Billes? The answer is a resounding “No”, but that will be dealt with in the

Derivative Action. The relevant question in this context, however, is whether it was reasonable

and fair for Newmat to loan funds, that were otherwise on reasonable and fair terms, to DDL

for this (or any other) purpose, which purpose was in the sole control of the borrower and its

officers? The legal answer is “Yes”. Vis-à-vis the Lender and the borrower the “reasonableness

and fairness” relates to the terms of the Loan, not the purpose for which the funds were sought.

What right did Newmat have to challenge DDL’s purpose of the Loan?

3.

Reasonableness and Earnings to Mason

[372] On another point, BJ also argued:

Mason and her children were not wronged or injured in any way by the Trust

Loan. To the contrary, it was in their interest because without it the value of

their shares in DDL was jeopardized from lack of capital to pursue the business

plan.

[373] BJ may be correct that Mason and her children were not injured by the granting of Trust

Loan. However, they were injured by the enforcement of the security for it on default. More to

the point, they were wronged by not having an opportunity (given to them by the USA, by the

Page 87

ABCA and the common law) to determine whether or not they wished to be involved in the risk

which ultimately manifested in the default of the Loan and the loss of their entire investment. It

was the lack of respect for their rights that was the wrong. It was the realization of the risk that

was the injury. The value of their shares was not in jeopardy prior to the Loan, which is the

time that they had the right to assess the risk.

4.

Conclusion

[374] On considering the evidence and arguments, I have concluded that the terms of the

Loans were reasonable and fair, as between the Lenders and DDL. Accordingly, the third

requirement of section 115(7) was met.

F.

Conclusion on Compliance with Section 115(7)

[375] The Loans are not void or voidable if all three components of section 115(7) are met. I

have found that the first two components were not met, although the third one was.

G.

Validity of the Loans

[376] Failure to satisfy the terms of section 115(7) of the ABCA permits the Court, under section

115(8), to exercise its discretion to set aside the transaction on any terms it thinks fit.

[377] However, before ever considering section 115(8), Billes et al. argue, in effect, that the

Loans cannot be set aside where there is lack of knowledge of the breach of section 115(7) by the

Lenders.

1.

Loans Valid Due to Lenders Lack of Knowledge of Breach

[378] Billes et al. argued, relying upon Dimo, Beck v. Graham, [1991] O.J. No. 208 (H.C.),

online: QL (OJ); Liu v. Sung (1997), 37 B.C.L.R. (3d) 158 (C.A.); PII Photovision International,

Inc. v. Thayer (1996), 30 B.L.R. (2d) 286 (B.C.S.C.), and Cannaday v. McPherson (1995), 25

B.L.R. (2d) 75 (B.C.S.C.), rev’d (1998), 44 B.C.L.R. (3d) 195 (C.A.), that lack of compliance

with section 115 of the ABCA does not render the transaction void, but merely voidable. Billes

argued further:

Even if shareholder approval were absent this would not affect the validity of the

loan. Non-compliance with articles, by-laws or any unanimous shareholders

agreement may not be asserted against a person dealing with the corporation unless

the person has, or by virtue of his or her position with or relationship to the

corporation ought to have, knowledge of those facts at the relevant time.

ABCA, sections 15, 16, 17 and 18.

I agree.

Page 88

[379] As to the facts relevant to this argument, Billes et al. submitted, in part²⁷:

The Trust is not a "person" who has, or by virtue of its position with or

relationship to DDL ought to have, knowledge of any alleged non-compliance at

the relevant time. Neither Mann nor Lavery have been shown to have any

knowledge of non-compliance. Billes' evidence is that McAteer assured her that

he would seek the consent of Mason and ensure the matter was properly minuted,

and that he represented to her that he had done so. McAteer was a lawyer, the

President and Secretary of the company.... He had custody of the Minute Book.

It was not unreasonable for him to undertake that role or for Billes to expect that

he would carry it out. He formally represented in the Officer's Certificate that

the USA did not impede the loan. Thus, Billes is not a person who had, or by

virtue of her position with a relationship to DDL ought to have had, knowledge

of any alleged non-compliance.

The same arguments apply, mutatis mutandis, to Newmat, and Newel, Steven Matkaluk

(“Matkaluk”) (26% shareholder in Newmat) and Billes in this context. I have found that the

Lenders (including Billes in that capacity) may rely on that provision in relation to the breach of

the USA. See also my analysis on this issue of knowledge by the Lenders under “Constructive

Trust”, infra

.

[380] No party challenged Billes’ statement of principle, but McAteer challenged the facts.

McAteer agreed with the indoor management rule, and the effect of lack of knowledge in law,

but argued that there was knowledge in fact:

The debenture is void and unenforceable against DDL by the Trust. Following

both Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation and others,

[[1985] 3 All E.R. 52 (C.A.)] and Anderson Lumber Co. v. Canadian Conifer Ltd.

[(1976), 66 D.L.R. (3d) 553 (Alta. S.C. (T.D.)), aff’d (1977), 4 A.R. 282 (C.A.),

leave to appeal refused (1978), 7 A.R. 88 (S.C.C.)] when a contract is entered

into by the directors in excess or abuse of its power, or in noncompliance with its

articles a third party, without knowledge of the excess or abuse of its power, may

rely on the act of the directors as valid, “the indoor management rule.” If,

however, the third party has actual or constructive notice that such steps had

not been taken, he will not be able to rely on any ostensible authority of the

directors and their acts, being in excess of their actual authority, will not be

the acts of the company.

In the case at bar, Billes has failed to disclose her interest in the Trust in writing

as required by the USA and the ABCA. Billes also failed to fully inform

McAteer of her true involvement with the Trust. The matter, entering into the

27

I have excerpted certain provisions of this quote with which I do not agree.

Page 89

loan agreement with the Trust, was not referred to the shareholders of DDL as

required pursuant to the USA. The board of directors acted in excess or abuse of

its power and the Trust had knowledge, actual, through Billes, of that excess or

abuse of power. The Trust can not invoke the rule in Royal British Bank v.

Turquand, [1843-60] All E.R. Rep. 435 (Ex. Ct.) “the indoor management rule”

because the creditor (Trust) was represented by a trustee (Billes) who was also a

shareholder/director of the debtor [DDL]. Billes’s knowledge became the

creditor’s (Trust’s) knowledge. In other words the creditor knew of the

irregularities of debtor and could not rely on the lack of knowledge of the

irregularity to permit it to enforce the debenture based on the indoor management

rule. [Emphasis in the original]

[381] As is obvious from my findings in these Reasons, I do not agree with most of this

argument. Specifically, I have found that: Billes fully disclosed her interest to McAteer, and

accepted his undertaking that he would and had done all the things necessary to disclose her

interest and obtain shareholder approval; and that Billes had no knowledge of McAteer’s failure

to carry out his undertaking. Indeed, I find that all the things McAteer claimed Billes failed to

do were things which, in fact, I find he undertook and failed to do. Moreover, Billes did not

have knowledge that the steps required to validate the Loans had not been accomplished.

Accordingly, that knowledge could not be imputed to the Lenders through Billes and the

Lenders are protected by the indoor management rule.

[382] Therefore, on this basis, I find that the Loans are not voidable.

2.

Remedy under Section 115(8)

[383] Billes also argued in relation to the statutory breach that the Court has a discretion as to

whether to grant a remedy under section 115(8), namely, to set aside a transaction for lack of

compliance with section 115. I agree: Dimo Holdings, supra, at 128-129; Beck, supra; and PII

Photovision (supra). I agree. Further, Billes relied on the comments of Fruman J. (as she then

was) in Dimo at 129, that “if the transaction cannot be unwound, it should not be unwound”,

and that is particularly so where the debtor received the loan funds and cannot repay.

[384] As noted elsewhere in these Reasons, Mason acknowledged that it would be difficult to

“unscramble the egg” and argued that a remedy under the oppression provisions of the ABCA

would be appropriate, as an alternative to setting aside the Loans.

[385] In my view it would be inappropriate for the Court to exercise its discretion under

section 115(8) to set aside the Loans in this case for a host of reasons, including, but not limited

to:

Page 90

(a) the Loans were, in my view, reasonable and fair to DDL at the time of their

approval²⁸, a consideration which Billes, correctly in my view, argued was relevant to

the section 115(8) discretion;

(b) they were necessary for DDL to continue its plans, especially the Newmat Loan as it

appeared that DDL was not able to find adequate financing elsewhere;

(c) while it was ultimately Billes’ responsibility to disclose her conflict of interest to

Mason under the USA and section 115 of the ABCA, her failure to do so was largely due

to McAteer’s failure to carry out his undertaking to her and his representation that he

had completed it;

(d) the only party injured as a result of the non-disclosure and non-approval, other than

the $200,000 Loan (to be discussed further in the Derivative Action), is Mason, and she

has a full remedy under the oppression provisions of s.234 of the ABCA

;

(e) the Loans cannot be completely unwound - the Court should not unwind only a

portion of the transaction - it is not possible to “unscramble the egg”;

(f) the Loans were granted for valuable consideration and the funds from the Loans were

further advanced to, inter alia, the Kingswood Entities and used for construction

projects, including the construction of the KG&CC and the Golf Dome. Furthermore,

those entities and DDL were unable to repay the funds advanced. In other words, DDL

was unable to effect restitutio in integram (restore the parties to their previous

positions): Delorme v. Metcalfe Realty Co. Ltd., [1968] 1 O.R. 124 at para. 2 ( H.C.J. -

Haines J.); Liu at para. 7 and Cannaday

v. McPherson, supra;

(g) related to (e) and (f), legitimate third party rights have now intervened: Liu at para.

5b; and Bull HN Information Systems Ltd. v. L.I. Business Solutions Inc. (1994), 161 A.R.

268 at para.25 (Q.B. - Kent J.);

(h) realization has taken place on the “hard” assets held as security and there is no value

to the limited partnership units which were also held as security;

(i) the validity of the construction mortgage is, or may be, res judicata by virtue of the

Manitoba foreclosure;

(j) perhaps most importantly, the Lenders were unaware of the non-compliance of the

Loans, and, indeed, received and relied on Officer's Certificates that there was

compliance; and

(k) not without relevance, it would indirectly give a remedy to McAteer that he does not

deserve. I say this because, not only do I find that he had actual knowledge of Billes’

conflict and the details of her interest, he specifically approved the Loans. Therefore,

vis-à-vis McAteer, there was substantial compliance with all of section 115, except the

requirement of writing, and that failure I find rests at his feet based on his undertaking to

Billes.

[386] Accordingly, I exercise my discretion not to set aside the Loans under s.115(8) of the

ABCA. Therefore, it follows that the Trust and Newmat Loans are not void or voided, but rather

28

This is to be distinguished from the interests of the individual shareholders of DDL, as was

discussed supra.

Page 91

valid. Accordingly, there is no need to consider the arguments relative to the distinctions between

remedies as they relate to the different security provided.

F.

Other Available Remedies

[387] The determination that a remedy is not appropriate under section 115(8) does not,

however, dispose of the issue of Billes’ liability for failure to provide disclosure in accordance

with the USA and the ABCA. All of this was at the expense of Mason, who, in the process

suffered a breach of her rights as a shareholder under the USA. Billes’ liability to Mason in this

regard is not in her role as a Lender, but in her role as a signatory to the USA. That breach is

entitled to a remedy. The next issue is the appropriate remedy.

[388] There are remedies that are available to compensate those whose rights and interests have

been breached. In my view those rights and interests are only those of Mason and, to the extent of

the $200,000 Loan, DDL. In my view these rights are best remedied through the oppression

remedy, and, if available, the Derivative Action respectively.

1.

The Oppression Remedy

[389] The oppression remedy under the ABCA is set out at s. 234, quoted supra

.

[390] The broad nature of the oppression remedy has been acknowledged by both courts and

academics. In that regard, Mason cited D. Peterson, Shareholder Remedies in Canada, at para.

13.42:

13.42 Where there has been a breach of the interested transaction provisions,

some thought should be given as to the most appropriate remedy for relief. ...

Orders setting aside contracts and accounting for profits have been made under

the oppression remedy. There is a greater body of jurisprudence under the

oppression remedy on which one may rely, and to the extent that the issue is the

reasonableness and fairness of the transaction or there is other questionable

conduct involved, it may be most expeditious to settle all matters under the

oppression remedy. However, for an isolated case of breach of the interested

contract provisions, it may be more convenient to proceed under those provisions

for relief, particularly where the breach is simply a matter of a failure to disclose

the interested contract or obtain the prescribed shareholder or director approval.

[Emphasis added by Mason.]

[391] Similarly, McDonald J. in First Edmonton Place

L.R. (2d) 122, at 136 (Q.B.) stated:

v. 315888 Alberta Ltd.(1988), 60 Alta.

,

This remedy, as it appears in s. 234 of the CBCA (and now in s. 234 of the

A.B.C.A.) has been described as “the broadest, most comprehensive and most

open-ended shareholder remedy in the common law world” (Stanley M. Beck,

Page 92

“Minority Shareholders’ Rights in the 1980's”, in Law Society of Upper Canada

Special Lectures (1982) Corporate Law in the 80s, 311 at p. 312). It gives the

court wide discretion to remedy virtually any corporate conduct that is unfair.

[392] Accordingly, Mason argued:

It is respectfully submitted that in the circumstances of this case, from Mason's

perspective it would be appropriate to rectify all matters under the oppression

remedy. Billes, McAteer and the lenders of the Trust loan and the Newmat loan

ought to be directed jointly and severally to compensate Mason in an amount

equal to the loss in the value of the shares of Devoncroft caused by the

oppressive conduct.

Aside from the reference to Lenders liability, I agree.

[393] I agree further that the oppression remedy is, in the circumstances, the most appropriate

avenue by which to provide Mason a remedy for McAteer’s and Billes’ conduct. In arriving at

that conclusion I have, considered the policy underlying the remedy. I have also had regard to

the development, purpose and application of the oppression remedy to date.

a.

History and Purpose of the Remedy

[394] The history of the oppression remedy and the policies underlying it are thoroughly

canvassed in First Edmonton (Q.B.). Although the Court of Appeal ultimately stayed the order

granted by the trial judge in that decision ((1989), 71 Alta. L.R. (2d) 61), the discussion

remains instructive in the context of the development of the remedy.

[395] Prior to the creation of the statutory oppression remedy, the courts accepted that

business decisions were to be made by directors and majority shareholders. In other words, the

courts accepted the “majority rule” principle and left the decision to sue in the hands of those

who controlled the corporation. Accordingly, the courts only involved themselves with the

internal management of corporations in very limited circumstances.

[396] The courts were later granted limited power to deal with acts of oppression by statute.

By s. 210 of the Companies Act, 1948 (U.K.), 1948, c. 38, the courts were given a narrow power

to remedy oppressive conduct. In order to obtain an oppression remedy under those provisions

the applicant had to first show that a winding up order was justified and then persuade the court

that an order of that nature would be unfair. Further, an isolated act was insufficient to invoke

the remedy. Rather, a continuous course of oppressive conduct was required. The landmark

case in relation to those provisions is Ebrahimi v. Westbourne Galleries Ltd. and others, [1972]

2 All E.R. 492 (H.L.).

[397] Later legislation, namely, the United Kingdom Companies Act, 1980 (U.K.)

, 1980, c.22

and The Companies Act, 1985 (U.K.) 1985, c.6, further expanded the remedy such that it

,

Page 93

became available on the basis of conduct which was “unfairly prejudicial to the interests of

some part of the members” (First Edmonton (Q.B.), at 136-138).

[398] The first Canadian jurisdiction to enact oppression legislation was British Columbia, in

1960. However, the oppression remedy was not generally available in Canada until the

Canadian Business Corporations Act, S.C., 1974-75-76, c.33, was proclaimed in force

December 15, 1975. Shortly thereafter, a number of provinces, including Alberta, adopted very

similar provisions. Indeed, the ABCA is modelled after the CBCA. Accordingly, the policies

underlying the CBCA oppression remedy are of assistance in interpreting the analogous

provisions of the Alberta statute²⁹.

b.

The Scope of the Oppression Remedy

[399] Prior to the enactment of the CBCA, a task force was established by the Federal

Government to consider the appropriate role and scope of the legislation. As noted by

McDonald J. in First Edmonton, at 132, quoting from the Detailed Background Paper for the

New Canada Business Corporation Bill, at 2, one of the central objectives of the task force, was:

[T]o create a practical balance of interests among shareholders, creditors,

management, and the public, a balance that ensures both adequate investor

protection and maximum management flexibility in the overall context of the

public interest.

[400] This ‘balanced’ approach represented a marked departure from the traditional common

law view of ‘majority rule’ which dictated the courts’ non-interventionist stance vis-à-vis the

internal management of a company: Shuttleworth v. Cox Bros. and Co. (Maidenhead), Ltd.,

[1926] All E.R. Rep. 498 (C.A.).³⁰Thus, although derived from s. 210 of the United Kingdom

Companies Act 1948 (U.K.), 1948, c. 38 the oppression provisions of the CBCA (s. 234) were

much broader than any other legislation in any other jurisdiction at that time (First Edmonton

,

(Q.B.), at 138).

29

However, one must be careful in relying upon authorities which interpret other provincial Acts,

because, as Egbert J. noted in Stech v.Davies (1987), 53 Alta L.R. (2d) 373 at 378 (Q.B.),

referencing Diligenti v. RWMD Operations Kelowna Ltd. (No. 1) (1976), 1 B.C.L.R. 36 (S.C.),

the sections of some provincial acts are not as wide as the Alberta statute. McDonald J. made a

similar observation in First Edmonton, at 155.

30

Thus, one must be very careful in applying old cases espousing traditional common law corporate

principle. This caution was given by Moore C.J. in Westfair Foods Ltd. v. Watt (1990), 106 A.R.

40 at 49 (Q.B.), (1992), 4 Alta. L.R. (3d) 268 (C.A.), application for leave dismissed [1998]

S.C.C.A. No. 634, and the Ontario Court of Appeal in Re Ferguson and Imax Systems Corp.

(1983), 43 O.R. (2d) 128 at 137 (C.A.), leave to appeal dismissed (1983) 20 O.A.C. 158 (S.C.C.).

Page 94

[401] The broader scope of the remedy under both the CBCA and the ABCA was largely the

result of the extended definition of “complainant” and the fact that these Acts provided for three

categories of prohibited conduct which would give rise to an oppression remedy, namely:

(a) oppressive conduct;

(b) conduct which is unfairly prejudicial; or

(c) conduct which unfairly disregards the rights of one of the groups specified in the Act

.

[402] It has been suggested that the unifying theme throughout these three categories of

conduct, is whether the conduct is “unfair”: The Alberta Institute of Law Research and Reform,

Report on Proposals for a New Alberta Business Corporations Act (Report No. 36), Vol. 1

(August 1980), at 142. That suggestion is consistent with Lord Cooper’s statement in Elder

and others v. Elder and Watson Limited, [1952] S.C. 49, which is often cited as the threshold or

foundation for entitlement³¹to the oppression remedy in Canada (at 55):

[T]he essence of the matter seems to be that the conduct complained of should at

the lowest involve a visible departure from the standards of fair dealing, and a

violation of the conditions of fair play on which every shareholder who entrusts

his money to a company is entitled to rely.

[403] It follows that, in the context of a shareholder, the inquiry becomes: “Is the conduct

unfair to the shareholder”: First Edmonton (Q.B.)

, at 140, quoting from Report on Proposals for

a New Alberta Business Corporations Ac, supra at 141-142.

c.

Statutory Interpretation

i. Unfairness and Reasonable Expectations

[404] No statutory definition of “unfairness” is provided for the purpose of applying the

legislation. Guidance in that respect has developed through the case law. Indeed this was the

legislator’s intent. As set out by Dickerson, Proposals For a New Business Corporations Law for

Canada, supra, at para. 484:

... the courts should have very broad discretion, applying general standards of

fairness, to decide these cases on their merits.

[405] Having been charged with the task of exercising its equitable jurisdiction to determine

what constitutes unfairness in each particular case (Westfair, per Moore C.J., at 51), the courts

have prescribed a liberal and broad interpretation to the section. Such an interpretation has

31

See also: First Edmonton Place (Q.B.); Diligenti, supra; Keho Holdings Ltd. and Oliver v. Noble

(1987), 78 A.R. 131 (C.A.); and Dickerson, Proposals For A New Business Corporations Law for

Canada, supra, at 163.

Page 95

permitted the provisions to carry out their intended purpose: Stech v. Davies, supra, at 380;

Keho Holdings, supra, at 136 (C.A.); Re Ferguson, at 137; and Westfair, supra, at 369 (C.A.))

[406] Although the application of the section will be very fact specific, McDonald J. in First

Edmonton, at 146, listed some of the factors that may be relevant in determining whether

conduct is unfair, namely: the history and the nature of the corporation; the essential nature of

the relationship between the corporation and the creditor; the type of the rights affected; and

general commercial practice.

[407] J.A. Campion, S.A. Brown and A.M. Crawley in “The Oppression Remedy: Reasonable

Expectations of Shareholders”, L.S.U.C., Special Lectures 1995: Law of Remedies (Toronto:

Carswell, 1995) at 229, suggest that there were two overriding principles which emerged from

the analysis in First Edmonton (Q.B.): (1) the underlying expectations of the stakeholder are the

interests which the oppression remedy seeks to protect; and (2) the need to balance the interests

of the stakeholder against the right and duty of the management to act in the best interests of the

corporation, despite that it may require acting to the prejudice of the stakeholder.

[408] The list of considerations set out by McDonald J. was expanded by Moore C.J. in the trial

decision in Westfair to include (at 53): the history of the corporation; the type of interests

affected; general commercial practice; the nature of the relationship between the complainant

and alleged oppressor; the extent to which the impugned conduct was foreseeable; the

expectations of the complainant; the impact of the conduct upon a stakeholder’s interests; and

the size, structure and nature of the corporation. In so doing, Moore C.J. also applied a

reasonable expectations analysis.

[409] In varying the decision in Westfair, the Court of Appeal, per Kerans J., found that the

legitimate expectations of a party are the starting point for a determination of what is fair.

[410] Campion observed, at page 248, that:

The relationship between the principle of shareholders’ reasonable expectations

and the oppression remedy is notable for its justificatory coherence. In the event

that a shareholder’s reasonable expectations have been breached, a situation may

exist which is unfairly prejudicial to the interests of that shareholder. The

unfairness emanates from the breach of the reasonable expectations. The

prejudice necessitating relief is the detriment suffered by the shareholder as a

result of the breach of their expectations.

[411] Today the reasonable expectation assessment has become the generally accepted

approach to determining whether corporate conduct may be characterized as “unfair”. As noted

by D. Peterson in Shareholder Remedies in Canada, at para. 18.101.1:

As the oppression remedy jurisprudence has developed, “reasonable expectation

analysis” has become the standard analytical tool. It has been said that “[t]he

Page 96

unifying thread of the oppression remedy is to protect such reasonable

expectations” of corporate stakeholders. [Citations omitted.]

[412] In terms of what constitutes reasonable expectations, D. Peterson, cites a number of

examples of expectations that courts have found to be reasonable and worthy of protection at

para. 18.101.1:

(a) shareholders are entitled to a reasonable expectation that directors will fulfil

their fiduciary duty and act lawfully: Palmer v. Carling O’Keefe Breweries of

Canada Ltd. (1989), 67 O.R. (2d) 161 at 170 (Div. Ct. - VanCamp, Southey and

MacFarland J.J.);

(b) shareholders have a reasonable expectation that their corporate contractual

obligations will be adhered to, unless there is no basis to infer such reasonable

expectations from the agreement: West

v

. Edson Packaging Machinery Ltd

.

(1993), 16 O.R. (3d) 24 at 29 (Gen. Div. - Sullivan J.), and Schicchi

Bay Estates Ltd. (1994), 98 B.C.L.R. (2d) 391 (S.C. - Melvin J.);

v. Orveas

(c) a fundamental reasonable expectation of a shareholder is for management to

maintain basic records and not co-mingle corporate funds with those of non-

related enterprises: Lee v. To (1998), 39 B.L.R. (3d) 293 (Sask. C.A. - Tallis,

Cameron and Wakeling J.J.A.); and

(d) the legitimate expectation of shareholders is that the business will not fail and

will not liquidate. Therefore, the company has a duty of prudent management to

forestall that event. It can be brought to account if it strips the company of its

assets or adopts a liquidation policy: Westfair (D.L.R.) 48 at 54-56 (Alta. C.A -

Harradence, Kerans and Cote J.J.A.). [Emphasis aded.]

[413] Campion summarized shareholder expectations (at 233-234) as follows:

They include expectations as to the nature of the business invested in, the

corporate structure, the ownership structure, the financial structure of the

corporation and the source of the control of the business and affairs of the

corporation.

In addition to these expectations, which will vary depending on the nature of the

corporation invested in, there are various norms of corporate law that

shareholders may be presumed to expect:

•

that the business and affairs of the corporation will be managed by a board of

directors which will act in the best interest of the corporation;

that shareholders have no right to manage the business and affairs of the

corporation except to the extent that they have removed such powers from the

board of directors pursuant to a unanimous shareholders’ agreement;

that the extent of any obligations owed by and between shareholders will be

pursuant to an agreement between the shareholders; and

•

Page 97

•

that majority rule is the touchstone of corporate governance.

ii.

The Three Grounds of Prohibited Conduct

[414] The case law also provides guidance as to the scope of the three types of conduct that

will ground an oppression remedy, namely: oppressive conduct; unfairly prejudicial conduct;

and conduct which unfairly disregards the rights of specified groups. While these categories of

conduct are not mutually exclusive, the courts have developed distinct definitions for each.

[415] The definition of ‘oppression’ has been held to incorporate an ‘abuse of power’ situation

whereby the majority is able to perpetrate abuses because of the imbalance of power: Scottish

Co-Operative Wholesale Society, Ltd. v. Meyer and another, [1958] 3 All E.R. 66 (H.L.).

[416] The latter two terms in s.234(2) have been interpreted as providing more latitude for a

finding of prohibited behaviour. This position is supported by the historical development of the

section, which suggests that the remedy is designed to protect both legal and equitable rights

and therefore should be afforded a wide scope: Re. Mason and Intercity Properties Ltd. (1987),

59 O.R. (2d) 631 (C.A.), leave to appeal dismissed (1987), 62 O.R. (2d) ix (S.C.C.).

[417] The words ‘unfairly prejudicial’ denote that there is an imbalance between the interested

parties of a corporation, and that there is an inequality of treatment with no justifiable reason

(Stech, supra).

[418] Additionally, in First Edmonton, McDonald J. adopted the statement of Professor

Shapira in “Minority Shareholder’s Protection” (1982), 10 N.Z.L. Rev. 134, commenting:

More concretely, the test of unfair prejudice should encompass the following

considerations: the protection of underlying expectation of shareholders in

closely held companies, and the detriment to the members’ proprietary interest.

[419] The phrase “unfairly disregards the interests of” is arguably the lowest threshold of

prohibited conduct which must be shown in order to obtain an oppression remedy. This phrase

also suggests that there has been unjust treatment of one of the parties and the use of the word

‘interests’ implies that the definition extends beyond a stakeholder’s strict legal rights.

[420] In Stech, Egbert J. at 379, interpreted the phrase to mean “to unjustly and without cause

... pay no attention to, ignore or treat as of no importance the interests of security holders,

creditors, directors or officers of a corporation”.

[421] Campion suggested that “unfairly disregards” is the appropriate ground under which to

deal with procedural complaints.

iii.

Good Faith

Page 98

[422] The broad definitions applied to the prohibited grounds of conduct, particularly the latter

two, have resulted in a clear shift away from focussing on the intention of the corporate actor to

focussing on the impact of the conduct upon the interests of the security holder, creditor,

shareholder, director or officer. The adoption of the reasonable expectations analysis has also

had an unavoidable impact on the requirement for a finding of bad faith as a prerequisite to a

finding of oppression. McDonald J. in First Edmonton noted, at 144, that:

Diligenti demonstrated a new direction. Whereas in the past good

faith and the constitutional power of the directors and the majority

had been critical, the emphasis shifted to the damaging effect on

the interests set out in s.234 (see: Professor Shapira’s article at p.

149).

[423] Similarly, in R.S. v. RW-LB (1993), 147 A.R. 241, Mason J., following an extensive

review of the case law, stated at paragraph 64:

Based on these authorities, I consider that proof of want of probity or mala fides

is not essential in establishing an oppression action and the right to obtain a

remedy from the court.

See also: Shapira, at 145.

[424] The requirement of a finding of mala fides to support a finding under the “unfairly

prejudicial” and “unfairly disregards” grounds for liability was specifically considered by the

Ontario Court of Appeal in Brant Investments

v. KeepRite Inc., supra, at 176:

In considering whether conduct is “oppressive” one can appropriately

look to

the English cases decided before 1980 which defined that word in a similar

context. Adopting the definition applied by Lord Simonds in the Scottish Co-

Operative case - namely “burdensome, harsh and wrongful” - it is unlikely that

an act could be found to be oppressivewithout there being an element of bad faith

involved. However, in considering the alternative question of whether any act is

unfairly prejudicial to, or unfairly disregards the interests of one of the protected

persons or groups, I am of the view that a requirement of lack of bona fides

would unnecessarily complicate the application of the provision and add a

judicial gloss that is inappropriate given the clarity of the words used. Of course,

there may be many situations where the rights of minority shareholders have

been prejudiced or their interests disregarded, without any remedy being

appropriate. The difficult question is whether or not their rights have been

prejudiced or their interests disregarded “unfairly”. In testing the facts in a given

case against the word “unfairly”, evidence of bad faith as to motive could be

relevant, but there may be other cases where particular acts effect an unfair

result, but where there has been no bad faith whatsoever on the part of the actors.

[Emphasis added.]

Page 99

See also: Lyall v. 147250 Canada Ltd. (1993), 84 B.C.L.R. (2d) 234, at para. 35 (C.A.).

d.

Summary of Oppression Principles

[425] In summary, the purpose of the oppression remedy is to provide an avenue for minority

stakeholders, including both shareholders and creditors, to protect their interests from harmful

corporate decisions. The central focuses in the determination of whether a party is entitled to

relief under the oppression remedy are: the reasonable expectations of the stakeholder; the

unfairness or prejudice of the conduct in light of these expectations; and the impact of the

conduct upon the stakeholder’s interests.

e.

Application of the Remedy in other Cases

[426] While the underlying principles and purpose of the remedy are clear, the wide statutory

language results in decisions that are highly fact orientated. Re Ferguson is authority for the

observation that one should be cautious in making any direct comparison between the various

oppression cases. Nonetheless, a review of oppression cases from Alberta, as well as other

jurisdictions, is helpful in developing a flavour for the types of circumstances that will give rise

to an oppression remedy. I have included herein a summary of only those cases which bear

some factual resemblance to the case at Bar.

[427] In Re Ferguson, three couples were shareholders in a corporation. The complainant and

her husband divorced and she argued that her former husband was trying to push her out of the

business and prevent her from receiving dividends. The Ontario Court of Appeal found that the

husband’s actions and those of the other directors who succumbed to the husband’s will,

demonstrated conduct which was oppressive and unfair. The Court, however, reversed the trial

judge’s remedy of dissolution in favour of individual remedies where oppression was found.

There the Court specifically found that the offending majority shareholder treated the company:

... as his personal domain. He acted improperly and his conduct [could] only be

characterized as prejudicial to [the company] and its shareholders.

[428] In Stech, Egbert J. found that the actions of one of the two equal shareholders, in dealing

with the assets of the two corporations, were taken unilaterally and without notice to the other

shareholder. The Court granted an oppression remedy, separating the corporations into two

wholly owned corporations and requiring the determination of the value of the shares. In the

process, Egbert J. noted that for conduct to be considered offensive it should, at a minimum,

represent a departure from “fair play”.

[429] In First Edmonton, McDonald J., at 141, agreed with Professor M.A. Waldron’s

recognition, in “Corporate Theory and the Oppression Remedy” (1981-82), 6 Can. Bus. L.J.

129 at 151, that the concept of unfairness extended the oppression remedy to “a general range

Page 100

of unfair conduct: [including] ...unfairness in ignoring previous ... agreements among

shareholders about their future relationships....”. [Emphasis added.]

[430] In Liu, supra, the corporation borrowed from investment groups in which the directors

were interested. None of those directors abstained from voting on the loan. A debenture was

granted as security for the loan. Within a couple of weeks a demand for payment was made,

followed shortly by the appointment of a manager/receiver. The Court found that the effect of

the impugned transactions did not constitute oppression, under the more restrictive B.C.

legislation, but that the only possible complaint was one of breach of fiduciary duty.

Specifically, the Court held (at para. 13), that:

... in general terms, the motive behind conduct alleged to be prejudicial or

oppressive is “largely immaterial”, and that the effect of the actions is key.

[431] In Sahota v. Basra (1999), 45 B.L.R. (2d) 143 at paras. 29-30 (Ont. Gen. Div. -

MacKenzie J.) the Court dismissed an argument that a causal connection between unfair

treatment and a corresponding tangible detriment suffered by the complainant, was

unnecessary. That finding was based on the rationale that the underlying purpose of the remedy

is to protect interests, and the apprehension of detriment suffered by the complainant was

sufficient.

[432] The case of Lyall, supra, relied upon by Mason, is instructive to the case at Bar. There

the Plaintiff and two others owned the shares of the Defendant company, which was

incorporated for the purpose of facilitating the sale of shares of the group to a third party. There

was a unanimous shareholders agreement which the Court concluded modified the bylaws of

the company so as to require unanimous approval of a resolution to repudiate the share purchase

agreement. The British Columbia Court of Appeal held that, contrary to that requirement, the

two other directors had purported to approve such a resolution contrary to the wishes of the

Plaintiff, thereby causing the company to embark upon a course of action without authorization.

The Court concluded that the Plaintiff had been prejudiced as a result.

[433] The Court in Lyall found that the actions of the two directors unfairly prejudiced and

unfairly disregarded the complainant and his interests. In the result, the Court held (at para. 46)

that the decision of the two “was therefore made without regard to the rights of [the Plaintiff] to

express his approval or disapproval to the Unanimous Shareholders Agreement”. Further, at

paras. 48-50, Legg J.A. for the Court stated that:

At a minimum, Lyall, as a shareholder of the Company ..., was entitled to expect

from the other shareholders and directors that in making corporate decisions, they

would respect and adhere to the provisions of the Unanimous Shareholders

Agreement....

The acts of [the other two] ... constituted a wrong to Lyall in that they breached

the Unanimous Shareholders Agreement entered into with him and abrogated his

Page 101

legitimate interests and expectations as a shareholder of the Company....

[Emphasis added.]

By causing the Company to repudiate the Share Purchase Agreement [without

Lyall’s approval of a unanimous resolution], [the other two] caused the Company

to embark upon a course of action outside its ordinary course of business. Under

the Unanimous Shareholders Agreement, [the other two] had no authority by

themselves to effect such a fundamental change in the business of the

Company. They required the express consent of Mr. Lyall to do so. The actions of

[the other two] can only be regarded as unfairly prejudicial to Lyall's interests.

[434] In Lyall, the Court based its finding of prejudice on the fact that the Complainant, absent

the Court’s finding, would have to pay 1/3 of the substantial litigation costs the Defendants had

incurred in unsuccessfully avoiding the sale, plus all of his own legal costs in taking a contrary

position. In terms of a remedy, the Court awarded the Complainant his legal expenses to the

extent that they were reasonably and necessarily incurred as a result of the conduct of the

Defendants.

[435] Redekop v. Robco Construction (1978), 89 D.L.R. (3d) 507 (B.C.S.C.), dealt with the

issue of mala fides in the context of a director’s breach of duty. In that case the director and

majority shareholder of the corporation negotiated a contract with another corporation in which

the director held shares, without complying with the disclosure provisions of the Act. The Court

held that conduct of that nature was oppressive as the director had helped himself using the

corporation’s assets.

[436] In Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. Sup. Ct.), Lederman J.

of the Ontario Superior Court of Justice [Commercial List] dealt with a case wherein a group of

retired employees offered shares for sale to active employees pursuant to a shareholders’

agreement. The corporation purchased a number of shares itself in a manner which breached the

shareholders’ agreement and the CBCA. The Court observed, at p. 211:

The case of 218125 Investments Ltd. v. Patel (1995), 33 Alta. L.R. (3d) 245 (Q.B.

- Rooke J.) is authority for the position that the Shareholders’ Agreement can be

used as a guide when determining the reasonable expectations of the

shareholders. In the case at bar, the 1994 transaction directly violated the

provisions of the Shareholders’ Agreement. In the absence of clear acquiescence

by the Applicant shareholders, an action in violation of the Shareholders’

Agreement and the CBCA cannot possibly be said to be reasonably expected by the

Applicants. Nor can the Business Judgment Rule be applied in such

circumstances in order to prevent judicial intervention. [Emphasis added.]

[437] I have also considered the following cases where the oppression remedy has been

applied, but which do not add materially to my considerations on the facts, or the development

of the law:

Page 102

•

Goldex Mines Ltd. v. Revill (1974), 54 D.L.R. (3d) 672 (Ont. C.A.);

Neri v. Finch Hardware (1976) Ltd. (1995) 20 B.L.R. (2d) 216 (Ont. G.D. -

Feldman J.);

•

Jackman v. Jackets Enterprises Ltd. (1977), 4 B.C.L.R. (S.C. - Fulton J.);

Bank of Montreal v. Dome Petroleum Ltd. (1987), 54 Alta. L. R. (2d) 289 (Q.B. -

Forsyth J.);

•

Calmont Leasing Ltd. v. Kredl (1993), 142 A.R. 81 (Q.B. - Russell L.), upheld

(1995), 165 A.R. 343 (C.A.), varied (1995) 32 Alta. L.R. (3d) 345 (C.A.);

Wright v. Rider Resources Inc. (1994), 159 A.R. 321 (Q.B. - Hunt J.);

Arrotta v. AVVA Light Corp. (1995), 175 A.R. 299 (Q.B. - Sullivan J.), appeal

allowed on the summary judgment and a new trial ordered on the merits (1995)

78 A.R. 100 (C.A.);

•

Argali Holdings Inc.

Clarke J.);

400280 Alberta Ltd.

v

. Hoal Investments Ltd. (1995), 175 A.R. 335 (Q.B. -

v. Franko’s Heating & Air Conditioning (1992) Ltd. (1995),

166 A.R. 241(Q.B. - Hart J.);

218125 Investments Ltd. . Patel

Three Point Oils Ltd. . Glencrest Energy Ltd., [1997] A.J. No. 451 (C.A.);

Clarke v. Rossburger(1999), 254 A.R. 30 (Q.B. - Cairns J.);

HSBC Capital Canada Inc. v. First Mortgage Alberta Fund (V) Inc. (1999), 247

A.R. 37 (Q.B. - Paperny J.);

•

v

, supra;

v

•

Alberta (Treasury Branches) v. Seven Way Capital Corp. (2000), 261 A.R. 278

(C.A.); and

•

Mikulak v. Rubin, 2001 ABQB 594;

f.

[438] As noted supra, fairness is the threshold for oppressive conduct.

i. Billes

Application of the Remedy to the Case at Bar

[439] In the case at bar, it is clear that Mason’s reasonable expectations have been breached in

several ways.

1.

Failure to Disclose

[440] The most obvious disregard for Mason’s interests was the failure of Billes to disclose the

fact, and provide the details, of her interest in both of DDL’s major Lenders.

[441] Further to the failure to make disclosure, the Loans in question were approved in violation

of the USA and the ABCA. The USA clearly provided that where a director has an ‘interest’ in a

financial decision, the director should abstain from voting. Where 50 percent or more of the

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board was ineligible to vote, the decision had to be put to the shareholders for determination.

Billes was one of two directors and therefore was holding 50% of the votes of the Board of

Directors. At a minimum, this would require shareholder notice to Mason (which was not given).

As McAteer only held 10% of the shares, it would have been impossible for the transaction to be

approved by a shareholder vote without the inclusion of Mason. Not only was the ABCA

breached, but the USA was ignored.

[442] This case is similar to Lyall. In the case at Bar the USA modified the bylaws of DDL to

require a resolution of the shareholders of DDL to approve the loan. The failure of Billes and

McAteer to put the Loans decisions to the shareholders, as required by the USA, deprived

Mason of her right to approve or disapprove the Loans. By requiring her approval, she had the

right to avoid the risk associated with the Loans by refusing approval, or selling her shares (as

she tried to do to Billes after October 8, 1992, but was rejected out of hand), or making some

other arrangement to protect the position of her children.

[443] Due to the failure of McAteer and Billes, Mason was deprived of the opportunity and

otherwise helpless to avoid the ultimate downfall of DDL and the loss of the shareholder’s

position she held in the interest of her children. The result in my view was to unfairly prejudice

her, and certainly to proceed while unfairly disregarding her rights as a shareholder under the

USA. In either case, she is entitled to relief.

[444] Liu may appear, at first blush, to have arrived at a contrary conclusion, despite similar

circumstances. However, the facts in Liu, are significantly different from those in the case at

Bar. In Liu

:

a. there was no USA;

b. the shareholder had a right to vote on declaration of their interest; and

c. the trial judge found that the Plaintiffs had suffered no damage.

None of those factors are present here.

2.

The $200,000 Loan

[445] In addition to the failure to disclose and obtain shareholder approval, Billes and

McAteer took personal benefits from the increase in the amount of the Newmat Loan.

Specifically, the Newmat Loan was increased from $1.9 million to $2.1 million in order that

McAteer could receive $200,000.00 and repayment of his non-interest bearing shareholder loan.

Billes, in turn, received sole ownership of the Wolfe Street property. This transaction clearly

indicates that Billes and McAteer were treating the assets of DDL as though they were their

own personal assets. Moreover, the last $100,000.00 of this loan was advanced less than two

months prior to McAteer’s letter on behalf of DDL requesting a reduction in interest and citing

difficulty in payment. This would indicate that it was not in DDL’s interests to be repaying non-

interest bearing, shareholder’s loans at a time when it must have been obvious that DDL was in

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serious financial trouble. It is certainly indicative that no regard was given to Mason’s lack of

interest in the Wolfe Street transaction.

[446] In my view this is not dissimilar from the situation in Keho. In that decision, at 137,

Haddad J.A. discussed the principle shareholder’s conduct in arranging for a loan without the

approval of the board of directors, which loan was for the benefit of his personal corporation:

A disturbing aspect of Oliver’s conduct is that he seems to have considered his

position beyond challenge by using Keho’s line of credit to his personal

advantage. He treated Keho as his personal domain. He acted improperly and his

conduct can only be characterized as prejudicial to Keho and its shareholders.

[Emphasis added.]

Haddad J.A. concluded that such conduct failed to meet the applicable standard of fairness.

[447] In the present circumstances, I find that Mason had a legitimate right to expect that

Billes and McAteer would not disregard the interests of DDL and the other shareholder, Mason

herself, in order to derive a personal benefit for themselves. In so doing I find that Billes and

McAteer acted in a manner which was unfairly prejudicial and unfairly disregarded Mason’s

interests.

3.

The Effect of Those Acts as a Whole

[448] In Calmont Leasing Ltd.

v. Kredl (1995), 165 A.R. 343, the Court of Appeal found that a

piecemeal approach in looking at the alleged wrongs is unnecessary and that the trial judge can

look at all of the matters complained of together in order to sustain a finding of oppression or

unfair conduct within the meaning of the ABCA. Accordingly, even if one of the acts

enumerated above would be insufficient to find oppressive conduct or conduct which unfairly

prejudiced the rights of the other shareholder or disregarded her interest, I am satisfied that the

acts when considered together are more than sufficient to ground such a finding against Billes.

However, that said, the primary infringing act was the lack of disclosure and consent contrary

to the USA and ABCA

.

[449] It was argued by BJ (in the context of remedies for failure to disclose) that, contrary to

being oppressive or not in the best interests of DDL and its shareholders, the Kingswood Entities

and DDL’s shareholders were given a new lease on life by the Trust Loan. Accordingly, it

submits that there is no equitable reason to consider providing a remedy as there was no "wrong"

that needs to be "remedied".

[450] I agree with BJ vis-à-vis DDL, but not vis-à-vis Mason as a shareholder, whose personal

interests may well have been different than those of DDL. Specifically, the detriment to Mason,

as a shareholder, was that it increased her risk that the shares she held for the Mason/McAteer

children might become (as it turned out) worthless. The “wrong to be remedied” was depriving

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Mason of the choice, as a shareholder, to participate or not participate in the Loans which, while

creating an opportunity for DDL, also created a risk for her as a trustee shareholder.

[451] It was also argued that, had disclosure been made, Mason would have approved the

transactions in any event. This argument is premised on the fact that the Loans were supported by

McAteer and he would not have done anything to harm the interests of his children. Moreover, it

was argued that these transactions would allow DDL to proceed with its Kingswood

developments and increase the value of the shares of DDL, and that Mason would have seen this

herself or been convinced by McAteer.

[452] The arguments amount to: what would Mason have done if she had knowledge of Billes’

interests.

[453] Specifically Billes argued:

...the Court ought to determine that even if Mason was not apprised and did not

consent to these loans (we submit the Court should determine that she was and

she did), she would have approved these loans if asked. We make this

submission on the basis of her own evidence that McAteer was the manager, that

McAteer was looking after the family interests regarding DDL, that if McAteer

was happy she was happy, that she knew funding was required, and that she

expected Billes to be a financial partner, and that she was content to rely on the

Directors' assessment of what was in the best interests of DDL. We also refer to

Mr. Cristall's evidence that no other financing was available and that the terms of

these loans were fair and reasonable. It lies ill in Ms. Mason's mouth to complain

about the terms and the loans.

[454] I do not agree. Let us be clear as to a number of fundamental matters:

(a) Mason was neither an officer, nor director, but rather a 40% shareholder (for the

Mason/McAteer children);

(b) Mason had the right to believe that she had the security of the USA in place and had

no obligation to search out information to determine the details of what was happening

financially at DDL, nor did she appear to be the “active” investor inclined to do so. She

was not involved in the day to day management of DDL at any time before or after April

23, 1990, and in her cross by TM she acknowledged that she was “not a business

person”, “not familiar with those things...” and that she “did not interfere or get involved

with the company either before or after Billes became a partner”. This was even more

the case as she was getting general oral information on the progress of the Kingswood

project;

(c) Mason had no obligation to investigate to ensure - rather she had the right to expect

that - Billes and McAteer were obeying the USA and the ABCA; and

(d) Billes had an obligation to obey both the USA and the ABCA, to disclose her material

interests in writing, to refrain from voting as a director in support of the Loans, and to

Page 106

get Mason’s shareholder’s consent in writing. Moreover, Billes knew this as is

witnessed at the time when the Newmat Loan was still proposed as an Albikin loan, she

was aware of the need for shareholder approval (Exhibit 55, p.2, para.1). However, she

relied on McAteer in this regard.

[455] Accordingly, I do not find the argument that Mason would have approved the Loans, had

adequate disclosure been made, or any similar arguments, convincing. In other words, I find that

Billes has failed to demonstrate, on a balance of probabilities, that Mason would have consented

to the Loans. In that regard I note that Mason tried to sell her interests in DDL when trouble arose

in October 1992, between Billes and McAteer. I see no reason why she might not have done so in

February or October, 1991 when these transactions were being negotiated. She might well have

felt that there was too much risk for her children and asked McAteer or Billes to buy out her

interest and this might well have taken place at that time (indeed, she so enquired of Lavery in

December 1992 and he made enquires of Billes and told Mason that Billes was not then

interested). She was not asked about this hypothesis in her evidence - perhaps for good procedural

or tactical reasons.

[456] In any event these arguments overlook the fact that, by their conduct, Billes and McAteer

abrogated Mason’s right as a shareholder under the USA and deprived her of her right to

participate in the decision itself.

[457] Billes argued that if there was a defect in the Loans and she were found to be culpable it

would only be to a very minor degree. She submitted further that, in assessing whether her

conduct was oppressive, the Court ought to consider: the concessions that were provided by the

Lenders in allowing DDL time until the Loans were called; the subsequent Standstill Agreement;

Albilkin’s agreement to advance (if appropriate) and the actual advance of some additional funds;

and the ultimate reasonableness in calling the Loans. Taking all of these considerations into

account Billes submitted that her conduct cannot be characterized as oppressive.

[458] These factors do not in my view, excuse Billes. Had I based my finding in favour of an

oppression remedy on the enforcement of the Loans, and Billes’ involvement therewith while still

a director of DDL (as argued by Mason on the authority of Scottish Co-Operative Wholesale), the

above considerations might be more persuasive. However, as I have found that it was Billes’

failure to disclose and her taking of personal benefits at the expense of DDL which ground an

oppression remedy, the above factors can not exonerate her from liability to Mason.

[459] Although I have found no bad faith to exist on Billes’ part, such a finding is not

necessary. It is the conduct and its effects which are important. In all of the circumstances of

this case, I find that Mason’s interests have been unfairly disregarded and prejudiced.

ii.

McAteer

[460] I have found Billes liable to Mason under the oppression remedy. The issue arises as to

whether McAteer should also be liable under the oppression remedy. In this regard the Mason

Page 107

Action alleges that McAteer wrongfully permitted DDL to enter into the Trust and Newmat

Loans in breach of the USA and the ABCA, and wrongfully or negligently signed Officer’s

Certificates when he knew the statements therein were false and concealed the existence of the

Trust and Newmat Loans.

[461] McAteer argued:

We agree that the failure of Billes to disclose her interest in both the Trust and

Newmat may lead to an oppressive remedy. The duty which was breached was

the duty of Billes and not McAteer. In the event this Court finds that Billes

breached her duty and the appropriate remedy is the oppressive remedy, then

Billes and her related entities ought to be held accountable. McAteer ought not to

bear any liability.

[462] Indeed, McAteer went further and argued that he ought to be considered a joint

complainant in respect of this oppressive conduct. However, McAteer has not pled to this

effect. Further, although he is capable of falling within the definition of complainant under s.

231(b) of the ABCA, I find that McAteer was a participant in the oppressive conduct rather than

a complainant as a result of having engaged in conduct which was unfairly prejudicial and

which unfairly disregarded Mason’s rights as a shareholder. The specific conduct which I am

referring to includes that alleged by Mason, including, but not necessarily limited to, the

following:

(a) McAteer had actual knowledge of the terms of the USA and the requirements

for shareholder approval of the Loans when a director was in a conflict of

interest situation;

(b) McAteer had actual knowledge of Billes’ conflicts of interest and knew, or

ought to have known, that she was in a conflict of interest position with DDL in

respect of each of the Loans;

(c) McAteer knew that no shareholder resolutions on behalf of DDL had been

signed approving either the Trust Loan or the Newmat Loan and he knew that no

shareholders meetings had been called to seek approval for either of these Loans;

(d) McAteer knew that his assertions in the Officer’s Certificates that “the

Company is not bound by any provision in . . . any Unanimous Shareholder

Agreement which would in any way hinder or restrict the powers of the

Company or the officers of the Company to authorize, execute and deliver the

debenture” were false on the facts;

(e) McAteer received the benefit of the $200,000 Loan by way of a reduction in

his non-interest bearing, unsecured, shareholders loan. As outlined supra, this

was done without the knowledge or consent of Mason;

(f) McAteer knew that Billes believed on the basis of his misrepresentation that he

would and did make the appropriate disclosure to and obtain Mason’s consent in a

manner that was consistent with the ABCA and USA.

Page 108

[463] In the end result, I find that McAteer and Billes are jointly and severally liable to Mason

under the oppression remedy.

g.

Form of Remedy

[464] The next issue is the appropriate form of remedy. The oppression provisions provide

wide powers for the creation of an equitable remedy tailored to fit the circumstances. The

Court’s broad discretion in this context is, however, limited by the qualifications that it is to be

exercised only to rectify the oppression and may protect the complainant’s interests only as a

shareholder: Naneff v. Con-Crete Holdings Ltd.(1995), 23 O.R. (3d) 481 (C.A.).

[465] In fashioning a remedy appropriate to the circumstances I have also had regard to the

comments of Farley J. in 82009 Ontario Inc. v. Harold Ballard Ltd. (1991), 3 B.L.R. (2d) 113 at

197 (Ont. Gen. Div.), aff’d (1991), 3 B.L.R. (2d) 113 (Ont. C.A.):

The court should not interfere with the affairs of a corporation lightly. I think that

where relief is justified to correct an oppressive type of situation, the surgery

should be done with a scalpel and not a battle axe. I would think that this

principle would hold true even if the past conduct of the oppressor were found to

be scandalous. The job for the court is to even up the balance, not tip it in favour

of the hurt party.

[466] In this case, there is no value left in DDL to salvage. The only logical remedy to

compensate Mason for the improper conduct of McAteer and Billes is to value her interest and

to restore her to the position she held at a point in time when the conduct had not yet occurred.

To suggest any other remedy would involve speculation as to whether she would have approved

the Loans if the requisite disclosure had been made, or that DDL would have failed in any

event.

[467] The ability to assign responsibility to directors or officers personally for oppressive

corporate conduct was confirmed in Budd v. Gentra Inc. (1998), 111 O.A.C. 288 (C.A.). The

Court found, at para. 46:

A director or officer may be personally liable for a monetary order under that

section [the oppression provisions] if that director or officer is implicated in the

conduct said to constitute the oppression and if in all of the circumstances,

rectification of the harm done by the oppressive conduct is appropriately made

by an order requiring the director or officer to personally compensate the

aggrieved parties.

[468] I am satisfied that the pleadings and evidence disclose facts which support a monetary

order against Billes and McAteer personally. As above, I am also satisfied that both McAteer

and Billes are guilty of the conduct that constitutes the oppression. Accordingly, I find that it is

Page 109

appropriate in the circumstances to rectify the harm done by ordering them to compensate

Mason as an aggrieved party, pursuant to s. 234(3)(l) of the ABCA

.

[469] I have undertaken the determination of the appropriate amount of those damages later in

these Reasons.

2.

Constructive Trust

[470] Mason and McAteer, under the damage components of the Mason and

McAteer/Kingswood Actions, contended that if a director of a company breaches his or her

fiduciary duties and misapplies the funds of a company so that they come into the hands of a

stranger who receives them with knowledge of the breach, actual or constructive, the stranger

cannot retain those funds. The stranger in those circumstances in effect becomes a constructive

trustee in relation to the funds and the transaction is thus invalid and ought to be set aside. In that

regard Mason and McAteer relied on Rolled Steel Products (Holdings) Ltd. v. British Steel

Corporation and Others, supra at 88, quoting Belmont Finance Corporation Ltd. v. Williams

Furniture Ltd. (No. 2), [1980] 1 All E.R. 393 at 405 (C.A.):

The Belmont principle thus provides a legal route by which a company may

recover its assets in a case where its directors have abused their fiduciary duties

and a person receiving assets as a result of such abuse is on notice that they have

been misapplied.

[471] Applying those principles to the case at hand, McAteer and Mason argue that, although

Billes may have disclosed that she had an interest in the Lenders to McAteer, she was bound by

the provisions of the USA to disqualify herself from taking any part in the decision to enter into

the Loans. In that regard McAteer cites Anderson Lumber Co. v. Canadian Conifer Ltd., supra.

The directors of DDL were compelled to refer the matter to the shareholders of DDL to decide.

Thus, the decision was not within the capacity or authority of the directors. I agree so far.

[472] It was further argued by Mason and McAteer that because the Lenders had knowledge of

the breach of Billes’ duties to DDL, constructively via Billes (no actual knowledge is alleged), the

Loans are void, the Lenders are constructive trustees for the security pledged and DDL is entitled

to the return of its property. I do not agree. Quite simply, I find Billes did not know of the lack of

compliance because she relied on McAteer to obtain (and believed that he had obtained) Mason’s

consent. Therefore, if Billes did not know of the breach, neither did the Lenders, through her. I

further have found that the Lenders had no knowledge of breach from any other source.

[473] Moreover, there may also be an argument that Billes’ knowledge is not the knowledge of

the Lenders. The Court of Appeal in Anderson Lumber Company, supra, makes clear that any

knowledge must be brought home to the directing mind and will of the third party corporation.

However, having found no knowledge, I need not pursue this argument to a final determination.

Billes was a director of Newmat, but not an officer and not part of management. As it relates to

the Trust, while I have found her in de facto control for decision making purposes, the Trust could

Page 110

only execute a Loan by a majority of its trustees, and she was only one of three separate legal

entities (trustees) who constituted the Trust.

[474] I accept the submissions of Billes that, in the negotiation of the Newmat Loan, Newmat

was represented by Newel who consulted with Matkaluk, both of whom were directors and

officers of Newmat. For the purposes of this transaction, Newel, the Chief Financial Officer of

Newmat, and the Newmat officer most active in the business dealings of Newmat, was the

directing mind of Newmat. Accordingly, I find that he was the person providing instructions for

Newmat, although Billes and Lavery, on her behalf, were also in communication with Marshall.

Even there, however, I find, as Lavery corroborated, that Billes left the final decisions to Newel,

stating that she was “washing her hands” of it. There is nothing in the evidence to suggest that

either Newal or Lavery knew of any difficulty with the making of the Newmat Loan, or even that

there was a USA among DDL's shareholders. Indeed, I find that Newel was unaware of Mason's

interest and believed DDL was owned 50/50 by Billes and McAteer. As such, Newmat could not

be said to have had knowledge of the breach.

[475] In relation to the Trust, Billes was only one of three Trustees and she had no beneficial

interest in the Trust. I note that, while Billes did not have legal control of the Trust, I have found

that she did have de facto control, in that neither of Lavery nor Mann would vote against her

view, unless there was any illegality. However, I find that neither Lavery nor Mann were aware of

Billes’ breach of her disclosure obligations to DDL. Moreover, McAteer represented to Whitlock,

at the beginning of the discussions regarding the Trust Loan, that DDL was solely owned by

McAteer (39 1/3% for his children) and Billes (Exhibit 471), although, of course this was not

true. I find that Billes did not know that McAteer had not complied with the requirements on her

behalf. As a result, the Trust had insufficient knowledge, constructive or actual, to become

constructive trustees.

[476] In the result, the Loans and the security therefor were valid and enforceable. In other

words, as third parties dealing in good faith with the directors of DDL, and without knowledge of

irregularity, they were entitled to assume that the internal steps requisite for the formal validity of

the directors’ acts had been duly carried out: Rolled Steel Products, supra.

[477] Mason acknowledged the Breckenridge principle (see: Communities Economic

Development Fund v. Canadian Pickles Corp., [1991] 3 S.C.R. 388) which states that a debtor,

even if a transaction is a nullity, has no answer to an action for money had and received, as it has

a legal obligation to repay the funds received. Nonetheless, Mason attempted to distinguish that

decision on the basis that there were no other creditors in that case - a distinction that does not

follow from a review of the reasoning of Iacobucci J., at 213 et seq.

[478] Mason points out, however, that even if the Trust Loan and the Trust debenture were set

aside, the Trust would still have a claim against DDL for monies had and received, although it

could lose its status as a “secured creditor”.

Page 111

[479] Billes et al.. argued that, even if shareholder approval was not obtained, the statutory

"indoor management" rule applies. I have applied that rule in favour of the Lenders, because of

their lack of knowledge of irregularity.

[480] Further, the Loan transactions, although in excess of DDL’s power due to the lack of

internal compliance, were not ultra vires. That is, they would not have been beyond DDL’s

capacity if there had been proper internal compliance. McAteer summarized this distinction,

relying (as did Mason) on Rolled Steel, in this fashion:

Browne-Wilkinson L. J., discussed the use of the phrase “ultra vires” which

literally means beyond the powers. He discusses the use of the phrase and how it

has been used interchangeably in reference to the objects of a corporation and the

powers to carry out those objects. He distinguishes the dual use of the phrase and

limits the use of the phrase to the situation where a corporation has violated the

articles or objects of the corporation and is beyond the capacity of the corporation

and therefore wholly void.

[481] Consequently, the Loans and their security are not void on those grounds. Given my

finding that Newmat and the Trust did not have notice of the irregularities regarding the internal

approval of the Loans, and that the transactions were fully executed prior to any knowledge on

Mason’s part, she is only entitled to hold liable the parties who carried out the transactions,

namely McAteer and Billes. See Rolled Steel, at 88, 91-92, which states:

... it is clear that a transaction falling within the objects of the company is capable

of conferring rights on third parties even though the transaction was an abuse of

the powers of the company: see e.g. Re David Payne & Co. Ltd. [1904] 2 Ch. 608.

It is therefore established that a company has capacity to carry out a transaction

which falls within its objects even though carried out by the wrongful exercise of

its powers.

... If two trustees convey trust property in breach of trust, the conveyance is not

void. ... Even if their powers under the trust instrument did not authorize the

conveyance, the legal estate will vest in the transferee. ... If the beneficiaries only

discovered the position after the conveyance, the transferee, if he took with notice,

would be personally liable as a constructive trustee and the property conveyed

could be recovered: but the conveyance would not be a nullity. So in the case of a

limited company, if a transaction falls within the objects of the company (and is

therefore within its capacity), it is effective to vest rights in a third party even if the

transaction was carried out in excess or abuse of the powers of the company. If the

members of the company ... only discover the facts later, their remedy lies against

those who have wrongly caused the company to act in excess or abuse of the

company's powers....: see Belmont Finance Corporation Ltd. v. Williams Furniture

Ltd. (No. 2), [1980] 1 All E.R. 393....

Page 112

... the principles of ostensible authority apply to the acts of directors acting as

agents of the company and the rule in Royal British Bank v. Turquand (1856), 6 E.

& B. 327, [1843-60] All E.R. Rep. 435 establishes that a third party dealing in

good faith with directors is entitled to assume that the internal steps requisite for

the formal validity of the directors' acts have been duly carried through. If,

however, the third party has actual or constructive notice that such steps had not

been taken, he will not be able to rely on any ostensible authority of the directors

and their acts, being in excess of their actual authority, will not be the acts of the

company.

The critical distinction is, therefore, between acts done in excess of the capacity of

the company on the one hand and acts done in excess or abuse of the powers of the

company on the other. If the transaction is beyond the capacity of the company it

is in any event a nullity and wholly void: whether or not the third party had notice

of the invalidity, property transferred or money paid under such a transaction will

be recoverable from the third party. If, on the other hand, the transaction (although

in excess or abuse of powers) is within the capacity of the company, the position of

the third party depends upon whether or not he had notice that the transaction was

in excess or abuse of the powers of the company. As between the shareholders

and the directors, for most purposes it makes no practical difference whether the

transaction is beyond the capacity of the company or merely in excess or abuse of

its power: in either event the shareholders will be able to ... hold liable those who

have carried it out.... [Emphasis added.]

[482] Billes argued that the Rolled Steel case is distinguishable, because the Court found actual

knowledge of lack of authority. That may well be the factual case, contrary to what I find here,

but it does not affect the application of its principles to this case. Billes also argued that the “Trust

and Newmat are not persons who have or ought to have by virtue of a position with or

relationship to DDL knowledge of any alleged non-compliance with a USA”. I agree with this

later submission on my findings.

[483] Billes also argued, relying on ABC Colour & Sound Ltd. v. Royal Bank of Canada (1988),

70 C.B.R. (N.S.) 251 (Alta. Q.B.), aff’d (1991), 117 A.R. 271 (C.A.) that, even if a constructive

trust were found to exist, there was an issue as to what assets would be caught by the constructive

trust. She argued that, except for HAL, DDL had no assets, and the hard assets were all in the

Kingswood Entities, but, due to the security, there was no equity left. Accordingly, she argued

that DDL and the Kingswood Entities were insolvent, and accordingly had not suffered a loss. I

can put this argument quickly to bed because I have found that none of the Lenders or their

Counsel had knowledge of Billes’ breach of her duty to DDL and Mason. Moreover, I have

upheld the Loans and found that the processes of execution on the security were not unreasonable,

and finally, I have granted Mason a remedy under the oppression provisions.

[484] Accordingly, there is no additional relief to be granted under the constructive trust

doctrine.

Page 113

3.

Breach of Fiduciary Duty

[485] Mason argued that Billes and McAteer, in their capacity as a directors, owed Mason a

fiduciary duty as a shareholder. Mason relied on Hodgkinson v. Simms, [1994] 3 S.C.R. 377 and

Frame v. Smith, [1987] 2 S.C.R. 99, as setting out the general characteristics of a fiduciary

relationship.

[486] In my view the law has not yet reached a point where directorship necessarily entails such

a duty towards a shareholder. I acknowledge, however, that there may be exceptional

circumstances where this conclusion would not apply: Colborne (Q/B.), supra: McKinlay

Transport Ltd. v. Motor Transport Industrial Relations Bureau of Ontario (Inc.) (1996), 96

C.L.L.C. 210 (Ont. Gen. Div. - Lane J.); Ellis, Corporate Commercial Fiduciary Duties

, supra, at

15-25, 28; and Budd v. Gentra, supra.

[487] Mason argued that such circumstances did exist in the present case. Specifically, she

referenced the conversation that she, McAteer and Billes had on October 26, 1990, shortly after

the revelation of the McAteer/Billes affair on October 23, 1990, (referenced in her October 12,

1992 letter to McAteer - Exhibit 137). In that conversation all three agreed that the

Mason/McAteer children would not suffer. Mason submitted that this created a fiduciary

relationship between McAteer and Billes to her vis-à-vis the Mason/McAteer children.

Specifically, Mason argued that:

... in the circumstances of this case both Billes and McAteer undertook to act in the

best interests of the McAteer Children and therefore were in a fiduciary

relationship with Mason who was the trustee for their interests in DDL.

Mason completed the argument by alleging that Billes and McAteer had breached their fiduciary

duties to DDL and Mason in several respects, and as a consequence DDL and Mason were

entitled to damages on a restitutionary basis.

[488] In my view, the nature of that conversation was that McAteer, Mason and Billes would

ensure that the children would not be unduly hurt as a result of Billes’ and McAteer’s extramarital

affair and the breakdown of McAteer and Mason’s marriage. Notwithstanding that the word

“business” was included in the confirmatory answer to which Billes responded on cross, I find

that those representations did not relate to Billes’ investment in or the operation of DDL. In that

regard, even Mason described it in these words:

And in the beginning, I think there was every effort made by all three of us that we

would try and make this divorce as amicable as we possibly could and that the

children would be hurt as little as possible by the fact that we were divorcing.

[Emphasis added]

Page 114

I find that this understanding, and indeed agreement, did not create a fiduciary relationship

between Billes and McAteer as directors on the one hand and Mason as a shareholder on the

other.

[489] I find further that it is unnecessary for me to determine whether there were any other

circumstances in the present case that gave rise to a fiduciary relationship between Billes and

McAteer vis-a-vis Mason. It is clear that there is a close relationship between fiduciary duty

and oppression in that, where a breach of a fiduciary duty has occurred, the test for oppression

will also have been met: Calmont

v. Kredl (1993), 142 A.R. 81 (Q,B.), aff’d (1995) 165 A.R.

81 (C.A.), Mikulak, relying on Clarke

v

. Rossburger, supra As I have already found that an

.

oppression remedy is appropriate in the circumstances, in relation to Mason, there is no need to

provide an alternate source of relief under the guise of a fiduciary duty.

[490] Moreover, speaking in the context of fiduciary duties of directors or majority shareholders

vis-a-vis minority shareholders, the Ontario Court of Appeal in Brant v. KeepRite, supra, at 172,

discussed the important policy considerations militating against expanding fiduciary duties in a

corporate context:

The enactment of [the oppression] provisions has rendered any argument for a

broadening of the categories of fiduciary relationships into the corporate context

unnecessary and in my view, inappropriate.

It must be recalled that in dealing with s. 234, the impugned acts, the results of the

impugned acts, the protected groups, and the powers of the court to grant remedies

are all extremely broad. To import the concept of breach of fiduciary duty into that

statutory provision would not only complicate its interpretation and application,

but could be inimical to the statutory fiduciary duty imposed upon directors in s.

117(1) (now s. 122(1)) of the CBCA.

In my view those comments apply with equal force to the current context, in the sense that adding

a layer of fiduciary duty to the duty to act fairly would unnecessarily complicate matters,

particularly where the oppression remedy alone provides adequate relief.

[491] Mason argued further that Billes owed her a fiduciary duty in Billes’ capacity as a

creditor. I my view fiduciary obligations will arise between creditors and lenders dealing at arms

length only in rare circumstances. In this regard Mason argued:

It is rare in the context of an arms-length commercial transactions that there is a

finding of a fiduciary relationship between a bank and its customers. However, in

special circumstances fiduciary relationships can be found. The onus of proof lies

on the customer who alleges that in any individual case the line has been crossed

and a fiduciary relationship has arisen.

[492] In making this argument, Mason referenced C.I.B.C. v. De-Jai Holdings Inc., supra where

the Court refers to, inter alia, J.F. Varley, "Fiduciary Responsibility of Lenders", published in

Page 115

L.S.U.C., Lender Liability and Responsibility (November 3, 1989) at p. C-7 (see also Ellis, at 7-

2.1 to 7.2.2(1)), where the author stated:

The lender should be seen to have assumed a particular responsibility beyond what

one might expect in the ordinary course of a lender-borrower relationship.

...

Lender involvement in management of the borrowers' business, as sometimes

practised by "venture capitalists", "merchants bankers" can similarly be seen as an

assumption of a particular responsibility beyond the scope of the ordinary lender

role, especially if shares or board seats are taken, or if the lender begins to deal

directly with the lender's employees or suppliers on matters of management (not

lender) responsibility.

The Court observed:

The above noted comments are, in my view, of assistance in determining whether a

fiduciary relationship exists in the circumstances of this case. They indicate that it

is necessary to examine the relationship between the parties before examining the

conduct that it is alleged gives rise to a breach of duty, in determining whether a

fiduciary relationship exists.

[493] Billes countered by arguing that there was nothing on the facts of the present case to give

rise to the unusual and extraordinary situation where the Lenders might be fiduciary to their

borrower, DDL. I agree.

[494] As to Billes vis-à-vis DDL, I note that, in discovery, Billes acknowledged that she was a

venture capitalist, and I find in this case that the above description is, generally, applicable to

Billes. However, Billes was not a Lender in the Newmat Loan, and not a “beneficial” Lender -

that is, she was a Lender in name only (as a Trustee) - in the Trust Loan. In any event, having

found that Mason is entitled to an oppression remedy, I need not pursue this issue any further.

[495] As I have held supra, in the context of a “financial partner”, although there may have been

some reliance by Mason and McAteer on Billes to find financing in order to allow DDL to

continue to carry on business, there was no agreement or undertaking by Billes to that effect.

Further, Mason stated that she was unaware that the Lenders were connected to Billes. Clearly if

Mason was unaware of Billes’ conflict of interest she could not have expected Newmat and the

Trust to set aside their own self interests for the sake of DDL, particularly given that the Loans

were structured as demand loans.

[496] Mason also argued that Newmat and the Trust ought to be held to be in fiduciary positions

as she alleges that they acted in association with Billes in the breach of her duty. In that regard

Page 116

she relied on Canada Safeway Ltd. v. Thompson, [1952] 2 D.L.R. 591 (B.C.S.C.). Mason put it in

these words:

...Newmat, the Estate Trust and Owen Billes, while not in a fiduciary position

themselves to Mason, may be caught in the circumstances of this case by the

fiduciary duties owed to DDL and Mason by Billes in that they acted in

association with Billes in the purported enforcement of the securities and with

the knowledge that Billes was in breach of her duty to DDL and Mason.

However, the argument fails as I have found that Billes was unaware of her failure to disclose in

that she was relying on McAteer in that regard. The evidence leads me to conclude that those

entities continued to lack such knowledge until after the Loans were in default, and the only

option seemed to be enforcement.

[497] Mason argued further that McAteer has also breached his fiduciary duties in failing to

make prudent business decisions and failing to advise of Billes’ conflict of interest. With respect

to allegations regarding prudent investments, in my view that is a business judgement, and

although it is reviewable, the Courts have been loathe to substitute their own opinions for that of

the directors: Brant Investments v. KeepRite Inc, supra; CW Shareholdings Inc. v. WIC Western

International Communications Ltd. (1998), 39 OR. (3d) 755 (C.A); D. Peterson Shareholders

Remedies in Canada at para. 8.20.1), so long as they are acting in the best interests of the

company: Re Smith and Fawcett Ltd., [1942] Ch. 304 (C.A.); Cramer v. General Telephone &

Electronics Corp. 582 F.2d 259 (3^rdCir.1978); and Burland v. Earle, [1902] A.C. 83 (P.C.); Teck

Corp. Ltd., supra. In other words, “the court looks to see that the directors made a reasonable

decision not a perfect decision”: Pente Investment Management Ltd. v. Schneider Corp. (1998),

42 O.R. (3d) 177 (C.A.), aff’g (1998), 40 B.L.R.(2d) 244 (Ont. Gen. Div.).

[498] This is not a case in which the Court’s further involvement under a fiduciary duty remedy

is appropriate. However, McAteer’s knowledge of Billes’ conflict and his failure to disclose it,

knowing the impact it would have on Mason, is enough for me to find him jointly and severally

liable with Billes, under the oppression remedy, as I have done.

[499] There were considerable further arguments (pro and con) in relation to fiduciary duties

and damages to Mason. However, having found Mason entitled to damages under the oppression

remedy, I find that I do not need to consider any other independent remedy based on breach of

fiduciary duty.

I.

Relief to Mason

1. Declarations

[500] Mason, in the Mason/McAteer Action, is entitled to a declaration that McAteer and

Billes have conducted themselves as directors and shareholders in DDL in a manner that was

unfairly prejudicial to and which unfairly disregarded Mason’s interests.

Page 117

2.

Damages

[501] As a remedy, Mason focussed on damages in the amount of the equivalent of the value

of Mason’s shares at the time of the oppressive conduct. In this regard, Mason argued:

D. Peterson in Shareholder Remedies in Canada reviews the orders available to

remedy oppressive actions in c. 18. Peterson discusses the order directing a

purchase of security at paragraphs 18.175 through 18.197.1 of c. 18. He also

discusses the order compensating an "aggrieved person" at paragraphs 18.208

through 18.227.

Under s. 234(3)(g) of the Alberta Business Corporations Act, the Court is

empowered to make "an order directing a corporation…….or any other person,

to purchase securities of a security holder".... D. Peterson points out that no

specific guidelines have been provided for the valuation of shares. However,

two general principles have emerged with respect to the valuation methodology

under the oppression remedy. The first is that the shares of the minority are to be

valued as if the oppressive conduct did not occur, if the circumstances are

appropriate. The second principle is that the shares are to be priced at "fair

value". Further, where the oppressive conduct has reduced the value of the

corporation, the general rule is that the valuation date is the date on which the

application was commenced.

At para. 18.178 and 18.179, D. Peterson points out that the cases suggest that

there are at least four circumstances where the courts will order a purchase of

shares. The first circumstance is where majority shareholder abuse leaves no

meaningful opportunity for involvement by the oppressed party. D. Peterson cites

Scottish Co-operative Wholesale Society Ltd. v. Meyer as an example. In that

case the oppressive conduct resulted in the destruction of the company. Without

a viable going concern, the only alternative was to order the majority to purchase

the shares of the minority at the price they would have been worth if the oppressive

conduct had not occurred. [Emphasis of Mason removed, and new emphasis

added.]

[502] On the issue of valuation date, Mason went on to argue:

D. Prentice in an article entitled "Minority Shareholder Oppression: Valuation of

Shares" (1986) 102 Law Q.Rev. 179 discusses a number of decisions dealing

with the principles to be adopted in valuing shares pursuant to an order of

purchase. At p. 184, he writes:

"…..The other issue of importance dealt with in recent cases is the date on which

the valuation should be taken to have been made. For example, should it be at the

Page 118

date the oppression occurs, the date of the petition, the date of judgment, or at

some other date? Keeping in mind the general principle that the oppression

should not be allowed to affect the value of the shares, the following principles

can be culled from the cases. First, if there is any "such a thing as a general rule"

then the "date of the order or the actual valuation would be more appropriate than

the date of the presentation of the petition or the unfair prejudice" (Re London

School of Electronics Ltd., [1985] 3 W.L.R. 474, 484B). The reason for this

being that an interest in a going concern ought normally to be valued at the date

of the purchase order. However, as Nourse J. pointed out in Re London School of

Electronics Ltd., the overriding requirement of fairness may make this rule

subject to so many exceptions that the exceptions will gobble up the rule: in fact

the first general principle may be that there is no general principle

.

Second, the valuation date should not (a) deprive the petitioner of the benefits

of any contributions he has made to the business success of the company, or

(b) confer on the petitioner the benefits of contributions to the company's

business for which he has not been responsible. Both of these principles are

implicit in Re London School of Electronics Ltd. (see also Re O.C. (Transport)

Services Ltd. [1984] B.C.L.C. 251)...." [Emphasis added.]

[503] Mason relied on Hodgkinson

calculation of damages in the context of breach of fiduciary duty. She also relied on the cases

cited therein, specifically London Loan & Savings Co. . Brickendon, [1934] 3 D.L.R. 465

(P.C.), and Commerce Capital Trust Co. . Berk, supra, for the proposition that (Hodgkinson v.

v. Simms, supra with regard to the law relating to the

v

Simms, supra at 441) “once the plaintiff has made out its case for non-disclosure and the loss

occasioned thereby the onus is on the defendant to prove that the innocent victim would have

suffered the same loss regardless of the breach”.

[504] Based on these and other submissions on the law, Mason finally argued:

Applying the principles set forth above to the facts of the present case, it is

respectfully submitted that Mason should be compensated for the loss in value of

the shares she held in DDL which was caused by the oppressive conduct of

Billes and McAteer. The evidence of Siebert, which is to be preferred in this

matter, indicates a "fair value" of the shares in the range of $440,000.00 to

$600,000.00 as at February-March, 1991, being the date when the oppressive

conduct of Billes and McAteer commenced. At the present time the shares of

DDL are worthless since the oppressive conduct of Billes and McAteer resulted

in the destruction of the company.

[505] In my view damages to Mason in the amount of the value of her shares at the time the

oppressive conduct occurred, March 21, 1991, are appropriate. Such an order is appropriately

made under s.234(3)(l) as an order compensating an aggrieved person. An order that McAteer

and Billes purchase Mason’s shares in DDL at a valuation date just prior to the oppression

Page 119

under s.234(3)(g) would yield the same result, but it would be an unnecessary fiction given that

DDL is now defunct.

a.

Fair Value

[506] There was significant argument on what the fair value of the Mason shares was at the

time I found the oppressive conduct to have commenced, being the time of the Trust Loan on

March 21, 1991. Lorne Siebert (“Siebert”) (called by Mason) and Jeffrey Cristall (“Cristall”)

(called by Billes), each Chartered Business Valuators, gave expert comments and opinions

relevant to that matter. While sidetracked on arguments of definition and methods of assessing

fair market value, the issue between them essentially boiled down to determining whether the

purchase by Billes of a 50% interest in DDL in April 1990 was an indication of the fair value of

the shares at that time and ten or eleven months later. Billes argued that Siebert’s methodology

departed from standard writings on the subject and was not an indication of fair value, but

rather that the value, based on Cristall’s opinion was nil.

[507] The evidence of the experts, Siebert and Cristall, and the other experts who provided a

basis for their analysis in their expert reports and testimony, was detailed and technical. In

providing a basis as to how I arrived at my conclusion regarding valuation, I believe that I can

do no better than to repeat some of the evidence that was given and arguments that were made

and provide my comments thereon.

i.

Siebert’s Evidence

[508] Siebert’s primary report (Exhibit 351) relied upon the analysis of Derek Malcolm

(“Malcolm”), a Chartered Accountant with expertise in forensic and investigative accounting.

Malcolm was engaged to identify, analyse and summarize various documents to provide a

historical basis for valuation of DDL and, as relevant, the Kingswood Entities, and prepare a

report (Exhibit 333) in that regard. Siebert also prepared a rebuttal report (Exhibit 352) in

response to Cristall’s report (Exhibit 393), and in oral evidence commented on Cristall’s

rebuttal report (Exhibit 394).

[509] In arriving at the value of the DDL shares at April, 1990 and March, 1991, Siebert used

(para. 1.4 of Exhibit 351) the following definition of “fair market value”: “the highest price

available in an open and unrestricted market between informed and prudent parties, acting at

arms length and under no compulsion to transact, expressed in terms of monies worth". While

there was much cross and argument about this definition, I find that it is precisely the definition

used by all the learned authors referenced, including: R.M. Wise, J.E. Fishman and S.P. Pratt,

Guide to Canadian Business Valuations, (Looseleaf), Volume 1 (Toronto: Carswell,

2000)(Exhibits 353 and 397 - para. 205.03); and D. Peterson, Shareholder Remedies in Canada,

supra, c. 4). See also: Mackenzie Financial Corp. v. McRae (1998), 81 O.T.C. 321 at para. 130

Page 120

et seq, (Gen. Div.), referenced in 36941 Alberta Ltd.

v. Pocklington (2000), 271 A.R. 280 at

para. 84 (C.A.). Moreover, except for the qualifying “factors”, Siebert’s definition is not

inconsistent with the definition in article 1.01(h) of the USA (Exhibit 13), to which the parties

agreed. Cristall also used this definition (Exhibit 393), except he added the word “equally” before

“informed”, a modifier that I find inconsistent with the accepted definition and invalid.

Nonetheless, Cristall claimed that removing that qualifier did not really affect his opinion. As

such, I find that there is little need for further debate on the subject, aside from some comments

on the issue of “equally”. I would , however, point out that, for the oppression remedy, the

operative consideration is “fair value”, not “fair market value”.

[510] In short, Siebert concluded, using the market comparable approach, that the en bloc value

of DDL at April, 1990 was $1,500,000.00 making Mason's 40% interest worth approximately

$600,000.00. In arriving at that conclusion Siebert was cognizant of the Billes acquisition of 50%

of DDL shares and was of the view that that transaction met all of the factors involved in the

definition of fair market value.

[511] In addition, Siebert looked at other transactions that took place at or around that time and

indicated they supported his view of the value of 100% of the shares of DDL at April 30, 1990.

These transactions included the Murray transaction (Transcript 1235 et seq.), the McLarty

transaction and McAteer's view as to the value of DDL shares in the Separation Agreement

between McAteer and Mason. He also looked at the H & T Enns Holdings Ltd., the Curtises, the

Smirnovs and WC Enterprises transactions and stated, in chief:

In each of these transactions -- and they were all buying minority interests in the

Golf LP .... So here we have other parties buying into the golf course believing

that there's [$1,000,000] worth of value in that golf course....

...

And if you look at all these transactions ... it is my view that the best evidence is

the transaction where Billes purchased 50 percent of the shares of DDL for

$750,000 for the equivalent of [$1,500,000] for the value of the DDL shares.

But the other transactions suggest that other people believe there was value in

DDL, in its assets, in its prospects in the future. And not that all the values

exactly line up; but they all suggest that various parties believe that there was

value in this enterprise, in this project if you will, this vision of McAteer.

[512] He was then asked about the value of 100% percent of the shares of DDL at March 21,

1991. He stated that, in his opinion, there would not have been any significant or material

change from the $1,500,000 value just ten months earlier. He based his opinion in that respect

on:

Page 121

(a) no significant change in the nature of DDL's business as it was still in the real

estate development and golf course business;

(b) plans that DDL had in place in April, 1990 had been executed, including the Murray

buyout, the Phase II land acquisition, and the sale of an interest in the golf course to the

Curtises;

(c) lot sales continued at approximately the same rate as DDL had enjoyed in April of

1990;

(d) the financial position of DDL had not changed materially;

(e) DDL was able to attract additional capital (the Trust loan) - Siebert theorized that

nobody would put money into DDL unless they believed in DDL's future prospects;

(f) the long term nature of the investment - the shareholders were aware there would be no

positive cash flow from the Kingswood project until approximately the fall of 1993; and

(g) the Separation Agreement between Mason and McAteer (Exhibit 28) would indicate

they believed the en bloc value of DDL was in excess of $1.5 million [the children’s 40%

share holding was indicated to be worth approximately $775,000].

[513] In relation to the last point, I would not have put any weight on the values used in the

Separation Agreement as they do not reflect arms length transactions. With that exception, I find

the above analysis supportive of Siebert’s conclusion as to fair market value as at March 21,

1991. I would again point out, however, that for the oppression remedy, the operative

consideration is “fair value”, not “fair market value”.

ii.

Cristall’s Evidence

[514] Siebert and Cristall agreed that there was no material change in the value of the shares of

DDL between April 23, 1990 and March 21, 1991. The difference between Siebert's and Cristall's

Reports was primarily in the different view they took of the value of the DDL shares at April 23,

1990.

[515] Billes summarized Cristall’s evidence at length. In the next section I will refer to that

argument extensively, interjecting where I disagree.

[516] Cristall opined that the net asset approach to going concern value was appropriate for

DDL, as it was a real estate development company with no history of earnings. This is consistent

with Exhibit 353. He also gave evidence that it was not necessary to obtain a valuation of each

property as a valuator in the exercise of his professional judgement may rely upon other evidence.

[517] Cristall's report stated (Exhibit 393) that DDL had a value of nil on November 27, 1992.

Although this nil value might well have been the case on a net basis, after the Trust and Newmat

Loans were added to the liability side of the financial statements, that was not even the view of

Sali, Counsel for Billes, at that time. Here we see Billes argue that there was no value to the 50%

shareholding she acquired in 1990, yet when matters were in dire straits in October 1992, Counsel

on her behalf was still proposing a value of those shares of $500,000 (Exhibit 119a and 128).

Page 122

Surely this is not indicative of no value in early 1991, before $3.3 million in debt was added. This

demonstrates the incredulity of the Cristall opinion.

[518] Cristall provided valuation opinions for April 23, 1990 and March 23, 1991 (Exhibit 394),

concluding that the value of DDL on those dates was nil. Those opinions were based on

independent appraisals or other evidence of valuation.

iii.

Arguments and Analysis

[519] I do not accept Cristall’s opinion, and find it preposterous that Billes, a sophisticated

business person with professional advice, would invest $750,000 to buy 50% of a company that

was worth nothing. I also come to that conclusion after an analysis of the numerous arguments on

the subject.

[520] Billes, however, argued:

Cristall gave evidence with respect to the assessment of the various transactions of

1990 (Murray, Smirnov, Curtis) which were suggested by Siebert to be relevant.

He testified that such transactions would require adjustment or investigation to

insure that they were on the basis of money or money's worth. He noted that a

number of the transactions (Murray, Smirnov, Curtis) were not money or money's

worth, but had significant non-cash components.

Cristall gave evidence with respect to the market comparable analysis. In that

regard, Mr. Campbell's authoritative commentary was substantiated by Cristall.

The commentary is set out in Exhibit 354, and reiterates the basic propositions in a

market comparable approach that there must be a sufficient number of transactions

and the details of the transactions must be sufficiently known, in order for one to

come to a reasoned decision as to whether the prices of the transactions are

comparable and can be used to yield a value.

[521] While the details of the transaction need to be known, as is the case here, the theory

requiring a “sufficient number of transactions” applies when there are no valid “actual sales” of

the subject shares and one must look at other sales surrogates to provide a notional market value

opinion. When there is an “actual sale”, as in the sale of shares to Billes, and it is a valid

indicator, and I accept that it is, I am of the view that numerous transactions are not required.

Only one is required if it meets the definition and is an “actual sale”.

[522] Billes then argued:

Cristall testified that there is a difference between price and value, and that in

assessing value, one must make certain assumptions with respect to the attributes

and motivations of the buyer and seller. These attributes are set out in the

Page 123

definition of fair market value, and Cristall testified that, although his wording was

slightly different and was developed by him, it had the same meaning.

Cristall testified that part of the attributes of the willing buyer and willing seller

are that they are acting prudently and are equally informed. Cristall testified that,

in his view, the requirements for prudence were not met and that a buyer and seller

would have obtained more information in the due diligence process. [Emphasis

added.]

[523] I do not accept his conclusion about being “equally” informed. As I have noted above, it is

inconsistent with other acceptable definitions for fair market value, including the one used by

Cooke, for his fair market value analysis (Exhibits 386, 388 and 389). I find that Billes, in the

purchase of 50% of DDL was “acting prudently”, and “knowledgeably”, but obviously could not

be as “equally informed” as the vendors.

[524] Billes submitted further that, although Siebert selected the "comparative" approach and

characterized the Billes purchase of a minority interest as a cash transaction and as a market

comparable for the en bloc value of DDL, he did not provide an opinion of value.

[525] That argument is confusing, because, while Siebert did not calculate a value, he testified

that the value paid by Billes was indicative of fair market value in his opinion. In this regard he

said: “I understand what the transaction value was; and ...it is my opinion that that is indicative of

what the fair market value was.”

[526] Billes contended as well that Siebert's methodology departed from the standard writings

on the subject and that fair market value is an assessment in a notional market place. She stated

that it involves hypothetical buyers and hypothetical sellers and that this point was made by

Cristall, and is found in the independent literature (Exhibit 353, extract from Wise et al.,

Canadian Valuation Service, at para. 205.03).

[527] This is similar to the point above - while fair market value may include “an assessment in

a notional market place”, it need not be tied to a notional market when, in circumstances such as

this, there is an actual sale of the asset in question at the subject time. The requirement is, thus,

not a “notional market”, but rather a sale (in this case an actual sale) within the definition of true

market value.

[528] Similarly, Billes stated:

Value and price are not the same concepts. Prices arise from recent sales.

Sometimes value of comparable interests can be estimated from analyzing those

sale prices. That is the market concept. It is described in Exhibit 253, para.

215.04.

Page 124

[529] I agree with the first proposition. I also agree with the second, where there is a need for

comparative analysis of unrelated sales, which, when utilized, is in accord with the third

proposition. However on the same point as above and at the risk of repetition, I find that

comparative analysis of unrelated sales is unnecessary if there is, as in this case, a valid actual

market value sale of the subject asset. To conclude on this issue, if buyer A comes within the

definition of “fair market value” and pays $x for an asset on day y, and buyer B wants to obtain

an opinion on the value of the asset as at day y, one would rightfully conclude that the value was

$x, without enquiring as to the value others paid for different, but similar, assets at other times.

[530] Later, on a more specific analysis, Billes argued that:

Siebert described the market comparable approach in para. 4.4 of his report

(Exhibit 351), stating that it was appropriate where recent "transactions" (plural) to

buy and sell the shares of a company or a closely-comparable company can be

identified and there is sufficient evidence to suggest that these "transactions"

(plural) are representative of en bloc fair market value.

While more than one sale of the subject assets would provide greater confidence, I find that more

than one valid “actual sale” is not required, if the one in question is a true indication of fair

market value.

[531] The Billes argument continued:

In Exhibit 351, Siebert expressed his beliefs (not opinions) as to the en bloc fair

market value based on the market comparable approach to valuation (Exhibit 351,

paras. 5.4 and 5.5).

... when one considers what Siebert actually did, he did not employ the market

comparable approach. A single transaction does not qualify as a market

comparable. A single transaction for a minority interest is not a market

comparable for the en bloc interest.

[532] I have commented on the argument between a calculated opinion on value and Siebert’s

expression of value, which I find to be, in law, an opinion none-the-less. While what Siebert

opined on may not be the “market comparable approach” in the sense that it is not based on other

external comparable sales, it is expert evidence of fair market value of these shares which I accept

in its conclusion.

[533] The Billes argument continued:

Moreover, the Billes purchase contained a significant non-cash component (the

services of McAteer). This was not a clean purchase of shares for cash. It was a

part of an agreement which contained non-cash elements (Exhibit 12A).

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Again, I disagree. It was for cash, but the services of McAteer merely added unquantified value to

the shares.

[534] Billes continued:

Siebert admitted he did not have sufficient information to quantify the value of

McAteer's services (Siebert, 1303 - 1307). His assumption that the vast majority

of the deal was a cash transaction (Siebert, 1307), is inconsistent with the evidence

of Lavery and of Billes (paras. 104,114 supra).

Again, I do not agree. While Siebert may not have been able to quantify the value of McAteer’s

services, that does not mean that they did not add value to DDL, as the evidence of Lavery and

Billes suggest. Nevertheless, that, in my view, does not detract from true market value. However,

this merits further comment.

[535] The fact that much faith and value was placed upon McAteer as a key person, or that he

was prepared to work with a draw from his shareholders loan, with little or no additional

compensation, does not, in my view, adversely affect market value - indeed, it enhanced it. As

Lavery acknowledged when he testified:

As part of the proposal, McAteer in effect agreed to work for nothing for several

years .... it basically gave Billes his services for a couple of years, which, given

any sort of reasonable compensation for an executive of his experience, had

some significant value.

[536] These factors, in my view, went to the goodwill of DDL, such that its value may have

been more than the sum of the value of its physical assets. It also includes the goodwill in

McAteer’s participation and his vision of the development. The fact that McAteer was taking

little salary, and receiving compensation through the repayment of shareholders’ loans is not a

negative impact on the value in my view.

[537] The argument of Billes again continued:

It is notable that McAteer, the most informed of all the parties on April 23, 1990,

agreed to sell his 10% interest for the least amount. He received $50,000, and in

light of the significant non-cash components pursuant to Exhibit 12A, the amount

for which he actually sold his shares was likely significantly less.

Further, if Siebert's comments were to be used to gauge any alleged loss by Mason,

it must be remembered that she claims as trustee for the 40% shareholders (the

children). There was no transaction for their shares on April 23, 1990. The value

of their shares falls to be determined within the hypothetical market place and,

Siebert made no analysis of any discounts for minority interest or for illiquidity in

the shares arising from the provisions of the USA.

Page 126

I interrupt the argument again to find Billes’ share purchase was not in a “hypothetical market

place”; rather, it was the actual acquisition of a 50% share interest in DDL. As to the discounts, I

agree, but no expert, including Cristall, provided any analysis on an appropriate discount.

[538] Billes’ also highlighted Cristall’s point in his rebuttal report (Exhibit 394), that the buyers

did not appear to have done sufficient due diligence. Cristall's opinion was that it was imprudent

to rely upon the outdated appraisals and unsubstantiated management information which is found

in Exhibit 10. He testified that the forecasts prepared by management in Exhibit 10 were

aggressive.

[539] Billes also noted that Cristall has carried on most of his valuation career in the Province of

Manitoba and had experience at the time with golf course projects in Manitoba. She noted that

Siebert does not share those qualifications.

[540] While Cristall is from Manitoba and the knowledge of the local situation is valuable, he

was qualified as a chartered valuator, as was Siebert. I do not find that the fact that Siebert had

not practised as a business valuator in Manitoba and had not valued golf courses in Manitoba

diminishes his opinion. Neither he nor Cristall, were qualified as experts on the value of

Manitoba golf courses or their shares.

[541] Moreover, I do not accept Cristall’s analysis of the due diligence, but that merits some

further observations. Due diligence, like an opinion of value, is a reasonable and informed view

on the available information; it is not perfection.

[542] The fact that Lavery, who provided the due diligence, was not a business valuator is not

conclusive. He was (as he confirmed in testimony) Billes’ business advisor, as well as the

engagement partner at Deloitte responsible for DDL, and if she needed more advice or

information, he was exactly the person to get it for her. He did not consider it necessary. Mason

put it this way in argument:

Lavery was more than merely a "tax partner" at Deloitte & Touche. Lavery was

a business advisor for Billes as well as the engagement partner responsible for

DDL, Newmat, HAL and other parties. In many respects, Lavery was the

common denominator between the major witnesses in this matter - namely

Billes, Newel, and McAteer.

Lavery also testified that he had experience with golf course developments in the Calgary area.

While obtaining real estate appraisals might have been theoretically prudent, it was not a

requirement in the circumstances, nor does it detract from the investment price being a very

strong indicator of fair market value.

[543] In any event, Lavery did “due diligence” with respect to other golf course developments

in Alberta, and ultimately gave Billes advice that “given the structure of the transaction that

Page 127

there might be a reasonable opportunity for profit and some protection on the downside given

the underlying assets”.

[544] Lavery confirmed in his evidence that Billes was an experienced business person and

had experience in real estate development as a result of her investment in Lands End in

Saanich, B.C.

[545] The Billes argument continued:

Cristall used an appraisal-based approach, whereas Siebert based his comments on

a market comparable approach. Siebert agreed that he would get appraisals if he

was doing a fair market value calculation in the absence of a transaction. As

submitted above, there were not market comparables or "transactions" which is the

standard expressed in his report. He purported to rely on one transaction for a

minority interest. He then extrapolated to comment on the en bloc value of DDL.

His comments are not within the parameters of his own definition.

I agree with the description of what Siebert did and said, but not on the conclusions argued.

[546] The argument continued:

The reason why informed and prudent parties would obtain appraisals is that they

also would have considered the value of this company given the stage of its

development, on an asset basis.

I have already addressed this.

[547] Billes alleged a number of “additional observations” or discrepancies in Siebert’s

understanding of the factual base for his opinion. Based on my analysis of these allegations, I

have found no real discrepancies that, on the evidence, affected his opinion. Accordingly, it

would not be a valuable exercise to pursue each of these and to lay them to rest.

[548] I can stop the analysis because Billes’ arguments do not adversely affect my preference

for Siebert’s conclusions over Cristall’s. Moreover, Mason countered Billes’ observations and

arguments with further detailed arguments and analysis that aid me in my conclusion to accept

Siebert’s opinion and to reject Cristall’s (see Mason’s argument at p. 35 and in reply at pp. 13-

14).

iv.

Conclusion on Fair Value

[549] I accept the evidence of Siebert as to fair market value over that of Cristall, recognizing

that my task is merely to find “fair value”. In fact, except for one assumption that Cristall makes,

their evidence is substantially the same. I find that the assumption made by Siebert, but rejected

by Cristall, that the purchase by Billes of a 50% interest in DDL for $750,000 is a valid measure

Page 128

of fair market value and should be accepted. I find further that Billes was a sophisticated investor,

who had the advice of a business adviser and chartered accountant from a major chartered

accounting firm, that due diligence was undertaken and that all the other tests of fair market value

were met.

[550] Counsel for Mason argued that the damages based on the fair value of the shares should be

in the range of $440,000 to $600,000. The final question is how does the Court determine where

in that range the appropriate amount falls.

[551] In evidence and argument Siebert and Mason concentrated on the agreement between

Siebert and Cristall that the value had not changed significantly between the Billes purchase and

the Trust Loan. Remembering that Siebert had noted a fair market value of $600,000 as at April

1990 (Exhibit 351, para. 5.), it would follow that, if the value had not changed, it should be

$600,000 at March 21, 1991. However, Mason cannot escape the expert finding of Siebert that

“rolled forward ten months to adjust for lot sales and changed to individual assets and liabilities”,

the value would be $440,000 (Exhibit 351, para. 5.2.). Cristall supported that reduction in his

testimony, although his view in that regard is contradicted by the fact that he was of the opinion

that the value in each case was nil. Siebert’s opinion is binding on Mason and she has not

demonstrated either through oral testimony or argument any reason upon which to change that

opinion.

[552] Therefore, I accept the value of $440,000 proposed by Siebert as a basis for the

calculation of damages. I might well have allowed a minority discount as an adjustment, but no

expert provided me with a basis upon which to make that calculation and, accordingly, I make

none. Additionally, it may well have been that some of the considerations in the previous

paragraph would have made a minority discount for a 40% interest minimal, and therefore it may

not have been an issue of any substance.

[553] Consequently, I find damages in the amount of $440,000.00 are appropriate as

representing the “fair value” of the Mason interest on March 21, 1991, at the time of McAteer’s

and Billes’ oppressive conduct relating to the execution of the Trust Loan documentation. As her

minority interest had been oppressed by conduct at the time by the Trust Loan, I find that the

damage had been done prior to the Newmat Loan and therefore its operation had no additional

affect on her loss. Compensating Mason for the loss in share value is the only remedy available

that will place her in a position as if her interests had not been oppressed.

b.

Punitive Damages

[554] Aggravated or punitive damages were sought in the prayer for relief in the Mason Action.

I have granted damages under the oppression remedy in that Action. Are aggravated or punitive

damages also appropriate?

Page 129

[555] While Billes argued that “there are no circumstances which remotely justify an award

[for aggravated or punitive damages]”, Mason argued:

In Alberta, the rationale underlying awards of punitive damages lies with

Clement, J.A.'s declaration of principle in Paragon Properties Ltd. v. Magna

Investments Ltd. (1972), 24 D.L.R. (3d) 156 at 167 (Alta. S.C.A.D.):

The basis of such an award [of punitive damages] is actionable injury to

the plaintiff done in such a manner that it offends the ordinary standards

of morality or decent conduct in the community in such marked degree

that censure by way of damages is, in the opinion of the Court, warranted.

The object is variously described to include deterrence to other possible

wrongdoers, or punishment for maliciousness, or supra-compensatory

recognition of unnecessary humiliation or other harm to which the

claimant has been subjected by the censurable act.

Paragon Properties Ltd.

Clement J.A.'s remarks have since been endorsed by Wilson and McIntyre JJ. in

Vorvis . I.C.B.C., [1989] 1 S.C.R. 1085.

v. Manga Investments Ltd. was decided in 1972.

v

[556] Having considered the circumstances of the within case, including the conduct of Billes

and McAteer, I find that punitive damages are not appropriate. In my view Billes and

McAteer’s conduct has been taken into account under the oppression remedy and there is

nothing so egregious, despite my finding of fraud in relation to McAteer, that would justify a

further award of punitive damages.

c.

Flow of Damages

[557] Under s. 233(c) of the ABCA, I order that the damages flow directly to Mason in trust for

the McAteer children.

J.

Consequences to Others

1. To the Trust, Newmat and DDL

[558] I have found that the Loans were valid at the time that they were entered into.

Accordingly, DDL is bound thereby.

[559] However, in the Mason Action it was alleged that the Trust and Newmat, in enforcement

of their security, obtained realization from parties and in amounts that were actionable. I shall

address this infra.

2.

Security Granted by Kingswood Entities

Page 130

[560] As the Loans are valid and, accordingly, the principle debt remains enforceable, so too

does the security granted by Kingswood. As such, I need not address the arguments advanced by

Billes that, inter alia, Mason and McAteer are estopped from arguing that the Trust debenture is

invalid on the basis of the Manitoba foreclosure proceedings.

3.

BJ and TM

[561] In the Outline for Argument, the issue is stated thus:

c. BJ and TM

i.

If there are consequences to BJ or TM, is any failure by BJ or TM

excused, or are they liable to Billes and thereby responsible to

contribute (in whole or part) to any damages payable to any other

party? If so, why (in fact or law)?

The issue was similarly expressed later in the Outline for Argument in relation to the specifics of

Billes’ Third Party Claims against BJ and TM in the McAteer/Kingswood and Mason Actions.

The issue is substantively the same in both except that the relief sought in the Mason Action

relates to not merely setting the Loans aside but a remedy under the oppression provision of the

ABCA.

[562] I will record my ultimate conclusions here and come back to the factual findings that form

the basis for those conclusions.

[563] BJ and TM are named as Third Parties by Billes et al.. in the McAteer/Kingswood, Mason

and Derivative Actions, in relation to the Trust and Newmat Loans respectively. Leaving aside

the Derivative Action for the moment, the Third Party claim by Billes et al.. against BJ and TM in

each of the McAteer/Kingswood and Mason Actions is specifically directed at the claims that the

Loans were “invalid or unlawful or prohibited” by non-compliance with the USA and section 115

of the ABCA. In that context, Billes et al.. claim indemnity or contribution, if the Plaintiffs

succeed in their claims, on the basis that BJ and TM were respectively “negligent and in breach of

their duties” to Billes et al.. This claim for negligence is based on the allegations that BJ and TM

knew or ought to have known of the USA, the provisions of section 115 of the ABCA, and the

identity, roles, and relationships between the parties. Alternatively, Billes alleges that BJ and TM

failed to make due and proper inquiry in those regards, and failed to properly advise Billes et al.

[564] As I have found the Loans valid, which was the basis for these third party claims, it

follows that Billes et al. require no indemnification and the third party claims of Billes et al. are

dismissed. However, even if I had found the Loans invalid for other reasons, I find that BJ and

TM had no knowledge of the breaches alleged and are entitled to rely upon the indoor

management rule. I find further that they were neither negligent nor in breach of any duty to

Billes et al., to the same result.

Page 131

[565] I have found Billes liable to Mason under the oppression remedy. However, I note that the

Third Party claims by Billes are specifically in reference to the validity of the Loans and not in

relation to the oppression remedy. They do however reference the same facts and rely upon the

same failures. Moreover, paragraph 14(j) of the Third Party Notice contains a basket clause of

“such further and other particulars of negligence”, etc. In any event, assuming the pleadings are

adequate, the conclusion to which I have arrived (lack of knowledge and lack of negligence),

would absolve BJ and TM of any liability to indemnify or contribute to liability.

[566] I will address the Third Party claim of Billes against BJ and TM in the Derivative Action,

infra.

[567] It follows that BJ and TM are not liable to indemnify Billes et al. in the

McAteer/Kingswood or Mason Actions.

[568] As the liability of BJ and TM in relation to the Loans and the oppression remedy is

dismissed on the basis of lack of knowledge of breach and lack of negligence, I need not

comment on other related issues, including: the need for (or advisability of) expert evidence as to

the standard of care of the “reasonably competent member of the profession”; and whether the

Trust and Newmat, having regard to the timing of the advances of the Loans, relied on the work

done by BJ and TM.

4.

McAteer

[569] It follows from my findings that McAteer is unsuccessful in the McAteer/Kingwood

Action in his request to have the Loans set aside on the basis of Billes’ lack of disclosure.

However, based on his role in relation thereto, I find him and Billes jointly and severally liable to

Mason, under the oppression remedy in the Mason Action. Moreover, I find him liable to

indemnify Billes for misrepresentation under the Billes Counterclaim in the McAteer/Kingswood

Action and the Billes Third Party in the Mason Action, based on the same facts. I will discuss

these conclusions, infra.

K.

Conclusion

[570] I find Billes and McAteer jointly and severally liable to Mason for breaches of the USA

and the ABCA, and, in my view, it is appropriate to rectify all such liability under the oppression

remedy, where I grant judgment of $440,000.

X.

THE McATEER/KINGSWOOD ACTION

A. The Claim

[571] The Statement of Claim in the McAteer/Kingswood Action is long on facts but short on

allegations. The allegations against Billes et al. include: (1) that Billes would be a financial

partner to McAteer to ensure that the DDL and Kingswood projects would obtain proper and

adequate financing until completed and refinanced; (2) the Defendants, by breach of contract and

Page 132

negligence, had conspired to take the DDL/Kingswood projects for themselves; (3) Billes

induced McAteer not to proceed with financing arranged with Household Trust, but rather to

borrow from Newmat, for the purpose of achieving (2); (4) the Loans were approved without

Billes disclosing her interests contrary to the USA and the ABCA, and requesting the Loans

accordingly be set aside; and (5) the Defendants had trespassed on and converted the Plaintiffs’

property to their own use. The Plaintiffs also sought relief pending trial, including an independent

receiver manager, and general and punitive damages.

[572] I have concluded that there is no merit to the McAteer/Kingswood action. I have largely

dealt with the substance of each of issues (1) to (4) supra. I find that the allegations in (5) were a

part of appropriate steps to realize on the security when the Loans were in default. Further, with

respect to (5), I find that there were no actions by the Defendants after the execution of the

Loans and their default which grounds liability against the Defendants. Additionally, there is

no convincing evidence that there would have been any assets left for DDL after the realization.

Accordingly, the entire claim in the McAteer/Kingswood Action is dismissed.

[573] However, I do find McAteer liable under the Newmat Counterclaim in the

McAteer/Kingswood Action.

B.

The Billes/Newmat Counterclaim

[574] The issue of McAteer’s liability under the Counterclaim in the McAteer/Kingswood

Action was set out in the Outline for Argument as follows:

H.

Liability and Damages on the Counterclaim in the McAteer Action No.

9201-19685?

1.

On what factual and legal basis is Mr. McAteer liable to any of

(a) Ms. Billes

(b) Newmat

(c) Estate Trust

(d) Mr. Billes

(e) others

on the counterclaim in his alleged role as (i) a lawyer, (ii) a

guarantor, or (iii) otherwise? Why or why not?

2.

3.

What are the factual and legal defences to the counterclaim?

If Mr. McAteer is liable on the counterclaim in his alleged role as

(a) a lawyer, (ii) a guarantor, or (iii) otherwise, what are the

damages? How are they calculated? Are there any setoffs?

1.

The Billes Counterclaim

Page 133

[575] There is considerable similarity between the allegations in the Billes Counterclaim in this

McAteer/Kingswood Action and the Billes Third Party claim against McAteer in the Mason

Action. The cause of action to which Billes is entitled to recover against McAteer is fraudulent

misrepresentation. Billes is entitled to only one such recovery. Having regard to some

limitations in the pleadings and prayer for relief in the Billes Counterclaim, I have determined

that the relief is more appropriately granted under the Billes Third Party claim against McAteer in

the Mason Action and accordingly I shall discuss that cause of action infra under the Mason

Action.

2.

Newmat Counterclaim - McAteer Guarantee

[576] In the Counterclaim by Newmat, it is alleged that:

33.

On or about October 10, 1991 for valuable consideration and by written

instrument under seal McAteer guaranteed payment to ... Newmat of the liabilities

of Devoncroft under the Newmat Loan Agreement.

34.

There were terms, inter alia, of the aforesaid instrument such that:

(a)

(b)

McAteer promised to make payment to Newmat in the amount of

the liability of Devoncroft to Newmat up to the amount of

$1,950,000.00 plus interest at the rate set forth in the Newmat Loan

Agreement;

McAteer agreed to pay interest on the sum demanded at a rate equal

to the rate or rates charged by Newmat to Devoncroft.

35.

After accounting for all amounts advanced under the loan, credits received

and interest accrued, there remains due and owing by McAteer pursuant to the said

written guarantee as at February 1, 1995 the sum of $2,113,683.86 consisting of

outstanding principal of $1,950,000 together with interest in the amount of

$163,683.86. Interest continues to accrue thereon at the floating annual rate of

interest established and announced as such from time to time by Alberta Treasury

Branches on commercial loans plus 2 1/2% per annum.

36.

By letter dated November 23, 1992, Newmat by its solicitors made demand

upon McAteer pursuant to the guarantee to pay the sum of $2,054,424.36 but

McAteer has failed and refused and continues to fail and refuse to pay that amount

or any amount.

[577] McAteer acknowledged that he signed the McAteer Guarantee (Exhibit 63) and made no

payments under it.

[578] As noted by Iacobucci J. at 413 of Communities Economic Development Fund v.

Canadian Pickles, supra (cited by Mason for a different purpose):

Page 134

Generally speaking, if the principal debt is void or unenforceable, the contract of

guarantee will likewise be void or un-enforceable: see generally, J. O'Donovan and

J.C. Phillips, The Modern Contract of Guarantee (1985), at pp. 183-93.

[579] Although I agree that is the rule generally, I would note that Billes submitted a number of

authorities which emphasized that the application of the rule is dependant upon the language in

the written agreement and the factual matrix of the individual case: Manulife Bank of Canada v.

Conlin, [1996] 3 S.C.R. 415; Olympia & York Dev. Ltd. (Bkpt.), Re (1998), 113 O.A.C. 52 (C.A.),

refused leave to appeal (1999), 123 O.A.C. 399 (S.C.C.); Garrard v. James, [1925] 1 Ch. 616;

Heald v. O’Connor, [1971] 2 All E.R. 1105 (Q.B.D.); Bank of British Columbia v. Turbo

Resources (1983), 46 A.R. 22 (C.A.). She also argued that, as a guarantor who received a portion

of the loan funds, the Breckenridge principle applied to McAteer, Club and Developments.

[580] However, here, contrary to the urging of McAteer, I have found the principal debt

enforceable, and accordingly, no other real defence thereto being advanced by McAteer, the

McAteer Guarantee is also enforceable.

[581] Further, I note that: McAteer covenanted with Newmat that DDL would perform its

obligations (Loan Agreement, Article 7.01 - Exhibit 67); the McAteer Guarantee provided that it

would be binding notwithstanding any defect in the Debenture or any failure of the security

intended to be created by the Debenture; the guarantor undertook a "several", "absolute", and

"unconditional" liability as if he were a principal debtor (Exhibit 63, Article 1.2); and the

McAteer Guarantee contained an extensive waiver of common law defences (Exhibits 63,

Article 3.1).

[582] In accordance with the pleading, and based on the evidence, I find McAteer is liable on

the basis of his Guarantee to Newmat (Exhibit 63), in the sum of $1,950,000, less any further

credits due, plus interest accrued from November 23, 1992.

[583] I note that the Draft Judgment Roll filed herein by Billes et al. reads as follows:

Newmat is hereby awarded judgment against McAteer in the amount of

$3,233,041.89, together with interest thereon pursuant to the guarantee from and

after March 15, 2000 at the rate of Alberta Treasury Branches prime rate plus 2

½%, to be calculated and compounded annually (in accordance with the Loan

Agreement - Exhibit 67)³²utilizing Alberta Treasury Branches month end closing

prime rate.

[584] Billes and Newmat argued that “The amount outstanding on the Newmat loan as at

March 31, 2000, is $3,026,966 (Exhibit 422), or alternatively $2,715,379 (Exhibit 423). As I

32

In fact, I note that Exhibit 67 provides for interest to be compounded monthly, but that would only

apply to the date of this Judgment.

Page 135

understand it, the former is based on compounding monthly and the latter is simple interest. I find

that the former is in accordance with the Loan Agreement (Exhibit 67) and the McAteer

Guarantee (Exhibit 63, which refers back to the Loan Agreement). However, I have not

recalculated it, and accordingly leave it to Counsel to calculate and agree on the amount owing to

the date of these Reasons, and insert same in the Judgment Roll, or, if Counsel cannot agree, to

re-attend before me to determine same.

XI.

ENFORCEMENT AND REALIZATION OF SECURITY

[585] For the reasons discussed supra, I find that the terms of the Loans were reasonable and

fair as between DDL and the Lenders, and that the Loans were valid upon execution. The next

series of questions relate to whether something occurred after their execution to prevent or limit

the ability of the Lenders to enforce their security, approved their right to enforce their security,

and whether, on realizing on their security, they took any steps that were actionable.

[586] As noted supra, this matter was initially raised in the consequential fact conclusions part

of the Outline for Argument in these terms:

What was the realized value (post receivership/bankruptcy) on the disposition of

assets of DDL and the Kingswood entities which are in issue? What are those

issues? How do they relate to the decisions that will have to be made in

connection with the larger issues which arise in these proceedings? How do they

relate to appraised values?

[587] What follows is a discussion on these issues.

A.

Enforceability - Interest Deferral

[588] The issue of enforceability, having regard to alleged interest deferral, was stated in these

terms in the Outline for Argument:

Did the lenders under the Trust Loan and/or the Newmat Loan, in fact, defer

interest? What evidence is there to support/refute this? If so deferred, for what

period? Does this affect the default and calling of the loan(s) such that the demand

and subsequent receivership is invalid? If the answer is affirmative, is the

Manitoba court action res judicata to any such conclusion?

[589] After a review of the arguments, it appears that the deferral of interest has really become a

non-issue and I find that it did not adversely affect the Lenders in enforcing their security.

However, I will set out my reasons for that conclusion. I will address the issue of res judicata

below.

[590] Billes cited the following alleged (partial) facts in response to the issue:

-

March, 1992. McAteer seeks concessions from Mrs. McLarty, Owen

Billes and the Trust on the terms of their loans, citing difficulty in paying

Page 136

(Exhibits 85A, 86). Billes suggests McAteer consider making a proposal for the

Trust trustees to consider deferring interest for two to three months (Exhibit 87). ...

Billes advises the Trust will assist DDL by allowing it to accrue until July the

payments due April 1, May 1, and June 1 (Exhibit 89).

-

April - May, 1992. DDL is in default on Trust and Newmat loans.

-

May, 1992 and thereafter. The Kingswood entities cannot pay all their debts

accruing due May 26, 1992. McAteer describes cash needs and requests Billes provide a

$171,000 credit facility (Exhibit 321).

-

June 5, 1992. Albikin advances $60,000 to DDL to assist paying unsecured

creditors. (Exhibit 99).

...

-

November, 1992 [Lenders Loans called]

[591] Exhibit 89, a letter from Billes to McAteer dated March 27, 1992, offers deferral and

accrual of interest from the Trust Loan for April to June. Exhibit 99, being a memorandum from

Billes, signed by both Billes and McAteer, appears to refer to a previous agreement:

These monies are not to cover any interest payments to Trust or to Newmat, both

of which have agreed to let the interest due accrue for several months until the

cash flow in Kingswood/DDL has improved....

[592] I find as a fact that there was an oral agreement between Billes and McAteer (confirmed in

writing without clear specificity in Exhibit 99) that the Lenders would not enforce their security

over an unspecified period time during the summer months of 1992. I note, as to timing, that

Billes in her undated July 1992 letter (Exhibit 107) to McAteer referred to an October 15^th

deadline. However, Lavery’s evidence was that “there was no definitive understanding as to when

it would end”. Billes acknowledged that she had agreed on behalf of the Lenders that “those two

entities would let the interest accrue for several months, i.e., until the revenues improved, cash

flow would improve before the fall”, and that both Lavery and Newell had concurred. There was

an attempt by McAteer (through Marshall) to put this into an agreement in August 1992 (effective

to September 1993), but it was never accepted by the Lenders (Exhibit 121, and testimony of

McAteer).

[593] Is such an agreement binding on the Lenders? I find that the agreement was not legally

binding on the Lenders, but was nevertheless acquiesced in by the Lenders. There are several

reasons why I find it was not legally binding, including: there was no consideration; there was a

lack of clear and unequivocal intention on the part of the Lenders to formally waive payment, as

opposed to Billes personally (although it appears the Lenders went along with her wishes - see

Sask. River Bungalows v. Maritime Life, [1994] 2 S.C.R. 490 at 501); and, vis-à-vis DDL, it was

Page 137

orally agreed to only by Billes, without written agreement by the Lenders, in contravention of a

written agreement to the contrary (e.g., Newmat Loan Agreement, Article 1.04 - Exhibit).

However, the fact that Billes appeared to agree to it on behalf of both Lenders is some indication

of her influence over the Lenders. Moreover, the Lenders did not try to enforce their security

during this time; not until November. I find that to be at the end of the duration of this non-

binding oral agreement. Accordingly, no issue arises.

[594] In any event, neither Mason or McAteer seemed intent on pursuing the issue. Mason

argued: “Mason does not take the position that the subsequent demand and receivership of

Devoncroft is invalid strictly on this basis”. While McAteer referred to “the Law and Argument

under the Trust Section above”, no submissions on this point can be found in the argument.

[595] Billes argued further that “This point is not pled. We submit it ought not to be considered

by the Court”.

[596] In view of the lack of enthusiasm for this issue (non-issue?), I shall not pursue it further,

other than to conclude that the oral agreement to defer interest payments by DDL under the Loans

had no impact on the Lenders enforcing their security after November 1992.

B.

Enforceability - Failure to Obtain Market Value

[597] There was an undercurrent throughout the trial by Mason and McAteer that the Lenders

disposed of the security for the Loans at considerably under value, often to closely-held, non-

arms-length number companies. The corollary argument was that the value of the security

exceeded the amounts owing under the Loans. This was in specific reference to the allegation in

paragraph 29(i) of the Amended Statement of Claim in the Mason Action that:

...in the enforcement of the Estate Debenture and the Newmat Debenture, the

Defendants Billes, Lavery, Mann and Owen G. Billes improperly instructed and

caused the receiver to realize upon the assets of DDL in order to appropriate such

assets for themselves or any one or more of them, to sell such assets to non-arms-

length recipients or to sell them to third parties, all at prices significantly below

fair market value and in a commercially unreasonable manner;

Accordingly, parties were requested in the Outline for Argument, in the section on “Evidence”,

and, in particular, “Consequential factual conclusions”, to reply.

[598] Later in the context of Enforceability of the Loans, a similar question was asked in the

Outline for Argument in these terms:

Did the Estate Trust and Newmat fail to act in good faith, or fail to take reasonable

precautions to obtain market value for DDL’s assets on sale? If so, what

consequences follow?

Page 138

I will deal with these two overlapping, substantially similar, issues together.

[599] Mason described the issue in these terms:

Have the Trust, Newmat or Sill Streuber (the Receiver)³³satisfied the Court that

they acted in good faith and took all the necessary steps to obtain the best price

that was reasonably obtainable at the time in respect of the sale of the

Devoncroft/Kingswood assets?

[600] I have set out under the heading “General Facts” (supra) the basic elements of the

realization on the security by the Lenders. At issue specifically, is the sale of DDL’s interest in

HAL, the sale of the Golf Dome, and the sale of the Kingswood Golf Course.

[601] Focussing on the second related issue in the Outline for Argument, regarding value on

disposition of assets in general, and in the context of the specific opinions of Billes’ experts,

Billes argued:

It is submitted that the onus of proof is on the Plaintiffs to show that a loss was

suffered. The cause of action for alleged disposition of the hard assets, lies only

with the Kingswood entities [whose assets were pledged as security for the DDL

Loans, as Kingswood received the lion’s share of the proceeds]. The Kingswood

entities did not plead this, and it warrants no further consideration.

Alternatively, the record amply demonstrates that fair value was obtained for the

assets, and even if not, the debtor suffered no loss because there was no equity in

any of the assets.

The Golf Dome was disposed for $648,000 cash. Appraisals supporting that value

were obtained. Mr. Cooke gave evidence with respect to his appraisal and ..., it

ought to be accepted. There was no equity in the security.

It is submitted that in light of the HAL financial statements in Exhibit 186, the

McGregor appraisal [as at November 27, 1992 - Exhibit 384], and the report of

Mr. Cristall, there was no value in the HAL shares. There was no equity in the

security.

The front nine of the golf course was foreclosed by Court Order, thus

extinguishing the Trust debt. The Court of Queen's Bench in Manitoba determined

to grant a final order of foreclosure after the property had been unsuccessfully

offered for sale. It is respectfully submitted that no further inquiry need be made.

33

Sill is not currently a party to these proceedings, and therefore there can be no liability against it.

Page 139

Even if fair value was not obtained, no consequences follow. Only the Kingswood

entities would have a remedy for the disposition of their assets below fair value.

They did not plead nor request any remedy arising from alleged disposition at

amounts less than fair value. Nor was there any equity in the security.

Even if there were a remedy, the proper remedy would be damages: excess of

value over amount owing. The suggestion by Mason's counsel (without citing any

authority) that a constructive trust ought to be imposed, is without foundation,

particularly when the creditors do not owe any fiduciary relationship to DDL, lone

the Kingswood Entities, and would result in a windfall as there was no excess of

value in any of the assets over the amount owed.

Further, the creditors' ability and expectation that they would act in their own

interests, displaces any notion of a fiduciary obligation: Ironside v. Smith [(1998),

70 Alta. L.R. (3d) 393 (C.A.)], at 412-414.

As to the issue of good faith, the Court ought to consider the primary motivation

(Teck Corp. Ltd. v. Millar (1972), 33 D.L.R. (3d) 288 at 325-327 (B.C.S.C.)). It is

submitted that the evidence demonstrates that the Trust and Newmat acted in good

faith in their decision to call the loan and realize on the security. We refer to the

evidence ... that the companies were in a hopeless financial condition and the

lenders were acting to protect their rights. Ultimately, McAteer voluntarily

assigned the Kingswood entities into bankruptcy. The lenders indicated that a

proposal whereby McAteer remained in management would not be entertained, but

did not say that no proposal would be entertained. No proposal was forthcoming.

The lenders' concerns over the competence of McAteer as a manager, have been

amply demonstrated in the record.

I agree with the substance of Billes’ submissions generally, with some observations, that I will

make in examining specific dispositions.

1.

Disposition of HAL

[602] Sill, the DDL receiver, sold the one half interest of DDL in HAL to Billog for $7,500.00

(Exhibit 267) on October 25, 1994. Newmat agreed (Exhibit 424) to fund the purchase cost and

certain operating expenses. In August 1995, the assets were sold for a condominium project

(Exhibits 343 and 350) for a gross selling price of $1,050,000 (Exhibit 343 - close to the

appraised value as at January 1991 of $1,020,000 - Exhibit 345) for an after expense (including

reimbursement of Newmat) profit of $99,667, $39,867 of which would have been Billog’s 40%

share (Exhibit 424).

Page 140

[603] Mason argued that Sill made no effort to market DDL's interest in HAL or to determine

the fair market value³⁴of that interest prior to sale.

[604] In response, Billes replied:

Both Mason and McAteer were given notice of this proposed disposition and

were given prior opportunity to purchase same for $7,500 (Exhibits 226 and

226A). No suggestion was made by them that some other disposition or some

other price would be appropriate. Best gave evidence that it would be very

difficult to market a one-half interest in a privately held company as this. Cristall's

report (Exhibit 393, Schedule 3) suggests that the interest in Home At Last was

worthless, and no contrary evidence has been adduced by the Plaintiffs. Further,

there was no equity in the security; thus, this issue is not material to the issues in

this suit.

I accept the conclusion that follows from the latter argument, namely that neither Mason nor

McAteer have any actionable complaint, on the evidence, in relation to the value realized by the

sale of the HAL shares. Even more important, McAteer knew what the value was in January

1991 (Exhibit 345), and what was owing, and had the ability to determine whether or not to

purchase the asset. He chose not to do so.

2.

Disposition of the Golf Dome

[605] On March 25, 1994, 3038319 Manitoba Ltd., a wholly owned subsidiary of Albikin,

purchased the Golf Dome from Newmat nominee, 2809291 Manitoba Ltd. (“280"), for

$648,000.00 (Exhibit 246).

[606] Mason argued:

The appraisals received at the time Newmat's nominee disposed of the Golf Dome

as a "mortgagee" in possession, do not reflect the fair market value of the Dome.

The appraisals on hand were E.P. Cooke Real Estate Services Ltd. - $638,000.00

(Exhibit 238) and Realty World between $620,000.00 and $650,000.00 (Exhibit

241).

Mason was critical of Cooke’s appraisals. I will address those issues in a separate section.

[607] In the reply argument, Mason further argued:

34

For this purpose the definition of fair market value that I accept is that discussed, supra.

Page 141

... it is submitted that a heavy onus lies on Newmat (through its wholly owned

subsidiary 280) to show that in all respects it used its best endeavours to obtain

the best price reasonably obtainable on the sale of the Golf Dome. In Tse Kwong

Lam v. Wong Chit Sen and others, [1983] 3 All E.R. 54 (P.C.), Lord Templeman

states at 59:

In the present case in which the mortgagee held a large beneficial

interest in the shares of the purchasing company, was a director of

the company and was entirely responsible for financing the

company, the other shareholders being his wife and children, the

sale must be closely examined and a heavy onus lies on the

mortgagee to show that in all respects he acted fairly to the

borrower and used his best endeavours to obtain the best price

reasonably obtainable for the mortgaged property.

The ownership structure of 303 (the purchaser of the Golf Dome) and 280

(the mortgagee in possession, who held the Golf Dome as a bare trustee for

Newmat) at the time of the transaction is set forth in Exhibit 247. Billes through

Albikin held a 100% beneficial interest in 303. Billes, through Marlore and

Newmat, held a significant beneficial interest in 280 and was a director of 280.

[608] Billes replied:

The Golf Dome was sold for $648,000 in accordance with Section 135 of

the Real Property Act (Manitoba) [R.S.M. 1970, c. R30]. ...The Assistant District

Registrar ordered that the land may be offered for sale by 280 (Exhibit 221).

Prior to disposing of the interest, an appraisal was filed with the Manitoba Land

Titles Office (Exhibit 238), as was a valuation estimate (Exhibit 241). Both

reports are supportive of the value actually used. Counsel held an opinion from a

firm of Chartered Accountants that the sale was arm's length (Exhibit 247). The

District Registrar in the Land Titles Office authorized the sale (Exhibits 254,

256). Both Mason, and McAteer, were given notice of the proposed disposition,

and made no suggestions that the value was inappropriate (Exhibit 269). Neither

led any evidence to demonstrate that the disposition did not comply with

Manitoba law, nor was such an allegation pled.

The Plaintiffs have adduced no evidence in the form of valuation opinions

or estimates suggesting that the Golf Dome was disposed of for an amount less

than its fair market value, or that the disposition was commercially imprudent.

We submit the reverse onus does not apply because the purchaser from 280 did

not have an ownership interest in 280. Further, as there was no equity in the

property, the issue of disposition is not material to the issues in this suit.

Page 142

[609] I would observe that, as I understand it, s.135 of the Manitoba Real Property Act is

merely regulatory in nature in that it sets out the procedure to be followed on an application for

an order to sell property in default of payment. Billes may be correct in arguing that the appraisal

submitted to the Manitoba Land Titles Office may be “supportive” of the value of the Golf

Dome. However, that appraisal does not bind this Court or the other parties to this action with

respect to the value of that property. Additionally, I note that the opinion of Coopers & Lybrand

(Exhibit 247) was merely “for the purposes of the Income Tax Act” R.S.C. 1985 (5^thSupp.), c.1,

and does not determine whether the sale was at arms length for the purpose of being a valid fair

market value indicator. Indeed the letter stated:

... it is a question of fact whether or not unrelated persons are dealing at arm’s

length. A transaction between unrelated parties does not necessarily indicate an

arm’s length transaction. The prime factor of importance is separate economic

interests which reflect ordinary commercial transactions between parties acting in

their own separate interests.

In my view the onus remains on Billes and Newmat to show that the best price obtainable was

secured. I find further that they have satisfied that onus. Specifically, they have led evidence,

namely the appraisals, which indicates that the price obtained was within the suggested range.

While Mason has taken issue with this, neither she nor McAteer have put forward any evidence

to the contrary.

[610] McAteer argued a different point:

The Golf Dome was sold to a corporation wholly owned by Billog (Exhibit 271)

for $648,000.00. The purchaser entered into a management agreement with

Newmat (Exhibit 426). Newmat has earned management fees totalling

$723,898.00 to date (Exhibit 427). This transaction has provide both Newmat and

a related party to Billes, her son, to profit greatly from seizing control of this

asset.

[611] Billes responded:

McAteer suggests that Newmat has earned a management fee totalling

$723,898 to date (Exhibit 427). Exhibit 427 records management revenue from

303, not from the borrowers, pursuant to the agreement with 303. From that

revenue, Newmat paid salaries for the Golf Dome manager and expenses; Mr.

Newel also put his time into these services.

No interest has been paid on the Newmat loan since the spring, 1992, and

it is apparent from Exhibits 422 and 423 (loan balance calculations) that even if

one equated management fees from 303 to profits from the borrowers (which we

submit is not sound), the net benefit to Newmat is negative. It is unclear what

reasoning underlies McAteer's submission that the transaction has provided both

Page 143

Newmat and Owen Billes to profit greatly from seizing control of the asset. ... that

proposition is legally infirm and factually infirm.

I see nothing that is actionable in an entity with close ties to a creditor providing services for the

operation of a seized asset.

[612] Accordingly, I find that the disposition of the Golf Dome was for fair (albeit forced sale)

market value, and that Newmat and those “down stream” from Newmat, have satisfied the onus

upon them in this regard.

3.

Disposition of the Golf Course

[613] Regarding the golf course, the front nine holes were foreclosed to the Trust by the Court

of Queen’s Bench of Manitoba. The back nine holes were realized on security by a third party

and sold to a fourth party. The 18 holes were later bundled together by 3138993 Manitoba Ltd.,

a wholly owned subsidiary of the Trust, and sold to a Curtis owned Manitoba corporation (311)

for $1,225,000.00 (Exhibit 366).

[614] As Billes summarized, Peter Miller, a Chartered Accountant and chartered business

valuator, issued reports as follows: Exhibit 270; Exhibit 390, re: Kingwood 18 holes as at

November 27, 1992; and Exhibit 392 re: Kingswood 9 holes as at April 23, 1990 and March 21,

1991 (back 9 not yet completed). The summary continued:

The first report was an estimate of fair market value of the Kingswood 18 holes

for $1,180,000 to $1,385,000 as at August 31, 1993 or the Kingswood front nine

for $500,000 to $700,000 with a midpoint of $600,000 as at August 31, 1993. His

later reports did not arrive at a conclusion of fair market value. He was asked

whether the value could have been higher and in his view he was comfortable

concluding that fair market value would not be higher than in 1993. In his view

the value was at its highest in 1993.

[615] As Mason noted: his opinion was based on discussions with Gary Curtis, who did not

testify before the Court; Miller only made comments (as opposed to providing an opinion) as at

April 23, 1990 and March 21, 1991; and Club LP was in bankruptcy at the time of Miller’s

August 31, 1993 opinion. Mason also argued that, in addition to the above, the weight given to

his opinion should be impacted by the fact that he had not:

(a) given any consideration to the transaction by which Billes purchased an

interest in DDL or the Murray Buyout or the Curtis buy-in;

(b) reviewed the state of the golfing industry in Manitoba at the applicable dates;

and

(c) referred to the financial statements with respect to Club LP.

Page 144

I note these arguments but, as no evidence was provided to contradict Miller’s testimony, I have

no sound basis upon which to reject it.

[616] Mason argued:

The Trust ... sold same to 311 for $1,225,000.00 (Exhibit 366). The Trust

purchased the back 9 holes of golf for the sum of $500,000.00. This means the

front 9 holes of golf had a value of $725,000.00 in this transaction. The Trust

entered into an agreement with Gary and Wayne Curtis (Exhibit 367) whereby on

the subsequent sale of the 18 holes of golf by either Curtis or 311 they agreed to

pay the Trust 50% of the sale proceeds [net over the purchase price in Exhibit

366] to a maximum of $650,000.00. If the amount to be received by the Trust

was less than $650,000.00, then the Trust could veto any sale of the golf course.

[617] To this Billes replied at length:

The front nine holes of the golf course were disposed by order of

foreclosure of the Court of Queen's Bench of Manitoba. It is submitted that any

further transaction is not material nor subject to any reverse onus, since the sale

was not to a related party, a foreclosure order was granted and Club was

unwilling or unable to exercise any remaining right to redeem. It is submitted

that the back nine holes are not in issue - they were disposed of by another lender.

Mason's counsel suggests that because the Trust bundled the 18 holes

together and sold the same [for] $1,225,000, then the front nine holes had a value

of $725,000 in that transaction.

This suggestion is inaccurate. Billes gave evidence (Billes, 1895-1896)

that there was a very complex series of transactions that took several months to

reassemble the back nine and the front nine. In particular the documented

transaction at Exhibit 366 provides, inter alia:

(a)

In the Agreement of Purchase and Sale between 311 (Curtis' Corporation -

Purchaser) and 313 (Trust's Nominee - Vendor)

•

The Agreement was not a cash transaction

paragraph 5(b) - Purchaser to assume $150,000 of obligation to

Wall/Docking Corporation (3088406 Manitoba Ltd.(“308"))

paragraph 5(c) - $50,000 payable a year from date of agreement

...

Page 145

•

required Vendor's continued assumption of potential unlimited

liabilities arising out past course issues (Exhibit 367, paragraph 8)

(b)

In the Agreement of Purchase and Sale between 313 (Trust's nominee -

Purchaser) and 308 (Wall/Docking Corporation - Vendor) concerning

Back Nine (Schedule A to Ex. 366)

•

subdivision required between unsubdivided lots and Back Nine

(Pages 6, 7 and 8 of Schedule A)

this Agreement was also not a cash transaction.

paragraph3(c) - $220,000 by assumption of mortgage

paragraph 3(d) - $150,000 by Debenture to be paid over a year

later

•

Interim Operations Agreement required (paragraph 5)

Therefore it is incorrect to argue these series of transactions suggest a $725,000 value for

the front nine. Without attributing value to each of above, these series of transactions are

not useful as a comparable for the front nine. Further the whole of the Golf Course ($1.2

million with above restrictions) is worth considerably more than half a golf course.

[618] I believe that Billes’ first point covers the issue. The security, in the front 9 not being

redeemed, was foreclosed out to the security holder (the Trust) for whatever future it may have

had. What happens thereafter is of no relevance. The back 9 was not security realized on by the

Trust.

[619] The significance of the Mason argument on the numbers is not clear. The midpoint of the

Miller appraisal of the front 9 (which Mason criticizes) was $600,000. If Mason is correct in her

analysis, the Trust nominee got $725,000, more than the appraisal value. However, even if that

were the case, that, as I understand it, was still less than the amount owing on the Trust Loan.

What is actionable from this analysis? Moreover, there is no evidence by Mason to contradict

Billes’ assertions of value. The ultimate sale price would appear to relate to more than the

difference between the sale of the total package and the purchase cost of the back 9. That is, the

value of the whole 18 holes was, understandably, more than the sum of the parts.

4.

Cooke Appraisals

[620] Edward Cooke provided the following appraisal evidence:

•

Exhibit 385 Re: Phase 1 Residential Lots -- value of $1,477,000 at

April 23, 1990;

Page 146

•

Exhibit 385 Re: Phase 1 Residential Lots -- value of $889,000 at

March 21, 1991;

Exhibit 386 Re: Proposed Phase II Unsubdivided Lots -- value of

$217,000 at March 21, 1991;

Exhibit 386 Re: Proposed Phase II Unsubdivided Lots -- value of

$195,000 at October 10, 1991;

Exhibit 386 Re: Proposed Phase II Unsubdivided Lots -- value of

$162,000 at November 27, 1992;

Exhibit 388 Re: 26 Phase I Lots -- value of $710,000 at November 27,

1992; and

Exhibit 389 Re: Golf Dome -- value of $631,000 at November 27, 1992.

[621] Mason and McAteer were critical of Cooke’s appraisal of the Kingswood golf course,

lots, development land and Golf Dome. Generally speaking, their criticism went to the following

issues: deduction of expenses for selling lots and development of lands, including a developer’s

profit fee of 15%; his opinions were retrospective and involved the use of hindsight; his opinion

was based on a liquidation scenario not sales of lots, or the operation of the Golf Dome as a

going concern; his locational and functional obsolescence gave him an opinion less than the

costs of building, without providing any market comparable; and using the income approach he

deducted management fees and prepaid income. They concluded:

It is obvious that Mr. Cooke did not like the Golf Dome, as it was a new different

structure, the Development lands, as the lots were situate near La Salle, and he

did not consider the synergistic effect of golf course and residential lots. We

submit that his appraisals be given minimum weight and that his opinions be

given no weight at all.

[622] Neither Mason nor McAteer provided any rebuttal appraisal reports to deal with any of

these issues. There may be some conclusions on these issues at which the Court could arrive as a

matter of common sense, but the Court does not have expertise as an appraiser, does not know

the market, and is therefore largely left with the option of accepting the only evidence it has or

rejecting the opinions provided. As these are questions of fact, I have no expert evidentiary basis

on which to do the latter and am left with the former. However, dealing with the specifics, I

would refer to the evidence of Siebert and make some further comments.

[623] Siebert provided some valuable analysis of the valuation alternatives and the reasons for

them:

A liquidation approach would be used if a business was not viable as a going

concern. A going concern approach would be used for a continuing business

enterprise with potential for economic future earnings or cash flows.

I agree that the evaluation should have been done on a going concern basis, not a liquidation

basis, but, Billes argued that Cooke did not use a liquidation approach:

Page 147

In each instance, his definition includes that there is to be a reasonable time for

the disposition of the property - not a liquidation type of sale. His evidence was

that his approach was not a liquidation approach. The starting premise was the

market value for the lots; he did not discount the lot values.

In any event, even if it were on a liquidation basis, I have no evidence upon which to determine

what the different value would have been.

[624] I find that development costs and profits taken in the sale process are a proper deduction

in arriving at value. If an external sales agent is used, this cost comes off the gross sale price to

provide a net sale price. If internal agents are used, the recovery might be somewhat higher, but

still salary and commission must be deducted. I am unable to assess whether 15% is appropriate

or not, but there is no other evidence upon which I might rely.

[625] Appraisals are often, necessarily, retrospective, as Cooke testified. In most cases, for a

current date appraisal one is using comparative sales from some reasonable time past and then

making adjustments to estimate the current value. If you are doing an appraisal for some past

period, you often have more reliable data before and after the effective date, which can often

make the process of estimation more realistic. In other words, you know what the market was

actually saying at the time in question. I see no problem in retrospective opinions and the use of

hindsight, so long as the analysis is properly done, if the issue is to determine the value at that

past time, as was the exercise here. However, one must provide an opinion of value only at the

relevant date. Moreover, one must be careful in using data after the effective date, because it

may contain positive or negative stimuli that were not known to the market at the effective date.

In any case it is also important to make adjustments as necessary to reflect the market at the

relevant date. This is what was meant, as argued by Billes:

Cooke agreed with the basic proposition that the valuator only consider those

circumstances that exist at the valuation date. Cooke did include some statements

in his report which would not have been available to a prospective purchaser in

1991 (Exhibit 386, bottom of page 11). In the case of the Golf Dome, Cooke said

the appearance of the Dome when he saw it made him question the expected life

of the fabric, but he said that did not enter into his calculations. He said it did not

influence the value because at the effective date of the appraisal the structure was

new. He agreed that a purchaser in 1992 would not have the benefit of the

knowledge of the condition of the structure at the time it was inspected by Cooke.

[626] As to locational and functional obsolescence of the Golf Dome, if it were not going to be

used as a Golf Dome, then it may well be less valuable than if continued for that purpose. For

unique structures, as this was, it is often difficult to find comparables that are relevant and

helpful. In this regard, Cooke stated, as summarized by Billes, that: “... the structure was unique,

and it did not have a lot of uses”. For that reason, or if the operation is to continue on, then one

needs to appraise it on a cost basis or an income basis to determine what someone would pay for

Page 148

the property to earn revenue. Expenses to generate such revenue are a proper consideration in

order to determine what net income can be generated.

[627] As to Cooke’s views of the Development and its components or synergies, the Court does

not have the expertise to assess the views of the market as to values in relation to Cooke’s

opinion. If one is of the view that Cooke’s opinion was not what the market would consider

appropriate, the proper course is to provide a rebuttal opinion. As Mason and McAteer chose not

to do so, the Court’s hands are considerably tied as noted supra.

[628] In the circumstances of this case, I find no convincing reason why Cooke’s appraisals

should not be given full weight.

[629] BJ argued “The Court should not conclude from McAteer's testimony that

DDL/Kingswood had inherent value in excess of its debt load.” I agree with this at the time of

enforcement of the security.

5.

Conclusion

[630] Having considered all of the evidence, and the aforementioned arguments, I find that the

Lenders have presented evidence and argument sufficient to support any onus upon them to

demonstrate that fair market value was received through the disposition of all three of these

assets. I find further that Mason and McAteer have failed to provide evidence, or convincing

argument, to overcome that position.

[631] In the result, I can dispose of these issues as a matter of substance, and need not rely

upon the argument of Billes on the adequacy of pleadings. I would note, however, that nothing

to the effect of less than fair market value being received was pled.

[632] As a result, I find that the Lenders acted in good faith and obtained fair market value

(perhaps in a forced sale situation, which adversely affects value) for the security that DDL

pledged (through Kingswood) for the Loans.

C.

Res Judicata and the Manitoba Litigation

[633] The issue of res judicata flowing out of the Manitoba litigation arose a number of times

in the Outline for Argument. In the context of enforceability relative to deferral of interest,

discussed supra, the issue was raised in these words as to whether res judicata overcame any

limitations or restrictions in enforcing the security:

Does this [deferral of interest] affect the default and calling of the loan(s) such

that the demand and subsequent receivership is invalid? If the answer is

affirmative, is the Manitoba court action res judicata to any such conclusion?

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[634] Later in the same section of the Outline for Argument, as a form of “catch all”, it is raised

again:

Is there any other reason why the Trust Loan or Newmat Loan were

unenforceable? Is any such unenforceability overcome by/not required to be

considered by res judicata premised on the Manitoba Court orders? What

consequences follow?

[635] It was also raised in the context of the Derivative Action, which I will discuss, infra.

[636] The issue came down to whether the Manitoba litigation estopped the current actions,

limited some aspect of them, or had no effect on either. I find that it had the effect of determining

some specific issues (e.g. the lack of a collateral agreement limiting the enforceability of the

$1,000,000 construction loan; terminating the interest of Kingswood to the front 9 based on the

foreclosure of that security; etc.), on which I have come to similar conclusions on the merits,

independent of the earlier litigation. However, I do not find that the Manitoba litigation had the

effect of estopping Mason and McAteer from bringing the Mason Action and

McAteer/Kingswood Action. I will analyze the arguments that led me to this conclusion.

[637] Billes alleged that DDL, Mason and McAteer are estopped from bringing the present

action on the basis of res judicata. Specifically, Billes submitted that Mason and McAteer were

either parties or privies to the Manitoba litigation.

[638] Mason countered that she was not a party to the litigation, as she was not named as a

party nor served with the Notice of Motion, and that Kingswood Club Ltd. and Club LP were

the only Defendants named. She does acknowledge that she applied unsuccessfully for a stay of

the foreclosure procedures pending the determination of the validity of the Trust Loan in

Alberta. She argued further:

The criteria for finding privy have been discussed at page 221 of the decision of

420093 B.C. Ltd. v. Bank of Montreal (1995), 174 A.R. 214 (C.A.). In essence,

privies include any person who succeeds to the rights or liabilities of the party,

but it is essential that he who is later to be held estopped must have had some

kind of interest in the previous litigation or subject matter. It is an essential of

privity of interest that the privy must claim under or through the person of whom

he is said to be a privy. Privity is not established merely by having "some interest

in the outcome of litigation". There must be a sufficient degree of identification

between the two parties to make it just to hold that the decision to which one was

a party should be binding in proceedings to which the other is party.

Simply stated, when one considers the actions being advanced by DDL and

Mason in these proceedings (i.e. principally being a breach of fiduciary duty and

oppressive conduct), these are separate and distinct causes of action and are not

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"claims under or through the Kingswood entities". Accordingly, the assertion that

res judicata applies to the actions of Mason and DDL ought to be dismissed.

[639] Mason’s argued further:

It is also significant to note that Sill was appointed as receiver and manager of

DDL pursuant to the Trust security and the Newmat security on November 27,

1992 and that this appointment continued through the period of the foreclosure on

the front nine holes of golf (January 24, 1994) and the sale of the Golf Dome by

Newmat's nominee (March 25, 1994). Hence, DDL was under the control of the

lenders at the relevant times and was not in a position to act independently to

oppose the Manitoba proceedings.

...

In a somewhat analogous situation, the Alberta Court of Appeal has dealt with the

argument being put forward by Billes in respect of Mason in Angus v. Angus (R.)

Alberta Ltd. (1988), 85 A.R. 266 (Alta. C.A.). Belzil, J. A. speaking for the court

states at 273:

…The trial judge further held that the plaintiffs had an obligation to

intervene in the action commenced against the company by the selling

shareholders and to appear at and oppose the application for an order for

specific performance, and that, having failed to do so, they were now

estopped from seeking relief in the present action. No authority was

quoted by the trial judge or advanced by the respondents, and none has

been found, to impose such an obligation upon a shareholder. In my

opinion no such obligation is recognized in law. Indeed, it is questionable

that a shareholder would have status at all to intervene in his capacity as

shareholder. Even if they had been cited as parties they would not be

estopped if the issue were not really litigated: Spencer-Bower, Res

Judicata, 2^nded., p.44. [Emphasis added.]

Contrary to the assertions put forward by Billes ...the validity of the Trust loan

was never really litigated in the Manitoba action.

[640] Billes countered:

... The loan has been foreclosed in the Court of Queen's Bench of Manitoba.

Kingswood Golf & Country Club was a party to that litigation. Mason actively

participated in that litigation by opposing the Trust's application and applying for

a stay. McAteer participated in that litigation by applying for a rehearing (which

was unsuccessful), and then conducting an appeal (which was dismissed for lack

of prosecution).

Page 151

I agree with this statement of fact.

[641] Billes argued further that the definition of privy to litigation in Alberta is wide and

flexible. In that regard she relied on Argentia Beach (supra) and 420093 B.C. Ltd. v. Bank of

Montreal (supra). On that basis she submitted DDL, Mason and McAteer were privies to the

Manitoba litigation, if not parties. Where the interests are so closely aligned as was the case in

420093 B.C. Ltd. and Argentia Beach, supra, the court should make a finding that they are

privies. The fact that both McAteer and Mason actively participated in various aspects of the

Manitoba litigation, presents a compelling case for binding them to the result of the Manitoba

litigation.

[642] Alternatively, Billes argued in light of their active participation in the Manitoba

litigation, the Court should exercise its jurisdiction to prevent an abuse of its process. She cited

Roenisch (supra) (Q.B.), as an example of where the court has exercised such jurisdiction.

[643] Finally Billes argued that the judgment of a sister province like Manitoba ought to be

recognized in Alberta. She cited Morguard v. De Savoye, [1990] 3 S.C.R. 1077 and Wavel

Ventures Ltd. v. Constantini (1996), 193 A.R. 81 (C.A.), [1999] S.C.C.A. No. 279, in that

regard. Relying on Malik (supra) and LRSCO Investments Ltd. (supra) she stated further that, a

final order of foreclosure is a final order for the purposes of the rules respecting res judicata or

issue estoppel. Accordingly, she submitted:

What is occurring in this case is precisely the type of litigation by installment

which our Court of Appeal in LRSCO Investments Ltd. labelled an abuse of

process. It was necessary for the Court of Queen's Bench of Manitoba to come to

a conclusion that the security was valid and enforceable, before it could order

foreclosure. Many of the issues raised in this suit, were raised by Mason in her

initial opposition (as can be seen from the affidavit which she swore), or were

raised by McAteer in his letter to the Court of Queen's Bench of Manitoba, and

were issues in the appeal (the appeal books are reproduced in Exhibit 270).

It is not open for the Plaintiffs in this suit to suggest that the construction

mortgage is invalid or unauthorized, or that the lenders do not have title to it, or

that a collateral agreement existed which prevented the loan from being called.

The lender's rights under the construction mortgage have been enforced by a court

of superior jurisdiction, and the Plaintiffs had the opportunity in that suit to

challenge or did challenge the enforcement.

[644] I do not challenge the accuracy of the authorities upon which Billes relies. Moreover, I

specifically agree with the conclusion in the last paragraph. Indeed, those are some of the issues

to which I find that the doctrine applies.

[645] However, the issues being advanced in the current litigation, namely breach of fiduciary

duty, oppressive conduct, and the Derivative Action are separate and distinct causes of action,

differing materially from those raised in the Manitoba foreclosure litigation. The Manitoba

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action, and any principle of res judicata or issue estoppel arising therefrom, certainly does not

affect the oppression and Derivative actions, because the same issues, or “same subject of

litigation” were not determined in the Manitoba actions. The Manitoba action only dealt with the

foreclosure on security pledged through the Kingswood entities: Hall v. Hall and Feed & Grain

Limited (1958), 15 D.L.R. (2d) 638 (Alta. C.A.); Evin’s Contracting Ltd. v. Bank of Montreal

(1987), 20 B.C.L.R (2d) 57 (B.C.S.C.); Town of Grandview v. Doering, [1976] 2 S.C.R. 621, and

undoubtedly others, relying on Henderson v. Henderson, [1843-60] All E.R. Rep. 378; Pearlman

v. Winnipeg (City) (1982), 18 Man. R. (2d) 328 (C.A.), and Bank of BC v. Singh (1990), 51

B.C.L.R. (2d) at 273 (C.A.)). Further, these claims in this Court cannot be construed as claims

under or through the Kingswood entities.

[646] Res judicata and abuse of process may apply in relation to issues that were litigated and

finally determined or ought to have been included in the foreclosure proceedings. However, my

conclusion on the validity of the Loans and Loan security do not differ from those flowing from

the Manitoba litigation. It is thus, unnecessary for me to consider these arguments.

[647] In conclusion, in view of the fact that I have held that the security taken in the Trust and

Newmat Loans is valid (notwithstanding that there has been a breach of the USA and the ABCA),

I need not consider the issue of whether the Manitoba foreclosure is res judicata to the challenge

by Mason and McAteer. However, insofar as such a decision were to be a prerequisite to even

entertaining the issue of the validity of Loans and such security, I would find that the

participation of Mason and McAteer in the Manitoba litigation was not such that res judicata

would result. Nevertheless, on the merits of individual issues which were prime in the Manitoba

litigation, there are some, as discussed supra, where res judicata is determinative.

XII THIRD PARTY CLAIMS

A.

Third Party Claims - Liability of Counsel (McAteer, BJ & TM)

[648] This issue was stated in the Outline for Argument as follows in both the

McAteer/Kingswood and Mason Actions:

2/4. Is BJ liable, as a third party, to any of the Defendants for any reason apart

from the above considerations? Why/why not? If so, what are the

consequences? If liability is established do they have recourse in this

action against any other party? Who? Why?

3/5. Is TM liable, as a third party, to any of the Defendants for any reason apart from

the above considerations? Why/why not? If so, what are the consequences? If

liability is established do they have recourse in this action against any other

party? Who? Why?

As to Billes’ Third Party claim against McAteer in the Mason Action the Outline for Argument

stated it thus:

Page 153

4.

As to McAteer, as a third party, under what circumstances and on what grounds is

he liable to the Defendants? Why or why not? If so, what are the consequences?

If liable does it have recourse in this action against anyone else? Who? Why?

1.

McAteer

[649] I find McAteer liable under the Billes Third Party Claim to indemnify Billes for his false

representation to Billes that he had, as undertaken, disclosed her interest to Mason and obtained

Mason’s consent, in a manner which complied with the ABCA and the USA.

[650] As noted, supra, the allegations of McAteer’s misrepresentation against Billes were

raised in both the Billes Counterclaim against McAteer in the McAteer/Kingswood Action and

in the Billes Third Party claim against McAteer in the Mason Action. I have decided to grant

judgment to Billes, in indemnification of her liability to Mason, under the Billes Third Party

claim, but in doing so I will discuss the allegations and arguments from both claims.

[651] Billes argued in relation to the Trust Loan:

It is submitted that the same principles [as applicable to BJ] apply to McAteer,

because he acted for Billes and DDL, and undertook to ensure that the proper

legal requirements were met. Not only did he fail to provide any warnings to

Billes, he misrepresented the existence of proper resolutions in the minute book

and made misrepresentations to Whitlock as to the ownership of DDL. As a

result of these breaches of duty, he must indemnify Billes for any liability

imposed upon her.

[652] Similarly, Billes argued in relation to the Newmat Loan:

McAteer failed in his duty as Counsel for DDL and Billes, by failing to provide

the appropriate warnings and, should the Court find that Mason did not consent

..., then in misrepresenting that he had spoken to Mason or in allowing Billes to

believe that she had no objection to the loan, and in providing the Officer's

Certificate. As is the case with respect to the Trust loan, if Billes is held liable,

then McAteer must indemnify Billes....

[653] I have found that McAteer was not acting for Billes in the capacity as counsel in relation

to the Loans, and as such, he was under no duty to warn or advise her with respect to the validity

of the Loans or her liability to Mason. This does not, however, preclude liability on the basis of

his personal misrepresentation to Billes that he had advised Mason of Billes’ conflict and

obtained Mason’s consent in relation to the Loans.

[654] In order to be actionable, a misrepresentation may be either fraudulent or negligent, the

latter comprising a necessary component of the tort of deceit. What distinguishes a fraudulent

misrepresentation from a negligent misrepresentation is an absence of honest belief in its truth:

Page 154

Francis v. Dingman (1983), 43 O.R. (2d) 641 (C.A.), (1984), leave to appeal refused, 23 B.L.R.

234n (S.C.C.); P.M. Perell “The Fraud Elements of Deceit and Fraudulent Misrepresentation”

(1996) 18 Advocates Q. 23. In light of the facts I have found, specifically, that McAteer falsely

represented to Billes that he had told Mason of Billes’ conflict position and had obtained

Mason’s consent to the Loans, I find that McAteer’s statements were dishonest, and therefore

fraudulent. As these statements depended on his knowledge of his own actions he could not have

had any honest belief in the truth of those representations.

[655] In order to rely on a claim for fraudulent misrepresentation it is necessary for the

claimant to specifically plead any allegations of fraud and details of any misrepresentations: E.

Bullen et al. Precedents of Pleadings, 14^thed. (London: Sweet & Maxwell Ltd., 2001) at 816.

However, the presence of the actual words “fraud” or “dishonest” is unnecessary so long as the

statement of claim sets out allegations, which if proven, are capable of amounting to fraudulent

and dishonest conduct on the part of the defendant: Korte v. Deloitte, Haskins and Sells (1993),

8 Alta. L.R. (3d) 337 (C.A.), leave to appeal dismissed, [1993] S.C.R.; and Dallas v. Pringle v.

P.O. Dwyer and The Northern Investment Agency, Ltd. (1912), 6 D.L.R. 446 (Alta. S.C.).

[656] In her Statement of Defence in the Mason Action, Billes pled in paragraph 11 (see also

paragraphs 11 and 32 of the Billes Defence and Counterclaim in the McAteer/Kingswood

Action):

...Paul McAteer held himself out as an experienced and knowledgeable solicitor

who could and would advise Billes (personally and as trustee) with respect to

both loans, provided Billes with legal advice on both transactions, undertook to

advise Pamela McAteer (Mason) of the proposed loans, the identity of the lenders

and their relationship to the other shareholders and directors of Devoncroft,

undertook to obtain Pamela McAteer’s consent to the loans, and represented to

Billes (and thereby the lenders) that he had obtained the consent of Pamela

McAteer (Mason) prior to the making of each loan.

[657] Again, I note that no liability attaches to McAteer qua Counsel. However, in a personal

capacity the allegations would, if proven, amount to fraudulent misrepresentation. I find that

those pleadings are sufficient to support a claim of that nature.

[658] In any event, there is another pleading that even more clearly satisfies this requirement.

At paragraph 14(i) in her Third Party Claim against McAteer in the Mason Action, Billes

specifically alleges:

14.

In these proceedings, the Plaintiffs claim inter alia that the Newmat Loan

and the Trust Loan are invalid and unlawful or prohibited by reason of

non-compliance with the USA and section 115 of the [ABCA].... in the

event the Plaintiffs are successful, these Defendants claim indemnity or

contribution against ... [McAteer] on the grounds that they were negligent

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and in breach of their duties to these Defendants, the particulars of which

are as follows:

(i)

in the case of McAteer only, . . .he falsely or negligently

represented to ... Billes, that Mason was aware of and had

consented to the loans . . .

[659] In my view these allegations disclose a claim for fraudulent misrepresentation. Although

the opening paragraph refers to negligence, the subparagraph specifically alleges a false

representation which, if proven, would support a claim of fraudulent misrepresentation. I would

also note that similar allegations were made in the Third Party Notice against McAteer in the

Derivative Action, however, as will be seen, those pleadings need not be considered.

[660] The classic definition of the tort of deceit was set out in Derry v. Peek, [1886-90] All

E.R. Rep. 1 (H.L.). To succeed in an action of deceit a plaintiff must show:

(a) a false representation or statement was made by the defendant;

(b) that was knowingly false or made with reckless disregard to the truth or falsity of the

representations;

(c) the defendant must intend to deceive; and

(d) the misrepresentation must materially induce the plaintiff to act in a manner that

results in damage.

[661] As discussed earlier, I have found elements (a) and (b) satisfied in the present case.

[662] The third element, the intent to deceive, is easily satisfied where a knowingly false

misrepresentation is made directly to the plaintiff: L.N. Klar, Tort Law, 2^nded. (Toronto:

Carswell, 1996) at 495. Perell, supra, states at page 27:

. . . the proof of the element of an intent to deceive is connected to the nature of

what the defendant said and the knowledge and position of the parties when the

defendant spoke.

[663] In the circumstances, Billes was unaware at the relevant times (prior to October 9, 1992

or later) that McAteer’s representations were false. Nor was there any onus upon her to then

have made inquiries to confirm the veracity of the representation, as it is not an answer to a

claim in deceit that the victim of the fraud could have discovered for herself that the statement

was untrue: G.H.L. Fridman, The Law of Torts in Canada (Toronto: Carswell, 1990) at 128; and

Klar, supra, at 497, note 59.

[664] In all of the circumstances, I find that McAteer’s intent to deceive Billes is clear. In my

view, McAteer’s misrepresentations can only be explained by an intent, for whatever motivation,

to influence Billes to take a perilous course of action in relation to disclosure of her interest in

the Loans. There is no evidence that I find credible to support any other alternative. Indeed,

Page 156

while there is no way to determine it, one wonders whether the motivation might have been

intentional, namely, to use the alleged lack of knowledge, and the resulting lack of disclosure

and consent to attempt to avoid enforcement of the Loans in the future.

[665] The fourth and final requirement is that the misrepresentation materially induced the

plaintiff to act in a manner that results in damage. The test of materiality is objective: would the

statement have induced a reasonable person to act in reliance on it? If so it must then be

determined whether the plaintiff actually relied on it. Perell, quotes Hinchey v. Gonda, [1955]

O.W.N. 125 (H.C.) for the proposition that the test of determining materiality is whether the

plaintiff’s conduct might have been different had the representation not been made.

[666] I find that a reasonable person would have been induced in all the circumstances of this

case to believe a personal representation made by a fiancé (who was also a fellow director,

officer and shareholder, but, I find, McAteer did not make his representations in any of these

capacities) to the effect that he had completed a task that was requested of him. As discussed

previously, although her actions in signing the director’s resolution might have aroused her

suspicion, I find that any such suspicions were quickly and reasonably laid to rest by McAteer’s

misrepresentations orally and in the Officer’s Certificates. More particularly, I find that Billes

was so induced. I am satisfied that had the representations not been made, Billes would have

taken a different course of action. She is a sophisticated business woman who had retained

solicitors in relation to the Loans. She was also aware of the conflict provisions in the USA. She

had insisted on, and obtained compliance in the earlier $54,000 loan. On that basis I find that she

would have arranged for someone else to provide disclosure to and obtain Mason’s consent, or

would have done so herself, had she been aware that McAteer had failed to do so. My finding in

this regard is also strengthened by the further finding that Billes herself was induced by the

representations, otherwise she would have taken these further steps to ensure the validity of the

Loans.

[667] The second part of the requirement is that Billes has suffered damage. However, it should

also be noted that the damage suffered must flow in the ordinary course of events or in the

special circumstances of the case as a direct and natural consequence of the misrepresentation:

Fridman, supra, Vol. 2, at 129.

[668] Again I have no trouble finding that this requirement is satisfied. Billes’ damages,

namely her liability to Mason, was a direct and natural consequence of her reliance on

McAteer’s misrepresentation.

[669] It should be noted, however, that in the prayer for relief in the Counterclaim, Billes

merely sought:

(a)

In the event the Newmat Loan and the Trust Loan are held invalid,

damages ... together with ... interest [Emphasis added.]

Page 157

[670] I have not held the Newmat or Trust Loans invalid. Rather, I have granted Mason a

remedy under the oppression sections of the ABCA, based on Billes’ failure to disclose her

interest in writing to Mason and obtain her shareholder’s approval. That possibility was not

included in the prayer for relief in the Billes Counterclaim. The answer is that the Court is not

limited by the exactitude of a prayer for relief: Century 21 Real Estate Ltd. and Shtabsky v.

Reykdal Investments Ltd. and Umisk Farms Ltd. (1979), 9 Alta. L.R. (2d) 209 (S.C.T.D.);

Alberta (Public Trustee of the Estate of Robert Wallbridge, a dependent adult) v. Wallbridge,

[1984] AUD 2212 (Q.B.); and M.L.E. Industries Ltd. v. E.S.T. Investments Ltd. (1991), 116 A.R.

182 (Master Funduk); and Calmont Leasing v. Kredl (1995), 165 A.R. 343 at 352 (C.A.).

[671] In any event, there is another pleading which would clearly satisfy any requirement in

this regard. Billes’ Third Party Notice against McAteer in the Mason Action specifically claims

indemnity or contribution against McAteer in respect of any judgement obtained by Mason from

Billes.

[672] Damages recoverable in deceit are based on restoring the plaintiff to the position that she

would have been in had the representation not been made, not if the statement had been true:

S.M. Waddams, The Law of Damages (Toronto: Canada Law Book Limited, 1983) at para. 581.

Here I find that, had the misrepresentation not been made, Billes would have taken further steps

to disclose her interest and obtain Mason’s consent and to ensure the validity of the Loans.

[673] Accordingly, I find that the appropriate assessment of damages to Billes on McAteer’s

liability to her under the Third Party claim against McAteer in the Mason Action is equal to the

damages payable by Billes to Mason as a result of her liability under the oppression remedy. In

other words, McAteer will be liable to indemnify Billes for the loss she has suffered as a direct

result of his fraudulent misrepresentation.

2.

BJ & TM

[674] I have stated supra that I find that neither BJ nor TM were aware of the USA or Billes’

lack of compliance with the USA or the ABCA, and were entitled to rely on the indoor

management rule, supported by the Officer’s Certificates. As such I have found that they are not

liable to Billes by her Third Party claims in either of the McAteer/Kingswood and Mason

Actions.

[675] I use this section of these Reasons to provide more detailed background and findings to

support that conclusion. However, in reading what follows it should be understood that, while

BJ and TM are being treated separately in relation to the Trust and Newmat Loans respectively,

much of what was argued and my findings could apply to both, subject to some different

evidence, mutatis mutandis.

a.

BJ

Page 158

[676] McAteer testified that the commitment letters for the Trust Loan (Exhibits 30, 472 and

473) were provided to Desbarats at BJ, but then transferred to Whitlock. However, in his

testimony Whitlock stated that he did not understand anyone else being involved from BJ and

claimed no knowledge of any prior legal dealings of any of the parties with BJ.

[677] When Whitlock was asked (in chief), for whom he considered himself acting “as this

file progressed?”, he responded:

... we considered ourselves acting in the role of completing the documentation

necessary for this loan transaction, and that it would be the Trust who would be

relying on that documentation, and therefore, we would be acting for the Trust.

McAteer would be acting for the corporation, DDL, and he would be

responsible for the corporate and other matters relating to DDL.

...

... we were to deal with Lavery as the trustee, and on the corporate matters,

McAteer, and the combination of those two individuals, and then subsequently,

as the file progressed in later meetings with Billes, this was again restated and

re-emphasized.

[678] Whitlock also testified and I accept this evidence that:

(a) he relied on McAteer and his Officer’s Certificate as McAteer was understood by

Whitlock to be very knowledgeable in corporate governance, and loan security and

general documentation;

(b) he was not aware of the DDL USA;

(c) McAteer told him he owned 50% of the shares, and that 39% were held for the benefit

of his children, but McAteer made no mention of Mason owning any shares or having

any role in DDL (Exhibit 471);

(d) Whitlock was in touch with Steinburg regarding registration of Manitoba security, but

had no recollection of any discussion with him regarding Billes’ conflicts, or any request

by Billes to do so;

(e) while it was normal to get a solicitor’s opinion in addition to an Officer’s Certificate,

as McAteer was performing both roles he didn’t get the opinion as it would be redundant;

(f) while he did not normally examine minute books and only did so when a solicitor’s

opinion was necessary but not provided, he did not examine the DDL minute book

(probably available to him) as a solicitor’s opinion was not necessary here;

(g) he does not recall telling, but he may have told, Billes that the Officer’s Certificate

dealt with any concerns she may have had between her roles as a trustee of the Trust and

a 50% shareholder of DDL, but there was no reference to any USA; and

(h) Whitlock was at ease regarding conflicts of Billes between the Trust and DDL

because both the Trust and DDL were dealing with their own internal governance issues

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and all the parties that he believed to have an interest in DDL, that is all shareholders and

directors, were present and executing the documentation.

[679] Billes summarized some of Whitlock’s evidence, and in particular that:

Billes expressed her concern over conflict issues in her role as a Trustee and an

officer of DDL.

He did no corporate search of DDL; and made no inquiries as to the existence of

a USA.

[680] Mason also summarized some of the evidence of Whitlock, some of which explained the

starkness of Billes’ recount of same, and I accept the following therefrom:

Billes did not want to sign the Officer's Certificate out of concern about conflict

issues as she was a director and officer, and a shareholder of DDL as well as a

trustee of the Trust. Billes did not raise a concern about her conflict position as a

result of the Unanimous Shareholders Agreement.

...

Whitlock received instructions from Lavery to remove Billes’ name from the

Officer's Certificate.

[681] BJ argued:

... consistent with the indoor management rules of corporate law, Whitlock relied

upon the Officer’s Certificate of McAteer (Exhibit 39), who was also corporate

counsel for DDL acting on the Loan, wherein he opined and certified that DDL

was not bound by any USA which would in any way hinder or restrict the powers

of the DDL or the officers of the DDL to authorize, execute and deliver the

Debenture. This Certificate, coming from counsel, was equivalent to (indeed

stronger) than an opinion from borrower's counsel.

...

Whitlock gave evidence that his practice in acting for lenders was to rely on the

indoor management rule for the purposes of ensuring that the borrower had

complied with all internal corporate requirements....

...

... the evidence does not enable this Court to conclude that Whitlock failed to

exercise reasonable care by relying on a statement made in writing by a very

Page 160

experienced counsel, intimately familiar with the transaction and acting as ... an

officer and director of the borrower....

... The operative question as to whether it is reasonable to rely upon an Officer’s

Certificate, particularly the one granted in the circumstances, is not addressed [by

Billes] and the inference that there was a shortcoming is not supported with fact

or legal authority.

To the extent of this quote, I agree.

[682] BJ noted that Billes et al., the claimants against the Third Parties, never adduced any

expert evidence to the effect that the legal services provided failed to meet an appropriate

standard. As it relates to the Trust and BJ, BJ argued further that:

To the contrary, the evidence of Whitlock is to the effect that he followed his

usual practice which he believed to be consistent with indoor management rules

of corporate law. That opinion and judgment of Whitlock was not contradicted.

[683] The above evidence and arguments relative to Whitlock’s knowledge and action, with

which I agree, cause me to conclude that BJ would bear no liability if the Loans had been found

invalid, and that BJ is not liable to indemnify Billes for her oppression liability to Mason.

[684] I make these findings notwithstanding conflicts within the BJ firm vis-a-vis DDL,

McAteer and Mason over time. The evidence on this includes:

(a) Desbarats acted on behalf of DDL (see the letter of Mason of October 12, 1992

(Exhibit 137), where she says she will contact him as “the company’s counsel at BJ”, as

to the identity of the solicitor she was appointing to represent herself following the

meeting with Sali on October 9, 1992);

(b) BJ prepared the USA - as such, the firm of BJ had the knowledge, and as such

Whitlock had the means to knowledge, although not actual knowledge, of the existence

of the USA and its terms;

(c) after it became apparent, on or about August 10, 1992, that Sali had been retained

(Exhibit 117), Sali wrote to McAteer on August 11, 1992 (Exhibit 119), and there was

communication between TM, Sali and McAteer (Exhibits 122 and 125) about conflicts.

McAteer testified he met with Desbarats in late August 1992 and wrote to Desbarats on

September 11, 1992 (Exhibit 126) outlining the conflicts and potential conflicts, and

then requesting:

I therefore need to confirm that your firm is DDL’s lawyers as it has

been involved in all aspects of the formation of DDL, preparation of

Partnership agreements and lately with the completion of the Unanimous

Shareholders Agreement....

Page 161

TM brought this correspondence directly to the attention of Sali on September 23, 1992

(Exhibit 128). By letter dated September 25, 1992 to TM (Exhibit 129), Sali denied

knowledge of the latter and added:

I can say that I have spoken to Desbarats on more than one occasion

respecting this matter and have advised him that the present differences

are completely unrelated to any professional services he may have

provided to Billes, McAteer or DDL.³⁵I do not intend to play a

“restricted role”....

and invited McAteer to set out any objection to BJ acting, which McAteer does,

attacking the adversarial position, on September 29, 1992 (Exhibit 134);

(d) McAteer again wrote Desbarats and Whitlock on November 16, 1992 (Exhibit 149)

to complain about the BJ conflicts, as does TM on November 17, 1992 (Exhibit 150)

and Trawick on November 18, 1992 (Exhibit 158) -- these letters followed Sali’s

proposal of an Officer’s Certificate [“estoppel certificate”] on November 5, 1992

(Exhibit 143), to provide comfort to the Lenders;

(e) Desbarats responded to McAteer on November 19, 1992 (Exhibit 159), stating that:

I had always understood from [Sali] that we would not act in any legal

proceedings in connection with these matters because of our past

representation of you, Mason and DDL and our involvement in the

financings.

[Sali] assures me that Pitblado & Hoskins is not acting on instructions or advice

from him or any other member of our firm, but rather on direct instructions from

their client, whoever that may be; and

(f) Sali, in testimony, confirmed that BJ had been retained by both McAteer and

Mason in the past, including the purchase by Billes of an interest in DDL.

[685] I find Sali’s alleged assurances to Desbarats unconvincing. It appears clear to the Court

that Sali, while not on record in any “legal proceedings”, was acting for Billes and the Lenders

in the dispute leading up to the litigation, and, while he may not have formally “instructed”

Pitblado (as he asserts in his letter to TM of November 18, 1992 - Exhibit 157), it appears he

was actively involved in introducing Billes and the Lenders to Pitblado (TM was of this view

as set out in the similar letters to Pitblado on November 17, 1992 - Exhibits 150 -151). Sali

also addresses this issue in his letter of November 20, 1992 (Exhibit 160) in response to TM’s

letter of November 19, 1992.

35

On the contrary, I find them completely related, as McAteer points out clearly in Exhibit 134.

Page 162

[686] Notwithstanding this background, and the fact that it was Desbarats who introduced

McAteer to Whitlock, I accept Whitlock’s evidence that, at the time of the Trust Loan, he was

not aware of any professional work having been done for any of DDL, McAteer, Mason or

Billes. Desbarats, who didn’t testify, was obviously not so innocent. Nevertheless, it appeared

that the “bamboo curtain” was quite impervious.

[687] BJ should be embarrassed by the fact that, notwithstanding BJ had also been (1)

retained by McAteer to perform legal work, including the incorporation of DDL and the

formation of the partnerships, and (2) Desbarats acted for DDL, McAteer and Mason on the

sale of shares to Billes, and for those three on the USA, Sali felt it open to him to act for Billes,

in quite an aggressive manner against McAteer (a lawyer representing himself) and Mason

(unrepresented) in a meeting on October 9, 1992, to discuss the financial problems of DDL.

Mason’s letter of October 12, 1992 to McAteer (Exhibit 137) called it “aggressive and hostile

behaviour”.

[688] In the result BJ bears no liability.

b.

TM

[689] I have addressed the question of who TM was acting for and Marshall’s credibility,

supra. I now turn to TM’s knowledge of Billes’ conflict and TM’s role relevant thereto.

[690] As to TM’s knowledge of Billes’ interests, in cross by TM, the following exchange

with McAteer took place:

Q Now, sir, at no time was TM ever given any information by you that was

inconsistent with the facts contained in the certificate or the resolution, Exhibits

76 and 77, correct?

A The only -- the only matter that was raised, and I recall specifically asking

David to talk to Newmat about Martha's control. Other than that, no, we had

two directors, we'd completed a transaction, authorized me as president to do all

the documents, and that's what was happening. So I don't recall giving him any

other instructions relative to that.

Q Well, and further, you gave him no information that was inconsistent with

Exhibits 76 and 77, correct?

A I don't believe so.

[691] On September 30, 1991, Marshall was informed by Newal and Lavery that Newmat

was “not controlled by [Billes], but she has a position in it” (Exhibit 448). He knew Billes was

a director of DDL, but was not aware at the time of the Loan that Billes was a director of

Newmat. He did not have the DDL minute book, nor was he ever told of the DDL USA. He

relied on the Officer's Certificate associated with the Trust Loan, and no one ever advised him

that the Trust Loan Officer's Certificate was inaccurate. On January 6, 1992, he met with

Page 163

McAteer in relation to execution of the Newmat Loan documentation, and the documents,

including the Officer's Certificate (Exhibit 77), were reviewed and executed by McAteer.

[692] I accept the evidence of Marshall that McAteer agreed to attend to DDL’s “corporate

governance” issues - the internal function of meeting bylaws, shareholder agreements, and

statutory requirements to permit the lawful authorization and execution of documents by DDL.

Moreover, I find that McAteer at no time gave TM any information that was inconsistent with

the facts contained in the Officer’s Certificate. Equally, I accept the arguments of TM that:

(a) Billes gave evidence that while she was aware of the facts and the possible issue [of

conflict], she did not speak with Marshall, rather she was relying on others [McAteer]

to raise the issue with Marshall;

(b) the evidence is that, while Lavery and Newel were aware of facts which might give

rise to a conflict issue or a potential conflict issue, they neither provided TM with

information which would signal such an issue nor did they request TM to address the

issue;

(c) Lavery testified that he felt no obligation to deal with a potential conflict issue ...

[and f]urther, he understood that Billes was relying on McAteer to address the issue [as

I have found he undertook to do]; and

(d) Newel testified that he never raised the issue with Marshall and that he never

advised Billes that he had raised and addressed the conflict issue with Marshall.

[693] In the result, I agree that no information was provided to TM “about the existence of

the DDL USA or particulars of Billes' involvement in Newmat” to put it on inquiry to do

anything further than it did. Accordingly, TM is entitled to rely on the Officer’s Certificate, as

“[a]t no time was TM given any information to contradict the information in the Officer's

Certificate”.

[694] I find further that Newmat relied upon TM, in that there were no advances until

October 10, 1991, the date of the execution of the documentation. Although there is no

evidence on the timing of the first advance on that date (Exhibit 382), in relation to the time of

the execution of the documentation, it is to be inferred that the advance was made after one of

two calls by Marshall to Newal when he confirmed the execution. There is no evidence to the

contrary.

[695] Moreover, I do not find that, in all the circumstances, Marshall or TM breached any

standard of care of a solicitor in relying on McAteer’s Officer’s Certificate and entrusting to

him the corporate governance issues. More specifically, I do not find that TM was negligent in

the circumstances not to conduct corporate searches, make investigations as to the existence of

a USA, or to pursue an investigation as to the compliance with section 115 of the ABCA. The

obtaining of the Officer’s Certificate is the answer to all these requirements.

[696] With respect to BJ and TM, the arguments of Billes were most specifically articulated in

relation to Newmat. Generally, the same arguments would apply to the Trust, mutatis mutandis,

Page 164

noting that the issue of the limited retainer of TM was more in focus in Billes’ argument (but not

in my findings) than was the case with BJ. Billes argued:

If there is invalidity which can be asserted against Newmat ... (which is not

admitted but denied), any loss flowing therefrom ought to be indemnified by TM.

The legal principles applicable to the obligation of the solicitor, are set forth in

our submissions concerning the Trust loan and BJ, supra. The same apply to TM.

TM acted for Newmat and owed Newmat a duty to warn it of risk with respect to

the validity of the loan security or any course of action respecting the advance on

the loan which was known or ought to have been known by TM....

Because TM failed to warn Newmat, failed to perceive any issues of conflict of

interest, and failed to respond to any concerns over conflict of interest, it failed in

its duty to Newmat....

Billes also relied on A.M. Dugdale & K.M. Stanton, Professional Negligence, 3rd (London:

Butterworths, 1998) at para. 17.36-17.42 as authority for the proposition that a firm’s primary

task in connection with the execution of a loan and security documentation is to ensure the

lender obtains good and enforceable security.

[697] In response, TM argued that it has no liability on the following bases: no duty was owed

to Newmat or alternatively there was a limited duty in relation to the collateral security; no duty

was breached; and no causal link existed between any breach and the claim being advanced.

[698] In response, simply put, I find that TM was retained to protect Newmat’s interests and, as

such, had a duty to Newmat. However, I find further that TM did not breach that duty on the

facts before me. Having found no liability, I need not address the final argument on linkage,

which relates to Newmat making advances directly and without the reliance on the registration of

security.

[699] TM cited Spence v. Bell, supra; Midland Bank PLC v. Messrs. Cox McQueen (a firm),

supra; Feschuk v. Hudema (1994), 126 Sask. R. 26 (Q.B.); and Sinclair v. Smith (1981), 41

B.C.L.R. 374 (S.C.) for the proposition that a solicitor’s duty must be determined by having

regard to the subject retainer and the solicitor/client relationship. It cites as well Melnychuk v.

Ronaghan (1999), 237 A.R 110 (C.A.), and Roynat Inc. v. Dunwoody & Company and Canadian

Imperial Bank of Commerce (unreported) July 12, 1996 (B.C.S.C.) as authority for the

proposition that a solicitor is not under a duty to warn of things already known to the client.

[700] As to the retainer by TM, I have discussed this above. As to the duty that follows, little

further need be said other than referencing Central Trust v. Rafuse at 211-12:

Page 165

The fact that the capacity of a corporation to borrow and give security may be

limited or subjected to certain conditions by the provisions of the applicable

Companies Act is such basic knowledge that a reasonably competent solicitor

must be held to possess it, whether he is a general practitioner or a specialist. It is

a knowledge which a solicitor who undertakes to do the legal work to obtain ...

security from a corporation must possess, and with it there is a duty to exercise

reasonable care and skill to ascertain by an examination of the relevant

legislation what limits or conditions it imposes upon the capacity of a corporation

to give security. [Emphasis added.]

In my view, this would place on a solicitor the duty to be aware of issues of conflict of interest at

common law, by statute or under a unanimous shareholders agreement. Where that duty is

combined with a knowledge of facts creating a conflict, liability might flow from any loss

flowing from the conflict.

[701] I find that the fact that it was agreed between Marshall of TM and McAteer that the latter

was to deal with matters of corporate governance vis-à-vis DDL (as Spence was and did vis-à-vis

Newmat), and therefore in that sense limited the TM retainer, does not absolve TM of the duty to

make inquires and to obtain assurances that those matters were attended to. As it relates to

McAteer, TM (as did BJ) did so by requiring the execution of, and relying upon, the Officer’s

Certificate. This was done by TM without knowledge, or any reason to believe, that it was

inaccurate. The same also applied to Whitlock vis-à-vis the responsibility of BJ relevant to the

Trust Loan. In each case such reliance, and lack of need to make further enquiry, was reasonable

in my view. In this latter regard, I also agree with the argument of TM that “[g]iven McAteer’s

involvement in and understanding of the complex DDL arrangements, it was reasonable for TM

to rely on him”. The same also applies to BJ.

[702] As to whether there was a breach of that duty, as I noted supra, the onus is on Billes et al.

to establish that: the solicitors, knowing of a real or alleged material interest or provisions of a

USA that required special acts of compliance, failed to warn them of the risk involved, and had

they been properly warned or advised of the risk involved in a course of action, they would

probably have taken a different course of action.

[703] In this regard, TM relied upon W.M. Estey, Legal Opinions in Commercial Transactions,

2^nded. (Vancouver: Butterworths, 1997), at 127-28, for the presumption of regularity as it relates

to authorizing minutes and the like:

... the consensus, and the generally accepted custom and practice among

experienced commercial lawyers, seems to be that all appropriate formalities,

including the election of directors, the appointment of officers, and the convening

and holding of meetings, were duly complied with unless opining counsel has

actual knowledge to the contrary. This, in effect, constitutes another

manifestation of the so-called presumption of regularity .... As a result, most

commercial lawyers take the position that it is not necessary to conduct a full

Page 166

minute book search to confirm that all necessary corporate formalities, including

the proper election of directors, were duly complied with for purposes of the due

authorization opinion. Rather, they consider it appropriate to rely upon a copy of

the relevant directors' resolution duly certified by the secretary of the corporation

or other responsible officer with knowledge of the facts. The certification in this

instance would normally recite the fact that the meeting of directors was duly

called, a quorum was present throughout, the resolution was duly passed by the

required majority, and the resolution remains in full force and effect unamended.

The custom and practice of experienced commercial lawyers is that it is

appropriate for an opining solicitor to rely on such a certificate, absent any

knowledge to the contrary. [Emphasis added.]

[704] TM also relied on the same authority, at 261, in reference to the duty regarding conflicts:

An interesting question ... is whether the opinion giver is obliged to make

inquiries to determine whether any of the directors on the board of the corporation

which approved the agreement in question may have had a conflict of interest, or

whether the opinion giver is only required to deal with those conflicts which

become apparent during the course of the transaction. Most lawyers adopt the

latter view: that is, that it is not incumbent on them to make investigations but if

a conflict situation does come to light it must be dealt with. This is reflective of

the view taken by most counsel that they have no positive duty to inquire as to

whether directors have satisfied their fiduciary obligations, nor as to whether

there are any vitiating factors ... which may affect the enforceability of an

agreement. Thus, this matter as well should be dealt with by the opinion giver

only if he or she has actual knowledge of it. [Emphasis added.]

[705] TM also relied on Estey, citing Ormindale Holdings Ltd. v. Ray, Wolfe, Connell,

Lightbody & Reynolds (1982), 36 B.C.L.R. 378 (B.C.C.A.) for the principle that the standard

may be lower for a sophisticated client. However, I need not be concerned about the standard, as

I find both BJ and TM met the higher standard.

[706] Finally, TM also relied specifically on a number of sections of the ABCA that provide

statutory authority for TM’s handling of the Newmat Loan (the same considerations would apply

to BJ’s handling of the Trust Loan, mutatis mutandis). The most helpful of the provisions, and

implications argued to follow, are:

Section:

117 - Every director shall comply with the ABCA, regulations, articles, by

laws and unanimous shareholder agreement.

Implication: Given this statutory duty, it was reasonable for TM to presume that

Billes and McAteer would comply with the Act, regulations,

articles, by laws and USA.

Page 167

Section:

98.1 - Unless prohibited by the articles or by laws or unanimous

shareholder agreement, the directors may without the authorization of

shareholders, borrow money

Implication: It was reasonable for TM to believe that McAteer and Billes could

borrow money from Newmat.

Section:

250 - A certificate issued on behalf of a corporation may be signed

by a director of the company. That certificate is in the absence of

evidence to the contrary, proof of the facts so certified.³⁶

Implication: TM could reasonably rely on the Officer's Certificate dated

January 6, 1992, the Resolution of Directors passed on October 10,

1991, certified on January 6, 1992. [In relation to the Trust this

would be the March 21, 1991 Officer's Certificate executed by

McAteer.]

Section:

18 - A corporation or person claiming through a corporation may

not assert against a person dealing with the corporation that the

articles, by-laws or USA have not been complied with, or that a

person held out by the corporation does not have the power to

perform a duty which might reasonably be expected to be

performed by the director, unless the person has or ought to have

knowledge of the those facts at the relevant time.

Implication: Since TM was not in possession of the corporate records and was

never advised of contrary facts, it was entitled to rely on the

Officer’s Certificate and was not obliged to make inquiries of each

of the directors and shareholders in relation to the Newmat loan.

With the limitation of the purpose of s.250, I agree with the implications argued in the absence of

any evidence to the contrary.

[707] I find that neither Counsel from TM or BJ, acting on behalf of Newmat and the Trust

during the Loan transactions, had any knowledge of the irregularities relating to the Loans.

Specifically, I find that neither had notice of the USA or of any conflicting interest of Mason. In

discovery McAteer acknowledged under oath that these Counsel were not advised of the USA

(960/5 - 961/7), and even at trial he could not testify that he had advised TM of the USA.

[708] Only McAteer had (see s.18 ABCA) any knowledge of Billes’ failure to meet the

requirements of the USA or the statutory provisions to the same effect.

3.

Conclusion

36

Note, however, that a certificate under s.250(1) is in contemplation of being used for the purpose

of introduction into evidence under s.250(2)

Page 168

[709] I find that BJ, as Whitlock clearly acknowledged, acted on behalf of the Trust in

providing legal services for the security obtained by the Trust from DDL.

[710] I find that TM, notwithstanding Marshall’s claims to the contrary, acted on behalf of

Newmat in providing legal services for the security obtained by the Trust from DDL.

[711] However, I find that neither Whitlock nor Marshall had knowledge of, nor were

reckless or wilfully blind to knowledge of, the USA, or any irregularity in the internal approval

of DDL, and as such, were entitled to rely upon the indoor management rule and the respective

Officer’s Certificate of McAteer. As such, even if I had found (as I do not) the Trust Loan or

Newmat Loan security unenforceable, there would not have been judgment by the Trust

against BJ or by Newmat against TM. In short, having regard to all of the circumstances, I find

that BJ and TM exercised the standard of care of reasonably competent lawyers.

XIII. THE DERIVATIVE ACTION

[712] I must say at the outset that the Derivative Action, prosecuted by Mason on behalf of

DDL, was not prosecuted very actively in the evidence or argument. I believe this is so because

it was realized that no useful benefit would be obtained by DDL and Mason’s recovery could be

as easily, or more easily, accomplished under the oppression remedy. I agree with this rationale

and that result has turned out to be the case. Accordingly, I will be quite brief in my findings

and reasons in this section.

[713] For a good historical background on derivative actions (and, indeed, oppression

actions) in Alberta, see: First Edmonton (Q.B.), supra.

[714] The nature of the Derivative Action has been described above. Specific alleged breaches

include: (1) McAteer executing false Officer’s Certificates; (2) McAteer and Billes failing to

manage the affairs of DDL and avoid a business failure; and (3) McAteer and Billes failing to act

in the best interests of DDL by (a) failing to resolve the issues between them, and (b) on the

evidence, taking personal benefits from the $200,000 Loan. Based on the causes of action

claimed, it is alleged that DDL suffered damages. The relief sought for this and other alleged

breaches include, as against each of Billes and McAteer: damages; aggravated or punitive

damages; “an order directing that any amount adjudged payable by the Defendants in this action

be paid, in whole or in part, directly to Mason ... instead of DDL”; and solicitor-client or party-

party costs.

[715] To telescope ahead, on the evidence, I make the following findings in relation to these

3 claims: (1) true and actionable, but no damages result to DDL ; (2) and (3)(a) generally true

in fact, but not actionable in law; and (3)(b) prima facie actionable and for which I would have

found both Billes and McAteer liable to DDL for damages except that the liability is barred by

the statute of limitations.

A.

Limitations Issues

Page 169

[716] A tolling agreement with respect to this Derivative Action was entered into by the

parties, and confirmed by the Order of McIntyre J., which established that this action was

deemed to date from November 24, 1998 for limitation purposes. This means that any cause of

action discoverable prior to November 23, 1992 (midnight) is outside the limitation period.

Accordingly, as Mason submits, only causes of action which arose after November 24, 1992 are

properly to be considered in determining the liability of Billes and McAteer in the Derivative

Action.

[717] Accordingly, the first issue that arises is whether these claims are within the limitation

period for this action deemed commenced as of November 24, 1998. I will also deal with other

limitation issues in passing.

[718] The Limitation of Actions Act, R.S.A. 1980, c. L-15 (which is the relevant limitations

statute here) provided:

4(1) The following actions shall be commenced within and not after the time

respectively hereinafter mentioned:

(c)

actions

...

(ii)

...

for an account or for not accounting,

within six years after the cause of action arose;

...

(e)

actions grounded on accident, mistake or other equitable

ground of relief not hereinbefore specifically dealt with

,

within six years from the discovery of the cause of action

;

...

(g)

any other action not in this Act or any other Act

specifically provided for, within six years after the cause

of action therein arose. [Emphasis added.]

[719] As Mason argued, claims based on the breach of a fiduciary duty of a director are

equitable claims under subsection (e) and accordingly the applicable limitation period is 6

years: Calmont Leasing Ltd. v. Kredl (1993), 142 A.R. 81 (Q.B), aff’d Calmont Leasing Ltd. v.

Kredl (1995), 165 A.R 343 (C.A.). I would note that the limitation period for an oppression

action would also be six years in accordance with subsection (g): Jaska v. Jaska (1999), 141

D.L.R. (4^th) 385 (Man. C.A.).

Page 170

[720] In relation to derivative actions the British Columbia Supreme Court found in Park

Sunrich Processors Ltd., [1999] B.C.J. No. 807, (S.C.), online: QL (BCJ) that the six year

limitation set out in the basket clause of the applicable legislation in that case (s.4(g) here)

applied. I find that is also the applicable limitation here, subject to discoverability.

v.

Consequently, whether the applicable limitation period is based on subsection (g) or (e), it is

six years in either case. Accordingly, recovery for any cause of action arising or discoverable

prior to November 23, 1992 is precluded.

[721] Mason argued the limitations issue in oral argument in this way:

The record would indicate that there were three actions brought by Mason. The

first action was filed in December of 1992 and that is the Originating Notice of

Motion ... that pleads the oppressive conduct and seeks relief....

The second action that is commenced on behalf of Mason is an action

commenced by the Rogers firm [March 20, 1977] and I believe ... [oppression]

is specifically referred to in that action -- or in the record.

The third action ...[is] the Derivative Action. There is no doubt the Derivative

Action does claim oppressive conduct in addition; but it's an action brought for

and on behalf of DDL against the various parties. The other actions are brought

specifically in the name of Mason.

So the Derivative Action ... according to the tolling agreement, it's commenced

in November of 1998, and ... a six-year limitation period would ... apply to that

action. So that causes that expired six years prior to the date of the tolling

agreement are gone. The limitation period applies. The causes of action that

exist following that, following November '92, those are caught in the derivative

action then.

...

THE COURT:

So you're saying insofar as the original granting of the

loans prior to November '92, they are caught by your

[Originating] Notice of Motion pleading.

MR. DAVISON:

THE COURT:

Correct.

For limitation purposes.

Correct.

MR. DAVISON:

Page 171

[722] As Mason had not discovered the material facts upon which she based her claims for

oppression and breach of fiduciary duty until the meeting with Sali on October 9, 1992, or later,

those claims are well within the 6 year limitation periods under the Originating Notice of Motion

and the Statement of Claim in the Mason Action. Accordingly, while the allegations in the

Derivative Action against Billes and McAteer may be troubled by the limitation date, the

allegations in the Mason Action were clearly made within the limitation period.

[723] The issues that form the substance of the Derivative Action include the Officer’s

Certificates and the $200,000 Loan, which were a part of the Loans to DDL from the Trust and

Newmat and the creation and issuance of security in relation thereto. The latter, the Newmat

Loan, was executed on October 10, 1991 and January 6, 1992. Accordingly, the limitation

period, subject to discoverability, expired as of January 6, 1998 at the latest. The discoverability

principle was set out in Central Trust v. Rafuse, where Le Dain J. stated at 224:

I am thus of the view that the judgment of the majority in Kamloops [(City) v.

Nielsen, [1984] 2 S.C.R. 2] laid down a general rule that a cause of action arises

for purposes of a limitation period when the material facts on which it is based

have become discovered or ought to have been discovered by the plaintiff by the

exercise of reasonable diligence...

[724] DDL can only bring action through its officers, directors and shareholders. McAteer and

Billes certainly are not going to bring action, through DDL, against themselves: Park v. Sunrich

Processors Ltd., at para. 26, which cites Drove v. Mansvelt, [1998] B.C.J. No. 497, (B.C.S.C.),

online: QL (BCJ) for the proposition that “to expect a director to sanction an action against

himself is unrealistic”. That only leaves Mason to do so, and the evidence that I accept is that she

had no knowledge of the Loans, nor could she reasonably have had such knowledge, until after

the meeting with Sali on October 9, 1992 (see paras. 18 and 26 of the Statement of Claim in the

Mason Action).

[725] Following the Sali meeting Mason would have been in possession of all of the material

facts. Accordingly, the limitation period would have begun to run on or shortly after October 9^th,

1992, expiring on or shortly after October 9, 1998. Thus, as Mason would have had, or been

able to discover, the knowledge of the Officer’s Certificates and the $200,000 Loan from DDL

on or before November 23, 1992, and the Derivative Action was deemed to have been

commenced as of November 24, 1998, I find that these claims are outside the limitation date

and, as such, are dismissed.

[726] Billes contended that the claims for errors in running the business, or making or calling

the Loans after default, arose more than six years prior to November 24, 1998, and are

accordingly statute barred. Billes claimed further that any claim by DDL against the Lenders

realizing on their security relating to the alleged invalidity of their Loans or security, is also

barred, as the time for such action began to run from the date the Loans were executed or

perhaps the date of default: Wavel Ventures Corp.

v. Constantini, supra at 95. However, the

latter is of no consequence in this action, as the Lenders are not parties to the Derivative

Page 172

Action. Accordingly, the second argument is of no consequence. However, I will elaborate on

the first.

[727] It is arguable that any failure of McAteer and Billes in their duty to DDL in relation to

running the business, while it commenced at some hard-to-identify earlier time, was

continuing for some time. The effective date of the commencement of the Derivative Action of

November 24, 1992, was six years and one day after the demand on DDL on November 23,

1992, and therefore one could safely say that any continuing breach of duty had “crystalized”

at the earlier date. Accordingly, I find that liability for that would have been barred as at the

day the Derivative Action was deemed commenced.

[728] While I find that the causes of action in Derivative Action fail because they are outside

the limitation period, I will touch somewhat on the substance.

B.

$200,000 Loan

[729] I find that the $200,000 Loan was in the Newmat Loan documentation Mason received

on or about October 9, 1992. Mason also had counsel instructed in relation to the Loans prior to

November 23, 1992. There being no evidence of lack of actual discovery before that date, I find

that the claim against Billes and McAteer in respect of their breach of duty to DDL in using the

$200,000 Loan for their own purposes and contrary to DDL’s interests, is statute barred.

[730] If I were to have found this cause of action within the limitation period, I would have

concluded that the $200,000 Loan was contrary to the interests of DDL, and in breach of the

duties of McAteer and Billes as directors. My finding in that regard is based on the fact that they

treated DDL as their own personal domain, contrary to DDL’s interests, and my finding is aided

by the following evidence and argument.

[731] Counsel to Billes, Michael Robison, described it this way on October 10, 1991 (Exhibit

377):

McAteer is of the view that Numat (sp?) has made ... a $200,000 secured

loan to Devoncroft.... these funds will permit ... a repayment to you of the

$200,000 non-recourse debt thereby making reference to the note academic.

Accordingly, ... you would pay McAteer $224,100 for his interest in the

home the components of which are his cash contribution ($19,100), the now

repaid funds borrowed from you as a contribution towards the house ($200,000)

and his labour ($5,000).

[732] Billes made reference to it in her undated letter of July 1992, to McAteer (Exhibit 107):

“DDL is carrying the debt related to the $200,000 payment to you, created when you moved out

of 2229". McAteer also described it in reply on July 24, 1992, in one of his last personal letters

to Billes before there was a complete break in their business relationship (Exhibit 109):

Page 173

You have also referred to the $200,000 paid out to me personally on a number of

occasions. This payment was to resolve the personal difficulties arising out of a

financial arrangement where we purchased a house in contemplation of marriage.

It is a burden on DDL that you placed there because you did not wish to go

through with an agreement we had in relation to a personal loan by you to me.

You also wanted to purchase my half of 2929 Wolfe Street as opposed to selling

the house we owned jointly. We paid the loan back by triggering an early loan

repayment from DDL to me and increasing the debt load by $20,000 per year in

DDL.

The folly of agreeing to such a solution now surfaces, as we now are dealing with

the difficulties created of your unwillingness to live up to a personal commitment.

... Secondly the loan requires $20,000 to service it. And finally DDL is exposed to

additional cost relating to the tax payable on the advances. [Emphasis added.]

[733] I accept McAteer’s evidence that there was no discussion between Billes and him, in the

process of negotiating the $200,000 Loan, that it was in the best interests of DDL.

C.

Other Breaches Alleged

[734] It is possible for a corporation like DDL to be a complainant under the oppression

remedy at section 234 of the ABCA, through the definition of “person” in section 231(b)(iii)

upon the discretion of the Court. I have not been asked to exercise this discretion. Moreover,

DDL was a signatory to the USA, which I find was breached by Billes and McAteer. However,

the pleadings in, and the arguments of Mason in respect of, the Derivative Action focussed on

breaches by Billes and McAteer of their obligations under section 117 of the ABCA. As to

oppression by Billes and McAteer against DDL, although the Originating Notice of Motion

alleged it and leave to commence the Derivative Action was sought, that was not done until, as

I find, after the limitation period expired. Moreover, even within the time limit, except for the

$200,000 Loan, I find no actions by Billes and McAteer were oppressive, unfairly prejudicial

to, or unfairly disregarded DDL’s interests. Accordingly, I would not have granted a remedy

to DDL under the oppression provisions.

[735] Thus, I will focus on those alleged breaches/remedies, and not on any oppression

remedy in favour of DDL.

[736] The Derivative Action alleges, in paragraphs 19 and 20, breaches of fiduciary and legal

duties by McAteer and Billes in permitting DDL to enter into, inter alia, the Newmat Loan in

breach of, inter alia, s. 117 of the ABCA. Section 117(1)(a) provides:

117(1) Every director and officer of a corporation in exercising his powers and

discharging his duties shall

Page 174

(a) act honestly and in good faith with a view to the best interests

of the corporation...

[737] I do find that McAteer breached his duty under s. 117(1)(a) of the ABCA in not acting

honestly and in good faith with a view to the best interest of DDL, by signing false Officer’s

Certificates. I find he was also in breach under s.117(2) in failing to comply with the USA vis-à-

vis the requirement of a shareholders’ resolution for which he took the responsibility, but failed

to fulfil. However, that can result in no liability because the limitation period passed even on

Mason’s knowledge for DDL. However, even if it was within the limitation date there was no

loss to DDL because it got the Loans it needed.

[738] In the context of mismanagement, Billes argued:

Billes can only be found liable for breach of the obligations which she owed to

DDL. Billes was neither a director nor officer of the general partners or limited

partnerships. As submitted above, those are separate entities with their own

existence. McAteer was to be the manager of these projects, as Mason testified.

This consideration alone dismisses most of Mason's complaints about

mismanagement of the business. It was not Billes' responsibility to manage the

projects, either legally, or in terms of the reasonable expectations of the parties.

Further, Billes was entitled to rely upon duly appointed officers including the

president and secretary of DDL, and in doing so discharged her obligations.

Blair v. Consolidated Enfield Corp., supra, at 34-38

The business judgment rule also applies in circumstances as these. In order for

the corporation to be managed properly and efficiently, directors must be given

wide latitude in their handling of corporate affairs. Absent bad faith or some

other corrupt motive, directors are normally not liable for mistakes of judgment

whether classified as mistakes of fact or mistakes of law.

I have dealt with Blair earlier in these Reasons. In relation to Billes’ submissions concerning

the business judgment rule, I generally agree.

[739] The authorities relied upon respecting this business judgment rule were re Smith and

Fawcett, supra; Teck Corp., supra; Cramer, supra; PII Photovision, supra; and Burland, supra.

[740] Later the Billes argument stated:

As to the allegation that building the Golf Dome diverted cash and management

time away from golf course construction and lot sales, the same submissions

apply. Further it is submitted that cash could not be diverted from the golf

course (a separate entity), and if it was this was not the responsibility of Billes.

Page 175

It was the responsibility of the directors and management of Club GP, which

does not include Billes. The same is true of management time.

In further answer to such allegations, Billes was not a director or officer of any

of the limited partnerships or general partner.

In further answer to such allegations, each of the participants, Billes, McAteer

and Mason, understood that McAteer was to operate and manage the entities.

When a request was made in August and later, October of 1992, that he step

aside, both McAteer and Mason refused. Billes was not responsible for

management or operational decisions.

If the Golf Dome was over budget, this was not the fault of Billes, nor was it any

responsibility of DDL as opposed to Kingswood Developments.

Billes was not responsible to provide "leadership" to the Kingswood entities, nor

did the parties reasonably expect that she would do so.

Again I generally agree.

[741] Even if the above allegations were within the limitation period, I would dismiss them as

not having been within Billes’ responsibility. Accordingly, to the extent the actions are

arguably within Billes’ and actually within McAteer’s responsibility, they are not actionable

because they are caught by the business judgment rule.

D.

Conclusion On Liability

[742] I dismiss all claims within the Derivative Action. As the Defendants are not liable,

there is no liability by BJ and TM to Billes on her Third Party claim against them in the

Derivative Action.

E.

Remedy

[743] Mason noted the relief provisions of s.233 of the ABCA, following the derivative action

authorization section of 232, and argued, without referencing case authority, as follows:

In the circumstances of this case, it may be appropriate for the court to order that

any amount adjudged payable by Billes and McAteer in the derivative action

shall be paid, in whole or in part, directly to Pamela Mason, in trust for her

children (as security holders of Devoncroft), instead of to Devoncroft.

[744] In reply, Billes argued:

Page 176

Mason's counsel gives no reason as to why it would be appropriate for damages

to flow directly to Mason instead of DDL. If DDL has suffered the loss, then the

damages should flow to DDL. At that level, the damages first go to the

company's creditors, including Newmat. What is left should be shared amongst

the shareholders.

[745] Billes conceded that if liability were established for negligent management, the

appropriate remedy would be damages. However, she argued that there was no negligence

attributable to Billes, and as DDL had no loss (having no value at the material time), there

would be no damages to award.

[746] The remedy for any such breaches of duty by Billes and McAteer to DDL would have

normally been a judgment in favour of DDL for damages for its loss. However, such a

judgment would have been of little use to DDL as it is in receivership, has no assets of value,

and was struck off the corporate registry. The result would be that the benefit would go to the

Lenders. The Lenders should be entitled to no remedy directly or indirectly from the

Derivative Action. A benefit to the Lenders would not be necessary as the Lenders had the

security to enforce what they thought adequate for the risk they took when they loaned the

money - a risk that materialized. Therefore, there is no justification for, in effect, providing

further additional security after the fact when none of DDL, Billes or McAteer had any

obligation under these alleged issues to the Lenders. Moreover, this would not have been

acceptable as it would, indirectly, benefit Billes, through the Lenders, when it was her and

McAteer’s wrongful act that resulted in the judgment. Additionally, Mason having recovered

the value of her shares through the oppression remedy, has no remaining loss, and recovery

by her would be a windfall that would not be equitable. Accordingly, if I had granted damages

to DDL it would have been in the sum of $1. Had I granted damages, they would have been

against Billes and McAteer, jointly and severally, with no right of contribution between them,

in favour of DDL. Otherwise, I believe that no separate remedy is appropriate.

XIV. OTHER ISSUES

[747] I believe there are no other issues that require decision in light of my decisions herein.

[748] However, it would be surprising in litigation with this number of parties, the breadth

of pleadings and issues, the volumes of evidence and argument submitted, and, indeed, the

length of these Reasons, if there were not an occasional slip or an issue on which a decision

was not made. Accordingly, if there are any slips to which Rule 339 applies, or any issue not

decided herein that should have been decided and it is proper in law to do so, the parties may

return to the Court on consent, or on motion, prior to the entry of the Judgment Roll, to

remedy such matters.

XV. INTEREST

Page 177

[749] I leave it to the parties to calculate the interest to which Mason and Newmat are entitled

and include the calculations in the Judgment Roll by agreement, and if they cannot agree, to

return to me to determine the calculation. Interest to Mason will be under the Judgment Interest

Act, S.A. 1984, c. J-0.5. Interest to Newmat against McAteer will be as provided for in the

McAteer Guarantee by McAteer to Newmat.

XVI. COSTS

[750] In Patel, supra, I held that solicitor-client costs are to be awarded in oppression cases,

absent compelling circumstances. At para. 63, I said:

Without reviewing the cases further, but consistent with the rationale in solicitor-

clients awards in general (as discussed in Claudio's [Claudios Restaurant Group

Inc. v. Calgary (City) (1993), 147 A.R. 353, additional reasons (1993), 140 A.R.

376 (Q.B.)] and the cases referenced therein), and aided by the reasoning in

Naneff (and the cases referenced therein) in the context of a finding of

oppression, while costs are always in the discretion of the Court (see, inter alia,

269335 Alberta Ltd. v. Starlite Investments Ltd. and Eimer (1987), 53 Alta. L.R.

(2d) 142 (Q.B. - Rowbotham, J.), I believe that solicitor-client costs should be

considered prima facie the order of the day, absent compelling circumstances. In

this way they are much the same as the similar cost presumption in expropriation

cases: Costello v. Calgary (City) (1995), 163 A.R. 241, 23 C.C.L.T. (2d) 125, 25

M.P.L.R. (2d) 24 - last page). In this case, on the facts before me, and based on

my findings, I specifically find that the Plaintiff should be, prima facie, entitled

to solicitor-client costs. Such awards of costs are as much available against

individual defendants as against corporate defendants: Starlite case (above).

[751] TM argued:

The general rule regarding third party costs is stated in M.M. Orkin, The Law of

Costs, 2^nded. (Aurora: Canada Law Book Inc., 1999) at 2-73- 2-74:

The usual rule is that an unsuccessful plaintiff will not be charged with

the costs of the third party on the reasoning that the plaintiff did not sue

the third party, did not want him or her in the case and was not

responsible for joining the third party.

[752] I find that there is no reason to depart from the prima facie and general rules.

XVII. CONCLUSION

[753] In conclusion, I find that the actions of all Plaintiffs in this case, and the actions by

Defendants against Third Parties, are dismissed with costs, except for the Mason Action, as

against Billes and McAteer only, and the Newmat Counterclaim and the Billes Third Party

Page 178

claim against McAteer. The victors in each case shall have costs against those opposite in

interest, except for costs in the Derivative Action. In the Derivative Action I find that Mason is

only liable for incremental steps of the Defendants in the Derivative Action that were over and

above those taken in the Mason Action.

[754] In the result, Mason shall have judgment for $440,000, plus interest from March 21,

1991, and solicitor-client costs, jointly and severally against Billes personally and McAteer

personally, but not against the Trust or Newmat.

[755] In the Billes Third Party Claim against McAteer, Billes shall have an indemnification

judgment for the same amount and solicitor-client costs

.

[756] Newmat shall have judgment for $1,950,000 less any credits due plus interest from

November 23, 1992 and costs, against McAteer.

[757] All other actions are dismissed with costs.

[758] Costs shall include reasonable and legally permissible disbursements, including the

reasonable charges and accounts of expert witnesses who gave evidence at the trial or whose

expert reports were served prior to the trial and were contemplated to be called, and were

reasonable to be obtained, including, pursuant to Rule 600(1)(a)(ii), the charges made by such

persons for investigations and inquiries and assisting in the conduct of the trial.

[759] Except where solicitor-client costs are awarded, all costs are to be taxed, unless

otherwise ordered hereafter at any cost hearing, on the basis of Schedule C, Column 5.

[760] All costs will be against the party from which they are entitled in the first instance,

subject to any further hearing on the subject of costs.

[761] If I have missed any issue of costs, they will follow the event, unless there are issues of

unresolved pre-trial costs, contribution (such as a request for a Sanderson Order), unaccepted

settlement proposals, second counsel fees (if any), or any other issue of costs, about which I

have no current knowledge, or have received no argument, or have made no direction. In any of

these events the parties may speak to any such issue of costs, if necessary, prior to the entry of

the Judgment Roll.

HEARD on the 13^thday of March to the 31^stday of August, 2000.

DATED at Calgary, Alberta this 7^thday of November, 2001.

__________________________

J.C.Q.B.A.

APPENDIX I

Page 179

Page 1

AGREED STATEMENT OF FACTS AND DOCUMENTS³⁷

References herein to Exhibit Numbers are references to the Agreed Book of Documents.

The parties hereto agree to the following facts:

1

These Statement of Claim proceedings, and a trial of the issues in the Originating Notice

proceeding, are tried together pursuant to Order of the Court of Queen’s Bench of

Alberta dated October 17, 1997 and January 15, 1999. DDL is not represented by

counsel pursuant to an Order of the Court of Queen’s Bench of Alberta dated May 12,

1999 (See Record, Exhibit A).

2.

Devoncroft Developments Limited ("DDL") corporate information/history

Prior to Billes' investment April 23, 1990, DDL shareholders were:

Pamela Mason - 20%

Paul McAteer - 20%

Pamela Mason as Trustee for the Children of Pamela Mason and Paul

McAteer (namely, Catherine McAteer, Sarah McAteer and Paul William

McAteer) - 60%

After the April 23, 1990 investment by Billes, DDL's shareholders were as

follows:

Pamela Mason ("Mason") (40%) (claims as trustee for the children of

Pamela Mason and Paul McAteer);

Paul McAteer ("McAteer") (10%); and

Martha Billes ("Billes") (50%)

The transaction in 2(b) is reflected in the Agreed Exhibits (Exhibit 9).

At all material times DDL's directors were:

McAteer (appointed September, 1987)

Billes (appointed April 23, 1990)

Mason (appointed September, 1987; resigned effective April 23, 1990)

APPENDIX I

37

Some changes have been made to make this consistent with the terminology and exhibit references

at trial and in these Reasons.

Page 180

Page 2

Neither Billes nor McAteer resigned as directors before DDL was struck from

the Register of Corporations.

Date and jurisdiction of incorporation of DDL: Alberta, May 12,1987.

Date DDL struck/revived:

DDL was struck by the Registrar of Corporations (Alberta) in November,

1994.

DDL was revived by order formally dated January 19, 1999. (See

Record, Exhibit E (1)).

Billes, Mason, and McAteer were parties to a Unanimous Shareholders

Agreement ("USA") dated April 23, 1990 (Exhibit 13).

Receivership/bankruptcy

DDL was placed in receivership by private appointment dated

November 27, 1992.

DDL was never placed in bankruptcy.

Other Companies or Entities

3.

Marlore Enterprises Ltd. (“Marlore”)

Marlore’s sole shareholder at all material times was Billes.

The sole director of Malore at all material times was Billes.

Newmat Drilling (Western) Ltd. ("Newmat")

At all material times, Newmat was owned by Marlore (49%), Steven J.

Matkaluk (26%) and Larry Newel (25%)

At all material times, the officers and directors of Newmat were:

Billes, director

Newel, director, officer (secretary/treasurer)

APPENDIX I

Page 181

Page 3

Matkaluk, director, officer (President)

2809291 Manitoba Ltd. ("280")

This company was a bare trustee for certain security granted to Newmat

described below. At all material times, Newmat owned 280.

At all material times, 280's directors and officers were Newel and

Matkaluk

Billog Corporation Ltd.

At all material times, Billog was owned by Owen Billes

At all material times, the officer and director of Billog was Owen Billes

Owen Billes is the son of Billes

Albikin Management Inc. (“Albikin”)

At all material times the Martha Billes Family Trust owned the common

shares of Albikin

At all material times, Billes was the officer and director of Albikin

Muriel G. Billes Estate Trust ("Estate Trust")

a true copy of the will creating the Estate Trust is Exhibit 1.

At all material times the trustees of the Estate Trust were Billes, Michael

Lavery, C.A. ("Lavery") and Kenneth J. Mann

Devoncroft Developments (Winnipeg) Ltd. ("DDL Winnipeg")

DDL Winnipeg was incorporated pursuant to the Corporations Act

(Manitoba).

At all material times, DDL Winnipeg's sole director and officer was

McAteer.

APPENDIX I

Page 182

Page 4

Home At Last Ltd. (“HAL”)

Prior to 1994, HAL’s shareholders were DDL (50%), 369634 Alberta

Ltd. (10%), and 390812 Alberta Ltd. (40%).

390812 Alberta Ltd. was owned and controlled by Daryl Birnie.

4.

Kingswood partnerships/history

There are two Limited Partnerships involved in these proceedings. Both were

created pursuant to the Partnership Act (Manitoba). Further details are as

follows:

Kingswood Golf & Country Club Limited Partnership ("Club LP").

Club LP’s General Partner was Kingswood Golf & Country Club

Ltd. ("Club GP")

Club LP’s Limited Partners after the buy out of Ben Smirnoff’s

units were DDL (50%), C. Curtis (7.5%), W. Curtis (7.5%),

Pro-Golf Management Ltd. (20%), W.C. Enterprises Ltd. (15%).

(Pro-Golf Management Ltd. and was at all material times owned

and controlled by G. Curtis and W. Curtis. W.C. Enterprises Ltd.

at all material times was owned and controlled by W. Curtis.)

Kingswood Golf & Country Club Developments Limited Partnership

("Developments LP")

Developments LP’s General Partner was Kingswood Golf &

Country Club Developments Corporation (“Developments GP”)

Developments LP’s Limited Partner after the buy out of the

Murray interests was DDL

True copies of limited partnership agreements are in the Agreed

Exhibits(Exhibits 2 and 3).

Details on General Partners

APPENDIX I

Page 5

Page 183

Developments GP and Club GP are Manitoba corporations. They were

struck from the Register September 17, 1993. True copies of Manitoba

Corporate Registry Certificates of Dissolution are in the Agreed Exhibits

(Exhibit 239).

At all material times, McAteer was the sole shareholder of Developments

GP and Club GP

At all material times, McAteer was the sole director and an officer of

Developments GP.

McAteer, together with Gary Curtis and Wayne Curtis, were at all

material times the directors of Club GP, and McAteer was its President.

5.

Billes investment in Devoncroft Developments Limited

In 1990, Lavery introduced Billes to a potential investment opportunity in DDL.

Lavery was provided a proposal by McAteer.

Billes purchased 50% of DDL for $750,000 on April 23, 1990.

6.

Devoncroft and Kingswood assets

DDL's assets included:

100% of the Developments LP limited partnership units(after the buy out

of the Murray interests)

50% of the Club LP limited partnership units (after the buy out of the

Smirnov interests)

50% of the HAL shares

Club LP’s assets included:

the front 9 holes of the golf course in LaSalle, Manitoba

APPENDIX I

Page 6

a license to golf on the back 9 holes, from Developments LP. This

licence was granted by Developments GP to Club GP pursuant to a

license agreement dated October 15, 1990. The latter assigned the

licence to DDL (Winnipeg) by agreement dated February 22, 1991. DDL

(Winnipeg) assigned it to 280 by agreement formally dated February 6,

1992. True copies of the license agreement, and subsequent assignment

agreements are in the Agreed Exhibits (Exhibits 23, 31 and 75).

Developments LP’s assets included:

the golf dome and operations and lands on which it was situate in

Winnipeg, Manitoba.

the Phase I residential lots adjacent to the golf course in La Salle,

Manitoba.

the Phase I lots were subdivided into residential lots, and were

subject to certain covenants and security in favour of Royal Bank.

title to the back 9 holes of the golf course in La Salle, Manitoba and

certain lands (the "Development Lands") contemplated to be subdivided

into the Phase II residential lots.

(A)

(B)

The Development Lands had not been subdivided into lots or

from the back 9 holes of golf.

In addition to the Owen Billes and Enns mortgages (described

below), the Development Lands and back nine holes of golf were

subject to a third mortgage for $85,000 in favour of Taillieu

Construction Ltd.

Lands purchased from Terrence Petty, subject to a vendor take back

mortgage.

APPENDIX I

Page 7

HAL’s major assets were as follows:

HAL owned 4 residential apartment buildings in Red Deer, Alberta

HAL’s liabilities at September 30, 1992 included a mortgage on the

building in favour of Toronto Dominion Bank. Balance outstanding was

$717,046.

7.

8.

Owen Billes Mortgage

Owen Billes held a mortgage granted by Developments GP to DDL Winnipeg on

July 7, 1990, and subsequently assigned to Owen Billes.

McLarty Loan

Tess McLarty ("McLarty") (through Lavery) loaned $500,000 to DDL. The

loans were made July 3, 1990 ($400,000) and November 1, 1990 ($100,000).

Security was a second charge on the Phase I Residential Lots, (subordinate to

the Royal Bank of Canada).

9.

Estate Trust Loan

The Estate Trust loaned $1,200,000 to DDL on March 21, 1991.

Security documents are in the Agreed Exhibits and include:

the debenture (Exhibit 36).

the mortgage and the promissory note (Exhibit 37).

the assignment (Exhibit 37).

the pledge agreement (Exhibit 34).

Role of counsel - Bennett Jones Verchere ("BJV"), a partnership of Barristers

and Solicitors carrying on their practice in Alberta and elsewhere, drafted the

debenture and its attachments and prepared the mortgage and assignment.

Advances - $1,200,000 was actually advanced.

APPENDIX I

Page 8

10.

Newmat Loan

Newmat advanced $2,100,000 pursuant to a loan agreement dated October 10,

1991 (Exhibit 67) among Newmat, DDL, McAteer, Club GP and Developments

GP.

Security documents are in the Agreed Exhibits and include:

debenture from DDL dated October 10, 1991 (Exhibit 68).

promissory notes (Exhibit 66).

undertaking to Newmat from Developments GP dated January 27, 1992

(Exhibit 82).

McAteer guarantee dated October 10, 1991 (Exhibit 63).

mortgage for $1,500,000 from Developments GP to 280 dated January 6,

1992 and registered January 15, 1992 (Exhibit 73).

guarantee from Developments GP dated October 10, 1991 (Exhibit 65).

assignment of the licence to golf the back 9 holes of golf (Exhibit 75).

280 held the mortgage and assignment of license to golf the back nine, in trust

for Newmat pursuant to the Agreement of Trust dated January 28, 1992. A true

copy is in the Agreed Exhibits (Exhibit 83).

Role of counsel - Taylor McCaffrey, a partnership of Barristers and Solicitors

carrying on their practice in Manitoba, drafted the loan agreement and drafted

and registered security documents in connection with the loan agreement.

11.

H&T Enns Enterprises Ltd. (“Enns”) loan

Enns took a vendor take back mortgage from Developments GP and

Developments LP for $185,000.

This mortgage was on the Development Lands and the back 9 holes of golf.

Enns postponed this mortgage to the mortgage held by Owen Billes.

APPENDIX I

Page 9

12.

Terrence Petty loan

Terrence Petty accepted a vendor take back mortgage of $165,000 from

Developments LP on the Petty Lands.

13.

14.

Royal Bank loan

Royal Bank provided a loan facility to Developments LP for $851,000.

The facility was secured by a first mortgage on the Phase I Residential Lots.

Demands November 17 and 23, 1992

Newmat demanded its loan on November 17, 1992 and again on November 23,

1992 (Exhibits 152, 168, 169, 171)

The Estate Trust demanded its loan on November 23, 1992 (Exhibit 167)

15.

Appointment of Receiver Sill Strueber Fiske Inc. November 27, 1992

True copies of the Appointment documents are in the Agreed Exhibits (Exhibits

173, 176, 177, 178).

16.

17.

Standstill Agreement and General Security Agreement December 5, 1992

Billes, the Estate Trust, Newmat, Mason and McAteer entered into an agreement

dated December 5, 1992. A true copy is in the Agreed Exhibits (Exhibit 179).

Sill Strueber Fiske Inc. Report March 31, 1993

Pursuant to the Standstill Agreement, Sill Strueber Fiske Inc. delivered an interim

report (Exhibits 180, 181) and a report dated March 31, 1993 (Exhibit 185).

Billes, McAteer and Mason each received a copy of the Reports on or about the

dates thereof.

APPENDIX I

Page 10

18.

Disposition of Certain Assets

The Phase I residential lots were foreclosed by Royal Bank, not the lenders in this

case.

The Development Lands and the back 9 holes of golf were foreclosed by Enns.

Enns later paid out the prior Owen Billes mortgage.

19.

Bankruptcy particulars

Club LP, Club GP, Developments LP and Developments GP gave Notice of

Intention to Make a Proposal on May 5, 1993 (Exhibit 196).

KPMG was appointed interim receiver and subsequently receiver by Orders of the

Court of Queen's Bench of Manitoba (Exhibits 202, 214, 215).

Club LP, Club GP, Developments LP and Developments GP voluntarily assigned

themselves into bankruptcy on May 19, 1993 (Exhibit 261).

20.

This Statement of Facts is not exhaustive. For greater certainty, any party may lead

evidence to add to or supplement this Statement of Facts.

APPENDIX II

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OTHER NON-PARTY WITNESSES

- Robin Lee McMahon, a chartered accountant, a partner in Ernst & Young and senior

vice-president of Ernst & Young Inc., and a trustee in bankruptcy, acted as Trustee in

Bankruptcy for the Kingswood Entities, was called by McAteer

- Larry Braun, and Richard Hester, were chartered accountants practising in that capacity for

Deloittes and testified at the request of Billes

DDL and Kingswood entities

. regarding accounting services performed for

- George Harms, a chartered accountant and Master of Business Administration, who, from

September 1991 to August 1992 was Chief Financial Officer for DDL (Exhibit 378), with

accounting and operational responsibilities for the Kingwood entities, was called by Billes et

al.

- Spence, Counsel to Newmat on its loan from Alberta Treasury Branches (ATB) from which

it secured funds for the Newmat Loan, was called by Billes et al

.

- Ian Best, a chartered accountant and a licensed trustee in bankruptcy, at the relevant times

with Sill in Winnipeg, was called by Billes et al. regarding his and his firm’s role as being

appointed (1) on November 27th, 1992, the receiver/manager of DDL the Trust, (2) at that

same time, the receiver/manager of DDL by Newmat, (3) at that same time, agent of the

mortgagee in possession by Newmat's bare trustee, 280, with respect to the Golf Dome, and (4)

in early December, 1992, the monitor/manager of DDL and the Kingswood entities pursuant to

the Standstill Agreement, and pursuant to which prepared, inter alia, a business report dated

March 31, 1993 (Exhibit 186)

- Jay Mustapha, a chartered accountant living and working in Winnipeg, prepared financial

statements on the various Kingswood entities, was called by Mason

- Sali, a Barrister and Solicitor with BJ, Counsel for Billes et al. in the August - October 1992

period, was called by Billes

- Derek Malcolm, a chartered accountant and associate with Kroll Linquist Avey, with

expertise in forensic and investigative accounting, was called by Mason to summarize and

analyze information relating to the business of DDL and the Kingswood Entities (Exhibit 333)

- Lorne Siebert, a chartered accountant and chartered business valuator with Clark Valuation

Services Ltd., with expertise in determining the fair value of shares in privately held

companies and in quantifying financial business damages, was called by Mason to provide

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comments on the value of the shares of DDL as at April 1990 and March 1991 (Exhibit 351 -

rebuttal to Cristall under Exhibit 352)

- Peter McGregor, a real estate appraiser with Anderson Preece & Associates Inc., qualified to

practice in Alberta, was called by Billes et al. to give an opinion on the value of Sunnybrook

Apartments in Red Deer, being an asset of HAL, as at November 24, 1992 (Exhibit 384)

- E.P. Cooke, a real estate appraiser with Royal LePage Professional Services, qualified to

practice in Manitoba, was called by Billes et al. to give an opinion on the value of: (1) lots in

the Kingswood development at LaSalle, Manitoba, as at April 1990 and March 1991 (Exhibit

385); (2) the Golf Dome (Exhibit 389); (3) 26 residential lots at LaSalle (Exhibit 388); and (4)

development lands at LaSalle (Exhibit 386);

- Peter Miller, a chartered accountant and chartered business valuator with PMG, with

expertise in business valuation, was called by Billes . to provide comments as to whether the

fair market value of the assets of Kingwood as at November 1992 (Exhibit 390), and as at

April 1990 and March 1991 (Exhibit 392), was in excess of the corresponding value as at

August 1993

- Jeffrey Cristall, a chartered accountant and chartered business valuator with Meyers Norris

Penny, with expertise in the areas of business valuation, and business advice, including

valuation of businesses, interpretation of financial statements, financing of business ventures,

and fairness and reasonableness of the terms of financing and assessment of the

reasonableness of financial projections, was called by Billes

. to provide an opinion of value of

the shares of DDL as at November 1992, with comments as to value as at April 1990, and the

reasonableness of the terms of the Trust and Newmat Loans (Exhibit 393 - rebuttal to Siebert

in Exhibit 394)