Dun-Rite Plumbing & Heating Ltd. v. Walbaum

QUEEN’S BENCH FOR SASKATCHEWAN

Citation: 2009 SKQB 174

Date:

2009 05 14

Docket:

Judicial Centre:

Q.B.G. 959 of 1999

Regina

BETWEEN:

DUN-RITE PLUMBING & HEATING LTD. and ALEC KEITH

MORRISON

PLAINTIFFS

- and -

DWAYNE WALBAUM, ALL-RITE PLUMBING & HEATING LTD.,

TAMWAL INVESTMENTS LTD., TAMMY WALBAUM, ROBERT

SIM, ROSEMARY TURNER, GABRIEL CONSTRUCTION LTD.,

ALBERT FAZAKAS, ROBERT DUMUR and 593340

SASKATCHEWAN LTD., carrying on business under the name

DUMUR INDUSTRIES

DEFENDANTS

Counsel:

Diana Lee

Jennifer L. Koschinsky

for Dun-Rite Plumbing & Heating

Ltd. and Alec Keith Morrison

Patrick N. McDonald, Q.C.

Dave Bishop

for Robert Sim and Rosemarie Sim

for Dwayne Walbaum, All-Rite

Plumbing & Heating Ltd., Tamwal

Investments Ltd., Tammy Walbaum

Ken Karwandy

for defendants Robert Dumur,

593340 Saskatchewan Ltd.

Dumur

and

Industries

JUDGMENT

May 14, 2009

OTTENBREIT J.

- 2 -

TABLE OF CONTENTS

1.

2.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

FACTS AND EVIDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.1

2.2

2.3

2.4

2.5

How They Met . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Division of Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . 9

Type of Work Done . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Morrison Leaving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Dealings With Dumur - McAra Street

and the Loan and the $26,600.00 Credit . . . . . . . . . . . . . . . . . . 14

3.

THE FINANCIAL EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

3.1

Gordon Joyce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

a) In-Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

b) Cross-Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

3.2

Vern Jess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

a) In Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

b) Cross-Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

c) Re-Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

4.

THE COMPUTER DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

4.1

4.2

4.3

Brian Martens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

a) In-Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

b) Cross-Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Morrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

a) In-Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

b) Cross-Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Walbaum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

a) In-Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

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4.4

Adams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

5.

6.

MORRISON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

a) In-Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

b) Cross-Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

c) Read Ins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

THE ROSE STREET PROPERTY AND PRESUITTI JOB . . . . . . . . 105

6.1

Morrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

a) In-Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

b) Cross-examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

c) Re-examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

6.2

6.3

Presuitti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Walbaum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

7.

DWAYNE WALBAUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

a) In Chief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

b) Cross-examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

c) Re-examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

d) Read-Ins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

8.

TAMMY WALBAUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

HOWARD DAVIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

LEO PAYETTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

BLAIR MCPHEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

MORRISON REBUTTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

9.

10.

11.

12.

12.1

12.2

12.3

Morrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Donald Leier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

Andre Deneve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

13.

THE LIQUIDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

- 4 -

13.1

13.2

13.3

Adams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Morrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

The Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

14.

15.

POSITION OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163

14.1

14.2

Position of the Plaintiff re Dumur Co. and Dumur . . . . . . . . . 163

Position of Dumur Co. and Dumur . . . . . . . . . . . . . . . . . . . . . 165

14.3 The Plaintiffs’ Reply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

ARGUMENT RE THE WALBAUM GROUP CLAIM . . . . . . . . . . . 168

15.1

15.2

The Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

The Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

15.3 The Plaintiffs’ Reply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

THE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

DECISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

16.

17.

17.1

17.2

17.3

17.4

17.5

17.6

17.7

17.8

17.9

Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

The Authority of Walbaum . . . . . . . . . . . . . . . . . . . . . . . . . . . 192

Dumur, The Loan, McAra Street and The Credit . . . . . . . . . . 195

The Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

The Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

Morrison’s Forensic Work . . . . . . . . . . . . . . . . . . . . . . . . . . . 224

The Effect of Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

Loss of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

Breach of Fiduciary Obligations . . . . . . . . . . . . . . . . . . . . . . . 234

17.10 Walbaum’s Credibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

17.11 Pattern of Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248

17.12 The All-Rite Off-Set . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

17.13 Tammy Walbaum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

17.14 Punitive Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

18.

19.

OTHER CAUSES OF ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

SUMMARY OF ADJUSTMENTS AND

PAYMENTS TO BE MADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

- 5 -

20.

21.

22.

PRE-JUDGMENT INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

THE SIM/TURNER COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

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1.

INTRODUCTION

[1]

Alec Keith Morrison (“Morrison”) brings an action on his own behalf and a

derivative action on behalf of Dun-Rite Plumbing & Heating Ltd. (“DR”) against the

defendants, DwayneWalbaum(“Walbaum”), TammyWalbaum(“Tammy”)andAll-Rite

Plumbing & Heating Ltd. (“AR”) and Tamwal Investments Ltd. (“Tamwal”), two

companies controlled by Walbaum, collectively called the “Walbaum Group”. The

plaintiffs also sue Robert Dumur (“Dumur”) and 593340 Saskatchewan Ltd. (“Dumur

Co.”). The claims against Albert Fazakas (“Fazakas”) and Gabriel Construction Ltd.

(“Gabriel”) have been settled. The plaintiffs’ claim against Robert Sim (“Sim”) and

Rosemary Turner (“Turner”) was dismissed as a result of an application by them for a

non-suit after the plaintiffs had called its evidence against them.

[2]

The plaintiffs’ claim against Walbaum and AR is for having wrongfully

denuded DR of its assets for the benefit of Walbaum and for AR without consideration.

The plaintiffs allege AR assisted Walbaum and became the beneficiary of the transfer of

some of the DR assets. The plaintiffs ask the court to order the defendants to pay the

value of those assets of which DR was deprived back to DR.

[3]

The plaintiffs’ claim against Walbaum and AR is also for breach of

Walbaum’s duties as a director of DR, breach of trust, breach of fiduciary duty,

misfeasance, trespass, conversion, detinue and other wrong doing in relation to his

conduct of the affairs of DR.

- 7 -

[4]

The plaintiffs’ claim against Tamwal is for wrongful charging of rent to DR,

failing to repay DR for building renovations it did for Tamwal and retaining monies

owing to DR by Dumur Co.

[5]

The claim against Tammy is for wrongful receipt of wages and other benefits

from DR and conversion of DR assets to her personal use.

[6]

The claim against Dumur and Dumur Co. is for wrongful payment for a loan

owing to DR to Walbaum or Tamwal in breach of the loan contract and in breach of trust.

The plaintiffs also claim against Walbaum for that breach of trust.

[7]

Although not pleaded, the defendant AR asserts a set-off against the claim

of DR for monies and work AR alleges expended on DR’s behalf.

[8]

The principal parties in this dispute are Walbaum and Morrison. For the

purposes of this action, the interests of DR on the derivative action and Morrison are

aligned. They worked together as business partners in DR for 7 years. Morrison left the

business in December, 1995 and in the spring/summer of 1996, started his own business

leaving Walbaum to look after the business of DR thereafter.

[9]

Throughout the trial, the witnesses and documentation referred to various

professionals. Some of them testified. These were Mark Mulatz (“Mulatz”) of the

Gerrand Mulatz firm (the “Gerrand Firm”), Warren Sproule (“Sproule”) of the Hleck

Kanuka Thuringer firm(the “Kanuka Firm”), Wilson Olive (“Olive”), Dion Tchorzewski

(“Tchorzewski”) and Fred Zinkhan (“Zinkhan”) of the Olive Waller Zinkhan & Waller

firm (“Olive Waller Firm”), Vernon Jess (“Jess”) of the firm E.J.G. Dudley & Co.

- 8 -

(“Dudley”), Gordon Joyce (“Joyce”), Tom Sandbeck (“Sandbeck”) and Marla Adams

(“Adams”) of Deloitte & Touche (Deloitte”) and Daryl Shutter (“Shutter”) of Kraus

McKay Pederson (“McKay”).

[10]

A voluminous number of exhibits were filed mostly in binders thanks to the

excellent efforts of counsel. The binders were tabbed and sometimes within individual

tabs there were additional alphabetic divisions. I will refer to the exhibits as for example

P1-4 or P4-A7 to refer to P1-Tab 4 or P4, Tab-A7.

[11]

The trial proceeded in parts with the evidence on both sides respecting the

claim against Dumur and Dumur Co. and Sim and Turner being called and dealt with at

the beginning of the trial.

[12]

Some of the facts and evidence is arranged by discrete subject matter with

testimony of witnesses on that subject together. Some of the facts and evidence is

arranged by the person testifying. Where the cross-examination or re-examination results

only in the witness repeating the testimony in-chief or not adding anything new, it is not

usually set forth.

2.

FACTS AND EVIDENCE

- 9 -

2.1

How They Met

[13]

Morrison had been in the plumbing and heating business since 1974 and had

his own business. Walbaum had started DR in 1982 at age 20 and had worked initially

out of his garage. Walbaum indicated that when he worked at Comfort Plumbing &

Heating, he had met Morrison who was also an employee there. A friendship developed.

He and Walbaum worked together for approximately five years on various jobs prior to

Morrison joining DR. Morrison sold the assets of his business to DR for $30,000.00 on

October 1, 1988 and purchased half of the shares of DR from Walbaum. The share

purchase agreement is found at P4-A3. It was never replaced by a subsequent unanimous

shareholder agreement.

[14]

Morrison and Walbaum were equal shareholders in DR. Each was a director.

Walbaum was the president and Morrison was the vice-president (P1-23).

2.2

The Division of Responsibilities

[15]

Morrison was a journeyman plumber and had his ticket as a gas fitter. His

role in DR was to look after the workmen, the jobs and materials, know the details of the

job on an operational basis and also determine what equipment was required. Morrison

was the on-site person who coordinated the day-to-day work. Morrison testified that he

was required to be actively involved in the business.

[16]

Walbaum testified that although he had worked in the sheet metal area, he

had no plumbing or sheet metal certifications; his expertise was self-taught. He had a

grade 10 education and no technical or formal plumbing training. Morrison testified that

- 10 -

Walbaum was the marketing person at DR and looked after bidding for projects and the

day-to-day administering of the company. Morrison also had some involvement in

providing input to bidding projects. Walbaum knew people around town, was outgoing

and had substantial business contacts. He played the front office role in the business.

Morrison stated that he had little to do with the banking except the odd deposit.

Walbaum, in cross-examination, indicated that between 1988 and 1995 each of he and

Morrison did their own job with Walbaum in charge of marketing and financial and

Morrison in charge of the operational duties. Walbaum indicated that he still went out to

sites to review the work and was directly involved in the job at some of the sites.

[17]

Walbaum testified that he and Morrison always had a good relationship.

There was no conflict between him and Morrison. They went to the bar; they hung out

together. After his divorce, Walbaum spent more time at the office and they actually

spent more time together.

[18]

In cross-examination, Morrison indicated that either he or Walbaum could

make final decisions about aspects of the business and that agreement of both of them

was not usually required. Morrison admitted that both he and Walbaum had limited

education and relied on professionals to assist them in the running of the company such

as Mulatz, the company lawyer and Jess, their external accountant. Morrison indicated

that an accounting lady helped two to three days of the week and was assisted by Jess or

people from his office, who helped with month end financials. He indicated that when he

left DR, it would have been difficult for DR to operate since he was in charge of gas

permits but indicated that there were other employees who could carry on.

- 11 -

[19]

Morrisontestifiedthattheby-lawsforDR(P4-A2)hadbeenunchangedsince

he joined the company. Walbaum indicated that it was their intention to share equally in

the benefits of DR and neither questioned each other regarding the use of trucks or tools

from the company for personal use.

2.3

Type of Work Done

[20]

The office of DR was at 333 Dewdney Avenue, Regina and was initially 600

- 800 square feet with a shop of 2,000 square feet. Accounting and reception were in the

front area and there was a sheet metal shop in the back. The office was on a month-to-

month lease. By mid-1995, DR had 13 to 17 employees who did residential and

commercial plumbing.

2.4

Morrison Leaving

[21]

Morrison now operates his own plumbing business and has since 1996.

Morrison testified that he left the DR offices on December 22, 1995 on a planned family

trip. He returned from the trip on January 2 or 3, 1996 but when he came back from

holidays he was not feeling well. He called Walbaum and told him that he was not sure

if he was coming back and that he needed some time to decide. His wife had not been

happy with him working so much and he promised her that he would spend less time

away from home. Morrison testified he did not know at that point what lay in the future

for him and that he stayed home for 5 weeks in seclusion.

[22]

He felt worn down. Morrison testified that his knees had bothered him for a

while and that stress had built up over time. The stress he was under became greater as

- 12 -

the business grew and the problems regarding stress were affecting his memory on a day-

to-day basis. He indicated that the requirements and demands on him grew with the size

of the job. Morrison testified that on the surface his relationship with Walbaum was fine.

He testified that he kept the underlying business issues, which were upsetting for him,

from Walbaum. Some of these were that he believed Walbaum was doing work outside

the company, using materials from the company and collecting some money himself and

was making decisions on his own. In spring, 1996, he did not know if he wanted to be

involved in the plumbing and heating business and did not know whether he wanted to

be in business with Walbaum. He did not want to go back to DR. He said he had lost

confidence in Walbaum and did not trust him but he concealed that.

[23]

Morrison indicates that he was depressed during his seclusion and the

depression made him unsure of himself and unable to get involved in anything. After a

while he eventually felt like he could do some work and installed a furnace for a friend,

but not through DR. In April, 1996, he had heard that the locks on the DR office had been

changed and he was concerned. Walbaum testified that this was due to a break-in and

Morrison was offered the new keys to the office. Between February and May, 1996,

Morrison visited the shop in the evening and wrote several cheques to himself for money

which he believed he was owed but otherwise stayed away from DR.

[24]

Morrison testified that when he left he asked Walbaum to look after the

company. While he was in seclusion, Walbaum was managing the day-to-day affairs of

the company. Morrison, in cross-examination, admitted that if Walbaum had left the

company in 1995, that would have caused significant problems with the company. His

decision to not come back to DR was a unilateral decision and he left Walbaum hanging

regarding what decision he would make.

- 13 -

[25]

In cross-examination, Morrison indicated that he left the company to

Walbaum and thereby authorized him to do what he had to do to protect DR. He admitted

that he did not like some of the decisions that Walbaum made but agreed that Walbaum

had relied on professionals such as Multaz, Jess and other advisors to make business

decisions in the best interests of the company. He stated that he was not criticizing all the

decisions that Walbaum had made.

[26]

Walbaum testified that he was unsure about Morrison’s intentions. As time

went on, contractors were questioning what was happening and Walbaum was making

excuses for him. Weeks went by. Walbaum phoned his house and cell but there was no

answer. He did not know what to say to the staff. He was first able to track Morrison

down in late January. Morrison said that he had personal issues he had to deal with,

although he agreed to meet. When they met, Morrison indicated that it had nothing to do

with “you guys at the shop”. This was a four hour meeting and Walbaum asked Morrison

to come and talk to the employees at the office, which Morrison eventually did.

[27]

The defendants’ witness, Blair McPhee (“McPhee”), indicated that after

Morrison went on holidays, he did not see him again until February. McPhee himself

tried to phone Morrison a number of times and, in the middle of January, went by his

house. He was not able to locate Morrison or get him on the phone. In February, Morrison

came to the shop and McPhee indicated that Morrison told him that he was having

problems and did not know if he was coming back.

[28]

After Morrison left DR, lawyers become involved. Sproule acted for

Morrison and Mulatz was acting for Walbaum and DR. During the buyout with

negotiations with their lawyers on May 2, 1996 to arrive at a value for the company, they

- 14 -

agreed to maintain the status quo and the corporate assets. Morrison believed that the

corporate assets would be protected and the company would keep going as it had been.

He also indicated that he and Walbaum had agreed that he could start his own plumbing

business although he would make himself available for any DR matters. As well, it was

agreed between him and Walbaum that he could keep the DR leased vehicle until an

agreement was reached, but that the costs of a leased vehicle would be dealt with at that

time. Morrison requested to be kept informed about any major contracts or purchases in

DR or anything that would affect the status quo. He testified that he was aware that he

was technically still liable for the guarantee on Rose Street as well as his liabilities as a

director of the company, for wages to employees and especially to Revenue Canada.

2.5

Dealings With Dumur - McAra Street and the Loan

and the $26,600.00 Credit

[29]

Dumur testified that he knew Walbaum but that Morrison was his primary

contact. He had known Morrison for quite some time and was friends with him. He knew

that Morrison was an owner of DR but did not know if DR was a limited company. He

did not know, however, that both Morrison and Walbaum spoke on behalf of DR. Dumur

and his company, Dumur Co., a manufacturing business, had their offices at 1530-1534

McAra Street (“McAra Street”), in Regina, until the fall of 1995 when they moved to

White City.

[30]

Dumur testified that in late 1995, an opportunity came up very quickly for

Dumur Co. to buy a machine called a turret punch at a cost of $145,000.00. A decision

had to be made within days to buy that machine. Dumur approached Morrison for a loan

so that he could bridge finance the purchase. He discussed the general terms of the loan

- 15 -

with Morrison, i.e. that it was a short term loan, that he would pay interest and that the

loan amount required would be $120,000.00. He could not recall if in his discussion

with Morrison there was an actual interest rate or repayment date set. However they did

agree on an amount. Dumur testified that Morrison told him that he would talk to

Walbaum and when next he heard of the matter, he was handed a $120,000.00 cheque

payable to Dumur Co. at the DR offices in December, 1995 (“the Loan”) . This cheque

dated December 22, 1995 is exhibited at P1-5.

[31]

Morrison confirmed that Dumur had approached him in the fall of 1995 for

money for the turret punch because they were friends and that on December 22, 1995,

when he left DR ostensibly to go on holidays, he told Walbaum that there would be no

problem on his part giving a loan to Dumur.

[32]

In cross-examination by Mr. Karwandy on behalf of Dumur, Morrison stated

that he never discussed details of the Loan with Walbaum. He told Dumur that he

(Dumur) would have to talk to Walbaum respecting the Loan and he was sure that Dumur

went to Walbaum to discuss it. The next time he heard about the Loan was December 22

when Walbaum approached Morrison. He confirms that he told Dumur to talk to

Walbaum but he never agreed to the terms of the Loan. He does admit he told Walbaum

to loan the money to Dumur and he told Walbaum that he was not against it. Morrison

testified that he gave Walbaum full authority to deal with the Loan.

[33]

Morrison stated that Dumur had also raised with him the topic of buying

McAra Street in the fall of 1995. McAra Street was empty except for one tenant.

Morrison indicated that Walbaum and he had a couple of conversations regarding buying

McAra Street and that the day he left for holidays, he told Walbaum that it would have

- 16 -

to wait until he got home. When he came back from holidays, he possibly talked to

Walbaum about the Loan and about McAra Street. He recalls that Walbaum asked him

what he thought about McAra Street and he said he was in no state to make a decision.

He also remembers telling Walbaum he was not interested in buying the building.

[34]

Dumur testified that he had spoken to Morrison about DR buying McAra

Street in December, 1995. He believed DR was looking for a larger office and he was

led to believe by Morrison that DR would purchase McAra Street. The purchase price of

the building was to be $120,000.00. Dumur testified that he had no further discussions

with Morrison with respect to the purchase of McAra Street after Morrison returned from

holidays. Eagle Electric (“Eagle”), who remained the sole tenant in the building, had

moved out late in December. Dumur testified that he believed Eagle moved out because

theyfeltuncomfortablebecauseofcommentsthatMorrisonhadmadetoEaglerespecting

DR occupying the building. Dumur confirmed that nothing was ever formally written up

during his discussions with Morrison regarding the building and he had a handshake deal

with Morrison. He said DR moved in after Eagle left and started to pay the utilities in the

building. DR also began making changes to the building and DR’s employees and their

trucks were on the property. Dumur testified that early on it was of no concern since he

was friends with Morrison and also knew Walbaum but as the matter dragged on, he got

more concerned and eventually called Walbaum to get the purchase moving. The paper

work had not been completed. He indicated he had no idea where Morrison was. Dumur

indicated that he believed DR had bought the building and that it was okay for DR to tell

Eagle to leave the building. He believed that Morrison had kicked out Eagle in December

of 1995 and that he was doing this on behalf of DR. Dumur indicated that he lost income

from the tenant. He testified that between January, 1996 and September, 1996, no one

explained the change in the relationship between Morrison and Walbaum to him.

- 17 -

[35]

Morrison, in cross-examination, confirmed that he had talked to the owner

of Eagle. He spoke to him about the possibility that DR would buy the building, about the

possibility of taking over the space, cautioned him not to spend money doing anything

and about the possibility of getting moved. He did not tell Walbaum about the

conversation with Eagle. He admits that Dumur had approached him more than once

about McAra Street. Morrison confirms that Dumur may have assumed that DR would

buy the building based on his conversations before December 22 but Morrison confirmed

that he told Walbaum that McAra Street could wait and to do nothing until he got back.

He indicated to Walbaum that he was not comfortable with DR buying the building. He

indicates that he was not part of any demolition or renovations in the property. Morrison

testified that he had no idea when renovations were taking place on McAra Street by DR

and to his knowledge there were no renovations. Morrison expressed surprise that

Walbaum was dealing with Dumur regarding the purchase of the property while he was

in seclusion and gone from the company. He indicates that DR never actually took

possession of McAra Street. Morrison maintains that Dumur was dealing with him and

Walbaum as principals of DR and that he never said to Dumur that he was not a

shareholder and director of DR. Morrison indicates he first knew of the McAra Street

transaction when he saw Dumur 1-8, a letter from Mulatz dated April 11, 1996,

requesting a transfer and forwarding the offer to purchase. He acquired a copy of this

letter in the early part of 1996. Morrison indicates that he did not find out about the

$26,600.00 credit on the transaction until he saw documents at the examination for

discovery.

[36]

Dumur was also cross-examined by Mr. Bishop on behalf of Walbaum. He

indicated that he was 46 years of age and had no post secondary education. He testified

that he often dealt with his lawyers and his lawyer’s office sends out letters without

- 18 -

consulting him. He confirmed that he was a better friend of Morrison than Walbaum and

did not know Walbaum all that well. He said that with respect to McAra Street, his

dealings with Morrison were more than a discussion point. He said there was a handshake

deal with Morrison in late 2005 to sell McAra Street and that there was a similar

handshake deal with turret punch loan.

[37]

Dumur confirmed that in early 1996, he was getting pressure from his lawyer

to get the McAra Street sale done and that DR had began demolishing the interior of the

building in January, 1996. He remembered DR trucks being parked in the building in late

1995 and that they had access to the building. Dumur testified that Walbaum confirmed

the technical details of both the Loan and the property purchase and that Walbaum drove

a good bargain for DR on the interest rate on the Loan.

[38]

Morrison testified that he had told Dumur that he was taking time off. He also

told Dumur after May 1, 1996 that he had made a decision that he was not going back to

DR. Morrison stated that Dumur and him spoke often during the spring of 1996. He never

told Dumur that DR was not buying the building. He indicated that there was no good

reason why he did not tell Dumur that the building was not being bought.

[39]

He indicated in cross-examination that he did not know that Dumur felt that

promises were made to buy the building and that he never said to Dumur that he would

buy the building. He does not ever remember Dumur saying to him that he had to buy the

building. Morrison indicates that a decision to buy the building was a unilateral decision

on Walbaum’s part.

- 19 -

[40]

With Morrison being away from DR, in seclusion and not generally

communicative, WalbaumproceededtodealwithDumurrespectingtheLoanandMcAra

Street on his own. A receipt and a security agreement dated December 22, 1995 for the

Loan between DR and Dumur Co. were prepared and are found at Dumur 1-4 and 5

respectively. The documents spoke of only a temporary loan of $120,000.00 which was

to be repaid in full by June 30, 1996 along with interest calculated at 12% per year as

directed by Walbaum or Morrison. Security for the Loan was to be for the turret punch

and McAra Street, however when the security agreement was signed, it covered only the

turret punch. Dumur believes that he signed the security agreement later despite the date

on the agreement. Walbaum also had Dumur sign a personal guarantee for $120,000.00

dated March 28, 1996, found at Dumur 1-7. Dumur confirms that after December 22, he

was dealing with Walbaum exclusively regarding the Loan. He confirms that he did not

speak to Morrison in January or February of 1996 and knew nothing about Morrison not

being there.

[41]

On February 22, 1996, Walbaum, on behalf of Tamwal (which at that time

was 612501 Saskatchewan Ltd.), signed an offer to purchase McAra Street from Dumur

Co. found at Dumur 1-6. The purchase price was $120,000.00 payable by other financing

of $26,600.00 and assumption of the existing mortgage for the balance. McAra Street

consisted of 4 lots; 2 owned by Dumur Co. and 2 owned by Dumur.

[42]

Dumur believes that when he signed the offer to purchase, it was likely

signed at the offices of DR and he believed DR was purchasing the property. At that time

he had no reason to believe that he could not deal with Walbaum respecting the sale. The

phone number of the purchaser on the offer to purchase at Dumur 1-6 was the phone

- 20 -

number of DR. Dumur confirmed that the possession date was April 1 despite the fact

that DR had actually occupied the premises since late December, 1995.

[43]

Dumur testified that he believed that the $26,600.00 (other financing) in the

offer would actually be paid. However in a letter dated April 11,1996 to Dumur’s

counsel, at Dumur 1-8, Mulatz first indicates that his instructions were that the purchaser

(Tamwal) was to be given a credit of $26,600.00 on the purchase price to offset a debt

owing by Dumur to Walbaum. The statement of adjustments, found at Dumur 1-12,

prepared by Dumur’s lawyer and sent to Mulatz on or about April 24, 1996, showed this

credit to the purchaser as a repayment of a debt of $26,600.00. Dumur testified that after

the credit was taken off the amount owing, he knew he was not getting cash on the

closing and in fact did not get cash on that transaction.

[44]

Dumur’s lawyer also agreed that Tamwal could obtain a new mortgage from

the Federal Business Development Bank (“FBDB”) rather than assume the old one.

Tamwal obtained a loan of $150,000.00 from the FBDB to finance the purchase of

McAra Street and the purchase of 2 additional adjacent lots and to do renovations (P1-

14). DR signed an $80,000.00 guarantee of this loan to the FBDB on April 9, 1996

executed by Walbaum (P1-24). Mulatz closed the purchase on May 16, 1996 (P1-37).

[45]

Two days earlier, on May 14, at P1-34, Mulatz wrote FBDB to explain why

the $26,000.00 was not being paid and that the adjustment of $26,600.00 will be

documented by a promissory note by Tamwal to Dumur Co. which will be assigned to

DR by Dumur Co. as a credit against Dumur Co.’s $120,000.00 Loan debt to DR. Dumur

1-18, a letter dated May 23 from Mulatz to Shutter, verifies and further explains the credit

of $26,600.00 granted to Tamwal. That explanation is somewhat different than the one

- 21 -

given to FBDB. It explains that this was not a credit in the sense that it did not have to

be paid but was rather a loan by Dumur/Dumur Co. To Tamwal. When Tamwal wished

to pay it or sold the property, Dumur Co. would receive $26,600.00. Mulatz explained

that no interest was payable and no security was granted for this Loan. Mulatz also

explains (despite his earlier letter to FBDB) that there was no agreement to apply this

loan against the Loan of $120,000.00. Mulatz then set out a proposal similar to the one

in his May 14 letter to FBDB to document the credit whereby Tamwal would issue a

promissory note to Dumur Co. but Dumur would grant Tamwal an option to transfer and

assign the promissory note to DR as partial payment on the Loan by DR which could be

exercised at any time. There would then be a deemed transfer and assignment of the

promissory note to DR without further action or documentation. Mulatz explains in the

letter that as at May 23, 1996, DR was unable to credit that indebtedness against the Loan

owing to DR due to “buy out arrangements” occurring between its shareholders. He

indicated that upon those arrangements being concluded, DR and Tamwal may be

prepared to exercise the option. Dumur stated that he never saw Mulatz’s letter at Tab 18

or ever discussed this letter with Walbaum or Morrison. There was no evidence that the

promissory note by Tamwal to Dumur Co., as proposed to FBDB or Shutter, was ever

documented in those terms as such, prior to the Loan being paid.

[46]

However the issue is addressed after the Loan was repaid by a promissory

note and explanation note dated October 31, 1996 found at P1-56. This was prepared by

Mulatz. The promissory note is directly from Tamwal to DR for $26,600.00 and has the

provision that if the property is sold that the note will be repaid. The explanatory note

attached refers to the repayment of the Loan having been short by $26,600.00 because of

the set-off of the credit on McAra Street by Dumur Co. for this amount.

- 22 -

[47]

While the Loan was outstanding, Morrison and Walbaum were attempting

to address the buyout of Morrison from DR. Morrison and Walbaum and their lawyers

had met on May 2 to discuss the buyout but Mulatz’s memo reflecting the undertakings

of the meeting (P-10) is silent on holding the money in trust. The proposal of holding the

repayment of the $120,000.00 Loan in trust appears first in documentation dated May 30,

1996 (P1-39) where Sproule, writing to Mulatz, suggests that as part of the structured

buyout of Morrison. Mulatz, on June 6, 1996, (P1–40) conveys this to Walbaum and

explains “that the Dumur account receivable, if it is paid, be paid into trust with us

pending resolution of the decision [sic] as to matters.” Sproule, on June 6, 1996, (P1-41)

responds to Mulatz that “if and when the Dumur receivable is paid that it will be paid into

trust and held pending resolution of this matter.”

[48]

Mulatz, on behalf of DR, then sent a letter to Dumur Co. dated June 13 (P1-

64) indicating that the payments Dumur is to make under the Loan are to be paid to the

Gerrand Firm in trust until they advise further. Mulatz goes on to explain that the

shareholders of DR are engaged in negotiations to resolve ownership of the company and

untilsuchnegotiationsareconcluded, paymentswouldbeheldintrustbyMulatz’soffice.

This is the earliest documented notice to Dumur of any possible trust. Dumur testified

that although he did not recall receiving the letter (P1-64), if it was received it would

have been sent to his lawyer. He testified that he knew nothing of the agreements referred

to between Morrison and Walbaum and no one talked to him about such agreements. He

does confirm that he talked with Morrison respecting the payment of the Loan maybe

once or twice but never discussed legal matters. Morrison had asked him if he had any

issues respecting getting the money back but had never talked to him about a trust at any

time.

- 23 -

[49]

Sproule, onMorrison’sbehalf, nextforwardstheletterdatedJuly11(Dumur

1-20) to Dumur Co. reminding Dumur that Morrison was a director and shareholder of

DR and confirming the agreement of Morrison to Dumur Co. “repaying its indebtedness

to Dun-Rite Plumbing and Heating Ltd. by delivering the amount due to the Gerrand firm

in trust”. Although Dumur also did not recall seeing this letter, he indicated it would be

logical to assume that it would be forwarded to Shutter. Mulatz also forwards Sproule’s

letter dated July 11 (Dumur 1-21) to Dumur the next day and confirms Mulatz’s

understanding that upon delivery of that letter, that Dumur would attend to payment of

the outstanding balance which he, Mulatz, agrees to hold in trust until such time as

Walbaum and Morrison have agreed to disposition of the funds.

[50]

On July 25, Sproule, acting on behalf of Morrison, by letter (P1-44), asked

Mulatz if the Loan money had been received by him. Mulatz’s response is found at Tab

45, indicating no money had been received.

[51]

Dumur indicated that he and his lawyer were not part of any agreements

between Walbaum, Mulatz, Morrison and their lawyers. He indicated that he had no

reason to believe that Morrison was unaware of what was going on with respect to the

Loan. Dumur did indicate that Morrison may have called him and said “are you ready to

pay the dollars”. Dumur testified that he never believed he was subject to a trust. He left

everything in the lawyer’s hands.

[52]

Dumur’s explanation of the credit on the Loan was that he knew DR owed

him $26,600.00 from the McAra Street sale. He wanted this taken into account on the

repayment of the Loan and took the position that DR owed him the money. This credit

on the Loan was negotiated by him and his lawyers and he felt the $26,600.00 was

- 24 -

rightfully his and he was not giving up on it. He explained that the two lawyers were

trying to understand the transaction and he was completely comfortable with the way that

it was handled. He confirmed again that he had no discussions with Shutter regarding the

letters of Mulatz or his proposal but felt that Shutter knew that DR owed him $26,600.00.

He did not recall discussing anything about that with Shutter around May 20, 1996, close

to the date of Mulatz’s letter. He indicated that he did not talk to Morrison about the

$26,600.00.

[53]

It appears that the initial Loan repayment calculation, with the $26,600.00

credit to (Dumur 1-23), was done by Dumur Co. on August 6, 1996. It indicates an entry

for that amount on April 1 with a notation “to Dwayne Walbaum” and was forwarded the

next day, August 7, to Mulatz by Dumur Co. Tab 23 has a place for the signatures of both

Walbaum and Morrison. Tab 24, the memo forwarding the calculation, indicates that

“upon acceptance of these figures by Dwayne and Alec, our bank will be instructed to

make payment in trust to your office”. Dumur testified in relation to Tab 24 that there was

no indication at that time for him that both Morrison and Walbaum were not both part of

DR. Dumur testified that Tab 23 was never signed and returned to him.

[54]

On August 8, DR recalculated the figures showing the $26,600.00 credit and

forwarded the document (Dumur 1-25) to Dumur Co. It was signed by Walbaum but not

by Morrison. The interest was further recalculated by DR on September 25, 1996 (Dumur

1-26) and now shows interest accrued on the $26,600.00 credit of $1,552.39 at a rate

identical to that on the Loan. This time there is only one signature line for Walbaum. It

again shows the $26,600.00 credit referred to as “repayment made to Dwayne Walbaum

on April 1, 1996 by Dumur Industries”. Dumur testified that at this stage he did not know

whether Mulatz was dealing with both Walbaum and Morrison or only Walbaum. On

- 25 -

September 26, 1996, Shutter, on behalf of Dumur and Dumur Co., forwarded to Mulatz

a cheque for $102,815.93 which represented the balance calculated by DR (Tab 26) plus

per diem interest. The balance paid reflected a total credit to “Walbaum” of $28,152.59.

Shutter, at Tab 27, indicates that the money is being sent to fully pay out the Loan and

that they are looking for confirmation that the security for the Loan had been discharged.

Dumur indicates that the lawyers were dealing with the repayment of the money and that

he was not around at this time speaking to Walbaum about the transactions.

[55]

On October 1, 1996, Mulatz sent the funds forwarded by Shutter to payout

the Loan back to Shutter (Dumur 1-28). Dumur testified he did not know why the funds

were sent back and indicated that Shutter may have called and told him that the funds had

come back. He indicated that he did know that eventually Walbaum came to Shutter’s

office to pick up a cheque. Dumur 1-29, a memo on Kraus letterhead showing an

attendance on Mulatz on October 1, details a conversation with Mulatz wherein it appears

Mulatz advises Shutter that he could deal directly with DR and Shutter could prepare a

discharge and get DR to sign in exchange for the money. The memo ostensibly written

by Shutter states that Dumur apparently knows of this.

[56]

However, on October 2, 1996, Mulatz forwards the discharge of the security

to DR to the attention of Walbaum instructing him to provide a discharge to Dumur or

his representative upon receipt of funds (Dumur 1-30). At Tab 31, Shutter’s memo dated

October 3 indicates an attendance on Dumur which reads “he talked to Dwayne Walbaum

- he will come in to pick up cheque and sign discharge in receipt”. Dumur testified that

he left the receipt and pick-up details to the lawyers. Walbaum, on behalf of DR, signed

a receipt and acknowledgment dated October 4, 1996 for payment in full of the Loan

(Dumur 1-32).

- 26 -

[57]

Dumur testified that he and Dumur Co. have paid the turret punch loan, with

interest, and he never believed that the $26,600.00 was owed by someone other than DR.

Dumur testified that he has never been paid the $26,600.00 by Walbaum or Tamwal and

he had no reason to believe Walbaum had no authority to act for DR. He said nobody told

him any different. He also had no understanding of the trust conditions on Mulatz and to

this date, no one has explained to him why Mulatz sent the money back to Shutter.

[58]

In cross-examination, Dumur indicated that it was possible that he had

conversations with Morrison between March, 1996 and August, 1996. Dumur admitted

that the land transfer for McAra Street was to Tamwal. When shown Dumur 1-20, the

letter from Sproule to Dumur Co., Dumur accepted that the letter had asked his company

to pay the money to the Gerrand Firm in trust. He admitted that the letter of Mulatz,

found at Dumur 1-21, makes reference to Mulatz holding the money in trust, although he

never contacted Mulatz to speak about this issue.

[59]

Dumur testified in cross-examination that he does lots of handshake deals.

Dumur also confirmed that while he is positive that P1-6, the Loan agreement, was signed

when he got the cheque on December 22, 1995, the personal guarantee was signed in

March. In December, 1995, he believed that DR was obligated to buy the building. Back

then he did not know exactly how the assumption would work. With respect to the offer

to purchase found at Dumur 1-6, he believed that he was dealing with DR. He had no

conversations with Morrison from January to February or in May, June and July of 1996

except for one time when Morrison called up in June regarding the Loan.

[60]

Morrison testified that he had had numerous discussions with Dumur about

paying money into trust and he told him the money to DR was important and he needed

- 27 -

to protect it. He also told him he wanted the money paid into trust. Morrison testified that

Dumur said that if Walbaum and he wanted that, he would do that. He talked to Dumur

six to seven times and that the first conversations are prior to the due date of the Loan on

June 30, 1996. After June 30, 1996, he had asked him if he had paid the Loan back and

Dumur had indicated no. After June 30, Dumur had told him that although he had not

paid it back, his intention was to pay it into trust and based on that, Morrison believed

that Dumur would in fact pay it into trust.

[61]

Morrison testified that in April, 1996, he did not know about any discussions

regarding the credit for $26,600.00. He was unaware of the correspondence from Mulatz

in April and May dealing with the issue. He confirms that he did not receive any of the

calculation documentation passing between Dumur Co. and DR with respect to

repayment of the Loan and the calculation of the amount owing after the credit. He

confirms that he was not, in 1996, in touch with his office nor active in the corporation.

In short, Morrison did not know any of the specific details of the Loan repayment or of

the credit of $26,600.00 given to Walbaum on April 1. He indicated that when he had

discussions with Dumur around August 6, 1996, the credit was not mentioned. Morrison

admitted that the promissory note by Tamwal to DR was intended to show that Tamwal

owed $26,600.00 to DR (and that it showed on their books).

[62]

Morrison testified that he believed that he would receive $120,000.00 plus

interest. Morrison was unaware that on September 26, 1996, Shutter had made the

payment to Mulatz and that the money Dumur Co. paid was returned by Mulatz and paid

directly to DR. Morrison does recall a discussion with Dumur at some point where

Dumur told him the Loan had been paid. Morrison indicated that he assumed that it was

the entire amount and assumed that the money had been paid into trust. He also testified

- 28 -

that he assumed that the agreement regarding paying the money into trust was between

Dumur, Walbaum and him.

[63]

Morrisonwasunawareofthepromissorynote, foundatP1-56, andthedetails

and mechanics of the purchase of McAra Street while it was happening. He ultimately

became aware that McAra Street was sold and was aware that Walbaum had bought the

building personally. He did not believe that the purchase was through DR and he

indicated in testimony that he was not concerned that the building was purchased because

he believed Walbaum bought it personally from Dumur.

[64]

Morrison, incross-examination, indicatedthatWalbaumhadauthoritytorun

DR and as president, was allowed to sign documents on DR’s behalf. He admitted that

when he left, Walbaum was left to run the company and that he never at any point called

Dumur or others to tell them that Walbaum had no authority to run DR. He does not

dispute the fact that Walbaum was in a position of power to do things and that Walbaum

had the authority to give credit against a loan. Morrison also indicated that under the by-

laws of DR, Dumur 1-36, Walbaum as president could execute documents on behalf of

the company. He confirms that the by-laws were never changed. Morrison confirmed that

Walbaum was in control of DR and that it was in such control with Morrison’s

acknowledgment and understanding.

[65]

Morrison indicated that the liquidator for DR has not, to his knowledge, tried

to collect the Loan from Dumur. Morrison also admitted that neither Dumur’s lawyers

nor Dumur had any part of the meetings between himself and Walbaum respecting the

companyortheconversationsfromMorrison’sside. MorrisontestifiedthatWalbaumand

Mulatz would have known about the credit at the May 2 meeting that Mulatz, Walbaum

- 29 -

and he had at Sproule’s office. However the issue was not raised with him. Morrison also

observed that none of the letters passing between Mulatz and Sproule at P1-39, the

buyout proposal and P1-40, Mulatz’s letter to Walbaum that a June 12 meeting is

conditional on the receivable being paid into trust, speak of a credit being given.

[66]

Morrison observed that at the June 12, 1996 meeting between Morrison and

Walbaum, no one said anything about the credit. Morrison however indicated that when

they reached an agreement that the money from Dumur would be held in trust. No one

discussed the amount of the Loan, the interest or how it was calculated. Morrison did

admit that Dumur was waiting for direction from them to pay the Loan and that the letter

to him by Sproule was just telling him who the payee was. Morrison indicated that

Dumur’s obligation was to pay the money and that it was Mulatz who undertook the

obligation when Dumur paid the money to hold the money in trust until agreed between

himself and Walbaum. Morrison admitted that Dumur never argued the fact that he would

pay the money to Mulatz. Morrison does not dispute that Dumur paid to Mulatz what he

thought the balance was but nevertheless stated that Dumur had breached the trust with

him. He testified that there was no agreement between him and Walbaum to allow the

money to ultimately be handled as it was.

[67]

On being cross-examined by Mr. Bishop, Morrison testified that with respect

to any document after December, 1995, he had no choice but to accept the dates the

documents bore as accurate. He indicated that normally if a handshake deal came about

that the paperwork would follow and that it had happened on more than one occasion.

Morrison testified that he did however not make a handshake deal with Dumur regarding

McAra Street. Morrison indicated that he was not against buying the building but was not

prepared to make the decision to proceed. He admitted that in fact DR could not assume

- 30 -

the mortgage or take out a new mortgage because he was in seclusion and his signatures

would have been needed for this. He indicated that he was available but would not have

signed any mortgage documents. With respect to the Loan, he admits that he never

formalized security interests and terms of payment with Dumur and on December 22, told

Walbaum that he was leaving it up to him to manage. He admitted that Walbaum did a

good job of getting the Loan agreement with Dumur and that DR received $9,000.00 plus

interest as a result of Walbaum’s efforts. He pointed out, however, that the Loan to

Dumur and the purchase of McAra Street had nothing to do with one another.

[68]

Walbaum’s explanation of the details of the transactions on the Loan and the

McAra Street purchase follows. In examination-in-chief, Walbaum indicated that he

believes that Tamwal does not owe Morrison anything respecting McAra Street but does

say that Tamwal may owe DR some money due to the way the transaction occurred and

that there may still be some money owing.

[69]

Walbaum testified that he felt forced into the purchase of McAra Street. He

indicated he started Tamwal to finish the transaction. He indicated that the whole process

started with Morrison, Dumur and the agreement. He indicated that the McAra Street

building had come to their attention in November or December, 1995. Morrison initially

told him it was something that they should look at since their old building was crowded.

Walbaum indicates he saw this as a business opportunity. However, the issue sat there

and he did not hear any more about it. He indicated that the reason that DR considered

buyingMcAraStreetwasbecausethebuildingwasattractive. Itconsistedof6,000square

feet and had a compound and they needed a place to store pipe, equipment and the vans.

He testified that DR had things piled high and it had no compound. There was only 1300

square feet of shop space and there was no room. Sometimes they bought equipment and

- 31 -

items which came but could not be used right away and they needed a place to store it.

Sometimes things had to be stored for weeks or months. DR had high freight costs and

had no place to store equipment if it showed up early. Having a larger space meant being

able to bulk order and tender.

[70]

He indicated that Dumur had allowed Morrison and his staff to retrofit their

vans in the building and use McAra Street as an indoor space. McAra Street was used

after January, 1996 to store items and things for job sites. He indicated that DR continued

to use this space for the next few years. He indicated that when DR moved in, it

demolished all of the offices and gutted the building.

[71]

Morrison left it up to Walbaum to finish off the deal. Walbaum says that he

believes that Morrison, on behalf of DR, made a commitment to buy the building from

Dumur but he had no conversation with Dumur about this. He had discussed the price

with Morrison and the fact that DR was going to purchase the building. There were no

issues with respect to buying McAra Street between him and Morrison. He indicated that

Morrison told him the price that he had agreed to with Dumur and thereafter DR just

started using the building. Walbaum said that he was in full agreement to purchase the

building as it was in his view a good deal. Walbaum indicated that $120,000.00 was

achievable although this was the maximum that they could loan Dumur. He indicated that

during Morrison’s holiday, he had a few more discussions with Dumur. Walbaum

indicated that on December 22, 1995, there was no paperwork to cover the Loan. He was

concerned about the large amount of the money and did not know what the turret punch

was used for. After talking to Mulatz, who cautioned him, he decided to get security and

requested Mulatz to start putting security documents together. He knew that Morrison

- 32 -

was to be back at the end of the first week in January but when he did not return, he was

at a loss and did not know where Morrison was.

[72]

He presented Dumur with a personal guarantee for the Loan. In the same

conversation where Dumur signed the guarantee (Dumur 1-7) dated March 28, 1996,

Dumur asked about getting proper documents for the building purchase. Dumur told

Walbaum that they were taking the building apart and questioned why he was signing

documents for the Loan but could not get documents for the building. Dumur complained

that they could not kick out his tenant, gut the property and then not buy the building.

Walbaum told him that Dumur could not get the mortgage until Morrison got back and

that a mortgage assumption still required two signatures. He said he knew this because

he had talked to his banker and accounts manager. Dumur told him that he had an

agreement with Morrison to purchase the building. Walbaum told him that he would deal

with it when Morrison got back.

[73]

Time moved on and he told Dumur that Morrison was not back. Dumur

started getting adamant about going through with the deal and he told Dumur to relax. He

told him that if Morrison did not come back soon, that he would end up buying the

building. He indicated that Dumur was threatening to sue him and DR and he asked for

further time. He then sought legal advice. He recalls the offer to purchase (P1-8) and at

some point he told Dumur that he would buy it through another company if there was a

shelf company and the bank was prepared to give him a mortgage. After talking to Jess

about it, he was advised that it was possible to roll the property over into DR as long as

there was no revenue or enhancement and no tax consequences. Walbaum indicated that

the price in the offer to purchase was the price that Morrison told him would be paid and

that Morrison had agreed to. Walbaum said that it was agreed that they would assume the

- 33 -

mortgage and Dumur would carry them for the $26,600.00. Rather than assume the

mortgage, because the interest rate was high, he was advised by Jess to get a new

mortgage and so he did. In February to April, he carried through with the purchase of

McAra Street by Tamwal. During April, 1996, he could not contact Morrison. Walbaum

confirms that McAra Street, although purchased through Tamwal, was not rolled over

into DR.

[74]

As time went on, the Loan with Dumur was strapping the company for cash

flow. Walbaum felt that the sooner the money was back in DR the better. He believed that

the money was to be paid back to DR in Mulatz’s trust during the period of negotiation

between him and Morrison (i.e. May to July). Walbaum thought that the negotiations in

his view were over when Morrison indicated that he was coming back to work by virtue

of a letter from Sproule dated July 23, 1996 (P4-B25). He testified, however, that that

deal was over when Morrison indicated he was coming back to work and therefore felt

that the money did not need to be left in trust.

[75]

Between August and October, 1996, the Dumur Loan had not yet been paid

back. Walbaum was waiting for Dumur to get the money to pay it back. When Mulatz

contacted him about receiving a cheque for the repayment from Dumur, Mulatz asked

him what to do with it. Walbaum told Mulatz to send it back and tell Dumur to deal

directly with him. This was done through Dumur’s lawyer who conveyed the money to

Walbaum. The cheque was deposited into DR’s account at CIBC. Walbaum was not sure

if the money was invested with Levesque Securities (“Levesque”). He had had an account

with Levesque for 2 - 3 years. The bank did not have much to offer for investment and

he had asked a financial person about investing money. He said that he had 30-day bonds

at 3% - 4% and he did that. The investment person said he could put it into an investment

- 34 -

account tagged as DR money. Walbaum testified that with respect to P8 and P1-59, all

Dumur monies invested with Levesque went back to DR.

[76]

He indicated that cost was incurred by Tamwal to put the property back into

its original state and he felt that was DR’s responsibility. He was offsetting this against

the $26,600.00 and monies owing by Tamwal to DR.

[77]

In cross-examination, Walbaum admitted that the letter dated May 30, 1996

(P1-39), from Sproule to Walbaum care of Mulatz, proposed that the Dumur Loan money

could be used to finance a buyout or alternately be held in trust pending the completion

of the buyout. Walbaum admitted that a letter dated June 6 (P1-40) talks about an

upcoming meeting being on the condition that the Dumur Loan receivable be held in

trust. The June 12 meeting occurred and Walbaum admits that they did not discuss with

Morrison the credit or promissory note arrangement. Walbaum testified that he did not

understand that Morrison’s agreement to delay court proceedings, referenced in

Sproule’s letter of June 6 (P1-41), was contingent upon Walbaum agreeing that the

Dumur receivable would be paid into trust. Walbaumindicated that he thought the money

would be held while the parties were negotiating for the buyout but he does not recall

talkingaboutliquidation. Hedoes, however, notdisputeP1-41. HeconfirmedthatMulatz

was acting on his behalf when he wrote the letter dated June 13, 1996 to Dumur (P1-64)

instructing Dumur Co. to pay the Loan into trust. He also admits that Mulatz was acting

on his behalf when he wrote a similar letter dated July 12, 1996 (P1-43) and where

Mulatz indicates that he had not yet received the money (P1-45).

[78]

Walbaum admitted that by July 26, 1996, he had not contacted Morrison

directly or indirectly regarding the $26,600.00 credit nor did his lawyer. Walbaumadmits

- 35 -

that he knew on or about April 1, 1996 that the Loan repayment would be less than he

first thought because of the credit.

[79]

Walbaum indicated that he knew the money was being sent back. He admits

to not contacting Morrison to tell him the money was being rejected and has not seen

anything that suggests Mulatz contacted Morrison either. He admits signing the

discharges for the security documentation which Mulatz had prepared providing it to

Dumurdirectly. WalbaumalsoadmitsnotconsultingwithMorrisonrespectingthe receipt

for the Loan and the note on the promissory note found at P1-56 regarding alternate

arrangements.

[80]

He confirmed that the receivable, when it was paid, would be held in trust

pending resolution of the matter. He also confirmed that, in that the time Mulatz was

acting for him and on his behalf. Regarding Tab 50, the calculation of the payout of the

Dumur Loan, Walbaum did not consult with Morrison before sending this out. Walbaum

confirmed that as at September 25, he had not contacted Morrison regarding the payment

and he did not know if Mulatz had.

[81]

In cross examination, Walbaum further admitted that he invested the money

from the Dumur Loan with Levesque beginning in October, 1996. On August 27, 1997

he withdrew the monies. Walbaum indicated that the payout statement (P1-46) showing

$101,091.44 was roughly the correct amount. The Tamwal financial statement dated

March 31, 1998 (P1-63), at note 7, shows $26,600.00 owing to Dumur by Tamwal.

[82]

In cross-examination, Walbaum testified that with respect to P1-7, the

February 10, 1996 cheque to NICOR, he did not know of that with respect to McAra

- 36 -

Street deposit. However he did not dispute that DR paid the deposit for McAra Street.

Walbaum reviewed P1-13 to 24, all of which had to do with dealings with McAra Street.

[83]

Walbaum testified that Tamwal eventually sold McAra Street on May 11,

1998 as indicated in the offer to purchase at P4-K25. The balance to close of $32,440.85

was sent to Mulatz by the purchasers’ lawyer on June 18, 1998 (K28). Tamwal therefore

had at least $32,440.00 in June, 1998. K23, the Tamwal March 31, 1998 financial

statement, also shows investments by Tamwal of $52,121.00. That money went into

Walbaum’s personal name.

[84]

The parties read in various parts of the examination for discovery of the

opposite parties respecting the claim against Dumur and Dumur Co. The listing of these

questions are contained in P2, P3, P9 and D6. The parties also sought to read in questions

in clarification of the read-ins, some of which I allowed and some of which I did not.

Much of the information contained in the read-ins was dealt with and confirmed into

evidence during the examination and cross-examination of the parties. However, some

of the discovery questions do help to flesh out the whole story with respect to dealings

with Dumur.

[85]

From the questions, read-ins out of the examination for discovery of Dumur,

Dumur admits that everyone wanted the money paid into trust. He also indicated that the

only company that would give him a release of his security was the company that the

agreement was with.

[86]

From the read-ins, Walbaum denied ever talking to Dumur about the June 13

Mulatz letter or specifically about the idea that Dumur should pay the money to the

- 37 -

Gerrand Firm so it could be held in trust. Walbaum admitted that the money which is paid

by Dumur to DR was invested with Levesque at the National Bank and he invested

$93,400.00 plus interest in October, 1996. Walbaum also indicated on his discovery that

because Tamwal owed Dumur Co. some money for McAra Street, Dumur deducted that

from the money that he owed DR because Walbaum was a shareholder in DR. Walbaum

indicated that he never disputed the fact that Tamwal owed Dumur the money but

disputed the fact that he was able to deduct $26,600.00 from DR. Walbaum indicated it

really had nothing to do with him and that was not the deal between him and Dumur.

Dumur did it by himself. He took the opportunity to trade what Tamwal owed to him.

Walbaum indicated that initially his agreement with Dumur on the purchase was that he

would put a caveat against McAra Street so it could never be sold without paying Dumur

his $26,600.00.

3.

THE FINANCIAL EXPERTS

3.1

a)

Gordon Joyce

In-Chief

[87]

Gordon Joyce was called as an expert on behalf of the plaintiffs. His CV is

found at P4-B14, Appendix A. His detailed calculations and backup documentation can

be found at P4-B. Joyce has been a chartered accountant since 1976 and over the years

has worked in retail lumber, plumbing and heating and flooring companies as well as at

Deloitte and has since 1985 been doing public accounting. He presently does

bookkeeping for clients doing year end and financial statements and public accounting.

He does not do audit work. His practice is primarily small business accounting and

- 38 -

preparing corporate tax returns and small business returns. In his business he looks at

financial statements on a regular basis. He was qualified as an expert with the consent of

the defendants in his capacity as a chartered accountant to give opinion evidence on

financial statements and their components, estimating the fair market value (“FMV”) of

small corporations and expressing his views on taxation. He indicated that he had

prepared only a handful of evaluations. He has had experience doing year end financial

statements and working with inventories.

[88]

His general methodology and approach was to look at the book value from

the financial statements and then look at the FMV of the underlying assets of the

corporation. He looks at the income stream of the corporation, capitalizes it and sees how

that compares to the FMV of the assets from estimates or appraisals of the assets. The

difference between a capitalized value and the FMV of the assets is goodwill. He used

this methodology in arriving at his opinions with respect to DR. He testified that book

value does not enter very much into his calculations but it is helpful to estimate the tax

consequences. He testified that there may be intrinsic goodwill if the company is

profitable because of the volume of business and ongoing contacts the company has.

[89]

Joyce testified that he met Morrison in 1987 but that he had never worked for

DR. He had done professional work for Morrison in 1996 but at the date of the trial did

not do any work for Morrison. He testified that book value did not enter into his

assessment of value of DR. For example, on the balance sheets, fixed assets were

depreciated but that book value may have no resemblance to actual value. Joyce testified

that he checks for reasonableness on the balance sheet lines and looks for supporting

documentation to support the values on the lines. For example, in the case of accounts

receivable, some receivables may not be worth what is on the books and in analyzing the

- 39 -

accounts receivable, he looks at the reasonableness of the account and whether it should

be marked doubtful and discusses with the client what is reasonable.

[90]

Joyce testified that Morrison requested him to prepare a FMV analysis and

Appendix C was prepared at Morrison’s request as if the shares were being purchased.

Joyce’s calculations of the FMV of DR is found attached to the expert notice at P4-B14

as Appendix C. The valuation was done in May, 1996. He determines that DR is worth

$716,871.00 as at March 31, 1996. Joyce pointed out that most financial statements are

conservative and record the historical transactions of the company. Market value can be

different. Appendix C starts with the figures in the March 31, 1996 internal computer

balance sheet of DR found at P4-B9 plus estimating as necessary and adjusting line by

line to get to FMV as well as using past year financial statements of DR. Joyce testified

that he relied on Morrison to get actual numbers where necessary and discussed it with

him. Based on his experience with some other companies, the adjustments were

determined to be reasonable or unreasonable.

[91]

With respect to the accounts receivable, he had Morrison review the

allowance for doubtful numbers, found in B9, to see if they were too big or too small and

based on his review, he estimated $20,000.00 in bad debts was recoverable. Joyce

indicated that when he looked at the debts from 1993 to 1995 and the 1996 internal

statement and size of the bad debt, he determined that as the bad debts were increasing,

there may be an over allowance for bad debts which would reduce income. As a result

of discussions with Morrison and his opinion that quite a few receivables over 120 day

accounts were collectable, he made the adjustment. That number came from Morrison.

- 40 -

[92]

He also made an inventory adjustment of $16,250.00 on the basis of

consultations with Morrison. Morrison did a rough estimate, based on his experience of

the inventory of materials, in the shop and on vehicles. Joyce testified that most

companies have inventory higher than $8,750.00 in their service vehicles and shops.

Joyce indicated he never saw the inventory but relied on Morrison to come up with the

estimate. In Joyce’s experience with a plumbing company years ago, he indicated that

inventory was high as $25,000.00. He admitted that there may be different policies now

with respect to the carrying of inventory. He observed that on B1, in the 1992 statement

where the income was $566,232.00, inventory of $18,000.00 was carried. He indicated

that normally inventories are valued at the lower cost or realizable value. In 1995, sales

were $1.9 million and he found it unusual that inventory should be $8,750.00.

[93]

Morrison reviewed invoices to see if there was a difference between the

December, 1995 work in progress (“WIP”) and the March, 1996 WIP. He discussed the

practices used by DR with Morrison. At the DR premises, Morrison looked at various

invoices billed after December 31 which Morrison felt should be WIP and looked at the

accounts receivable and at WIP. Joyce’s working paper (P4-B17) reflected his WIP

calculations. Joyce pointed to P4-B24, a letter from Mulatz dated July 19, 1996 which

was part of the buyout negotiations, which showed various adjustments to WIP and other

items using the December 31, 1995 statement. Joyce pointed out that the adjustments in

Mulatz’s letter are different than his on Schedule C and makes adjustments that he did

not. For example, the Sherwood Community Bond is listed by Mulatz and in Joyce’s

view, if you are doing a market value now, it should be written off. Advances with

respect to Rose Street could also be written off because he expects that it could not be

collected. Morrison had looked at invoices shown on the list attachment to Mulatz’s letter

which were jobs specifically worked on in December which were not billed until January.

- 41 -

These invoices confirmed Joyce’s thinking that invoicing after December 31 included

WIP for prior periods. His examination included analysis of reasonableness of the WIP.

Morrison came up with a number that was an estimate. Joyce looked at the average cost

of the things purchased and the cost of sales and numbers. Based on cost and material in

1995, Joyce felt that it supported a reasonable adjustment of $67,500.00.

[94]

Joyce indicated that Morrison prepared the list of equipment and provided

estimated values to Joyce as set out in Note 1 to Appendix C. Morrison listed the values

and then he and Joyce talked about the market values and both agreed that the market

values for the vehicles were reasonable. For computer valuation, it was a little bit more

difficult although they agreed that 50% of the original cost or 50% of the replacement

cost should be the value of the computers. With respect to job equipment and tools, this

is based on 50% of replacement costs acknowledging that small tools are written off as

purchased. Joyce made an adjustment of $47,907.00 to this line.

[95]

With respect to the investment and advances line re 610544 Saskatchewan

Ltd., the 1150 Rose Street property, (“Rose Street”), he discussed this with Morrison and

added $22,507.00. Morrison said he was aware of additional expenses based on his

review and he provided this number to Joyce. Joyce indicated that if expenses are paid

on behalf of the company, it should have been a receivable to DR from the numbered

company.

[96]

There was an adjustment made to the goodwill starting point of $8,425.00,

since that number reflected the costs of the goodwill when Morrison became a member

of the company, less depreciation. Joyce made an adjustment of $91,575.00. He indicated

that there may be intrinsic goodwill even if this is not supported by income figures. He

- 42 -

testified that if a company starts from scratch, it will take some time to build up goodwill.

It takes some time to have employees and to build up the business. He pointed out that

in 1995, DR had a large revenue stream, contracts and progress payments and that the

company expected to make profits. It was worth something that the business was running

and therefore it had intrinsic goodwill. He acknowledged that the goodwill depends upon

how strong a company is.

[97]

To estimate the goodwill, he did a capitalization of the earnings as set out on

P4-B14, Appendix B. For his calculations he used the income statement from March 31,

1996 as set out at Appendix D. He compared the share value based on assets to the

capitalized value stream. He indicated that an investment in small business is risky and

the rate of return must therefore be higher. He indicated that normally 3 to 5 times

earnings is an acceptable capitalization rate and therefore he used a middle ground of 4.

Using capitalized earnings at 25%, he came out with the value of $660,000.00 and he

compared that number to the net assets. The difference was goodwill. It was between

$80,000.00 - $160,000.00. He adjusted this line by $91,575.00. He indicated that the

direction of corporate income impacts the goodwill value. If net income is going up,

goodwill be higher. The direction of income was going up in DR.

[98]

On the liabilities portion of Appendix C, respecting wages payable and the

corporate taxes he adjusted for extra income, he noted that there was a negative $9,000.00

adjustment for taxes. He indicated that there was no reason to put the number into a

negative and is usually a positive liability. He indicated that that reduced the share value.

[99]

HeindicatedMorrisonhadreceivedtheDecember31, 1995interimstatement

prepared for purposes of negotiations (B5) and the two of them went to DR offices and

- 43 -

looked at information to see if there was anything they could find. The Appendix C work

was done in May, 1996 after they received the December 31, 1995 statement. They

reviewed all the information at the DR offices to see if Appendix C was reasonable and

to determine whether the March 31, 1996 statements should be used.

[100]

Joyce made reference to P4-D17, his October 9, 1998 letter to Morrison. This

was one year after the liquidation. Joyce had attended to Deloitte’s offices to review the

September 30, 1997 statement working papers prepared by the Dudley office. He was

trying to ascertain if there was information to help with the valuation and if there were

numbers which were different. Joyce at that time did not have the 1997 year end adjusting

entries financial statements and corporate tax return. His letter is a critique of the working

paperspreparedbyJess(D1-16)andinJoyce’smindconfirmsthatWalbaumhadstripped

DR of assets for his and AR’s benefit and so that there would be nothing left for

Morrison.

[101]

Joyce testified that he was concerned about the $70,000.00 of write-offs in

the working papers. He wondered what the explanation was and whether they were bad

debts or not since they did not agree with the bad debts line found in the actual September

30, 1997 statement (D1-16). As well, with sales in 1997 of $1.9 million, it should have

been similar to 1995 but the write-offs were different. Joyce said that if profits would

have continued, that he would also have expected retained earnings higher than

$320,000.00 as set out in D1-16.

[102]

In his expert notice (page 2, paragraph C), he did a rough estimate of the loss

of profit for March 31, 1996 to November 13, 1997 and estimated $200,000.00 using

strictly averages. He bases this on his calculations in the statement of income and retained

- 44 -

earnings found in B14. He projected the income for the eight month period using an

average because the income level was increasing. The sales of 1997 in D1-16 were $1.9

million. He testified that with the same level of sales, one would expect a similar type of

profit as in 1995. Based on the valuation done and additional income, he would have

expected another $200,000.00 to $300,000.00 in retained earnings roughly.

[103]

After he reviewed the Dudley working papers and received information

Morrison had provided him, he summarized this in an analysis dated December 7, 1998

(P4-G6). This shows $644,545.07 to be charged back to Walbaum on his shareholders

loan account. Dudley’s shareholder loan calculation at G5 with the September 30, 1997

financial statement working papers showed $38,187.39. With respect to the attached

pages of information to support his calculation which Morrison provided, he indicated

that he had no other information than what Morrison gave. The attachment covered

miscellaneous data based mostly on Morrison’s knowledge. Joyce calculated that

$644,545.07 was withdrawn out of the company by Walbaum. This included a $6,400.00

contribution to Walbaum’s shareholder loan account, $111,544.00 of excess wages for

Walbaum and his family members and petty cash withdrawals which Morrison attributed

to Walbaum’s personal use. As well, this included Morrison’s estimates of $20,000.00

for renovations on 226 Cornwall Street in between 1989 and 1991, $20,000.00 for a

garage at 226 Cornwall Street, $15,000.00 for 309 Lorne Street allegedly purchased by

Walbaum for his father, $7,500.00 for plumbing put into Walbaum’s cabin at

Saskatchewan Beach when he was with his first wife and $25,000.00 of DR money into

Walbaum’s house at Berthiaume Bay in Regina. It also included a 1993 NSF cheque

charge for $9,850.00, which Morrison alleged was never recovered, $14,000.00 for the

Community Bond, which Walbaum allegedly cashed in and which money he kept,

personal use purchases, and petty cash withdrawals made by Walbaum from November

- 45 -

22, 1990 to October 1, 1997 totalling $231,904.07, and excess wages of $48,000.00

($108,000.00 - $60,000.00) for 1996. As well, this calculation included an alleged loss

by DR on work done on Ken Cooke’s house ($7,222.09), the sum of $18,036.37 of DR

material and labour put into the Sims Rose Street condo, the sum of $15,381.25 lent by

DR to Tamwal and the $26,600.00 credit on the Loan. It also included $1,500.00 for an

alleged work/materials swap with Garths Electric, two furnace instals where DR paid for

materials and labour ($3,000.00), the sum of $1,500.00 which Walbaum took personally

for a job done for Gary Keller and the cost of office renovations ($23,919.24), which DR

did of which AR received the benefits when DR closed down. In total, Joyce calculates

a shareholders loan of $644,545.07 after adjusting for Dudley’s calculation of

$38,187.39.

[104]

He was concerned about the withdrawal of the funds from DR. He reviewed

D1-17, the AR statement dated April 30, 1998, to see if there were any funds received to

the benefit of AR and if the withdrawal from DR had occurred. He looked at the balance

sheet and noticed that AR had retained earnings and wages payable. It had substantial

income. He found this unusual in a company just starting up which needs to go through

the process of getting customers. He indicated that most new companies have losses. He

assumed that the contracts of DR were transferred to AR and that AR had taken over the

revenue stream. AR took over and immediately generated profits. He added that this

assumption and the income of AR helps support the $100,000.00 goodwill figure.

[105]

He noticed that there was no WIP in the AR April 30, 1998 statement (D1-

17). He felt that the company should have WIP. He indicated that small companies do not

have a good costing systemthat allows themto determine good WIP numbers. He pointed

out that at D1-17 there was a seven month picture and at page 3 it showed revenue of

- 46 -

$1,156,568.00. It also showed management salaries of $70,000.00. Exhibit D1-18 at

September 30, 1998 showed retained earnings of $183,594.00 and wages of $101,197.00

indicating that AR was profitable. He pointed out that the level of sales in AR of

$1,922,859.00 is very similar to DR’s for the 1997 and 1995 year. After reviewing the

AR financial statements, he felt that the value of DR is reasonable as at March, 1996

being $716,000.00 as set out in Appendix C of P4-B14.

b)

Cross-Examination

[106]

Joyce indicated that he never contemplated testifying about these issues 12

years after the fact. He acknowledges that he was not the day-to-day accountant of DR

and that the day-to-day accountant would have a more intimate knowledge of DR. He

indicated that the external accountant would be in a better position to give an opinion

regarding the value because he has access to information that Joyce does not. He

indicated that he did not have a specialty as evaluator but knew principles of business

valuations. He indicated that most CA’s with 5 to 10 years of experience would be in a

position to give an opinion on value. He acknowledged that he attended the DR premises

after he did the valuation and he did not have access to a lot of the information. He also

indicated that he was not engaged to do a full audit or even a spot check and never did

review inventory, equipment or WIP himself but relied on Morrison for this.

[107]

He acknowledged that he was engaged to do an estimate of value for

Morrison to allow Morrison to be able to negotiate with Walbaum. When he started

working with Morrison, his intent was to get a reasonable estimate of value that would

be in a plus or minus range. He indicated the plus or minus range would be 20% - 25%

- 47 -

of the adjustments but not 20% of $716,871.00. He is comfortable with the variation of

20% - 25% in value.

[108]

He started with book value as a minimal value. He acknowledged that the

March 31, 1996 statement was incomplete because it was an internal document and there

was a concern that he did not have all of the information. The December 31, 1995

statement was only an interim statement and he was never asked to do an analysis of the

December 31, 1995 statement. He felt that the March 31, 1996 date was the correct one

and therefore used the most recent statement available. He did not have the April

statement at the time he did his analysis. He does not know who prepared the March 31,

1996 financial statement or who imputed the information. He acknowledged that there

would be adjustments made to that statement by a chartered or external accountant and

that those adjustments could be significant. However he felt that the statement was also

prepared for the benefit of third parties. He indicated that the company wants to have

accurate financial statements. If a bank is lending, they would want to see this financial

statement. He did not talk to any of the company’s bankers at the date of his valuation.

At the stage that he did his valuation, it was for negotiation purposes and not for general

use.

[109]

He does not recall how much time he spent on doing the calculations because

he could no longer find his time sheets. He estimated it took 10 - 20 hours for the initial

valuation. At the time he had done 3 - 5 valuations. He admitted that his opinion is only

as good as the underlying information, but he uses his own judgment to determine if the

valuations are reasonable. He admitted that if Morrison’s information which he gave him

is flawed, then his valuation is flawed. He said that he did not have free range with the

documents when he visited DR and he asked Morrison to get more information.

- 48 -

[110]

He did go to Jess’ office and looked at the September, 1996 working papers.

He also went to review some of the documents at Deloitte’s office but did not do a large

amount of examination. It was not in his retainer to do an audit. He chose not to meet

with Jess regarding how they prepared the statements and he could not remember why

he did not. He acknowledged it would have been good to talk to Jess to get more

information. If he had met with Jess, he may or may not have been able to testify

regarding some items.

[111]

He said he was familiar with how some companies over progress their

invoices if they can get away with it. He admitted that he had no experience regarding

contractors and First Nations. He indicated that the Brown’s Auction (“Brown’s”)

valuation of assets (D1-6) provided by Walbaum was a valuation based on liquidation,

but he indicated that if a party is in the business, they should have an idea of what the

asset is worth although it is preferable to have a third party evaluation. The only question

for him is whether the list includes all of the assets. There are obvious differences

between his valuation of $75,000.00 and the Brown’s number.

[112]

He said he accepted a certain amount of information from Morrison and he

used his professional judgment to determine if it was reasonable. He received no

documentationfromMorrisonrespectingthenumberswhichMorrisongavehimforsome

items. He relied on Morrison’s best judgment but did not have the underlying documents

to support this. Although he was originally asked the value of the shares, later on there

was a concern with respect to the activities of Walbaum. Joyce indicated that the

company was profitable up to liquidation. When he reviewed the company, there was a

concern that the assets might be stripped from it. He said that this was certainly one of

Morrison’s concerns and this was a concern after the valuation.

- 49 -

[113]

Joyceadmittedthatheneverreviewedanyofthecompanycontractsalthough

those contracts would have effected the valuation. He based his evaluation on what

Morrison told him. Morrison did not go into any specific contracts, he just accepted that

there were contracts. Joyce had not reviewed any corporate leases and did not review a

copy of the 1998 share purchase agreement at D1-2. He said he never had a copy of it;

he just never got it. He indicated it might change the way that he valued the shares, but

he never saw it at the time of valuation. He asked Morrison if there was any agreements

and Morrison never gave him any.

[114]

Paragraph 7.6 of the share purchase agreement indicated that no value would

be attributed to goodwill on a shareholder withdrawing and indicated that if goodwill was

based on withdrawal, it would affect the valuation of the company based on what the

interpretation of withdrawal is. He indicated that the document would affect the value if

the company was wound up rather than the negotiated share price. He indicated that DR’s

financial statements were conservative and he found nothing wrong with the statements.

[115]

With respect to Appendix C of his expert notice, his analysis of goodwill was

based on a number of assumptions. He acknowledged that the terms of the share purchase

agreement would impact goodwill. The question was whether Morrison had withdrawn

and should the valuation be done on that basis. He would have made a comment on the

share agreement. He knew of Morrison Mechanical and he knew that Morrison was

operating under Morrison Mechanical after 1996. He made no comment with respect to

the difference in corporate goodwill and personal goodwill in DR. He acknowledged

there could be a question of which it is, so what he was talking about was the corporation

and its goodwill. He did not give any aspect of personal goodwill in the valuation but it

- 50 -

could be a consideration. The subsequent things he looked at still supported corporate

goodwill rather than personal.

[116]

His valuation was based on the business being a going concern. He knew that

Morrison had left the company, that he was a director and that he was planning not to

come back. At the time he made the valuation, he was trying to base it on where things

were at and assumed that Walbaum would replace Morrison. He acknowledged that the

goodwill figure that he had was a calculation at the time and that the goodwill is zero

now.

[117]

With respect to P4-B9, the March 31, 1996 statement balance sheet, this was

given to him by Morrison. He knew that this would require adjustments and he presumed

that Morrison had access to the information. He eventually did look at the April, 1996

statement which is found at B-10. The two did not make much sense to him and it

depended on what had been billed and what was going on. His opinion might be out a bit

but his opinion was not meant to be 100% accurate. He pointed out again that at the point

of doing the valuation, they were negotiating and he was not hired to value the company

at December 31, 1995. Morrison had decided that the appropriate date would be March

31, 1996 and that is what he used.

[118]

With respect to the book value of DR hard assets, he acknowledged that the

FMV of certain assets can be less than the book value. Depreciation rates however are

fairly liberal and the book value is generally below FMV. He indicated that once assets

were on the books for a number of years, there is very little book value but still value in

the asset. He testified that Morrison was trying to come up with reasonable values. At

all times he thought his values were reasonable. He does not remember asking Morrison

- 51 -

the original price for the assets and if he had known that, it might have influenced his

valuation on Appendix C, page 2. It could impact goodwill which may have come in too

high. He accepted what Morrison said as sounding reasonable. He never looked at the

vehicles and did not know what they paid for the computers. He was referred to D1-13,

where original cost was disclosed.

[119]

He acknowledged that with respect to bad debt adjustment, this was based

on Morrison’s review. He acknowledged that the $20,000.00 adjustment was based on

accounts receivable which were older than 120 days and he did not know if holdbacks,

which are collectable, were included. Accounts receivable older than 120 days were hard

to collect. He relied on his own experience with the various accounts but acknowledged

that the 120 day and older debt is not usually on the statement. He did not know what was

actually collected.

[120]

With respect to the inventory adjustment, he did not know what the practice

was for DR except apart from discussions with Morrison. He did not look in the DR

building or the vans for inventory and he did not know what the difference was between

the costs and the value. He indicated inventory was valued at the lower of cost or the net

realizable value and felt that Morrison was trying to estimate the market value as opposed

to cost base. He merely accepted his figure.

[121]

With respect to the investment line and the added $22,507.00, Morrison

indicated those were additional expenses DR paid for the benefit of the numbered

company. Morrison said it was an investment that had nothing to do with him and felt that

it should not be shared as a loss and it should be valued. Morrison never shared D2-20A,

a letter from Mulatz to Sproule, relating to the investment, the advance on Rose Street

- 52 -

and Morrison’s signature of the DR guarantee. All that he knew was that it was a rental

property.

[122]

He acknowledged that DR’s profit margin in 1993 was 22%, 23% in 1994

and 26% in 1995. This could be used to check for consistency from year to year. He

acknowledged that the six month March 31 statement gross profit is 39%. He indicated

that it did raise questions for him and at the time the question was why it would change

that much. He said that at December 31, 1995, DR was at the top of the small business

limit and therefore did not want to bill more. The gross profit margin for 1995 would be

higher and six months of 1996 should be lower because there was a claim for bad debt

expense and management’s salaries. He felt that it may be the case that Morrison did not

give him a full explanation. The normalize earnings column was around 30% for gross

profit. He believes that the gross profit could have been increased.

[123]

With respect to petty cash, he did not know what the procedure was at DR

and did not know if petty cash was taken into account in the shareholders loan.

[124]

He acknowledged that with some trades, it was normal for employees to own

the tools. He acknowledged that Morrison did not talk about employee tools but only DR

tools.

[125]

With respect to D1-16, the DR September 30, 1997 statement prepared by

Dudley, the bad debts were $3,500.00 at that stage and he felt it may have been consistent

with stripping the company. With respect to WIP, the difference in accounting principles

may account for the difference on the statement.

- 53 -

[126]

He acknowledges that he lumped the Walbaum family income of

$171,000.00 together and he did not know if they actually provided services. He found

out later that there was an audit by Revenue Canada on these wages paid. He

acknowledged the 1994, 1995 and 1996 (D1-11 and 12), but said it depended on the

nature of the audits. He said the CRA did not do full and complete audits and the audits

do not necessarily lend credence to DR’s figures. He indicated that if there was an

additional $20,000.00 tax liability, it would reduce the retained earnings by $20,000.00

in his valuation.

[127]

He acknowledged that he did not know whether DR was affected regarding

bidding jobs after Morrison left.

[128]

With respect to D1-17, the AR April 30, 1998 statement, he did not go into

its details. He had done a quick review of it. He looked at it for results. He had to see if

it had goodwill which DR transferred to AR. He indicated that AR did not look like a

start up. What it looked like was a transfer of business to AR. He indicated that this was

the value of goodwill that people pay for. He acknowledged that the liquidator had

allowed AR to take over contracts and that Walbaum had years in the industry.

[129]

He indicated that his assessment was only meant to give reasonable value as

at March 31, 1996. He indicated that not any one item in his valuation is weakest. It is

dependant on Morrison’s word. He acknowledged that the adjustments and WIP were

Morrison’s numbers and the margin for error was large. He indicated that goodwill was

a rough estimate although the differences in March and April, 1996 internal statements

do not affect his opinion.

- 54 -

[130]

When asked by the court what affect the liquidation would have on his

valuation, he indicated the values for goodwill would disappear and everything would be

valued on a realizable value and that there would be no recovery of FMV. He questioned

however how the company went from an operating company to liquidation and

questioned what happened to the assets during that period.

3.2

Vern Jess

a)

In-Chief

[131]

The defendants called Jess, a partner with Dudley. Jess has a bachelor of

administration degree with distinction and has been a chartered accountant since 1986.

He recently took a business valuation module in Toronto as part of financial planning. His

accounting practice is active in construction and retail and he is well versed in

agriculture. He has been with that firm for 28 years. He has experience in small

businesses, pharmacy, agriculture, the construction industry and does work for a number

of plumbing firms. He has reviewed other files that come to his office. He indicates he

has experience regarding the market valuation of corporations. He spent his life in the

accounting industry. With respect to chartered evaluators, there are two in Saskatoon. His

experience has been in providing service to small businesses. He was qualified as an

expert CA to give opinion evidence with respect to corporate financial statements and

their component parts, establishing the FMV of a corporation including the interplay and

reliability of working papers, internal corporate accounting and taxation issues. The CV

of Jess is marked D4.

- 55 -

[132]

He indicated that he worked with DR between 1982 and 1997. The last work

that he did was the 1997 year end. During his work for DR, he prepared the yearly tax

returns. He also did the personal tax returns for Walbaum. Jess testified that the plumbing

industry was extremely challenging as a client. It is cyclical. He indicated that the hardest

part of doing accounting for this kind of business is nailing down the contracts that

extend beyond the year end such as WIP. He said in many cases costs are recorded before

the year end but the revenue is not recorded until the end of the contract with progress

payments. He said it was important to get proper cost accounting.

[133]

He also commented on the three levels of communications that accountants

give to clients and the public. The first is notice to reader, second is a review engagement

report which takes information supplied by management, analyzes it and concludes if the

financial statements are materially misstated, and the last is the audit which is an opinion

that financial statements are fairly stated. His job with DR was to do a review

engagement and report on the financial statement.

[134]

Most corporations have an operating line of credit. Banks require a review

engagement report to support this. The financial statement is used for the purposes of the

CRA, the banks and as well bonding companies. During the time he worked for DR, he

never had questions from the banks. The shareholders always dealt with it.

[135]

He indicated that the financial statements of DR were summaries of the

historical transactions. To prepare the financial statement, he would start with going

through the files and looking for tendency and trends. He may go to the job site. He had

discussions with management and he ran a trial general ledger (“GL”) line by line. He

looked at the bank account and he analyzed revenue and expense. He indicates that for

- 56 -

every year end, he or someone from his office spends 2 - 4 days on the file depending on

complexity. He indicated that he could not do a proper review of the financial data

provided by DR unless he attended the offices of DR. Once his work was complete, he

would sit down with Walbaum and Morrison and they would talk about whether it had

been a good year or a bad year and discuss it. He indicated that he likes to meet the

clients face to face to look the clients in the eyes and gauge reaction to various issues. He

indicated that over the years he talked with Walbaum and Morrison and tried to involve

both of them in the accounting work. He would print out a GL page for them. Between

1988 and 1995, he had more specific discussions with Walbaum. Morrison would say

“that’s Walbaum’s department” although Jess made efforts to try to involve Morrison.

Jess would go through the trial balance and if he had questions, he talked to either

Walbaum or Morrison.

[136]

Jess testified that between 1988 and 1995, when some of the financial data

was taken from computers, there were often posting errors which were not obvious. As

DR personnel got trained, they got better at it. He indicated that when he was doing a trial

balance, he scanned it looking for things and compared it to previous years. He indicated

that the GL was the actual book of original entries and all entries and transactions appear

there and there are summaries of all the accounts. DR had a GL in 1997, which he saw.

He does not recall anything missing from the GL in 1997 and he used that for the 1997

statement which he prepared after the liquidation for the liquidator.

[137]

With respect to inventory, he usually spoke with Walbaum who would give

him a specific amount. He also made efforts yearly to have Walbaum show him items of

the inventory. This was above his duties as part of the review engagement but he did this

every year. He indicated he overworked this file.

- 57 -

[138]

With respect to equipment and tools, he did a point in time analysis. Lists

were made. The company was responsible for how the tools were treated. He went

through the list to take a look at whether any of the tools and equipment would be capital

assets. He would also see some of the tools, for example lathes, in the shop but he never

went into the vans to look for equipment and tools.

[139]

With respect to the pay taken by Walbaum and Morrison, that was

establishedbymanagement. Whatever they feltwasappropriatewaswhattheywentwith.

Most times it was 50/50. The shareholders account was a difficult area because it

represented transactions between the shareholders and the company. As part of his work

he would scan the GL and review certain accounts. If something of a personal nature was

flagged, he would move it into the shareholders account. He discussed this with Walbaum

and Morrison if they were around. Jess indicated that there were no problems regarding

the shareholders loan account and that the numbers are a point in time balance.

[140]

With respect to Tammy, he indicated that she was always at the office when

he was there. He saw her at the front desk.

[141]

He testified that many times there would be adjustments in presentation on

the statements from year to year. Consequently the lines of the financial statements

sometimes varied. Sometimes in discussion with management, a minus might be moved

to another line. However nothing was moved outside of the statement. He gave as an

example moving expenses from the expense line to the cost of sales line. Jess looked at

the DR 1992 and 1993 statements at P4-B1 and B2 and confirmed that the columns are

not necessarily identical. On B2 for example, there is no wage payable category. Jess

testified that there were changes within the various sections and sometimes there was a

- 58 -

re-statement. There could be a reclassification of revenue and expenses which had no

affect on the actual statements. Jess indicated that the only adjustments which would be

made to financial statements is if there were differences in assets between the FMV and

the book value.

[142]

Jess testified that the December 31, 1995 statement was an interim statement

prepared on the basis that a shareholder had left the company. Jess did not prepare that

statement himself. It was prepared by one of his employees at Dudley. He indicated that

because of the parting of ways between Walbaum and Morrison, there were some

sensitivity with respect to the perception of impartiality and independence and therefore

this statement was done by someone else from his office. He indicated that he believed

that Walbaum leaving was the triggering event and that the December 31, 1995 statement

was a logical cut-off. Moreover, he thought the parties had agreed to that cut-off. He

referred to D1-14 showing a book value of $259,521.00. He testified that no further

adjustments were required. The accounting and financial statements were based on

historical costs. He said that FMV and liquidation value are two different values. Jess

testified that when valuing a company, it is safe to assume that it is a going concern but

according to the shareholders purchase agreement in place, it should be liquidation value.

He indicated that in 1996, DR was a going concern but in 1997, it had only liquidation

value at the end. He indicated that he was not asked to do a value at March 31, 1996. He

strongly believes the value was $259,000.00 based on the triggering event of one partner

leaving the company.

[143]

Jess has looked at P4-B14 and Appendix C, i.e. Joyce’s valuation. He

indicates that there is nothing wrong with the analysis on the surface but he does not

know where the numbers come from and he has trouble with Joyce’s adjustments and

- 59 -

critiqued them. On the bad debt recovery adjustment, he indicated that there was no trend

regarding this looking back. He indicated that the debt was not recoverable, therefore it

did not comply with the definition of an asset which is that it must have an economic

benefit, there must ownership and it has to have happened. He indicated that potential

recovery means that it may not be recovered and it should be taken out.

[144]

With respect to the WIP adjustment, he said he could not pick a number

unless he looked at the documents. He did say that DR over bills progress payments and

that WIP should be a liability and not an asset. It may be that over bills should be backed

out of the revenue. With respect to the inventory adjustment, he indicated that inventory

fluctuates day by day and moment by moment. He had a walk through the DR shop and

has not seen a lot of inventory. Staff are continually delivering inventory to job sites. He

indicated that the inventory number was a guess. It should be backed out of Joyce’s

calculation. With respect to vehicles, computers and equipment adjustment, these are

depreciable assets and he would be surprised if they exceeded the net book value. The

vans were old vans and had many miles on them. He does not believe that the $47,000.00

adjustment more than book value is justified. These depreciable assets have wear and tear

on them. He believes that the Brown’s appraisal at D1-6 supports him. He testified that

the amount of $47,907.00 should be backed out of Joyce’s calculation.

[145]

With respect to the goodwill adjustment and underlying calculation, Jess

testified that one of the fundamental questions is who owns the goodwill; DR, Morrison,

Walbaum or a combination. To have goodwill, there must be a going concern. If there is

no going concern, there is no goodwill. The history of the company should only be used

as a check for goodwill and future earnings may need to be discounted. Although Jess has

no problems with Joyce’s calculations as such, he indicated that there was a spike of

- 60 -

revenue in 1995. Joyce was right to average but the goodwill is not necessarily supported

as a going concern. He indicated that one of the partners had left. He indicated that if

there was goodwill, it was personal goodwill.

[146]

He questioned Joyce’s high March 31 starting point of gross profit of

$309,560.00 in his Appendix D. He saw P4-B9 and B10, especially B10, third page, in

preparation for the trial. He indicated that he was confused by Joyce’s use of the March,

1996 statement because if one looks one month later at April 30, the net earnings are only

$131,197.00 compared to $309,560.00. This tells him that there is something wrong with

the March period. He indicated that the gross profit for the company between 1993 and

1995 ranged between 23% - 29%. He indicated that Joyce’s average was 28% yet the

profit at March of 1996 was 38%. Jess suspects that the gross profit jump is because the

accounts payable are not accounted for and there would be a $110,000.00 adjustment

needed to bring it into line with historical profit figures. In short, he questions the 39%

return for the six month period and the goodwill calculations on P4-B14. Jess would back

out $110,218.00 to adjust the profit. He would also back out management and wages in

reasonable numbers. With respect to the multiplier rate on Joyce’s calculation of

goodwill, this is based on the risk involved and how much an arm’s length person would

want as a return. Jess felt that three was a relevant factor. In short, he felt that goodwill

was about $24,000.00 but he did not know if it was corporate or personal. He would back

out goodwill. He also indicated that the corporate tax could be added as of March 31.

[147]

With respect to the wages payable adjustment, Jess indicated that there was

a week holdback for employees for wages and that therefore there was always unrecorded

wage liability. Jess indicated that the calculation has no management fees as part of the

- 61 -

operating expense and that adjustments needed to be made to the March 31, 1996

statement. The April statement definitely affects net worth.

[148]

He concluded that Joyce’s calculation of $716,000.00 for FMV is high. He

indicated that the growth in the corporation between December and March of 1996 was

minimal and normal and that the logical cut-off point would be December 31, 1995. The

April statement substantiates that the normal income is $130,000.00 to that point. The

year end adjustments normally made on the statements would have to be applied to any

interim statements. The question to ask is whether it is reasonable when gross profit goes

from 25% - 38% and whether it is reasonable to use that concept to evaluate.

[149]

He testified that the March 31, 1996 to November of 1997 numbers do not

support a profit of $200,000.00 for DR. He cannot accept that.

[150]

He indicated that the working papers which he produced were based on the

records of DR. When the work was done he reviewed the records, the GL, the original

invoices, accounts and had discussions with Walbaumand Morrison. He had photocopies

of the documents to back up the numbers in the working papers, for example, a list of

accounts receivable and a mixture of his analysis on internal documents as necessary. His

working papers would not deal beyond September 30, 1997. His working papers are

accurate, told a story and backed up the numbers. He indicated at the time that Morrison

and Joyce attended at his office. His complete accounting for DR was there. However as

of 2004, the files were shredded when his firm moved. That determination was made in

the normal course. It was work which was done in 1997 and CRA had been through it and

Morrison had already been through it once. He determined that there was no need to keep

the documents and consequently they were shredded.

- 62 -

[151]

In 1997 he was working on the DR financials when he got a call from his

office that the Sheriff was there to get his records. It was at that point he found out that

Sandbeck was in control of DR. After a discussion with Sandbeck he was allowed to

finish the 1997 financial statement provided that the documents that he was working on

would be returned to Sandbeck. He used the 1996/1997 GL accounts to complete the

1997 year end and returned the documents to the liquidator. In his December 24, 1997

letter (P4-D9) from him to Sandbeck, he provides Sandbeck with copies of his 1997

working paper file, DR’s 1996/1997 donation file, DR’s 1996 payroll file, DR’s

1996/1997 petty cash file and DR’s 1996/1997 GL as well as alerting Sandbeck to

various outstanding issues, including filing the tax return and an under payment of

$13,275.24 for employee deductions. He asked the liquidator to address source

deductions in his letter of December 24, 1997. He was surprised it had not been paid. The

company should have had cash to pay these deductions. It appears Jess got no response

from Sandbeck to his December letter so he forwarded D1-7, a March 25, 1998 letter

reminding Sandbeck that there was a loss available to DR for carry back with a filing date

of March 31, 1998. He was getting worried and said it had to get dealt with to get the loss

carry back.

[152]

With respect to D1-16, the September 30, 1997 DR financial statement, Jess

had a concern that DR get looked after. Sandbeck was the boss and he left it to Sandbeck

to review the statement. He would not sign off on the statement unless it was approved

by Sandbeck. He had no written contract or letter for doing this work for DR/the

liquidator. He was allowed to do this as a result of a conversation. Jess was paid the

amount of $7,500.00 by the liquidator for this work. Payment came from Adams.

- 63 -

[153]

With respect to D2-24A and B, being the lists of DR documents at the

liquidator, he had not seen these prior to trial. The GL is noted in 24B, box 5/6. His

December 24 letter showed the petty cash being delivered and 24 B on page 2 showed

petty cash delivered for 1996 and 1997.

[154]

With respect to the CRA audits, Jess indicated that in any business, the CRA

is the final authority and that after they had done their audits, the adjustments were minor.

With respect to D1-11 and 12, the 1994 - 1996 audits, he indicated that the CRA would

look at the records and ask questions and do a preliminary assessment (Tab 11) and then

after response would do a final assessment (Tab 12). The 1994 to 1996 adjustments were

small. This means to him that the information provided is reasonable and the unrecorded

liability is meaningful. He indicated that CRA confirmed the numbers and the majority

of the adjustments.

[155]

A review of D1-12 shows the CRA audited the revenue, advertising and

promotion, travel, wages and benefits, purchasers, office supplies and maintenance,

material for expense for Rose Street, accounting and legal expense, petty cash, insurance,

subcontractors and rent files.

[156]

Morrison never raised any issues with him regarding the corporate financial

statements. Neither did Walbaum complain. Jess does not remember any heated

discussions with Walbaum or Morrison or between the two of them. He said there was

always an amicable working relationship.

- 64 -

[157]

WithrespecttoP4-B24, andtheScheduleAcalculationsattachedtoMulatz’s

buyout proposal of July 19, 1996, there is no involvement by him. He did not want to get

involved so he gave it to Claude Dion of his office for objective eyes.

[158]

With respect to P4-C12, the liquidator’s report to the court, his working

papers of 5/11/95 from his files (attachment 6), supports the liquidator’s report of the

shareholders loan balances as of September 30, 1997. His initials are on the box near the

top. These calculations were reviewed by Bill, his partner, who also reviewed the file.

Column #4 shows an entry of $6,400.00 which represents a contribution of funds by

Walbaum to the shareholders loan. This refers to a 1996 working paper. Morrison’s only

contribution is on the last line. He cannot say if all of the papers are initialed but that

would be the general practice. He indicated that the back up for these numbers were with

the client company. He attended there and did not take them off the site.

[159]

He acknowledged that with Morrison not being with the company, he was

relying on the representations of one party, i.e. Walbaum. He therefore did extra work

and procedures because he knew at some point he had to report to Morrison. He indicated

that he is not an accepting type of person and many times in the past if Walbaum gave a

representation, he would question Morrison regarding this too.

[160]

With respect to income streams, in this industry the income streams come

from service work or construction contracts. The income stream for construction is only

as good as the last successful tender.

[161]

With respect to P16, the first page dated September 30, 1998, this is an AR

working paper prepared by himand supports the DR receivables owing to AR. AR started

- 65 -

in October, 1997. There were accounts receivable and warranty work and paid bills. He

did not talk to Sandbeck about this. AR had received monies of DR. Jess testified that on

his calculations on P16 that AR is owed $86,000.00 and DR is owed $39,000.00. An

allowance for doubtful was set up.

[162]

With respect to F12, an excerpt from the DR bank ledger computer records

for the period February 28, 1995 to November 4, 1997, the printout from the bank

account could have been the print out of any system. This is not a complete ledger if it

is a DR document at all.

[163]

There was a $5,000.00 payment made to Tammy but he is not sure why. His

initial on his working paper (P4-F7) shows an analysis of payroll as at September 30,

1997. At the bottom the reference to P/L supports the financial statement. He pointed out

that wages are dealt with in the fiscal year and not the calendar year. The T4s are based

on calendar year but expenses are based on the fiscal and the $5,000.00 could have been

part of wages. With respect to D2-3F, this is a T4 in Walbaum’s name, shows earnings

which corresponds to P4-F7. There was a bonus in 1996 probably paid in October of

1996 or September. It would appear on Walbaum’s T4. At the top of the working papers

were payroll ledger accounts for these individuals. The bonus in 1996 would have been

expensed in September, 1996 year end and paid off after. It was set up on an accrual

basis.

[164]

There was very little conversation regarding the start up of AR. He was not

involved in advising with respect to AR but he helped set up the GL. There were no

numbers in the GL initially. He helped set up a chart of accounts for AR as well. He

prepared D1-18, the AR September 30, 1998 statement. The first page shows it was

- 66 -

checked by clerical staff. This is a file version, not a signed copy. Page 5 shows no tools

in capital assets. He does not know why. He indicated that in the industry, tools are lost

and stolen and a lot of it does not get capitalized. Small tools are written off against

income and expenses and only larger ones are capitalized. He assumes that it is these

larger ones which appear. Costs of the office equipment is $40,641.00.

[165]

Jess said that with respect to project profit margins, every project would be

different. Sixty-three percent profit on a project is rather high and suggests that there

might be posting errors. DR’s historical profit was 22.25%.

[166]

The two entries on P1-60 regarding Levesque would be the Dumur funds and

the interest. The 1997 DR income statement shows $11,000.00 plus interest reported. In

D1-15, page 3, other income interest is $11,397.00. P8, page 2 shows $104,529.53 which

is virtually identical to other numbers. The line item on P1-60 suggested there was a

separate entry for interest.

[167]

With respect to the cash process, Walbaum used a lot of petty cash expenses.

On occasion, he would scan these petty cash files with bills attached. He would advise

Walbaum not to use petty cash regarding other expenses as per diems. There were always

petty cash vouchers. Walbaum would hand them in and record and write the cheque. He

remembers Walbaum’s claims because they were quite large. During the period there

were questions regarding petty cash by CRA. However there were vouchers present and

CRA were satisfied with this. Jess indicated that he was always concerned about how the

petty cash worked and saw amounts that were large but he always looked through the

bills. As a result of this investigation, there was always support there and they appeared

- 67 -

to be okay. Any personal items that he found he would discuss with the shareholders and

make an entry in the appropriate shareholders account.

[168]

He prepared the financial statements for Tamwal. There was no interplay

between DR and Tamwal. They were two separate corporations. There are, however,

transactions recorded between the two. The Tamwal statement of March 30, 1998, P4-

K23, on page 2, shows that Tamwal owed DR $27,959.00. Note 7 shows that an

adjustment was made to a building figure. There were instructions from Walbaum.

Walbaum told him that DR had gutted the building and that this was a cost to get it back

into shape. Tamwal was charged with the work. The credits and debits shown at P4-K30

relate to K23.

[169]

With respect to the community bond, this is off the balance sheet. The

interest was reported and dealt with.

b)

Cross-Examination

[170]

Jess testified that he was not a business valuator. He had done some share

valuations for corporations internally regarding estate freezes. These valuations were

based on the financial statements and he had not done very many valuations; only about

six. He testified that the CRA says that share freezes cannot exceed the value of the

corporation. He instructs clients to get independent advice on land and equipment values

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and he computes the value. The actual valuation on the estate freeze is done by

independent people. He does not determine FMV by himself.

[171]

With respect to goodwill, he acknowledged that in order to do a goodwill

valuation, there has to be a revenue stream. Once one of the shareholders leaves, the other

shareholder must work more. The company is only as strong as its components. He

indicated that DR is not a going concern. He did not put a going concern note in the

finance statements until the 1997 DR statement. In his view there was a real concern that

the company would not carry on. On the September 30, 1996 statement, he did not put

a going concern statement on the financial statement because Walbaum was still making

money with DR. The revenue was $1,762,000.00. As soon as you put a going concern

statement on financial statements, there are ramifications at the banks.

[172]

Respecting inventory, he does not know the value of the pipes, etc., he is not

a plumber. His valuation on inventory is based on what the client supplies. If the

information is wrong, then it might be flagged in other areas when analyzed. For

example, a margin analysis may make it obvious. With respect to P4-B1, the September

30, 1992 statement, he acknowledged that there was $18,000.00 of inventory. He

acknowledged he never went into the vans and he cannot say if Brown’s valued

everything that DR owned. Liquidation value was anything between zero and book value.

[173]

He has performed audits and to do that he must search out line items and get

appropriate evidence. However, even an audit only says that the numbers are presented

fairly. He does not prepare the underlying documents. On a notice to reader for

compilation, he indicates that he just receives information and puts it in the financial

statement. Analytical work comes up in the audit and the review. He did not touch every

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invoice and bill saying it would take decades to do that. However, if he was doing an

audit in the case of accounts receivable, he would confirm the balances with the other

party, look at subsequent receipts and go to past year ends. If paid it is a good receivable.

He would check to see if the trial balances matches within the GL. The starting point is

to look at the trial balance which generally come through the computer system. You do

not look at every entry on the GL but rather go through it to find an area, look at it, and

spot check it. This is less than an audit. If auditing, you would look at the invoices. In his

judgment, he looks at items that he feels that should be looked at, for example, looking

at subsequent invoices, petty cash and flipping through the files. However he was not

engaged to do an audit.

[174]

He defined FMV as what an arms length person with knowledge of the item

would pay. He acknowledged that the balance sheet is historical costs, not FMV. He

indicated that the amount of depreciation on financial statements is different than for tax

purposes.

[175]

Small tools are not necessarily tracked. A drill in the case of this industry

would be worth $200.00 to $500.00 and be expensed. The financial statements would not

track the small tools if they are not compiled in a list by management. He acknowledged

that DR did not track small tools. He acknowledged that a new corporation could have

start-up costs.

[176]

The allowance for doubtfuls is determined at year end. This allowance is a

management evaluation of the accounts receivable. All allowances for doubtfuls are

dependent on management’s opinions. They know the trades and they know the

receivables.

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[177]

Jess acknowledged that he would go to DR once a year for 4 - 5 days to do

the year end. He does not recollect being there any other time except to answer a question

or two. There was no substantial work during the year. He considered Walbaum to be the

administrator person and Morrison to be the field boss. Although Walbaumwas the office

guy, he tried to deal with Morrison regarding WIP because he was the field manager. In

the spring of 1996, he did no work regarding the WIP adjustment. Up to the time that

Morrison left, he had a good idea of WIP and would accept Morrison’s view of WIP if

he told him.

[178]

With respect to P4-B14, Appendix C, the bad debt expense adjustment, this

would involve talking to management. He would accept the representations of

management and there would be no reason to doubt them with respect to bad debts. He

acknowledged there was no work done by him in the spring of 1996 regarding bad debts

and no work done by him on this adjustment. He stated however that Joyce’s adjustment

did not meet the definition of an asset. With respect to inventory, he did not do any work

on this in the spring of 1996. He did not go to McAra Street regarding any inventory nor

did he go to Rose Street for inventory. He knew that DR had a compound between 1995

and 1997. With respect to P4-B21, Morrison’s list of unpaid invoices, he did not look at

this document in the spring of 1996 either. With respect to P4-B14, the equipment list,

he did no work regarding the value and he had no idea of its value in the spring of 1996.

He did indicate that it would have been a chore to capitalize small tools.

[179]

The DR income statements in B9 and B10 are not in a format he recognizes.

He has concerns about where $309,560.00, the March 31, 1996 income number, comes

from. Current liability for wages of $84,958.00 should be looked at year end and

adjusted. There would have to be banked time taken into consideration as well as vacation

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pay. He indicated that these were not a document of DR. He questions the source. He

does not know which system they came from.

[180]

With respect to petty cash, the amounts were sometimes large and Walbaum

was paying per diem accounts to people traveling. The per diems were on a voucher.

There were handwritten vouchers but he cannot remember if they were signed by a

person. He indicated that he was not engaged to do a petty cash audit. With respect to P4-

H4, this was his working paper and it had to do with WIP. The Gordons First Nation

project (the “Gordons project”) was 90% complete. This working paper was prepared by

his internal staff.

[181]

With respect to the bill for Pippen, P4-K30, for $15,000.00 in April of 1996,

he does not remember how that worked. It has his handwriting at the bottom. At first DR

paid the bill and Tamwal showed a liability. Then it was determined that DR should have

paid it all along anyway. He received this explanation from Walbaum but did not consult

Morrison. K19 comes from the DR papers.

[182]

P4-J3 is a computer record respecting payment of legal fees to the Olive

Waller Firm. His initials are on it. He does not know whose ledger it was. With respect

to J4, it appears that he reduced his bill by $2,310.00. Walbaum had complained about

it. He was not aware that the spouses were getting any income except for Tammy. He did

not do T4s.

[183]

With respect to the working papers showing AR owing DR (part of P16), this

information would have come from the GL. Walbaum identified and looked at the

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account. He sees that it is 4A and 4B. These printouts come off the AR system with the

DR receivable on it.

[184]

He remembers the liquidation date of November 13, 1997. Later in the year

he did AR work and the premises were the same. Only the sign had changed. The people

were the same and the office equipment was the same. He did not look for the inventory

at the back. The computers may have been new.

c)

Re-Examination

[185]

Jess felt he did a lot of extra work after Morrison left. He had to follow up

because he was not able to communicate with Morrison. He went through the records. If

the expense accounts were abnormal, he would go to the vouchers. With respect to

payroll work that was done, that was much more than normal.

[186]

With respect to goodwill, in order for it to be an asset, it must belong to DR.

Walbaumand Morrison were valuable contributors. He indicated that when either leaves,

their goodwill goes with them. This determines future earnings. These earnings are based

on tendering and not guaranteed revenue. He does not see as DR owning any goodwill.

The goodwill is personal.

[187]

With respect to petty cash, the amounts were always high. He and Walbaum

got into some heated discussions. He indicated that it was better to write a cheque to an

individual.

- 73 -

[188]

With respect to the liquidation, he believes that the assets of DR were put on

fire sale. The biggest items is accounts receivable. DR was not a going concern. He

would not buy a liquidated company.

4.

THE COMPUTER DOCUMENTS

4.1

a)

Brian Martens

In -Chief

[189]

The plaintiffs called Brian Martens (“Martens”) in respect of computer

records recovered from the DR computer which Morrison bought from the liquidator in

September, 1998. He was qualified as an expert as a network support specialist selling,

supporting and repairing computer hardware and software as well as an expert in

determining the cause of hardware and software failure and repair. Martens was the

owner of Net Results Computer. He had a diploma in computer science from Montreal

College in 1986 and between 1989 and 1997 had worked for a number of companies in

the computer area. The bulk of his experience was in writing and designing programs. He

had knowledge on maintaining programs, was CNE certified and had extensive

experience.

[190]

He testified that he received a computer from Ms. Lee’s office on September

17, 1998. It has been explained to him that the computer was not running. He took the

computer to his shop and after examining the computer, he determined that the power

cable had been disconnected. When he went to plug in the cables, the pins on 30% of the

system board had been twisted or broken off the power interface connector on the board.

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As a result, he could not connect the computer and there was no way to get power to the

system. He testified that some pins were twisted off completely. He testified that in his

experience this does not happen from merely unplugging the computer. It would not be

likely that unplugging the computer would result in breaks. He testified that the damage

to the power interface connector could also not have occurred if the computer was

dropped. The components in the computer were secured and could not have hit this part.

[191]

The next step for him was to determine whether there was anything on the

hard drive that was usable so he removed the hard drive and connected it to his shop

computer. All the files on the computer had been erased. This had to have been done by

the operator of the computer. However, he ran a utility program to see if the files could

be restored and indeed some files could be restored. He advised Ms. Lee of the result of

his efforts and that some files were accessible from the hard drive. He never altered

anything on the hard drive. His instructions were not to alter the disk because it would

be used as evidence.

[192]

Martens had one of his employees go through the various folders which the

utility program was able to retrieve and they were able to provide a list of files which

could potentially be recovered. He asked Morrison to come in to give directions as to

what should be recovered and Morrison did so. As a result of these instructions, they

went ahead with recovery of a number of folders. He was instructed to run off certain

reports. He and his staff printed out the documents and provided the logs and reports to

Ms. Lee and Morrison. Morrison was never left alone with the computer. As a result of

the efforts of Martens and his employees, a large amount of data was recovered.

However, some files were corrupted. He testified that if the utility program which he runs

to retrieve the data reports that the recovery is 100% clean, then there is no possibility of

- 75 -

the data changing. The only time the recovery program will change data is if something

is corrupt and it makes a minor change to make it readable. He indicated, however that

the utility program would not add any but for example may only rearrange the data. He

testified that the recovery process would not change any of the numbers in a file. He

indicated that he had to contact the software vendor of the accounting program on the

files to assist him in order to read the file data and he did so. As a result he was able to

look at and read the accounts payable and receivable and other files.

b)

Cross-Examination

[193]

On cross-examination Martens admitted that a person with modest computer

background could not get rid of the data easily in seconds. They would have to have a

good knowledge of the operating system. He did say it was possible for a non-expert to

wipe out the drive with some direction. Martens had no comment on who created the data

retrieved from the computer. He said that he could have indicated when the files which

he retrieved were created and that he in fact maintained the log for when the files were

created. This is part of the submission by his office to Ms. Lee. This evidence was not

tendered. He further indicated that the computer always maintains a last version update

of a particular file and he did not determine when the data was modified. In fact they

were not looking for modification.

[194]

Martens further testified that he was not told that the computer was not

running. He testified that it takes approximately 5 minutes to take the computer out of its

shell. He was there only once when Morrison was at his office but he indicated that

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Morrison was there one other time. On the basis of his work with the computer, he could

not tell when the documents were entered. Although there was some incomplete data, the

data that was retrieved is reliable. He indicated that some files were corrupted and

therefore could not retrieved fully. He was not certain whether his employees retrieved

merely some of the information or all of the information that was available on the hard

drive. Morrison had instructed his employees to print off certain documents. He was

unaware if Morrison did not want certain pages printed but indicated that he was sure that

there were more things that could have been printed.

[195]

He admitted that only selected information was printed off from that

retrieved. He indicated that in his opinion, someone had tried to trash the computer.

4.2

Morrison

a)

In-Chief

[196]

Morrison testified that he attended an auction of DR assets held in

September, 1998 arranged by Deloitte. He bought the DR computer. Adams of Deloitte

brought him the computer approximately an hour after the auction ended and the

computer was given to Ms. Lee who was also present there. Thereafter he spent about a

year going through the records from the computer of DR hoping to get information. He

indicated he never had custody or control of the computer and as far as he knew, the

computer went directly to a company owned by Martens. When he was active in DR, he

was aware the computer was used for accounting but was not personally familiar with the

accounting done.

- 77 -

[197]

He confirmed that he had asked Martens to print out the records which were

retrievable and then he spent time going through them. During the trial, a box of what

appeared to be paper records were shown to Morrison, who looked through it. He

indicated that the documents were familiar to him and a lot of them were documents that

were retrieved from the computer by Martens on his instructions. He indicated that these

documents were disclosed in their Statement as to Documents.

b)

Cross-Examination

[198]

In cross-examination by Bishop, Morrison testified that he had a plan to

purchase the computer from the liquidator. At the auction there was no interaction

between him and Walbaum. Morrison could not explain how the computer was damaged

but he was told that DR employees were working on it prior to the auction and they were

in the process of shutting it down. Morrison was unaware of where the computer was

stored, how it was stored or if others had access after it was purchased. He was first told

that the computer was damaged after the auction when it was turned over to Martens.

4.3

Walbaum

a)

In-Chief

[199]

Walbaum testified that when the assets of DR were being auctioned, only he

and Morrison were tendering on it. He testified that the damage to the computer was news

to him. He did not know how they would damage the computer. He had two computers,

one at the front counter and one in an office behind the front counter. His staff were

- 78 -

working on the computer right up to the auction. His full staff was there and Adams was

up front with his staff while they were working on it. One of his assistants asked to

download material to a disk and she was able to do that. In short, Walbaum testified he

did not know how the computer was damaged.

4.4

Adams

[200]

She conducted the auction of the DR assets. She wanted to ensure that the

purchaser got the equipment. Morrison was the successful bidder for the computer and

she facilitated delivery of assets. She indicated that at no time did she see the cover off

the computer or see it being damaged.

5.

MORRISON

a)

In-Chief

[201]

Morrison reviewed the financial material found primarily in P4 and in

support of the testimony of Joyce. It was an attempt at forensic analysis of the financial

situation of DR effective March 31, 1996 with additional adjustments for subsequent

periods plus an analysis of DR’s business to liquidation and AR’s business thereafter.

[202]

Morrison reviewed the B Tabs in P4, especially B1- B4 as well as B11. These

were the financial statements for DR between 1992 and 1996 and he observed that the

revenues of the company for that period grew from $566,232.00 to $1,762,953.00.

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Morrison testified that he was generally pleased with the amount of business generated

by the company in 1995. And that sales had jumped approximately $700,000.00 between

1994 and 1995. Morrison’s counsel took him through various lines of the various

financial statements explaining each of the lines to assist the court in understanding how

to read the financial statements. Morrison reviewed the DR financial statements at P4-1,

2, 3, and 4 and observed that the statements varied in the title of the line items stated from

year to year. Some year’s lines were not present or the description of the line changed.

[203]

He also observed on P4-B13 that he and Walbaum were taking an equal

amount of monthly draws for salary. Morrison admitted that the $17,500.00 bonus shown

in Tab B was taken by him after he left DR by him coming into the business in the

evening and writing himself the cheque for the bonus.

[204]

Morrison indicated that some of the documents under the B Tabs were

printed off the broken computer, for example B8. In testimony he reviewed the meaning

of each of the lines on a document such as B8.

[205]

HeobservedthatonB4, theSeptember30, 1995financialstatement, theWIP

of only $7,500.00 was not the real WIP but was an agreed WIP. He indicated that some

WIP was not invoiced out and to get a true fix on what the WIP was, one would have to

approach this on a project by project basis looking at each contract and the expenses. He

indicated that some jobs were finished but had not been billed out in order to avoid higher

tax burdens. He indicated that one way of valuing WIP was through the job cost reports

he had retrieved from the broken computer. For example, he indicated that the internal

statement marked B8 represented unbilled but completed work.

- 80 -

[206]

With respect to capital assets, he stated that although capital assets

depreciated over time and lost value, depreciation was a tax calculation and the assets

might have greater FMV than depreciated value.

[207]

With respect to inventory, which was material purchased but not put into a

project, he testified that the service vehicles which DR had were full of repair parts,

controls and leftover materials from old jobs. He indicated that the inventory used in a

project does not necessarily show up in the job cost reports. However, there may be

inventory for specific things for a project stored in the shop and if a specific piece of

inventory was bought for a project, that would be on the job cost report. He testified that

inventory was replaced regularly.

[208]

In the fall of 1995, the business had just purchased two new used vans and

he was responsible for swapping out the inventory into the new vans. He had used

Dumur’s shop on McAra Street to do this and estimated that there was $7,500.00 of

inventory in each van. He observed that on P4-B4, inventory is only shown as $8,750.00

and that it was difficult to tell whether that was an accurate figure. However, he stated

$8,750.00 was too low in his view. As well there were other categories of inventory in

addition to what was in the service vans. He indicated that he guessed that there was

$30,000.00 to $35.000.00 in stock in total with what was in the service vans and other

inventory. He further indicated that DR did not have proper inventory control and

inventory grew all of the time. DR was always short of space for storage when stuff came

back from jobs. He indicated that the inventory level was higher in 1995 than in 1992.

[209]

Morrison testified that he did not accept the share equity of $217,372.00 on

the December 31, 1995 interim statement (B5) prepared by Dudley at P4-B5. He

- 81 -

indicated that there were a lot more assets which needed to be properly addressed and this

statement was not a true picture of the value of the company. He compared B5 to B8,

which was generated fromthe broken computer, and noted the difference in sales. He also

referred to B6 which was a December 31, 1995 balance sheet printed out of the broken

computer which showed the bank account being overdrawn by $146,356.00.

[210]

On reviewing B5, Morrison disagreed with many of the numbers including

the goodwill number and the unearned revenue number and indicated these numbers were

generated by Jess. He observed that neither B9, a March 31, 1996 DR internal document,

B6, a December 31, 1995 internal balance sheet and B10, the April 30, 1996 balance

sheet all off the broken computer, showed any unearned revenue as a liability as the

December 31, 1995 statement did.

[211]

Morrison testified that adjustments also needed to be made to the September

30, 1995 financial statements and one of those was WIP. He believed that B8, from the

broken computer, showed the WIP that was there prior to September 30, 1995 and is

consistent with what he knew. B9 was generated from the broken computer and was a

March 31, 1996 balance sheet although he could not remember if he generated this

document himself while he had access to the computer in the summer of 1996.

[212]

He and Joyce went into the DR offices in the early part of June, 1996.

Morrison indicated that B21 was a list of invoices that he had identified with Joyce at the

DR offices. He had made notes of the projects where work was done in December, 1995

covering WIP which should have been on the WIP statements. He felt those should have

been included in the December 31 statement generated by Dudley. He also went through

accounts receivable and accounts payable, employee time cards and invoices sent out

- 82 -

after the end of 1995 where work was done in 1995. He tried to correlate when the work

was done and the materials which were purchased. He got copies of all of the invoices,

service invoices and payables. He had a general look around the building and saw that

there was office equipment there. There were metal products there (B21). The last page

of B21, showing a figure of $123,673.37, was not his handwriting but he believes it was

the total of all of the invoices.

[213]

He indicated that B16 was in his handwriting and was an attempt to make a

list of all of the equipment he believed was at DR. He went through the list and indicated

that there were smaller tools as well as the sheet metal tools. In the plumbing area, there

were machines to thread pipe tools, jack hammers and small electric tools. He also said

there was some equipment on job sites. He stated that he valued the equipment by asking

a supplier for the new price of the equipment and depreciating it by 50%. He did accept

that DR had bought some of the equipment used but indicated that such equipment was

in high demand.

[214]

He indicated that Joyce prepared B14, Appendix C based on information

which he gave to him with respect to the equipment. The amount of $33,500.00 in Note

1 was the figure which came from the list of equipment value divided by one half. He

indicated that in his view, the inventory was worth $75,000.00 as stated in Joyce’s report

based on what he believed was in the service vehicles and the shop. With respect to the

bad debt line of the report, he believed that there was a possibility of recovering some of

the bad debts. He stated that $20,000.00 of it could be recovered based on his experience

at DR. He gave no other reason for why he thought this number might be recovered. With

respect to the investment and advances line of the report, the number shows the

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investment as at March 31, 1996 in Rose Street plus other bills which he found were paid

on behalf of that project.

[215]

With respect to the Community Bond, F1 indicated that the ownership was

transferred from Walbaum to DR in February, 1995. He believes that DR did not get the

cash from the bond and he does not know when the bonds were recalled.

[216]

Between the summer of 1996 and the fall of 1997, he had brought a motion

to have DR liquidated. The motion was heard and the decision was reserved. He believed

that AR had started operation in August or September, 1997. AR did exactly the same

things as DR and operated out of the same office. The AR phone number was the same

as the DR number. He knew that Walbaum had started a new company and was worried

about jobs and money. He testified that he discovered that Walbaumwas transferring jobs

from DR to AR. He referred to P7, the sale agreement dated October 1, 1997, whereby

Walbaum purported to transfer the assets of DR to AR subject to an adjustment for FMV

if the court later found that the consideration was inadequate. This agreement was

nullified as part of the liquidation order of Hunter J.

[217]

Morrison indicated that H1, a chart which kept track of small jobs that he

believed AR had invoiced to the end of November,1997, showed a total amount of

$142,254.76. He believed that DR continued to pay employees up to the end of

November. Morrison created H1 by going back and looking at post liquidation invoices

that AR had sent to people. He wanted to see if DR people and labour were used on jobs

after November 13, 1997. Morrison testified that if one looked at H1 and the columns,

one could find correlation on the time cards where it was DR’s labour. H3 had pay

cheques for DR employees and time cards for September to November, 1997 and he

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correlated H3 with H1. He looked at each employee’s time card to see if they had

participated in jobs and put any hours into a job and attempted to determine if they were

paid by DR but AR had billed the job. The employee hours on his list totalled

approximately 914.

[218]

H2wasinformationoffthebrokencomputer. Morrison, ongoingthroughthe

AR list of invoices in H2, looked for billings to November 30 and went through employee

time cards to match the job.

[219]

He reviewedC2whichwasDeloitte’slistingofdocumentsandindicatedthat

he did not have all the documents that he wanted. He believed that Deloitte had not

received all of the documents from Walbaum. He indicated that when he was active in

DR, he always had access to the bank statement. He was particularly looking for GL

statements. He has not seen the records that he has requested, which are enumerated in

Sproule’s letter to the liquidator at C10, up to the date of trial.

[220]

With respect to renovations, he testified that although DR bought McAra

Street and renovated it for a business office, that the company never moved to McAra

Street. Instead 333 Dewdney, the old office, was renovated. The renovations at Dewdney

included new ceiling, floors and paint. DR eventually took over another bay on Dewdney

Avenue and increased the total square footage to nearly 5,000 square feet. He believed

that the value of the Dewdney renovations, $23,919.24, are set forth in I 2 which is a

document taken off the broken computer. He observed that AR took over the DR

premises and I-1 is one of Dudley’s working papers dated September 30, 1996 dealing

with leasehold improvements valued at $5,130.00. This paper stated that as of October

1, 1997, DR no longer had a lease with the landlord of 333 Dewdney and the leasehold

- 85 -

improvements went with the building. The landlord leased the building to AR and the

leaseholds were written off.

[221]

Morrison also reviewed F4, 5 and 9 which deals with cheques paid to

Walbaum. These included, at F4 and 5, $5,000.00 on January 31, 1997, $42,257.89 on

March 20, 1997, all of which appear to be related to income from DR less tax. As well,

at F9 there were cheques for $15,000.00 on November 7, 1997, $53,000.00 on October

28, 1997, $12,353.00 on November 13, 1997 and two petty cash cheques in November,

1997 totalling $3,438.96. F12 was an internal or banking ledger and showed various

payments to Walbaum. He observed that a Dudley payroll analysis working paper (F7)

as at September 30, 1997, shows figures beside Walbaum’s name of $17,408.17 and

$125,146.64 totalling $142,554.00. He also reviewed F10, a CIBC DR bank statement

dated November 18, 1997, which show the $53,000.00 and $15,000.00 cheques both

being cashed on November 7, 1997.

[222]

He testified that petty cash cheques were issued to employees for out of

pocket expenses but a receipt was needed to get the cheque. He observed that on F9, the

signature on most of the cheques were Walbaums. He questioned the petty cash advances

made to Walbaum.

[223]

Morrison reviewed F11 dealing with cheques to Tammy from January to

November, 1997 for monthly salary. All of the cheques at F11 were to Tammy. He

testified that while he was active at DR, she did office cleaning on weekends and at night

but would only clean once a week.

- 86 -

[224]

Morrison went through the information at H30, a DR record, and attempted

to correlate the delivery of DR material to certain jobs which he believes might have been

billed by AR. He referred to H9 which was AR’s invoice to the Regina Exhibition

Association. He also referred to C12-1, which was a list of payables of DR that are part

of the liquidator’s report, which covered, for example, a surplus invoice (Suntech) for

$2,276.58 which shows up at H30 being billing initially to DR.

[225]

Morrison reviewed a number of other H tabs dealing with the Gordon’s

project for Gabriel Construction. Morrison indicated he was not familiar with the project

since he had left DR by that time. Morrison reviewed H10, H12, H13 and H32. With

respect to H32, this was a job cost report similar to the ones that DR had done. He noted

that the percentage of profit on this was 51.18% which was in excess of the normal 30%

goal that DR sought to achieve as a profit margin on his projects. He also reviewed H26

and H28 as well as H11 and H29 attempting to review the accounting for this project and

he also reviewed a number of other projects found in the H Tabs attempting to show

where material that DR paid for was on a project that AR in fact billed.

[226]

Morrison also reviewed K23, the Tamwal March 31, 1998 financial

statement. The balance sheet showing a liability by Tamwal to DR of $27,959.00. He

referred to Note 7 showing that Tamwal also owed $26,600.00 to Dumur. AR collected

$9,000.00 in rent from DR. He observed that the amount owing by Tamwal to DR had

not yet been paid back.

[227]

In the J Tabs, Morrison attempted to go through more financial data retrieved

fromthe broken DR computer. Morrison referred to J6, J7 and J9 and questioned amounts

paid to Dudley and the Olive Waller Firm. He questioned the payment to the Shirkey Law

- 87 -

Firm on September 20, 1995 for $662.37 as well as another bill and legal fees billed by

the Gerrand Firm during the shareholders dispute. Morrison indicated that he believed

that the Shirkey account was related to Walbaum’s divorce and DR was not responsible

for that. As well he questioned the Gerrand Firm invoice on the basis that he did not like

the Gerrand Firm giving advice to Walbaum regarding the shareholders dispute and

having the company pay for it. He also referred to J-2 which was an account of the Olive

Waller Firm for $6,267.75. This account was paid by DR. At J3, the Dudley working

papers at the year end, the accountant appears to determine they were justified. Morrison

takes the view that DR should not pay for Walbaum’s legal fees since his legal fees are

not paid for by DR.

[228]

In reference to E2, the appraisal of Brown’s of the equipment, he does not

agree with the value. He indicated that he paid $21,000.00 for only some of the items on

the list. He indicated that the valuation of Brown’s was a fire sale price. In the E exhibits,

Morrison reviewed the documentation to try to determine whether there was more DR

equipment than was actually sold at the auction. He indicated that some items such as the

BBQ for example, which was purchased for $717.00, was not available for sale at the

liquidation auction. He indicated that nothing on the list at E1 was available for sale at

the auction and that the supporting documentation in the E Tabs supports the list. He

indicates that he does not know where these assets are.

[229]

He testified that cheques to his wife, Sandra Morrison, for a three year period

were a form of income splitting and that he and Walbaum had agreed to pay the wives

$500.00 a month or $6,000.00 a year for these three years. He also testified that they

each paid their sons $7,500.00.

- 88 -

[230]

With respect to G1-7-8, he indicated that when he was active, the

shareholders loans were set up to keep track of credits and debits that he and Walbaum

had with the company. In reference to G3, he questioned the $6,400.00 contribution

shown in April, 1996 from Walbaum. Overall Morrison questioned Jess’ shareholders

loan calculations found in the G exhibits including a $2,000.00 entry in September, 1994.

[231]

With respect to G6, Joyce’s re-calculation of Walbaum’s shareholders loan

totalling $644,545.07, item #2, the reference to 226 Cornwall, where in the past DR had

an office, the house and garage figures come from him and are not exact. He testified that

he did not have the actual bills to put a number together but had to come up with a

number. He said it was his best guess. As well the reference to 309 Lorne Street, the

house for Walbaum’s father, which he believes DR improved, is a best guess figure as

is the reference to Saskatchewan Beach for $7,500.00 and $25,000.00 for Walbaum’s

residence at 3630 Berthiaume Bay. These items totaled $87,500.00.

[232]

Morrison testified that Walbaum used petty cash withdrawals personally

although he did not give any details on this. He indicated that after the fact he tried to get

a handle on petty cash disbursements to Walbaum and the petty cash calculations. He

prepared a compilation of the petty cash entries available attached to the back of G6 from

November 22, 1990 until October 1, 1997. He felt that it should have been handled

differently by way of a shareholders loan entry. He believes this money belongs to DR.

He testified that he did his calculations from the information available but some bank

statements and cheques were not available so he could not do full calculations. He

indicated he looked at the GL, statements and cheques at the liquidator’s office.

- 89 -

[233]

He also made reference in Joyce’s calculations to a disbursement for

$7,222.09 for Ken Cooke’s house. This is found in G7 from the broken computer and is

a job cost report for work done at 1162 Wascana Highlands. Morrison indicated that he

had worked on the house. The record indicates that DR invested $23,595.34 and shows

a loss of $7,223.00 for which he said Walbaum is responsible.

[234]

He also indicated that he is claiming for money put into Rose Street for Sims’

condo, the Tamwal receivable, the receivable from Dumur and the money that was not

collected from Watts Electric. There was a supplier invoice tagged to Watts Electric but

no invoice to Watts Electric for goods supplied. Morrison also testified that there was a

furnace install for which Walbaum had received $1,500.00 from a person named Keller

and that this money should have been received by DR.

[235]

MorrisontestifiedthatC16showstheliabilityforfailuretoremitwithholding

taxes and that at the present time, DR continues to owe $106,896.00 to CRA. He admits

that he still has this liability as director.

b)

Cross-Examination

[236]

Morrison was cross-examined by Walbaum’s lawyer. He admitted under

cross-examination that because of missing documents, he had to make certain educated

guesses about numbers and issues. He testified that he did not have numerous

conversations with Sandbeck, although he sent numerous requests for information

through his counsel. He never sat down with Deloitte to explain his theories about how

the finances should be handled. He left it up to Deloitte to collect the documents and the

assets and to pay the bills.

- 90 -

[237]

With respect to P4, C12(1) and (2), the list of DR creditors, he admitted that

there were a lot of suppliers and he did not know who got paid and who did not get paid.

He does know that suppliers never came after him in person although Ecco, through their

lawyers and letters to the liquidator, complained about unpaid bills. He was not aware of

any actions against him, DR or Walbaum respecting unpaid bills of DR.

[238]

Morrison indicated that he was aware of the corporate bylaws and never

made any complaints about them. He was aware of bylaw No. 2, the borrowing bylaw,

found at P4-A2, and was familiar with the share agreement at A3. He indicated that he

was not sure if he drew paragraph 7.6 of the share agreement to Joyce’s attention. He

does not question the validity of the share agreement at A3. He said it was simple and he

understood it when he signed it in 1998. He testified that not everything at DR was done

in a formalistic and legal way during the time he was at DR. Morrison does not remember

looking at the financial statements line by line. He testified that he just looked at the

bottom line of the financial statements between 1993 and 1995. He did not remember Jess

saying anything needed to be done differently. Jess had asked him about certain things

regarding accounting but more of the questions were directed to Walbaum. He testified

that he was not trying to suggest that the statements were inaccurate for the purpose for

which they were created but suggested that they were not accurate for the valuation of a

company. He did not believe there was anything inappropriate in the 1993 to 1995

financial statements. He was not questioning the validity of them but was merely

questioning what was not included or needed to be adjusted.

[239]

HeindicatedthatheandJesshadseveraldiscussionsregardinginventoryand

that Jess would challenge him on the inventory level. Jess would also ask if things were

materials or tool. He admitted that Walbaum had more interaction with Jess than he did.

- 91 -

He testified that Jess was working on the computer looking at the company documents.

His assistant, Claude, was there on a monthly basis. They were there because they needed

to refer to documents as part of what they needed to examine respecting inventory and

assets and the financial statement. He testified that there was no inventory control system

before he left and some people think of some items of inventory as garbage. He gave as

an example an old furnace, which would not be inventory but it would, in his mind, be

used equipment. Scrap copper was sold off every two to three months. He indicated that

duct work would always be gathered up and used stuff was always coming back and he

kept it if it had value. Lots of times things got thrown away.

[240]

He testified that the equipment was not new. He remembers buying things

from Kilborne Fluor and at auctions of other companies. He indicated that more than 50%

could be used equipment. Overall, the used equipment could go to 75%. He indicated that

the trucks which the company had bought were used. Despite this, he testified that he

believed that some of the equipment would sell for what they paid for it, or possibly it

could appreciate.

[241]

With respect to the December 31, 1995 statement of DR, he indicated that

liabilities and receivables fluctuated all of the time. He admitted that if one looked at a

specific day, valuations of these would vary. Some clients did not pay immediately.

Suppliers sent in invoices daily and monthly. The women in the office had to input all of

the documents. He admitted that possibly there were delays in inputting the numbers. He

indicated that he never inputted any of the data into the computer. He was unaware if the

computer had specific systems to track changes for recording invoices and jobs. He

believed the system would be expandable. It was up to the women in the office to create

another column if needed. He did not believe that there was specific columns in the

- 92 -

computer for the increased costs of travel and food out of town. He indicated he had no

input into the making up of the computer categories. He did not know what went into the

sales and job progress categories and what is all included.

[242]

WithrespecttoP4-B8, theDecember31, 1995incomespreadsheetstatement,

and B9, the internal March 31, 1996 balance sheet, he was not sure where he got the

documents or when he first saw the documents. He thought he saw B8 initially after he

rejected a verbal offer of $150,000.00 from Walbaum. He accepted that it was a monthly

income statement which still needed to have adjustments made to it. It was a monthly

snapshot. With respect to B8, page 2, he admitted the figures of $80,000.00, as

December, 1995 earnings for DR for that month, are not accurate and need year end

adjustments, taxes and GST. He was not saying that there were not other payables or

invoices and there may have been things not received at the end of the month. He did not

believe however that it was a month behind. He said it was important to progress jobs

properly to pay the bills and it was always an issue of dealing with a 10% holdback. He

admitted that DR progressed as much as they could and over progressed while he was at

DR. He does not ever remember holding off substantial completion and cannot think of

one instance where the general contractor disagreed with the state of completion.

[243]

He reiterated that he knew nothing about the Gordon’s project and reviewed

it and his analysis relied completely on documents. Tabs E did not deal with any

warranties or deficiencies of the DR jobs. He admitted that as a job gets bigger, there is

more opportunity for deficiencies.

[244]

He testified that when he attended the DR offices in June, 1996 with Joyce

to review documents, he spent some days there. He testified that everything was there and

- 93 -

that Walbaum and the staff did not stop him from looking at things. If he wanted

something they got it for him. Joyce was looking at different things in the documents than

he was. He testified that with respect to the September 30, 1995 statement, that work was

completed but was not billed out because of an effort to reduce the income to save tax.

He indicated that their bank, CIBC, was looking at their receivables and they had to take

them statements of receivables on a monthly basis. He does not agree that DR had

overbilled receivables in December, 1995.

[245]

He indicated that when he took bonus cheques in the spring of 1996, he went

in the evening to DR to write the cheques (D2-6) to himself. He did not check to see how

DR would be affected. He did not talk to Walbaum regarding writing the cheque or did

not contact Dudley.

[246]

With respect to B14, Appendix C, Joyce’s expert notice, he had originally

asked Joyce to help him determine the FMV for negotiation purposes. Joyce asked him

if there were more things that he needed to consider. He then made Joyce aware of his

theories regarding Walbaum between May and June, 1996. The December, 1995 interim

statement needed to be adjusted because in his view it was not accurate. This led to the

March 31, 1996 numbers. He indicated that the March 31, 1996 statement was arbitrary

and he did not know who had picked that date. He would have used the December 31,

1995 statement if all of the proper adjustments had been made to it.

[247]

He confirmed that his numbers in Appendix C, with respect to inventory,

were a best guess and he did not go into check the inventory. He assumed the inventory

would increase. He believes that his figure of $25,000.00 is more reliable than that of Jess

based on an educated guess. This is because the DR inventory was stored in the

- 94 -

warehouse and compound and he had a bunch of the inventory when he had re-outfitted

some new vans late in the fall of 1995.

[248]

With respect to equipment including the vehicles in Appendix C, he

suggested a market value of $75,000.00. With respect to the computers, his allocation of

value is based on what they paid and he felt they were worth this and that his numbers

were accurate. He placed a value of $11,000.00 on the office equipment. He admitted that

he never raised any of these valuation issues in the 1994 and 1995 financial statements.

In late 1996, he believed that Rose Street still had a positive value. When Joyce and he

visited the DR office, they found that other monies had gone to that project and Joyce

suggested that the expenses be reinstated and that the money DR paid to the building was

the investment. It was a number that he and Joyce agreed to at that time. With respect to

C11, the list he made of items purchased after January 1, 1996 up to liquidation, he did

not know at the time what was going on. He admitted that the fork lift, for example, could

be different than Walbaum’s brother’s fork lift. He testified that after he left he was not

aware of any policies with respect to broken tools. He accepted that prior to leaving, some

items which DR purchased were to be given away to charity.

[249]

With respect to B16, the list of tools in his handwriting which he said DR

had, he made this list in early 1996 and he believes all are DR items. He does admit that

most of the tools were second hand and that the list does not represent inventory but just

tools. This list was made from his memory. He does not remember exactly when he made

the list and thinks that he made it when he came out of seclusion in the spring of 1996.

He admits that many tools were lost on job sites and that other trades might take some of

the tools. Because they did not have a good tracking system for inventory, the tools

sometimes went missing. Some tools also broke and the employees had their own had

- 95 -

tools which they left at the shop. He admitted that for example, Blair McPhee had his

hand tools at DR.

[250]

With respect to the air compressor pointed out to him on B16, he could not

say it was or was not McPhee’s. Similarly he was not sure if the sewer machine or the vac

pumps were McPhee’s or not. He indicated that when he made B16, if he would have

know that some of the tools belonged to others, he would not have included them. He also

admitted that it was possible he has made a mistake and that some of the tools have worn

out and some have been thrown away. He did not know what happened to the tools at DR

in the two year period prior to liquidation. He was aware that a DR employee had stolen

a van. When asked about the edge machine, he indicated that it had belonged to Dumur

Co. He stated that his personal view of the value of tools was better than Brown’s. He

indicated that when he left DR, he had his hand tools and kept them. He testified that his

truck was a major concern to DR. He had the truck and it was being paid for by DR. He

knew the benefit would be dealt with later since he was using a corporate asset.

[251]

With respect to the cross referencing he did to B21, respecting WIP not

included in the December 31, 1995 calculation, he indicated he was attempting to get a

figure to add to accounts receivable. He questioned the accounts receivable number as at

December 31, 1995. He does not agreed with Walbaum’s numbers regarding accounts

receivable and he indicated he had identified $130,000.00 of invoices after 1996, which

increased the WIP.

[252]

With respect to D2-11B (B25), Sproule’s letter to Mulatz dated July 23,

1996, after the letter had been sent out indicating that he would assume an active

- 96 -

management role, he found that he could not go back. He never contacted Walbaum to

say that he was in fact not coming back.

[253]

With respect to Walbaum running DR, he did not know when Walbaum

should stop running DR. He indicated that the agreement they had was that he could start

another plumbing company and keep using the truck and that the benefits for the truck

would be taken into consideration in the final accounting. He never thought in terms of

Walbaum running the company for his benefit. When he was at DR, he and Walbaum

always split the profits.

[254]

With respect to D2-24B, the updated Deloitte list of DR documents in its

possession, he first saw this when he went to look at the documents at the liquidators.

With respect to the documents that the liquidator ultimately had, there were documents

missing. He had at one time had access to some of them but did not later.

[255]

He was aware that Deloitte was making deals with AR. He did accept that the

liquidator had entered into an agreement so AR could continue to use the DR equipment.

AR was to keep track of things and an accounting so it could be done properly. He

disagrees that AR is owed and should be paid any money by DR. He believed AR ended

up with DR assets.

[256]

With respect to D17, the October 9, 1998 letter from Joyce to him, he had a

conversation with Joyce about Walbaum ripping off the company or something to that

effect and asked him to help find out if it was so.

- 97 -

[257]

He testified that it is possible that DR got the Community Bond back as part

of an adjustment of Walbaum’s shareholder loan. With respect to P4-F1, page 2 thereof,

he admitted he was still an officer of DR, had signed the resolution and agreed to the

transaction whereby Walbaum agreed to account for all benefits from the bond and DR

was to pay for all expenses associated with it.

[258]

With respect to the Levesque document showing $50,000.00 in the name of

DR, he did not know where the funds went but they could have gone to DR.

[259]

He indicated that DR did not have a corporate visa during his time there.

Anyone who bought things with their own money was reimbursed.

[260]

With respect to payments to Tammy (P4-F11), at the time when Walbaum

and Tammy were boyfriend and girlfriend, he had no idea if she did any work at all and

cannot comment on pay.

[261]

He admitted that with respect to his complaints about the financial dealings

of the company, he was going back to 1988 and 1991. He indicated that it was always his

view that an accounting of the shareholder’s benefits would be brought forth. However,

he did not have the documents which go back to 1990 and did not do a detailed analysis.

The numbers which he has put in for his financial adjustments are outright bold guesses.

[262]

He admitted that some of the adjustment that he had given to Joyce were just

his guesses. He admitted that when a tenant moved out of the space, the tenant

improvements reverted to the landlord. He reviewed documents respecting work done on

11162 Wascana Highlands and Ken Cooke (G7). He admitted this was a snapshot in time

- 98 -

and that it may be subject to adjustments. The shareholders loan spreadsheets of Dudley

were discussed and agreed to for past years.

[263]

H1 was created using H2 and shows receivables for work done by DR and

collected by AR. He did not personally know any of the jobs in H1 as he was not on the

jobs. With respect to H2, there were AR documents but he could not comment on the

accuracy of the document. He was relying on H2 to say that the invoices in H1 were paid.

He compiled the supplier invoices in H7 when he was looking for job tags and supporting

information that invoicing was done by AR but supplies were paid for by DR. He

acknowledged that these documents were fraught with whoever was inputting the

information. He acknowledged that there may have been more items shipped than the job

required and then the excess would be taken back for credit. He could not tell this by

relying on the invoices. He assumes that it was tagged correctly but agrees that not all of

the material may have been used on the job. With respect to H7, he does not know how

these were created in the billing system because he was not there after 1995.

[264]

With respect to P4-H32, a listing of job cost reports for various jobs

including the Gordons project, the percentage calculations of profit are in his

handwriting. He admitted that the numbers were higher than the historical returns that the

company had had. He believes the profits were higher because a considerable amount of

DR labour created the profit. That was his theory. He admitted it was just a theory. For

example, with respect to the Gordons project calculations, he did not have all the

information to agree or disagree as to whether it might be wrong. Morrison went through

a number of other job cost reports but he had no personal knowledge of these jobs but

used the higher than normal profit margin as an argument that DR labour had been used

on the job but it was invoiced by AR.

- 99 -

[265]

Morrison reiterated that he felt it was inappropriate to have the corporation

pay legal fees to fight him. He did admit that his decision to leave increased the legal and

accounting costs for the corporation and that some of this was his responsibility. He

believed that Walbaum should take up responsibility for the extra costs as well and a

portion of the legal costs should be applied against Walbaum’s shareholders loan. He

indicated that in July, 1996 all bets were off. Legal action was threatened after that and

there was continuing confusion in July and August with offers back and forth between

the two sides. Morrison admits he agreed that Mulatz, during the negotiations for payout,

could advise Walbaum but if it went further than that, Mulatz had to step aside. He knew

that by August, 1996, the Olive Waller Firm were representing Walbaum. With respect

to J4, a number of Dudley invoices, he admitted that he is responsible for a percentage

of the Dudley invoices but not sure what percentage. He understood there would be tax

issues involved with the settlement.

[266]

With respect to K23, the Tamwal March 31, 1998 statement, he admitted

there may be things that he was unaware of regarding the debits and credits between

Tamwal and DR.

[267]

He admitted using the corporate gas card between January and April because

he was not sure whether or not he was coming back. He indicated that an adjustment was

necessary to be applied to the shareholders loan. With respect to the shareholders loans,

he does not believe that his part should be negative for the use of the truck.

[268]

Morrisonacknowledgedthattheliquidator’sletterofFebruary22, 1999(D2-

26), refused his request to authorize action against a number of parties, most of whom are

defendants in this action.

- 100 -

[269]

Morrison ended his cross-examination by stating that in his view, Walbaum

should not be paid more than one half the profits of DR for running it the two years he

was gone.

[270]

In re-examination, Morrison indicated that there was an agreement between

him and Walbaum that there would be no non-competition issues and that he could start

another company. He admitted that he had in his possession small tools, hammer and

screw drivers as well as other equipment which were valued at $1,000.00 to $1,5000.00.

[271]

With respect to the letter D2-12C, the Olive Waller Firm has proposed a

valuation of $8,500.00 for Morrison’s truck. He did not pay this and it went against his

shareholders loan.

[272]

With respect to D2-19E, the proposal by Sandbeck respecting an AR buyout

of the Gordons project, the number reflected a dollar amount that DR did for labour. In

his view, DR had only been paid $9,000.00 wages for the Gordons project.

[273]

At the conclusion of Morrison’s evidence, the court asked him a question in

respect to whether he specifically looked at the working papers and shareholders loans

calculations. He indicated that at year end, he was reviewing the number and not getting

into detail on the back-up. They talked in terms of a good and bad year and agreeing to

the work done and the year-end financial statements.

c)

Read Ins

- 101 -

[274]

Questions from Morrison’s discovery were read in by the defendants with

selected explanatory questions by the plaintiffs allowed.

[275]

Morrison, at his discovery, testified that he had entertained the idea of

moving into McAra Street, using the space and renting it out and that he thought of it as

a business opportunity. After it was bought, he never did go to see if it was used for

storage.

[276]

Morrison admitted that during his time at DR there were several occasions

where he used DR assets for non-business use and never accounted for it.

[277]

Respecting the Loan, he indicated that a handshake deal was good enough

for him and he had authorized Walbaum to make the Loan to Dumur Co.

[278]

He testified that he knew where all the DR documents were stored in the

office and he had access to them.

[279]

Furthermore, he indicated that he had access to every document that he said

he could now not find.

[280]

He testified that he did not know what inventory goods or machinery DR had

in 1996 because he was not there other than for a few days.

6.

THE ROSE STREET PROPERTY AND PRESUITTI JOB

- 102 -

[281]

The plaintiffs claimed against Sim and Turner for breach of contract and

failure to pay for renovations done by DR to their condo on Rose Street and called

evidence with respect to Sim and Turner’s dealings with Rose Street. Sim and Turner

applied for a non-suit which was granted. However Morrison still claims compensation

respecting these issues from Walbaum.

6.1

Morrison

a)

In-Chief

[282]

Morrison indicated that he had known Sim since the late 1980s. Sim’s

business, SimElectric, and DR would work together. He often met socially with Sim. Sim

married Walbaum’s sister. After Morrison became involved with DR, Sim had opened

some business doors for DR. He testified that they got along well and were neighbors at

the beach.

[283]

DR had done work on a restaurant in Regina and elsewhere owned by

Fausto-Presuitti(“Presuitti”). PresuittiapproachedMorrisonaboutDRdoingajobtohelp

him set up a restaurant in Toronto. The job required a special chimney and Morrison was

to supply it in Toronto. At the time Morrison did not know Sim was involved in this

venture but found out later. Presuitti wanted the chimney supplied and installed but

Morrison was only prepared to sell him the chimney. Walbaum approached him to say

that he was taking employees to Toronto to install the chimney. Morrison acquiesced in

him doing that. Tammy went as well. At the time, Tammy was Walbaum’s girlfriend and

not someone who could assist in the installation of the chimney. He testified that her

travel was paid for by DR. He questioned why Walbaum went along since his job was in

- 103 -

the office. He did not question the employees, McPhee and Deneve, about going to

Toronto because they were capable carrying out work on the project. Morrison testified

that Walbaum eventually explained that Tammy went with him to Toronto at Sim’s

request. This project was done in the summer of 1995.

[284]

Morrison referred to P4-B5, Tab 1 which indicated that there was an invoice

for $30,507.48 dated June 27, 1995 to Presuitti’s in Toronto under the heading “ledger

bad debts”. An entry dated September 30, 1995 shows a write-off of approximately the

same amount with a reference to Presuitti’s. It appears that the only payment that was

recovered on the Presuitti’s Toronto job according to Tab 1 was $150.00. B5-1 consisted

of documents retrieved from the broken computer.

[285]

Morrison testified that Rose Street used to be a government office and that

DR became a 50% owner of the building in March or April, 1995 when Sim and

Walbaum had formed a corporation (50% of which was owned by DR) to buy the

property. By the time it was brought to him, the deal had already gone through. In April,

1995, Walbaum came to him to tell him what they had done and presented bank forms

to Morrison which needed to be signed. P5-15 shows a guarantee agreement to the FBDB

on behalf of 610554 Saskatchewan Ltd., the debtor and the owner of Rose Street

whereby Walbaum and Sim each guaranteed for $50,000.00. Morrison did execute a

virtuallyidentical corporate guaranteeagreementbyDRfoundatP5-14whichguaranteed

$120,000.00 of the total of $250,000.00 debt owed by 610554 Saskatchewan Ltd. to the

FBDB. He indicated that he was surprised that DR was buying into Rose Street and he

was taken aback by it. It took him a while to sign the guarantee papers. He indicated that

the purchase of Rose Street was not something DR did regularly and in the 6 ½ years he

was at DR, it had never purchased real estate as part of the company business. He

- 104 -

indicated that he had signed because he felt the corporation had already been obligated

and if he did not sign, there might be a legal issue. Morrison acknowledged that he went

along with the purchase of Rose Street and signed the guarantee for it.

[286]

Morrison reviewed P5-3 which was some writing on a Crane estimating

sheet. He recognized the hand writing as Walbaums. He indicated that the top portion of

it was the overall picture of the work done to install a new heating system. The total of

materials and labour is $8,694.20. He reviewed P5-9 which showed an accounting on a

working paper by Jess for the period ending September 30, 1996 for monies spent on

610554 Saskatchewan Ltd. This amount was $39,039.56. Tab 9 shows a down payment

of $9,500.00 made on Rose Street. P5-10 was a working paper similar to Tab 9 as at

September 30, 1997 showing that $56,601.17 had been spent on Rose Street.

[287]

NICOR Properties was retained to look for tenants for the property. Sim and

Turner set up accommodations in the property in the fall of 1995. Morrison also reviewed

P5-4. This was a document retrieved from the broken computer. It was a job cost report

form in the name of Bob Sim and was recognizable to him. It kept track of all billings and

job costs as well as net profit. As at September 30, 1996, it showed a net profit of

$18,036.37 and in Morrison’s view outlined the value of the work done. He indicated that

he was not aware that the company was doing work for Sim directly.

[288]

Morrison reviewed P5-7, 8 and 12, which detailed the sale of lot 14 of Rose

Street to Hilderman Construction and an offer to purchase lot 13 of Rose Street by

Hilderman. P5-7 indicates that the sale proceeds of lot 14 of $35,230.90 was paid to the

City of Regina for taxes.

- 105 -

b)

Cross-Examination

[289]

Incross-examinationbyWalbaum’slawyer, MorrisonindicatedPresuittihad

approached him because of his expertise in regard to the special chimney, but that he

never agreed to go down and install the chimney for Presuitti. He indicated that he did

not go because of personal problems. Morrison admitted that the DR invoice for

approximately $30,000.00 for the installation of the chimney was not excessive.

[290]

Morrison admitted that prior to signing the corporate guarantee for financing

for Rose Street, Mulatz had explained to him the context and the nature of the deal.

Morrison indicated that he had spoken to Sproule prior to signing it, but he signed it

anyway. Later in cross-examination when again confronted with the guarantee, he

indicated that before he signed it he took some time to think about it and that he in fact

did not talk to Sproule and felt that there was no value in speaking to him about it.

Sproule had earlier told him not to sign any documents relating to the property and this

document was relating to the property but he signed it anyway. He thought that the

documents done by the accountants were very accurate, but also admitted that the staff

possibly made mistakes in inputting information into the financial forms. He indicated

that there were possible mistakes on P5-1, 4 and 16, and that he had made certain

assumptions, but could not say if they were accurate. He testified that the computer

system that they were using was being converted in an ongoing way in 1995 and that they

needed to refine the system to fit their industry and had to do test runs and work with trial

and error.

[291]

He wanted to make the purchase of Rose Street work. He indicated that he

was desperate to find a tenant for Rose Street because of the high cost of operating it.

- 106 -

After he came back from his holiday, he did not have any further dealings with Rose

Street. He admitted that he did absolutely nothing with respect to Rose Street after he left

the company and never gave it another thought. He indicated that that was Walbaum’s

responsibility and he let others make the decisions for him. He testified that he was

advised that the shareholders of the company were supporting the property. He knew that

DR was paying the ongoing expenses of the property.

[292]

He indicated that the liquidator never contacted him about Rose Street. The

only work that Morrison did personally on Rose Street was to start the boilers. He

believed that if DR did work on the property, it would be credited to Walbaum’s

shareholders loan and if renovations were done by DR then it was possible to credit it to

the shareholders loan. He admitted that there was no kickback or fraudulent transaction

between Walbaum and Sim with respect to the property and admitted that with the

present information he had, there was possibly no claim.

c)

Re-Examination

[293]

In re-examination, Morrison testified that he thought P5-9 and 10 have to do

shareholders loan accounts for Rose Street and the numbered company.

6.2

Presuitti

[294]

Presuitti testified on behalf of the defence. He testified that he and Sim,

through a company, agreed to open up a restaurant in Toronto. The restaurant had a

special wood burning oven which needed a special chimney and he talked to Morrison

about it. He indicated that Morrison had agreed to provide the chimney and install it. He

- 107 -

believed everything was agreed. When they came to do the work, Walbaum came instead

of Morrison. Because Tammy was good at decorating and he could not find people in

Toronto, he asked for Tammy to attend and he agreed to pay for her ticket, hotel and food

or reimburse the company. He wanted DR to install the chimney because he was

concerned that there would be no warranty if someone else did it. Walbaum came with

a crew and installed the chimney.

[295]

Ultimatelythebusinesswentunderbecausethesmallbusinessloanforwhich

he had applied was rejected. Although he did open up the restaurant, the business was

initially poor and he could not make the payments required to keep it open. He indicated

that Tammy helped him to decorate and set up the dishes and glasses although she did not

do a whole lot. He promised to pay Walbaum for his flight and hotel costs and gave

Walbaum a down payment at the beginning and that was it. He indicates that he lost

$60.000.00 to $75,000.00 of his own money in the business.

6.3

Walbaum

[296]

With respect to the Presuitti issue, Walbaum testified that they had done 8

to 9 restaurants for Presuitti in the past. His relationship with Presuitti was good and

Presuitti always paid his bills. Morrison alerted him to his discussions with Presuitti

regarding the Toronto job. He filled Walbaum in, they met, they talked and the chimney

was ordered to be picked up on site in Toronto. It was his understanding that they agreed

to the project and that Morrison and employees would go and do the job. In the summer

when Presuitti was ready for them, Morrison informed him that he would not go to

Toronto. Morrison gave him sketchy details as to why he was not going but indicated that

it was because of family issues that he would not go. Morrison told him that he did not

- 108 -

care if he went. Walbaum went and took employees and supervised the job, paid for

special equipment needed to install the chimney and bought parts as needed. Tammy

came along and Presuitti said he would pay for her room, meals and flight. Presuitti gave

him a $5,000.00 deposit toward the job. Tammy assisted in setting up the restaurant.

Later he was advised by Presuitti that the business had gone under. After discussing it

with Mulatz, he determined it was not worth chasing the Presuitti corporation for the

outstanding account.

[297]

With respect to Rose Street, Walbaumtestified that in the early 1990s, he and

Morrison had discussed taking DR into something more lucrative. He and Morrison were

not experts in property but Sim was. Sim had asked Walbaum and Morrison if they were

interested in Rose Street and the next morning Walbaum brought up the issue with

Morrison about partnering on the property with Sim. Both of them put off a decision for

a while. Morrison had questions about it but they determined that they were going to rely

on Sim’s experience in property and in the spring of 1995, they agreed to DR owning a

half interest in the building. Once the property was purchased, issues arose with respect

to the heating and boiler system which after some examination needed replacement. The

heating bill was high because of the boiler. The costs generally with respect to the

building were substantial. It had been agreed with Sim to get the main mechanical done

to each floor so that it could be condominiumized. That’s what they did. DR was

responsible for half the costs to the building. It affected the company a lot with the cash

being paid out. It became difficult to deal with. He had hoped to lease the building out

quickly through NICOR Properties but that did not materialize and he believed that they

could get the property designated a heritage building and thereby reduce taxes but that

did not materialize. They marketed it with real estate agents and receptions were held for

prospective purchasers. Eventually Sim moved into one of the floors in the building and

- 109 -

began paying rent. Walbaum testified that a number of efforts were made to rent out the

rest of the building.

[298]

Walbaum admitted that P5-3 was in his handwriting and that he had written

up what was to be done on the building respecting the main mechanical. He indicated that

Tab 4 was a tracking of the costs incurred on Rose Street. Although it was in Sim’s name,

the office staff used this as a handy reference.

[299]

P5-6 confirms the loan from the FBDB. This was done prior to Morrison

leaving the company. Walbaum testified that P5-9 kept track of all of the money that DR

had in the numbered company as did Tab 10 but for a different point in time. It also

confirmed that P5-11 was a document generated by Jess and that the writing at the bottom

was Jess’ writing.

[300]

The last he remembers dealing with Rose Street was when DR went into

liquidation. He testified that once the liquidator took over, the liquidation prevented him

from dealing with Rose Street. He indicated that he tried to help and when he became

aware of an interested party, he suggested to the liquidator to take some action. However,

he got no response from Sandbeck. With respect to D2-20B, he had people who were

interested in Rose Street and needed Sandbeck to call him back respecting that but he

never did. At one point he had a tentative offer to buy. With respect to D2-20C(1), July,

1998, a proposed agreement to sell DR’s share to Sim in return for Sim taking over all

liability, Sandbeck was dealing with it but Walbaum was keeping informed. Walbaum

wanted to cut losses but it was out of his hands. He let Sandbeck know what his thoughts

were. He does not know if Sandbeck had a conversation with Morrison regarding this. He

- 110 -

believed that DR could get out of the property what they had put into it if they take

advantage of the opportunities.

7.

DWAYNE WALBAUM

a)

In-Chief

[301]

Walbaum testified on his own behalf and on behalf of Tamwal as president

and as a director and shareholder of AR. He did not believe that he personally owed

money whatsoever to Morrison or to DR. He indicated that all the money that was

received from DR is earned and has been accounted for and there are no benefits that he

has taken that are not accounted for. Likewise, he believes Tamwal did not owe Morrison

anything. He believes Tamwal may owe DR some money due to the way transactions

occurred and the offsets were made.

[302]

As an officer of AR, he does not believe that AR owed DR anything. He

testified that after he started AR, he continued doing work for DR and trying to deal with

DR issues to help out. He felt this was not fair. He told Sandbeck this. He indicated that

Sandbeck in his mind, authorized him to stay in the old premises and he agreed to do that.

He testified that all the benefits to AR were documented daily. However there was no

listing produced by Walbaum as to what those benefits were.

[303]

Late in 1994, when they picked up a project in Watrous, he spoke to

Morrison who agreed to lease trucks for him and Morrison. They came as plain trucks

and they both put on running boards, liner rails and hitches and electric brakes. Jess

recommended that they claim a personal benefit for a portion of the truck. Both he and

- 111 -

Morrison indicated no and said they would argue it with Revenue Canada. Both had full

access to the trucks 24-hours a day. Walbaum drove it around and used it for his personal

business and Morrison did the same. He testified that Morrison drove the truck to

Vancouver. There was never any issue between them with respect to use of the truck and

it was not a point of contention between them.

[304]

With respect to the Regina Pats box, which Morrison indicated was used

personally, he indicated that it was leased by DR although the boxes were used by

Morrison and him and DR employees and families. He would take customers and clients

to use the box as Morrison did as well. This was discussed with Jess who recommended

that they have a log at the box door and record whether it is used as personal or not. CRA

re-did their taxes and they got hit for 50% of its value on the audit.

[305]

With respect to Morrison’s claims re Cornwall Street, the house where he

started the company, he does not know what the $20,000.00 represents and does not know

what the claim is with respect to Lorne Street. With respect to Saskatchewan Beach, he

agreed to sell it to Don Leier, who was a friend of Morrison’s. He testified that the

cottage had no ventilation or plumbing. He testified that he did not use DR assets when

he built a home on Berthiaume Bay. He did his own plumbing and mechanical.

[306]

With respect to their own wages, they would write cheques when they

thought it was appropriate. They therefore did not take monthly salaries of equal amounts

and had to bounce their salary cheques over the map to avoid attracting Workers’

Compensation. One month they took more money, one month they took less. Their wages

were different for some months. At the end of the year, Jess went through all of the

cheques given to Walbaum and Morrison. Sometimes bonuses were paid to them and this

- 112 -

was a direct link to discussions between them and Jess. Jess played a big part in this and

he would often recommend that bonus be given to minimize tax. Walbaum relied on Jess

for this advice.

[307]

With respect to money paid to Sandra Morrison, Walbaum was aware that

she was being paid and they discussed it. It was a way to reduce Morrison’s income.

During the time he was going through marriage difficulties, his share went into

shareholders loan.

[308]

He testified that on out of town jobs often times he would send the employees

out of town and give them cash to pay for items which they needed since he could not get

accounts set up because they were from out of town. He handed employees cash to live.

It was a way to control costs and not deal with false receipts. He said that dealing with

working out of town was a learning process. He would write a petty cash cheque to

himself and then bring the cash back to the office and hand it to the employees. The

employees would be given a cash allowance and this would be tax free. Morrison

supervised the out of town jobs. Regarding petty cash procedures and P4-G6, Walbaum

confirmed that he did many of the cheques for petty cash. Employees would hand in the

bill and twice a month he would write out petty cash, cheques go to the bank and give the

money back. Lots of time they brought items for DR at places where the company had

no account. He testified that there was no proper system in place with respect to petty

cash. He indicated that the rounded numbers on this list are likely from subsistence

allowances but he cannot tell which ones they are. With respect to page 2, #2, this is the

first he’d ever seen or heard of it. He had no clue of what that was.

- 113 -

[309]

He also testified that with respect to warranty, it was not uncommon to have

30 - 40 deficiencies on a site. The warranty period was generally one year on jobs and

two years on others. Between 1993 and 1995, Morrison was in charge of job site issues

such as warranties. When the job was finished and close to 90%, substantial completion

was reached and you could bill out a 100% but had to provide warranty documents and

letters as well as manufacturing certificates, shop drawings and binders for equipment.

Walbaum put these together and Morrison, as well sometimes, in the evenings in the

office. Later on staff did this.

[310]

Up to 1994, they really did not have much of a financial system. They were

doing it manually and playing around with software programs. However it became too

cumbersome to do it manually. Jess looked at different programs to operate their

accounting and he knew that DR would have to have an employee to operate

computerized accounting systems. Between 1993 and 1994, a system was developed. He

purchased a system which Jess said needed to be modified for their business. Between

1994 and 1995, he relied heavily on his lawyers and accountants for expertise. Walbaum

testified that he did not understand accounting. When the company moved to computers,

all he could do was enter data. Employees were trained to enter the payables and

receivables and Dudley would send a person monthly to review the inputting. Dudley

would then transfer the numbers to the GL and that’s when they caught any of the

mistakes. There were no numbers available for the company at mid-month. Entry of

supplies invoices were 10 - 15 day behind. He indicated that with their financial system,

there was a time lag and there were mistakes made. In some occasions, they would have

to get Jess or somebody from the Dudley company back two to three times a month to

deal with them. Jess and his staff would pick up the various accounting modules and

arrange them in the right place.

- 114 -

[311]

Walbaum testified that staff would enter data into the computer from day to

day. Jess and his staff would do adjustments and do the final reports and finalize things.

At the end of the year, he and Morrison would sit down and go over various items. Jess

and his working papers would document what they spoke about and what they did at year

or month end. Walbaum testified that there were no concerns by either him or Morrison

regarding the financial statements between 1992 and 1994. Nothing changed with respect

to the 1995 financial statement. It was done in the same manner as previous years. There

are no issues raised by Morrison with respect to the 1995 statement. They discussed with

Jess what dollars to take out of the company and Morrison did not raise any negative

concerns. The discussions between Walbaum and Morrison respecting the September

1995 year end took place in September before year end and as well in late October to

early November when Jess showed up to get their opinions about issues.

[312]

The residential work that the company did was done by Blair McPhee.

Eighty-five percent was commercial. Residential was not either of Walbaum’s or

Morrison’s expertise. With respect to residential work, there was a 3 - 4 day turn around

between job and client. These kinds of jobs were often bad debts. There was some money

under the table on some occasions. Some people would want to pay in cash. He did not

recall doing under the table jobs himself. He did admit to selling scrap metal and would

sell old furnaces in which case the money was put into a fund in the office for parties.

Walbaumtestified that any money that was not reported was shared by himand Morrison.

[313]

Jess would come to discuss with him and Morrison any issues that they had

to deal with. For example, he and Morrison would have to decide whether to capitalize

something because such as wages payable. For some of the discussions it was Morrison

and Walbaum or on some occasions, just Walbaum. Walbaum would provide back up

- 115 -

documents to Jess when he needed them and Jess would question Walbaum on the issue,

for example whether a job was 90% complete or not. Jess was physically on site at their

from time to time. He knew their system. He had worked with them respecting their

system. They often handed him documents. He would review them and then make a list

of questions and would ask Walbaum and Morrison. Often times, Jess needed documents

from third parties. Jess had freedom to go anywhere in their premises. He physically

walked back to the shops to review inventory and trucks. On occasions he would question

something.

[314]

Walbaumtestified that a meeting between himand Morrison took place daily

at approximately 6:00 a.m. at their shop. Both of them stayed there two hours after work

ceased. There was lots of time when they were the only ones there and they talked about

everything with respect to the company. At no time did Morrison raise any financial

issues with him that he complained about. Walbaum testified that never once while they

were working together did they argue or fight. They discussed wanting to get out of

nickel and dime jobs and getting bigger work. As well they did not want to do service

work because of bad payers.

[315]

Because DR was a high volume customer, Walbaum knew the supplier

companies wanted to do their business. They would come to the DR shop and often they

would bring over things to eat or drink. They often donated items to them personally if

they needed something. Often they would receive a bill for an item which the suppliers

ultimatelyprovidedfree. Theemployeesgotfreeproductfromthecompanyaswell. They

would attempt to pay the invoices within 30 days but sometimes they pushed them to 90

days. After they pushed the limits, the guarantees with the suppliers would go up.

- 116 -

Walbaum had personally guaranteed DR with the suppliers. In 1995 and 1996, the

guarantee requirements changed, and they were re-signed.

[316]

With respect to tools, he testified that up to 1995, DR had shop

manufacturing equipment, a break, a lock form and folding bar. Most of the larger stuff

was well used and bought at pre-auctions and was cheap. Hand tools were primarily

drills. Most of the employees were required to supply 3/8 inch drill, pouch, a 100 foot

cord and all physical hand tools. The company provided bigger items which were used

periodically. DR had borrowed some equipment, for instance a fork lift and sheet metal

equipment. In 1995, some of the suppliers like Ecco and Inland had equipment like

plasma machines to manufacture metal items. He testified that the industry changed from

1995 onwards. The vans that DR had were bought at a government auction. They were

old SaskTel and SaskEnergy vans. The vans had over 200,0000 kilometers. The half ton

trucks were used and were old. He does not remember where they got them from. With

respect to P4-B16, Morrison’s handwritten list of tools and equipment, is not DRs. Some

was borrowed from another company for example the edger from Dumur Co. and the

roller from another company. Some employees supplied their own tools. Some of the

equipment is 30 years old. For instance with respect to tools, they did not last and they

constantly had to buy new ones. Some tools were thrown away. Lots of time they had

rental tools. With respect to C11, he does not know where the lists comes from. The fork

lift was from Fuller Austin.

[317]

Walbaum indicated that in May of 1996, he did not have a personal lawyer.

Walbaum testified generally about the offers and counter offers and negotiations which

took place between May of 1996 and late summer of 1996.

- 117 -

[318]

By August of 1996, Walbaum had retained Olive of the Olive Waller Firm

to act on his behalf. During this time, the difficulties with Rose Street, McAra Street and

the Dumur Loan were getting larger. Suppliers were questioning what the relationship

within DR between Morrison and Walbaum was. One supplier wanted accounts brought

up to date and personal guarantees. There were issues with respect to the gas bond that

had to be renewed. The Loan with Dumur was strapping them for cash flow.

[319]

Walbaum testified that the December 31, 1995 statement was prepared

because Morrison had left the company and he was looking to purchase the shares from

Morrison and do an interim statement to determine value.

[320]

Walbaum testified that Tammy came to the office to clean and organize.

Some of the temporary women would not show up sometimes and she would answer the

phoned and also do radio. She also helped put service binder manuals together. In 1996

when Morrison did not come back, Walbaum asked Tammy to quit her job and come to

work at DR. Walbaum now had to work out of the office and he needed someone he

could trust to stay in the office. She was trained and thereafter answered phones, prepared

work orders, took messages and did secretarial work. Her usual hours of work were

between 8:00 a.m. to 5:00 p.m. and there were some nights and weekends. She had

flexible hours because of child issues.

[321]

With respect to the DR truck in the possession of Morrison, Walbaum had

asked him to return the truck and tools that had come with the truck. Walbaum indicated

that the value of the assets in the truck were $1,500.00 to $1,800.00.

- 118 -

[322]

With respect to D2-11B, the Sproule letter dated July 23, 1996, he assumed

that Morrison had changed his mind and was now not selling his shares and assumed he

would be returning to work. However, Morrison never did come back and never informed

him that he was not coming back. Walbaum testified that he had no issue with Morrison

coming back if he wanted to. Walbaum did not change how he was running the company.

Between November, 1996 and the summer of 1997, the business was normal and stable

but everything was a question mark. The bank by this time knew that Morrison was not

at the office. It was evident to Walbaum that things were going to crash. Suppliers were

withholding stuff, dealing with the banks was different and they were asking for more

documents. Some contracts were in jeopardy. For example, on one project, Hipperson

Construction was a low tender for a school. Hipperson told DR that they would not use

them as there was uncertainty with respect to DR and they lost the bid. DR tried to

challenge it but could not. The situation was affecting their bonds and guarantees. They

were refused to different bonds during that time. Walbaum felt that the company was

going down and there was little he could do to stop it.

[323]

In the early fall of 1997, Mulatz and Jess advised him that he had to decide

whether to move on to something else. He questioned how much longer he could run the

company with all of the issues the company had. It affected him personally.

[324]

In the fall of 1997, they gave up and started another company which was

something he could control himself. He testified that AR was set up by him with his

money. There had been no contact from Morrison up to that point. He started AR from

Mulatz’s office. The landlord of the Dewdney Street property, Mr. Wickenheiser, asked

if the company was staying or leaving. He told them he could not sign a lease and

guarantee under DR but he could under AR. Wickenheiser wanted a lease and guarantee.

- 119 -

He was getting advice from Mulatz and Jess to keep everything separate between the

companies in case there were cross-over issues. He got documents and letters out

respecting the new company and did that right away. He also spoke to suppliers and

contractors.

[325]

He had Mulatz prepare legal documents transferring the assets of DR to AR.

In late October and early November of 1997, he was dealing with all of these issues when

he got the liquidation order. When he got the call from Tchorzewski, he was told that the

order had been granted and that someone would show up at the DR offices. He was told

that he had no choice but to comply with the order. Shortly thereafter a gentleman arrived

and he said that they would lock the door of the premises. Walbaum and the others at the

shop went down the street to a local restaurant. He was trying to tell the employees not

to panic and was worried that they would move on.

[326]

He does not believe that he took payment of the bonus of $17,500.00 for the

1995 year end and assumes that it was dealt by Jess as part of the shareholders loan. With

respect to D2-7B, the letter from Jess to Sandbeck dated December 24, 1997 enclosing

11 sets of DR documents as listed therein, Jess had had a brief discussion with him and

provided those documents to Deloitte.

[327]

Walbaum testified that DR had surviving a number of audits. CRA had

audited the petty cash and the promotion travel accounts in 1992 and although they

disallowed 4 or 5 of them, there were very few issues. In a 1994/1995 audit, the tax audit

issues were limited to the skybox at the Brandt Centre, payments to Morrison and

Walbaum’s sons.

- 120 -

[328]

Walbaum confirmed that D2-8, were Jess’ working papers regarding various

issues and time periods. With respect to D2-9A, a calculation of AR monies paid for DR,

Walbaum told Jess as to why AR paid DR bills. Suppliers were refusing to charge items

to accounts, and some suppliers cut off DR and AR and said if DR made good on their

accounts, they would reverse that position. With respect to 9A, page 2, this documented

a discussion with Jess as to why AR was charging DR, tracking warranty work and

helping to collect receivables. AR kept to this. Walbaum indicated that this was all part

of the agreement with Sandbeck.

[329]

Walbaum admitted that $39,163.00, which was owing to DR, was received

at AR. The bank had deposited it to the wrong account. He did not reverse it because

money was owing by DR to AR and he made a decision to document it and deal with

Sandbeck about it. All of the original documents were provided to Jess. He had the

invoices that matched the cheques and he had all of the documentation.

[330]

After the liquidation, Walbaum was hounding the liquidator to take action.

It was imperative to move ahead on projects. There were five major projects but there

were many smaller projects. Walbaum personally worked on some of them and finished

them and DR got paid. He indicated that they completed a number of projects and the

liquidator was able to collect the money for those projects. DR was not sued by any party

in any of these projects. The concern was to complete the projects so that they would be

collectable. Walbaum tried to enlighten Sandbeck regarding suppliers and several

cheques which had been returned. The bank had frozen the account and suppliers were

not being paid.

- 121 -

[331]

Mulatz’letterofNovember26, 1997, foundatD2-14C, outlinedthesituation

and offering to assist Sandbeck. Some employees were wondering if they should return

to work. Walbaum instructed them to come to work. Rather than an employee going after

DR for severance, he offered them employment under AR. He testified he told Sandbeck

about this and Sandbeck agreed. If he released them, then Walbaum would employ them.

The situation respecting employees is detailed at D2-14E, the Olive Waller Firm letter

dated December 2, 1997. It indicates that the employees would start working for AR

December 1, 1997.

[332]

D2-15 was an attempt to say that AR would take over the completion of

projects and be responsible for the warranties. Walbaum was unclear as to what actually

happened to the projects listed in the agreement although he had done work on some of

these to finish them. He did not know the final outcome with respect to these contracts.

He indicated that that is where some trade-offs were happening as a result of the

agreement with Sandbeck to keep them going.

[333]

Walbaum co-operated with the liquidator. With respect to D2-16, these are

some job site contract work records but they are incomplete. DR supplied D2-17A and

B, respecting certain projects to Sandbeck’s office. Throughout he was trying to get

Sandbeck to agree to allow AR and to finish off the jobs. Deliotte allowed AR to take

over the lease vehicles (17F, 17G). Four DR employees made a claim to the labour board

and the labour board came back to Walbaum. Their time cards were with the liquidator.

In 17H, he was asking for copies of employee time cards.

[334]

With respect to the Gordons project, they were in the middle of this project

when the liquidation occurred. He had asked Sandbeck to make a deal to finish the job

- 122 -

but it never came to fruition. He observed that, one could not get a $40,000.00 profit on

a $70,000.00 job such as this. When the job ran into difficulties because of the

liquidation, Gabriel, the contractor, came to him and he told them to negotiate with

Sandbeck. Gabriel was looking for new estimates. Sandbeck indicated to him that he

could re-tender under AR. The engineer on the project gave the completion of the project

to AR because they had experience with it.

[335]

With respect to Tab 22, these were all letters regarding and evidencing the

non-responsiveness of the liquidator to suppliers bills and issues. People were looking for

information and to be given direction. Some were threatening legal action.

[336]

AR paid the liquidator $2,573.24 for additional equipment (D2-27).

[337]

The amount of $23,670.00 is the amount that is due to DR by AR after the

calculations with respect to work done by DR for AR less DR’s cheques in AR’s

possession (D1-18, Note 3, page 5). He did what he could to help DR and AR incurred

out of pocket expenses. AR is an unsecured creditor for $58,408.16 on the statement of

the liquidator at P4-C12 at page 6. That is a number they kept track of and which they

discussed with Sandbeck.

[338]

With respect to P4-F1, the Sherwood Community Bond, he recalls the letter

and agreement transferring the bonds to DR. He indicated that he bought the bond under

a personal name to keep the company of out it. He was approached by Morrison who told

him DR should get the bond because of the plumbing benefit. Mulatz prepared the

document. Walbaum testified that the bonds were taken back and all monies and equity

was returned to DR. This was around $2,000.00.

- 123 -

[339]

Withrespecttothe$53,000.00chequepaidtohim, thischequewascancelled

the same day by Gail, one of the office staff, who caught it and returned it. The credit was

applied the same day as the cheque went into the bank. The bank entry is not an invoice

since invoices do not have round numbers.

[340]

WithrespecttoP4-G6, Joyce’scalculationsrespectingtheshareholdersloan,

he disputes them and has no idea about several of the items. There is no money owing by

Ken Cooke or others as calculated. He does not know why these entries are there.

[341]

Dewdney Avenue was expanded. The tenant beside DR went bankrupt and

the landlord approached them and asked them to take the second bay and compound for

an additional $500.00 a month. After looking at $20,000.00 - $30,000.00 renovations to

expand Dewdney Avenue versus $250,000.00 to renovate McAra. It was decided that the

business would stay at Dewdney. The lease on Dewdney was an open-ended lease.

Walbaum testified that he had D1-9, the void agreement dated October 1, 1997 regarding

leasehold improvements, prepared. In the event DR moved out of its premises, certain

leaseholds were salvageable and he felt that it was fair to pay for them. This agreement

reflects $5,500.00 as the book value of the leaseholds. D1-8 respecting the equipment,

equates to the Brown’s appraisal of the same.

[342]

With respect to DR resources being used or billed by AR, Walbaum couldn’t

verify P4-H1, the listing of small job invoices, and commented that he does not know at

what point of time they were taken. If the document relates to DR paying for labour, its

accounted for in the deal with the liquidator and then accounted for by Jess. With respect

to H7, after the liquidator was in place, some suppliers billed incorrectly. They would

send bills to DR when AR picked up the material. A lot were sent back for credits to DR.

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Sometimes the invoices were never tagged properly. He believes there are credits for

these bills which were sent back. Unfortunately Walbaum does not have them, the

liquidator does. P4-H33 was sent out to help clarify the situation since the suppliers were

billing wrongly and creating a huge problem. With respect to H32, the progress billing

statements for various projects, the profit margins of 48% to 63% were far too high. The

profit margin net of 12% to 15% is appropriate although they do try to get 18% to 22%

gross.

[343]

With respect to J1, and the allegation that DR was improperly paying for the

law firms, the Shirkey legal work was for the theft problem at the shop. An employee had

taken a van home and headed off. The employee was charged. With respect to J4, Jess

had worked for DR. This was a DR issue.

[344]

With respect to K17, the documentation of the $26,600.00 credit on Dumur

loan, this is reflected in Tamwal’s financial statements. There should be offsets and

credits. Insurance was put on the building because Dumur had requested it. This was

accounted for in Tamwal. Tamwal still owes DR money and is just waiting the outcome

of this litigation. The amount of money that Tamwal owes is reflected in Jess’

calculation. With respect to rent charged by Tamwal, DR was using Tamwal’s building.

The rent for McAra was $1.50 per square foot or $1,500.00 a month including power, gas

and maintenance.

[345]

Walbaum disagreed with the adjustments Joyce made in his calculation of

FMV. Walbaum got the Brown’s appraisal of office equipment inventory and vehicles,

shown as D1-6. He thought that getting a price from suppliers was not appropriate.

- 125 -

[346]

Walbaum testified that all of the documents which were from the broken

computer are point in time documents. He testified that P4-B9, the March 31, 1996

internal balance sheet, is not accurate. B10 is a comparative although that is not

necessarily accurate and requires adjustments. When Dudley looked through these

documents, there were customarily changes to expenses and net earnings would be

corrected. Walbaum pointed out that in P4-B14 and B10, there is only one month

difference and the income fluctuates substantially. Walbaum indicates that these

statements used by Morrison are inaccurate and they are not to be relied on until the

accountant reviews them.

[347]

With respect to goodwill, Walbaum testified there was in his view no

goodwill in the company. Morrison’s goodwill went with him and his personal goodwill

went with him. Walbaum testified that a plumbing company these days works by

tendering and you either tender low or you get nothing. This was not a company which

people drive up to.

[348]

He did not question the liquidator with respect to the source deduction issues

but he stated that there was enough money in the liquidation initially to pay Revenue

Canada.

[349]

With respect to missing documents, Morrison and his consultant came to the

office to look at documents. When the liquidator came to lock up the building, they

vacated the building. With respect to the documents referred to at P4-C12, page 2, the

liquidator’s report, at the bottom, Walbaum has never been asked for any documents.

Every project document the liquidator requested was service and maintenance manuals.

Sandbeck had asked for these and he had looked through them. Binders were to be

- 126 -

provided to the contractor. All of the documents with respect to these projects were in the

binder books. Some projects were not finished off by AR. They were not allowed to

finish these.

[350]

He has not stripped the company of anything. He does not know what he took

from DR except wages. Anything that AR or Tamwal used that belonged to DR has been

documented. There was not any other occasion that has not been documented.

[351]

Walbaumindicatedthatheaccountedforeverything. Hebelieveshedoesnot

owe anything.

b)

Cross-Examination

[352]

Walbaum admitted that it was their intention that he and Morrison would

share equally in the benefits of DR. In general conversation, neither questioned each

other regarding personal use of truck or tools or said yes or no to that. Walbaum admitted

that if either of them used DR assets, there was to be an accounting. Morrison looked

after the crews, projects and bidding. At the beginning, they both went to out of town

sites. On some occasions, the workers would stay where they wanted and paid a

subsistence allowance. Walbaumcould never recall an instance where Morrison had used

Visa for a hotel. Travel accounts for jobs and travel expenses were inputted to the cost

of projects.

[353]

Walbaum admitted that the company had a share value in March of 1996 but

he did not know if there would be anything at the date of trial. He acknowledged that

prior to 1995 there were discussions with Dudley regarding keeping the income of

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corporation under $200,000.00 to avoid a higher tax rate. However, they never used not-

billing sales as a tax planning procedure. Jess told them to record the sales properly and

he would look after the tax. For the 1995 year end, they would have invoiced normal

progressing for year end. They did not refrain from billing at year end.

[354]

With respect to petty cash, if this money was for subsistence allowances,

there was no receipt required. For tools, if an employee bought it and brought in a receipt,

they would reimburse from petty cash. Petty cash receipts should have been retained.

Walbaum reviewed D1-11 and 12, the August 5, 1997 audit and notes which indicated

that there were some receipts available and others not.

[355]

Tab 63, the Tamwal March 31, 1998 financial statement, was prepared by

Dudley with Walbaum giving Dudley information.

[356]

Regarding P10, the letter dated May 14, 1996, Walbaum indicated that

Mulatz wrote this letter on his behalf. It outlines the understandings and agreements

reached by Walbaum and Morrison at their May 2^ndmeeting. He had seen the attachment

and he does not dispute what this is. He was aware that the status quo was to be kept. He

was aware that Morrison could carry on his own business if he wanted to. Regarding the

letter of September 20, 1996, Walbaum agreed to this. It was an interim agreement with

Morrison taking over the lease payments. However there still needs to be an accounting

for the lease payments paid by DR prior to the take-over. He confirmed that the letter

dated November 14, 1996 was part of the continued negotiations. He confirmed that the

rest of the documents in P10 were part of continued negotiations right up to January 9,

1997. Regarding P11, these were between the lawyers and he had not seen those. He did

not have any part of those letters. The Olive Waller Firm acted for him until fall of 1997.

- 128 -

He confirmed that by August of 1997 there were no results from the negotiation.

Walbaum, at first testified that he did not know that Morrison was going back to court but

after having his memory refreshed by his sworn affidavit dated September 23, 1997, he

admitted that he knew Morrison wanted to go back to court. He did not dispute that a

series of letters in P11, between August 19 and September 23, 1997 were negotiations.

[357]

With respect to P4-B16, he confirmed that the roller belonged to Fuller

Austin where he brother worked. He indicated that on D1-5 where he had asked Inland

to value the roller. He did not realize it belonged to Fuller Austin at the time.

[358]

He confirmed that DR had a couple of computers and business records were

imputed by Gail Serbu. He confirmed that D2-16, the job cost reports for various projects,

were generated by the DR computers.

[359]

With respect to the Dudley working papers, regarding what DR owes to AR,

the time cards to back this up were sent to Deloitte. Walbaum indicated that an office

memo was sent to Deloitte documenting this but it is not in court. He explained this to

Sandbeck and gave it to him. He does not have any fax verification sending the office

memo. He indicated that he stuck them in a courier package. The office memo reports

were not done on a computer system. They were done on a spreadsheet and Walbaum did

not keep the documentation. He does not have any copies and the originals have been sent

to Deloitte. He indicated that these statements verifying this were with Deloittes but they

have not been brought to court. With respect to an office service claim for $8,709.80, he

does not have documentation. This would reflect in the office costs, time, stationary to

track it and would be a total. He indicated that he charged the management fee beyond

the liquidation. He does not have the backup for a number of items on the list including

- 129 -

the Federated claim. He confirmed that AR did warranty work but had not brought

anything to court regarding the warranty work.

[360]

HeconfirmedthatthejobcostreportsforexampletheAvonleaPersonalCare

Home came from the AR computer but was just a general outline of the point in time

regarding profit. He indicated that when Mulatz sent the letter of December 4, 1997

attaching a draft agreement wanting to take over the DR projects, it showed the costs

allocated to date. It offered to take over the project whether there was any profit in it or

not. He indicated that there were more expenses straggling in with respect to the project

and would depend on what the office staff had entered when the statement was taken.

[361]

With respect to P13, the Olive Waller Firm letter of December 2, 1997, he

indicated that Tchorzewski was acting for AR on Walbaum’s behalf. He believes that the

$1,100.00 for the vehicles had been paid. With respect to the December 9, 1997 letters,

he assumes that it referred to vehicles. There was no writing from the liquidator

authorizing AR to do warranty work, charge management fees, charge office charges or

incur supplier bills. This was all verbal with Sandbeck. The only thing in writing was

using the DR equipment.

[362]

Walbaum confirmed that it was usual to enter business records into the

computer and keep payables and other business records there. He believed that they

entered sufficient information for the internal records. The internal reports were

somewhat close but were never accurate. For example, bills that came in would go to the

project manager who would review to see that it was authentic and agreed to and then the

bill would sit on that desk for one week or one month and then go to Walbaum’s desk to

approve the entry. If there was a dispute, there was a delay. It depended on how fast

- 130 -

everyone got to the paperwork. Normally they were 15 to 30 days behind in entering

things. Someone entered things into the computer every day. The program had three

modules. The GL entry was done on the 15^thof the next month. From the time a

document was received until it was recorded into the computer was approximately 15 -

30 days.

[363]

With respect to P4-C12, he does not dispute that $39,164.00 of DR cheques

were deposited to AR’s account. He acknowledges that the liquidator on November 25,

1998, asked for contracts and documents to support AR’s claim for reimbursement. He

did not have any documents to give them. Whatever they had were taken by the

liquidator. All they had was service binders and maintenance binders. He indicated that

he had the documents at one time. The liquidator was asking for a lot of stuff they did not

have. They did look and gave the liquidator what they found. He is not certain if despite

the liquidator’s request, if any documents were received by them. He did not have any

documents for 610554 Saskatchewan Ltd. respecting Rose Street. These were documents

that Sim had and he had no access to this information. He did not know what they could

provide.

[364]

With respect to P4-F8, the Dudley working paper regarding the bond, a

portion of the investment was refunded. Walbaum received $3,000.00 and this was

accountedforintheshareholdersloan. Walbaumsaidheactuallyreceived$2,789.00, this

was received personally. He reviewed P4-G3, the shareholders’ loan calculations of Jess

and admitted that he does not see one that says Community Bond.

- 131 -

[365]

With respect to P4-D9, the employee deductions, Jess’ letter to Sandbeck

mentioned as of September 30 that there were $13,275.54 arrears, and these would not

be remitted until October 30, 1997 when Walbaum is still in charge of DR.

[366]

WithrespecttoP14wheretheliquidatoraskedformissingmailingaddresses,

they were asking for documents which they Walbaum did not have. He had no documents

to assist the liquidator.

[367]

Regarding the liquidator’s letter to AR (P14, page 2), AR paid for that

equipment. AR bought whatever the liquidator said was bought. Regarding D2-27, this

was the only cheque regarding the DR assets purchased. He does not know if there are

any other cheques. AR sent the cheque for this amount.

[368]

Regarding P4, I2, this was a job cost report. These are not accurate, there

could have been more entries required. With respect to D1-8, he acknowledged that

Hunter had voided the agreements at Tab 8 and Tab 9. Regarding D1-9, the nullified

agreement to purchase DR leaseholds, he was prepared to pay for items considered an

asset that AR could move. This accounts for the tenant’s portion not the landlord’s

portion. After the liquidation, AR was there at the premises for 3 to 4 years.

[369]

With respect to Joyce’s reference to 226 Cornwall Street, he acknowledged

that at one point DR had an office and a garage and a shop. He did not construct the

garage after Morrison joined. However they built a shop and office and put some drywall

on. Walbaum confirmed that they got a new furnace at one point but did not get new

plumbing. They redid the kitchen and a friend did that job. He fixed up the basement 4

to 5 years after Morrison joined. He did not have ground put around the house as

- 132 -

Morrison indicated. At the time Morrison joined the company, he owned his house.

Excavation and weeping tile was done in the early 1980s.

[370]

With respect to P4-G3, the Dudley working paper and the comment that he

believed that he did not take the bonus and it went into the shareholders loan, he admitted

that he did not see the $17,500.00 in the shareholders loan calculation.

[371]

RegardingP4-H4, DRjobprogress, anotherDudleypaper, thiswasdiscussed

in detail with Walbaum and Dudley consulted with him. He did not dispute that AR sent

Agco invoices and got paid and that Agco was at one time a client of DRs. He referenced

P4-H2. Regarding P4-H9, Regina Exhibition Association was was a customer of AR. It

was also a customer of DR. Regarding P4-H3, all or most of the employees at DR became

AR employees after November 13. He does not dispute the time cards H3. With respect

to P4-H32, both the James Smith and Gordons projects became AR projects.

[372]

With respect to P4-F6, he does not dispute that he took the bonuses and got

paid. With respect to F7, he does not dispute that his wage was $125,146.64. He does not

know what the sum of $17,408.17 is. With respect to P15, he does not recall Karen

Walbaum getting $6,000.00 a year for each year between 1990 and 1992. He does not

dispute that Karen got paid but it was for a service. He does not know where the T4s for

Karen are. He indicated that Sandra Morrison got paid the same amount.

[373]

He acknowledged that DR paid the Dudley bills but did not pay the Joyce

bills. With respect to J7, he indicated that the Olive Waller Firm was working for him to

deal with the liquidation and other matters with respect to DR. He was not sure if this bill

was paid. Walbaum had DR pay them for work done on behalf of DR. With respect to J2,

- 133 -

he believes this is an instance of where DR agreed to pay half the bill and there needed

to be clarification as to what was a DR issue and what was not.

[374]

With respect to P4-J3, he does not know whether this legal bill was paid.

With respect to J9, this reflects calls with lawyers. The Olive Waller Firm was billing DR

for the liquidation and buy-out in part. He does not know if this was paid. With respect

to J1, page 2, the Gerrand entries, all of these were paid by DR. With respect to J1, the

account of Shirkey dated September 20, 1995, he does not believe it dealt with the

divorce but it had to do with theft by an employee. There was a second invoice for the

same amount for this but this as well did not deal with the divorce.

[375]

When they took over another bay on Dewdney, they took over a compound

as well. They did major renovations on the new bay, replaced the floor on the old one.

The new bay was at the end of the building and had a fenced compound behind.

[376]

He acknowledged that P4-K18, were invoices from Tamwal regarding

storage and rental. K19, a Jess working paper dated September 30, 1997, shows a cheque

to Tamwal for $9,630.00 but he cannot confirm this cheque went through. With respect

to K23, page 6, note 8, the Tamwal March 31, 1998 statement, he thinks Tamwal got paid

by DR. Regarding K12, the purchase of McAra Street, he admitted that DR paid the cash

to close and when the property was sold, the money was paid to Tamwal. K30, the Pippen

bill, had to do with McAra Street. Tamwal could have paid this. With respect to K24, he

believes that DR paid the bill and that is why it shows up as a loan to DR. K19, a Jess

worksheet reflects what is due from Tamwal to DR. He admitted that Tamwal has not

paid DR. K23, the balance sheet shows Tamwal owes DR $35,506.00 but this may

include the Pippen bill and only $27,959.00 might be owing. This means that Tamwal

- 134 -

collected the rent for the building and DR paid for the renovations. The Pippen bill was

not included in K19 on Walbaum’s instructions. Tamwal eventually sold the building in

1998 and received $32,440.00.

[377]

With respect to the oil investments at K23, note 3, these were investments by

Tamwal and went into this name. He admits that AR got $7,500.00 from Tamwal. The

notice to suppliers (P4-H33) from AR was sent from September 24, 1997 was sent at his

instructions. With respect to H33, he felt that this notice would limit confusion. He

confirmed that AR was up and running as of October 1, 1997. With respect to the notice,

P4-D11, this went to suppliers and wholesalers. He does not recall if it was sent to

customers. It may have been sent to some contractors to stop confusion. In September and

October of 1997, he was sending notices to suppliers and some customers under both DR

and AR. At that point he was experiencing trouble with suppliers and customers because

of ongoing problems. He could not continue to operate. He told them that he would be

continuing as AR and would still provide service to DR customers. He was trying to find

a way of operating without hurting the company and a way to stop dealing with DR under

his name. To do it would otherwise would have hurt collections. He admitted that he was

a shareholder in both corporations and had an interest. He admitted that the phone

numbers for DR and AR and the locations were the same.

[378]

P4-D14 and D15, both AR statements, were prepared by Dudley. With

respect to D15- Note 2, there were no tools as capital assets. He thinks the tools may be

in office equipment. With respect to G5, Jess’ shareholders loan calculation, he agrees

he received all of these amounts. He confirmed that DR, on November 13, 1997 worked

out of Dewdney Avenue and the next day AR had the same phone number and location.

- 135 -

There was no physical change between DR and AR. He reviewed P17, the photocopy of

the website of AR which indicated that the company was established in 1982.

c)

Re-examination

[379]

On re-examination, he confirmed that the GLs for 1996 and 1997 were in

Dudley’s letter of December 24, 1997 at P4-D9 and sent to Deloitte by Dudley.

[380]

He confirmed that in July of 1996, all bets were off because Morrison said

he was coming back to work. He assumed he was. He believed that the tentative deal

which was done in May was only to last a month.

[381]

With respect to the McAra Street renovation issue, DR was in long before

December. Between the holiday period in December, they were going to renovate to suit

DR. They had contractors give quotes for renovations.

[382]

DR.

With respect to P11, the Olive Waller Firm was working for Walbaum and

[383]

WithrespecttoD2-17H, theseemployeetimecardswereallpackagedupand

put in courier bags and shipped to Deloitte.

[384]

With respect to the computer job costs reports, the system automatically puts

in net profit. The total expenditures is what is spent to date. The bottom is left to

complete. This is not, however, net profit. Where the system says balance to complete,

- 136 -

the receivable is an estimate of the project. The warranty had to be added and would not

know that until a year later. Sometimes there are 1 or 2 year deficiencies which are not

allocated for. There is no allowance for deficiencies.

[385]

With respect to 226 Cornwall Street, the furnace was put in the home while

he was renting. Barry Lamontange asked if Walbaum wanted it and it was put in and

charged to the landlord. With respect to P17, the website, the 1982 date is a mistake and

should be 1997. The reference to 1982 is when Walbaum started in business.

[386]

With respect to why DR was paying legal fees prior to liquidation, he

indicated that there was an evaluation taking place for the purpose for the company. He

was not necessarily going to purchase the shares. The shares could be redeemed. The

lawyers were protecting and documenting and he did not know why that would not be

paid by DR. The fees were calculated on the basis of lawyer’s view and his view

regarding a DR portion.

[387]

With respect to Rose Street, he sat down with Sandbeck and at that point did

not have an accounting for it. Sim had the accounting.

d)

Read-Ins

[388]

Morrison also read in questions from the discovery of Walbaum regarding

the claim against Walbaum and Walbaum’s wife and related companies. Many of the

read-ins dealt with factual situations brought out in chief and cross-examination of

Walbaum. Walbaum admitted in the answer to some of the questions read in that he was

in sole control of DR after Morrison stopped being active in the company until it was

- 137 -

ordered into liquidation. He also admitted that the application for liquidation was

originally initiated in August, 1996 and then put on hold for approximately one year.

Walbaum indicated that DR invested $56,601.17 in Rose Street. This would have

included labour and materials and mortgage payments and utility payments. There are a

lot of things that would make up that number. A clarification question was allowed on

this series of questions that Walbaum could not be certain that that was all the money

invested since it only went up to a certain time and more could have been invested after.

[389]

In the read-ins, Walbaum admitted that at some point in time before the

liquidation, DR had worked on the Gordons project and that after liquidation, the DR

employees became employed by AR and the same people completed the Gordons project

under AR. Walbaum indicated that some of the DR staff was doing AR work and DR

work, although a fair amount would have been DR work. That was because DR employed

the employees and he did not pay them under AR. DR had to lay them off. He indicated

that he had talked to Sandbeck and that Sandbeck would pay up the employees to the end

of November and would lay them off so that they could be hired by Walbaum if he

wanted. First DR had to let them go. Walbaum indicated that he assumed that Sandbeck

would, because he had the time cards and he would pick what was DR expense and what

was AR expense and that AR would be invoiced. A claim would be made for employees

who worked on AR jobs but DR paid for them.

[390]

Walbaum also indicated that when Rose Street was sold, the money did not

go to DR but went into the account of 610554 Saskatchewan Ltd. Walbaum also admitted

that the work on McAra Street were for the benefit of Tamwal and he was the sole

beneficiary of Tamwal Investments. Walbaum admitted that in the 10 years that DR had

been in operation to September, 1997, they had never rented additional storage space.

- 138 -

[391]

Walbaum indicated that there were occasions where he and Morrison both

used the company money and that they were entitled to do it as long as it was paid back

to the shareholders loan account at the end of the year. Walbaum admitted that he owed

DR over $38,000.00, based on the shareholder accounting. Walbaum indicated that

Tamwal was wound up in June, 1998. Walbaum was asked to produce an accounting for

AR’s use of vehicles, equipment and inventory by DR. He indicated that he did not

believe there was an accounting available. Walbaum indicated that he had bought

approximately $54,000.00 worth of investments in Tamwal at a time when there were

monies owing by Tamwal to DR for bills that DR had paid for Tamwal. Walbaum

indicated that the Olive Waller Firm bills, which were paid, were for them to defend DR

from the liquidator.

[392]

Walbaum indicated as well that for each of the petty cash entries found in the

petty cash working papers, whether they be for meals, travel or vehicles or whatever, he

would have had to turn in a receipt. Walbaum undertook to produce these receipts but

indicated in his response that any and all receipts would be located with the liquidator at

Deloitte. He does not have these documents. Walbaum did admit that he received monies

for the petty cash amounts referred to in the documents but again was unable to produce

receipts for these as these would have been located with the liquidator. Walbaum

indicated that Deloitte came and took all of the DR documents with them that were at 333

Dewdney Avenue.

[393]

By October 17, 1997, Walbaum had opened accounts under the name of AR

and he had given personal guarantees to pay suppliers. Walbaum, after being shown AR

computer records, did not disagree that by the end of November, 1997. AR had billed

$53,368.47 to the Regina Exhibition Association. He indicated that the City of Regina

- 139 -

and Regina Exhibition Association came to AR when they were notified that he was no

longer operating DR. This happened through discussions with him. Walbaum indicated

that he told them that if they wanted to continue operating with DR, they would have to

contact Sandbeck. Walbaum told them that he was operating under the name of AR. He

told them that AR could do the job fast. After Regina Exhibition Association found out

that he was going out on his own, they approached him to do the work. He indicated that

not much of the work at the Regina Exhibition Association over the two months ending

November 30, 1997 had to do with labour paid for by the liquidator. He did, however,

admit that a portion of it would be labour paid by DR through the liquidator and that AR

owes DR some money. With respect to the improvements to leased vehicles, that was

dealt with in the working papers and he had no dispute with the amount of money that is

reflected in the working papers. Walbaum admitted that there was $1,403.12 of

improvements made to his vehicle.

8.

TAMMY WALBAUM

[394]

Tammy Walbaum was called by the defence. She testified that she believes

that she does not owe DR or Morrison anything. She earned money that she was paid. In

1995, she did all of the cleaning of the front office, reception, kitchen and bathroom at

DR and was paid for it. She also cleaned up the back shop area. From 1996 on, she was

at the DR offices from 8:30 a.m. until 4:00 p.m. answering the phone and filing and doing

errands. She was in the front office along with other employees but after she got to know

the computer and office system, she would enter invoices, filing and eventually did

dispatching of service men. She handled work orders and pricing and prepared

maintenance manuals by organizing and tabbing them.

- 140 -

[395]

She confirms that while at DR, she was running errands for all kinds of

supplies and often would get petty cash advances to buy the supplies or use her own

money and get reimbursed. She would always hand in receipts to Gail Serbu who would

reimburse her. If she was buying supplies and bought some personal items, she would

advise Gail and the matter would be adjusted. She confirmed that P4- F11were her pay

cheques from DR and at D2-3G and H were her T4s for the 1996 and 1997 year. She

confirmed that in early 1996 when Morrison was not at DR, it was difficult. Walbaum

was working more hours and he was hardly ever home. She confirmed Morrison never

called in 1996 or 1997 while she was there and there were no calls in 1998 from Morrison

to DR.

[396]

SheconfirmedthatD2-17EwasherprintingandWalbaumhadinstructedher

to write Sandbeck.

[397]

She testified that she was not aware that DR had paid any trips to Mexico

when questions about that. She confirmed on cross-examination that receipts would

sometimes be adjusted by Gail and Gail would write her a cheque. She confirmed that she

could not get money reimbursed without a receipt.

[398]

She confirms that she went to Toronto on the Presuitti job and when there,

she swept up and set up dishes and glasses and washed and help decorate and set up the

restaurant. She confirmed that during her trip to Toronto on the Presuitti matter, she took

a side trip to Niagra Falls for a day. Tammy reviewed P4-2F 11 and 12 and confirmed

that money was for her although she was unaware of what the cheque No. 3339 for

$5,000.00 was for.

- 141 -

9.

HOWARD DAVIES

[399]

Mr. Davies was called by the defendants. Mr. Davies had worked for

Wolseley Plumbing and Heating for nearly 30 years. Wolseley is a wholesaler of

plumbing equipment. He had been on disability since June of 2008. He had known

Walbaum and Morrison since 1989. He was a sales representative and made calls on

independent plumbing companies selling them products. He indicated that he had made

calls once or twice a week and indicates that when he would call DR, Tammy or Gail

Serbu would answer the phones. He confirmed that he gave free products to DR regarding

renovations on Dewdney and to Walbaum for his house. There were no invoices for these

free products because they were given with the approval of the manufacturer. In cross-

examination he confirmed that although he gave free products to a lot of customers, he

never gave anything to Morrison for his house. He explained that the reason that

Walbaum got free things was that he asked him if he could help out at his house and

Dewdney Avenue premises.

10.

LEO PAYETTE

[400]

Leo Payette (“Payette”) was called by the defendants. Payette has been in the

plumbing industry his entire life and worked as a manager for Crane’s Plumbing Supplies

from 1992 to 2008. He left Regina approximately 6 years ago. Between 1992 and 1998,

he was the manager for plumbing. He is familiar with DR, Walbaum and Morrison. He

would often go to DR between 1995 and 1997 with Vern Runge. When he went there,

Tammy, Walbaum and Morrison and other people were there. He indicated that he

provided free product if the business owners were substantial customers. He supplied this

to show homes or personal homes. In some cases the manufacturers would write-off the

- 142 -

product or would discount it and as a result the owner would end up with free product.

DR was a substantial customer and they often donated food to DR events. He testified

that Vern Runge approached him respecting Walbaum building a house and he did

provide free product to Walbaum and it was written-off. Vern Runge has passed away a

few years prior to trial. Payette referred to a letter dated November 18, 1993 on Crane

letterhead with Runge’s signature. He was aware of this transaction.

[401]

Payette also confirmed that the city plumbing accounts that he dealt with did

not carry large inventory because of there were wholesalers in town. He indicated that

country accounts carry more inventory. As well there was lots of competition by

plumbing companies.

[402]

Incross-examination, PayettetestifiedthatoneoftheresponsibilitiesofVern

Runge was to call on DR and that when he came to Regina, which was four to six times

a year, he would often go out with Mr. Runge to DR. He testified that Mr. Runge was in

more regular contact with DR. He confirmed that when he went into the larger plumbing

shops, he saw a lot of inventory. Although he admits he did not go into the DR

compound, what he did see when he went into DR and went through the warehouse, was

shelving, sheets of sheet metal and some copper pipe on a rack. He confirms that Mr.

Runge never came to him asking for free product on behalf of Morrison.

11.

BLAIR MCPHEE

[403]

BlairMcPhee(“McPhee”)wascalledonbehalfofthedefendants. Heworked

for DR from 1988 to 1997 and with AR from 1997 to 2001. He testified that in December

of 1995, employees would customarily show up and pick up any tools they needed, put

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them in the vans and go to their job sites. He confirmed that in the summer of 1995, he

attended the job at Presuitti’s in Toronto. He helped put up a special heavy wall chimney

for Presuitti’s restaurant. He confirmed that Tammy was there helping the owner’s wife

do decorating. He also stated that he saw Tammy at the office at Dewdney Avenue and

saw her cleaning, answering phones and working in the back shop. She also did clerical

work. He testified that in the 1995 period, the inventory and equipment at DR was less

compared to the inventory and equipment that his present employer Academy Plumbing

and Heating carries. The DR Plumbing and Heating service van had approximately

$2,000.00 in material which they normally carry. He testified that the shop in 1995 and

1996 was small and that they were always tripping over things.

[404]

He confirmed that he did work on Berthiaume Bay and helped Walbaum to

landscape and install a tub. He did this on nights and weekends and did not get paid for

it. With respect to a trip to Mexico, he paid for that. He confirms that he never had any

corporate credit card and got cash or cheque from the company for incidentals and often

got it from Walbaum. He reviewed P4-B16, the list of tools, and confirmed that there

were items on the list that were his personally and other items that were borrowed. With

respect to the green tanks, all were owned. The bar folder was borrowed. He indicated

that some of the items could have belonged to other people and that some of the items

were older stuff which was bought at auction or are second hand. He indicated that many

items in 1995 and 1996 were broken and some were stolen. He confirmed that each of the

employees had their own hand tools. If the hand tool wore out or it was broken, they

could replace it.

[405]

He confirmed that he did work on Walbaum’s cottage. He was, however, not

paid by Walbaum for this.

- 144 -

12.

MORRISON REBUTTAL

[406]

I made a ruling during the trial that Morrison would be entitled to rebut

certain issues which may have caught him by surprise as a result of the defendant’s case.

Accordingly, he was examined and cross-examined. Don Leier testified as did Andre

Deneve on rebuttal.

12.1

Morrison

[407]

Morrisontestifiedthat333Dewdneyhadacompound. Peter’sSewerService

was next to their bay. It moved out and the compound became available. They started to

pay rent and use it and had it between 1992 and 1995 when he left.

[408]

Regarding out of town travel, he went out of town more often and had contact

with hotels and would arrange rooms and meals on the jobs. He went out to set all of this

up. If his men were working out of town and had to buy lumber and miscellaneous items,

he would write cheques and take the bills. He would write cheques to the person who

handled the bill. It was not practical for him to reimburse expenses. In cross-examination,

Morrison had admitted that when Walbaum looked after a job out of town, that there was

never a corporate credit card.

12.2

Donald Leier

[409]

Mr. Leier indicated that Morrison was afriendofhisandheworkedpart-time

at DR. He left DR about the same time Morrison left on holidays and before that had

- 145 -

worked there for 4 - 6 years. He had done some work at the shop cleaning up the shop

and the compound and he kept the scrape material in the compound outside. The

compound was fenced. He remembers going to Watrous regarding the Mainline Motors

job. On that occasion, the hotel was paid for and the meals were paid for although he did

pay for a couple of meals. He got reimbursed cash from Walbaum for these bills.

[410]

Walbaum had told him that a bunch of work had to be done on his cottage.

Leier testified that the cottage had a full bath and an old claw foot tub and sink and an

older kitchen sink and taps. All the hot and cold water is piped in and there was a sewer

system in place. In cross-examination, Leier confirmed that he had no notes of all this.

He paid $17,000.00 for the cottage. The old claw foot tub was newly plumbed and the

wall hung sink had new taps and toilet but there was no electricity. He testified that he

was good friends with Morrison and had helped him out in 1996, after Morrison left DR.

12.3

Andre Deneve

[411]

Mr. Deneve was called by the plaintiffs. Mr. Deneve testified that he worked

with Morrison at DR between May of 1993 and January of 1996. He had access to the

compound and shop. He testified that the offices at the 300 block Dewdney consisted of

a shop and front office. Outside the building was a compound, 25 x 40 feet which was

fenced.

[412]

He testified that he worked out of town from time to time and that Morrison

arranged the hotel and meals part of him going. He never got a per diem for doing out of

town work never got cash to cover his travel because Morrison had arranged all of it.

- 146 -

[413]

On cross-examination, Deneve testified that he did not work at DR after

January of 1996. He confirmed that the compound was a gravel compound and that DR

was using it. He also confirmed that he worked for Morrison in May of 1996 by doing a

few jobs and did lots of jobs for him in 1996 and 1997. He confirmed that while he was

at DR, there were 8 or 9 different employees there and that at any time there were one or

two jobs out of town. He admitted that he did not know how the other employees were

being dealt with with respect to the out of town expenses. He confirmed that Morrison

and Walbaum gave cash to whoever handed receipts to them. He also confirmed that the

business premises at Dewdney were cramped and more space was needed.

13.

THE LIQUIDATION

13.1

[414]

Adams

The order for liquidation of DR was made on November 13, 1997 at the

request of Morrison. Deloitte was appointed the liquidators. Adams testified on behalf of

the plaintiff. Initially, Sandbeck was the liquidator acting for Deloitte but he was not

called. Sandbeck was the vice-president in charge of the file and had other staff helping

him. Adams became involved in the DR matter in August, 1998 and had no personal

involvement with it prior to that. She acknowledged at P4-C-12 in her report that there

was some concern about the solvency of DR.

[415]

Plaintiffs’s counsel took Adams through various issues with respect to the

$53,000.00 cheque which Walbaum cashed. Adams was not sure that the money was

returned to DR. She had no information on it.

- 147 -

[416]

Adamsindicatedthattheinformationwithrespecttounsecuredcreditorswas

from information supplied by AR. There was no formal proof of claim mechanism as in

the case of bankruptcy whereby the unsecured creditors filed their claims with the

liquidator. When questioned about the entry for the claim of AR of $58,408.16 Adams

indicated that Walbaum had alleged this amount to be made up of a number of entries

based on a working paper showing that amount. Adams understood that all the amounts

claimed by AR related to monies already paid out on DR projects. She indicated that AR

did not provide to them cancelled cheques for the payments and that the number included

management fees and GST and warranty claims. She was not provided any supporting

material but did receive a working paper from AR’s accountant with respect to this

number. Adams stated that the liquidator did not authorize AR to expend monies for DR

on these matters.

[417]

With respect to the list of documents in possession of the liquidator found at

C2 she indicated that on the list there were no bank statements or cancelled cheques for

the period prior to October of 1996. He indicated that some of the records of DR were

obtained at the time of the liquidation order and others later. Some records were also

delivered by Dudley on September 9, 1998 and additional records were retrieved by her

after she had been at the Dewdney office and talked to Walbaum. She indicated that the

last box of documents was delivered on October 21, that box being labelled AR. They

were actually DR documents. She said Deloitte got many documents November 13, 1997

when the bailiff visited DR offices and retrieved the file. She indicated she was satisfied

that the liquidator had requested all DR documents from Walbaum.

[418]

With respect to petty cash receipts, there were no petty cash receipts from

1990 to 1995. She indicated that she did get a file folder with approximately eight

- 148 -

bundles and each has a petty cash claim. The entire petty cash file that she received was

not thick. With respect to the documents received on accounts payable, she has looked

at those but did not have any outside source documents from the vendors. They do have

a company list prepared but do not have certain documents prior to 1996. She does

remember going to the DR office to look at larger project documents. They were large

binders on each of the construction projects at the DR offices. He received binders on the

Avonlea project but did not have others. She asked for those and those have not been

turned over by Walbaum.

[419]

At C2, page 3, it shows where the working papers are from. She indicated

that these documents supported a 1997 corporate tax return that they had filed. She

indicated that Deloitte did not do an audit or review in a technical sense but the files were

the supporting documents. Dudley had prepared the draft financial statements.

[420]

When shown P8, three documents, one of which is a letter from the Credit

Union dated November 25, 1995, and shown P4-C12, page 6, referring to the community

bond she remembers that a cheque was paid to Walbaum for $2,480.69. With respect to

P8, the letter from the Credit Union, she does not recall specific details of the

investigation of the account and looked at the working papers of Dudley. With respect

to the Levesque paper, she believes that there should have been $50,000.00 as shown on

deposit dated July 29, 1997 under the description DR plumbing which could be traced via

the Dudley working papers which belonged to DR. She did not ever receive it as a

liquidator. She does acknowledge that the $50,000.00 is shown as an investment by

Dudley and moved to the Walbaum’s personal account. It was charged through on a

shareholders loan account. C12 indicates this money was paid out to Walbaum but

- 149 -

accounted for in the shareholders loan. With respect to the amount of $104,529.53 loan

monies, she does not know where this money went.

[421]

With respect to C16, the letter from CRA, she requested this document as an

update and wanted to see the status of any amounts owing. This shows unremitted gross

deductions of $40,659.37. She indicated this would be remittance due for the period prior

to November 13, 1997. She indicated that the liquidator did not have sufficient funds to

pay this amount.

[422]

SheindicatedthatMorrisonhadrequestedtheliquidatortosuethedefendants

but the liquidator declined that they did not have the resources and therefore could not

proceed.

[423]

When confronted with D2-14, a letter dated November 20, 1997 from Milani

and the last paragraph thereof she indicated that this came from their legal counsel and

was authorized by the liquidator. Although she did not have direct knowledge of this, this

was in her view an exigent circumstance and she did believe it was a long term

agreement. Sheindicatedthattherewasa longertermagreementdraftedbyWalbaumthat

was not executed by the liquidator. She noted that the letter indicated that Walbaum

would keep an accounting. The liquidator did not receive an accounting mentioned in this

letter to the best of her knowledge.

[424]

In cross-examination, Adams indicated that holdbacks are unique to the

construction industry and that many of the DR projects were in process. She indicated

that they did not have documentation on the project to identify the issues.

- 150 -

[425]

With respect to C12-3, this report was prepared by Adams. There was an

interim statement that there was at one point $80,000.00 in the bank after receipts. She

indicated that there was a positive balance to liquidator but this did not take into account

the account’s payable. She indicated that pursuant to the order they were instructed to

identify and realize the assets and report back to the court and thereafter a plan to pay the

monies would be set up. They had an option to seek advice or to pay the money into court

and they therefore paid the money into court. Adams indicated that pursuant to the court

order they were to identify and liquidate the assets and report back to the court. She

agreed that generally that the longer accounts receivable were outstanding the harder

they were to collect.

[426]

With respect to D2-14, the November 20 letter from Milani to the Olive

Waller Firm, she was not personally involved. She was not part of the conversation

between Sandbeck and Walbaum.

[427]

In cross-examination she indicated that the relationship between Walbaum

and Morrison was problematic but it was not fair to say that each were individually

problematic in their relationship with the liquidator. With respect to C12, page 1, the

approach the liquidator took was one of balance and neutrality.

[428]

In cross-examination she indicated that she deposited a couple of accounts

receivable but does not recall any assistance by Walbaum to collect the accounts. She has

no knowledge of any cheques sent by AR. With respect to the approximately $39,000.00

DR money deposited by AR, she has requested the money back but has not received it.

She indicated that AR represented that they were entitled to keep it as a set-off for

assisting DR. She indicated she had a working paper which itemizes this set-off number

- 151 -

from Jess. She indicated that AR did not hide it was a set-off, but on the other hand did

not substantiate it. She indicated that they had made requests for information on the

money claimed but did not receive it. She indicated that there was no support to Jess’s

working papers respecting the set-off which indicated that she did not know that

Morrison had any DR property. Nor does she have anything from Walbaum or anyone

else that Walbaum had anything other than any DR property other than what he bought.

She indicated that if there was a list it should of been provided to her when she asked for

information.

[429]

With respect to Tamwal, she does not recall receiving a claim from Tamwal

for any off set. She has no direct knowledge regarding any discussions with Sandbeck

regarding Tamwal.

[430]

Adams indicated that when she filed her fees they were reduced she that does

not believe there was any reference to problems with Sandbeck. She indicated that she

may have said there was some concerns. She said the fee was not discounted for anything

specific. She testified that Sandbeck had become ill and that there may be concerns but

does not recall anything specific. She admitted that in a July 9, 1999 affidavit she stated

that there may have been complications because of Sandbeck’s illness.

[431]

She said that they became aware that there would be a derivative action and

did not oppose it. She indicated she is not aware of any unpaid accounts from creditors

and unaware of any litigation respecting that. She indicated that there were claims by

CRA and some builder’s liens but has no direct knowledge of their resolution. She

indicates on D2-24B, the listing of documents, the first page was prepared by the Regina

office. The second page is a list of documents and believes that page 2 is added on to the

- 152 -

existing list. She does not recall seeing a note that Jess delivered documents to Sandbeck.

She believes that Sandbeck attended to DR on the day of liquidation and asked for all the

documents available from DR.

[432]

With respect to D2-25, her February 1, 1999 letter to Walbaum, this indicates

this is a complete list of books in their possession. However, other letters said that they

do not have everything they need.

[433]

With respect to the equipment, those assets were sold to AR. She is aware

that there was a list of items purchased from suppliers. It was decided that DR should

receive compensation for it and remembers that those items have been purchased. AR

sent the cheque for these items and was paid into the trust account. AR complied with the

letter. There were no further requests.

[434]

She asked Walbaum to agree to a voluntary assignment of the company into

bankruptcy but Walbaum would not agree to this. She does not know what Morrison

replied to this.

[435]

With respect to C12 and P8 regarding the Levesque investment account entry

of $50,000.00, they were continuing to follow-up when the derivative action was

commenced. They believe it will be part of the derivative action. She believes that her

office may have contacted Levesque but required help from the shareholders. The

Levesque account was in the name of Walbaum, they were not liquidators of Walbaum.

They would have required his assistance. There is no explanation on the Jess working

papers for this entry. The working paper was not an external document as to where the

money came from. Although she spoke on the telephone to Jess she did not recall

- 153 -

speaking to him regarding this issue. She tracked the money herself regarding the

shareholders loan. There was a journal entry made by Dudley showing this $50,000.00

was put into Walbaum’s shareholders loan. She assumes that this is the same $50,000.00

as on the Levesque paper. There appear to be some matching dates.

[436]

She has not read any notes about any meeting between Jess and Sandbeck.

She has not received a proof of claim for the set-off by AR nor has she gotten any backup

from any of the other 58 unsecured creditors but no proof of claim is required.

[437]

She indicated that they took the tax return for the year ending September 30,

1997 which Jess prepared and modified it slightly. They did not review it. It was filed at

CRA because there was a loss carry back which could be part of the company and that

it was part of their mandate under the order. The tax return was filed because of the

possible recovery of money from previous years.

[438]

With respect to D2-17F, Sandbeck’s comment regarding releasing interest

in the vehicles, she is not familiar with this. She does not know if this is an agreement

although it may be a representation. With respect to D2-18, Walbaum expressing concern

about the documents removed, she has never seen this. She not recall seeing a list of

documents taken on November 17. She prepared a record of what was on hand in August

of 1998.

[439]

She testified that as she was collecting account’s receivable, she became

aware that there was confusion between AR and DR based on her work on the accounts

receivable.

- 154 -

[440]

With respect to D2-22, the letters from suppliers complaining about the

liquidator’s non-communication, she was unaware of it. She did not know if Sandbeck

was not getting back and had no knowledge of any delays.

[441]

With respect to P4-F9 and 10, she does not know where the $53,000.00 funds

went nor does she know anything about the $53,000.00 credit.

[442]

On re-examination with respect to P4-F10, the $53,000.00, she did not know

whether it was a deposit by a client of DR. She testified that the liquidator did not destroy

any DR documents. With respect to D2-27, assets in AR, she became aware of these after

Morrison reviewed the records and pulled out certain invoices. In the fall of 1998,

Morrison brought a list of DR assets still in possession of AR, this was a year after

liquidation.

13.2

Morrison

[443]

Morrison also testified with respect to the liquidation. He spent part of his

time at Deloitte going through time cards of employees, statements of suppliers invoices

and anything related to DR. He admitted going through the documents listed on C2 on

the first page. There were things that were missing and items that he never saw at

Deloitte. He wanted to see where the money went. When he was active in DR he was

always able to look at the bank statements. He indicated there were bank statements in

September of 1995 and he got them at least once a month. He also indicated that while

he was at DR there were annual general ledgers kept for each year and he wanted them

available to see if there was anything important. With respect to C10, he has not seen

those records requested to this day.

- 155 -

[444]

In cross-examination regarding the liquidation, Morrison had indicated that

hedidnothavenumerousconversationswithSandbeckalthoughrequestsforinformation

were sent through his counsel. There were numerous letters from his lawyer to Deloitte.

He indicated that he never sat down with Deloitte to explain any of his theories about DR

and all he wanted was to have Deloitte collect documents and assets and pay the bills.

[445]

With respect to C12-1, there were a lot of companies and suppliers of DR.

He did not know who got paid and who had not got paid. The suppliers never came after

him in person. He is not aware of any actions against DR or him or Walbaum related to

the liquidation of DR.

[446]

He indicated that he never asked the liquidator why the liability the CRA was

not paid. He acknowledged that the liquidator entered into an agreement with AR to allow

it to use the equipment. AR was to keep track of it so the accounting could be done.

13.3

The Documents

[447]

Documents respecting the liquidation are found in P4-Tabs C and D2. The

liquidator’s report found at C12 prepared by Adams gives a summary of status of

liquidation at that point. Between November, 1997 and January of 1999 the liquidator had

in its account a low of $75,520.00 and a high of $82,361.00.

[448]

C9, a CRA letter to Sandbeck dated August 13, 1998, shows indebtedness of

$46,901.30 owing on employee remittances. There was some cooperation between the

parties with respect to the filing of the tax return for the year ending September 30, 1997.

Based on the exhibits at C15 and 17, Adams filed the appropriate tax return with a draft

- 156 -

financial statement prepared by Jess. At C18, there is an indication that the filing was

accepted by CRA. In effect corporate taxes had been paid up to September 30, 1997 apart

from the remittances issue.

[449]

At P14, Adams sent a revised status update dated November 25, 1998. She

refers to the working papers of Jess regarding the shareholders loans for the period

September 30, 1990 to September 30, 1997 and indicated that they would form the basis

for the liquidators towards to the court. She indicated in that revised statement of affairs

that she was unable to value Rose Street. This is also confirmed at C12 where effect Rose

Street is treated as a loss by the liquidator.

[450]

There is correspondence between the Olive Waller Firm and Sandbeck. At

D2-14, a letter dated November 20, 1997, five projects are referenced and Milani agrees

that AR could use the equipment and inventory of DR to continue working on the projects

until further notice. The letter refers to an understanding that Walbaum will continue to

maintain accounting occurring since October 1, 1997 including time spent by employees

and projects and inventory used. It states that the equipment is only to be used for the

projects. At B of that tab, the Olive Waller Firm sent a letter dated November 25, 1997

to Sandbeck setting out a list of DR accounts payable as of October 31, 1997 and

indicating that the major concern is to guarantee that the employees will be paid for work

completed. They want assurances that wages would be paid and also identify a problem

with suppliers and the dishonouring of DR cheques. On November 26, Mulatz sent a

letter to Sandbeck asking for confirmation of the details of payment to suppliers, labour

and materials on projects and indicated that some suppliers were unpaid and the workman

were unpaid and if the matters were not rectified the projects would be a loss and that the

- 157 -

reputation of AR would be damaged. He wanted DR accounts paid indicating that there

was significant cash in the account for that purpose.

[451]

In 14 E, a letter dated December 2, 1997, there is a response to a Milani letter

of November 27, 1997 (not in evidence) indicated that AR offered employment to the DR

employees effective December 1, 1997 and suggesting that the liquidator pay the

employees for work on the DR projects. As well, there was a proposal for AR to take over

the projects.

[452]

At Tab 15, there is a draft agreement dated December 4, 1997. It was

prepared by Mulatz and sent to Walbaum that AR would take over five listed projects.

This agreement was never approved by the liquidator. At 17F, a fax by Sandbeck,

indicated that AR had purchased certain vehicles from DR for $1,100.00.

[453]

At D2-19A to F there are a series of documents which indicate that Walbaum

had requested to take over the Gordons project. While they were negotiating, Gabriel

terminated the contract with DR.

14.

POSITION OF THE PARTIES

14.1

[454]

Position of the Plaintiff re Dumur Co. and Dumur

Counsel for the plaintiffs argued that there was a trust, that the Loan monies

were impressed with a trust, that Dumur Co. and Dumur knew about the trust and that the

trust was breached. The letter of July 12, 1996 from Sproule, which was forwarded by

Mulatz to Dumur and Dumur Co., directed both of them to pay the Loan receivable into

- 158 -

trust and that Mulatz agreed to hold the money in trust until the parties agreed to its

disposition. The plaintiffs argued that the three certainties required for a trust were

present.

[455]

Ms. Lee argued the Canadian Pacific Air Lines Ltd. v. CIBC (1987), 61 O.R.

(2d) 233 and Air Canada v. M &L Travel Ltd. (1993) 108 D.L.R. (4^th) 592 cases and

indicated that although Dumur was a stranger to the trust, he knowingly assisted in the

breach of the trust. He knew the Loan was to be paid into trust and that he knew he

needed the agreement of both Morrison and Walbaum to deal with the money. This

changed the nature of the agreement. It was not enough for Dumur to take direction from

Walbaum or Mulatz. She pointed out that the trust will not fail for want of a trustee. The

money was impressed with a trust. The point of the trust was to preserve the receivable.

Ms. Lee argued that Dumur was in fact dealing with Morrison and his solicitors, as

evidenced in the July 12 letter and the oral testimony of Morrison that he told Dumur

about the trust. She argued that what Dumur should have done was to be in contact with

both sets of solicitors and notify Morrison’s solicitors of the returned money. The

plaintiffs argue Dumur Co. knew of the trust and of Morrison, a beneficiary, and breached

the trust by failing to place the money with Mulatz or to protect Morrison. The plaintiffs

argue Dumur is liable for knowingly assisting the breach.

[456]

She argued that s.18 of The Business Corporations Act, R.S.S. 1978, c. B-10,

as am. (the “Act”), and the indoor management rule does not save Walbaum and Dumur’s

actions. Dumur must have known that Walbaum and Mulatz were acting outside the

scope of ordinary authority. Agreement of both Morrison and Walbaum was needed.

Moreover, she indicates that the $120,000.00 Loan to Dumur and the repayment was

- 159 -

outside of the ordinary course and was in fact an extraordinary situation and the indoor

management rule does not apply.

14.2

Position of Dumur Co. and Dumur

[457]

Dumur and Dumur Co. questioned whether there was actually a trust. Dumur

Co. and Dumur should not be put in a position of proving that there is not a trust but the

onus is on the plaintiffs. Mr. Karwandy argued that knowledge of Dumur is an issue.

Dumur did not know whether Morrison had resigned or was still an officer of the

corporation. Dumur knew nothing but that Mulatz was acting for DR. It was not Dumur’s

job to figure out their status of Walbaum and Mulatz and it appeared that both were part

of DR. Karwandy points out that if there was a trust, the trust was actually created at

Mulatz’s office and that Mulatz was the man to hold the money in trust but none of that

applies to Dumur Co. and Dumur. Dumur Co. is only a debtor and has paid the money

and fulfilled its obligations under the Loan agreement. Karwandy points out that at P1-

42, Sproule gives Dumur Co. a specific direction regarding payment which is to deliver

it to Mulatz in trust and he has done that. Dumur was not sophisticated and all references

to the agreement of both Walbaum and Mulatz means no more than that the money

should be paid to Mulatz. There was no reason to believe that Walbaum did not have

authority to act for DR. Dumur Co. relies on Mulatz’s representation that Shutter could

deal with Walbaum directly and it was reasonable for Dumur Co. and Dumur to accept

the direction of Mulatz on behalf of DR.

[458]

Karwandy also argued that the trust may have failedbecause Mulatz returned

the funds and it may be that Mulatz did not believe that it was subject to a trust. He

questioned why the plaintiff would not have called Mulatz to testify on that issue. He

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indicated it was Morrison’s case to make that there was a trust and he could have called

Mulatz who was at the center of the matter.

[459]

Dumur Co. has paid the Loan agreement and documented the credits. The

documents speak for themselves. Karwandy argued that Morrison’s testimony regarding

a conversation with Dumur about the trust agreement was farfetched and that there was

little or no conversation with respect to the monies and any trust. He indicates that

Morrison built up his understanding from the documents and that the theory of trust

developed later as the claim evolved.

[460]

He argued that the terms of the trust were uncertain, and in any event, Dumur

was not a party to the trust. Karwandy argued that DR should not be suing for the credit

on the Loan because the numbered company got the credit. No one came to Dumur to say

it was not DR. Karwandy distinguished the Air Canada, supra case because in that case,

CIBC was a substantial beneficiary of its own decisions to use the money which is not the

case here.

[461]

From Dumur’s perspective, when Mulatz negotiates the credit on McAra

Street and the Loan, Dumur does not know that Morrison is not part of the company at

that time. Dumur assumes that everyone knows of the credit.

[462]

With respect to the involvement of Tamwal, from Dumur’s point of view it

looks like DR and Walbaum are involved. Mulatz is the lawyer and the deal was signed

in the DR offices. The witness is a secretary for DR. Karwandy indicates that Dumur does

not have a duty to inquire beyond that. He did not have to check into the numbered

company but assumed that it was an emanation of DR.

- 161 -

[463]

He argues that there is no constructive trust because s. 18 of the Act has

taken away the ability to have constructive trusts put in place. FromDumur’s perspective,

Walbaum had authority to do what he did and it is up to Morrison to show that Walbaum

did not have authority. Section 18 is an absolute defence. This was an ordinary

transaction and the money was loaned in the ordinary course. As well, the buying of the

land was not out of the ordinary course. The credit was a valid one and not negotiated

behind Morrison’s back.

14.3

The Plaintiffs’ Reply

[464]

Ms. Lee, in her reply to Mr. Karwandy’s arguments, argued that the

debtor/creditor relationship between the parties in the Air Canada, supra case at

paragraph 4 was transformed into a trust. She argues that even if the debt has been paid,

the trust remains. She argues that Dumur Co. cannot rely on their representations made

by Mulatz and that Dumur’s knowledge is key. He was aware of the inquiries made by

Sproule and the letter at P1-44.

[465]

Regarding the argument that Dumur was not sophisticated and thought he

was dealing with an emanation of DR respecting McAra Street, she states that the

distinction is clear. With respect to why Mulatz was not called, she indicates that the

question is irrelevant. She pointed out that the degree of dishonesty and fraud required,

as set out in the Air Canada, supra case, is not moral turpitude but lack of equity and

fairness and that Dumur took a risk acting as he did to the prejudice of Mulatz’s rights.

She argues that if Dumur had done the right thing, the asset would continue to be

preserved.

- 162 -

15.

ARGUMENT RE THE WALBAUM GROUP CLAIM

15.1

[466]

The Plaintiffs

The plaintiffs referred to Waxman v. Waxman (2002), 25 B.L.R. (3d) 1 (Ont.

S.C.J.) affirmed 2004 44 B.L.R. (3d) 165 (Ont. C.A.), Chiu v. Universal Water

Technology Inc.(2004), 45 B.L.R. (3d) 313 and Jordan Inc. V. Jordan Engineering Inc.

(2004), 48 B.L.R. (3d) 115, both Ontario cases as well as Tourangeau v. Taillefer (2000),

94 A.C.W.S. (3d) 650 as cases where the facts and circumstances of the shareholders

dispute were similar to this one and where the court provided relief to the aggrieved

shareholder and corporation.

[467]

As well, the plaintiffs cited Whiten v. Pilot Insurance Co. 2002 SCC 18 as

the governing case on punitive damages.

[468]

The plaintiffs claim nearly $1,100,000.00 of damages plus $572,000.00 of

prejudgment interest from the defendants. The plaintiffs argue that Joyce and Morrison

valued the company at $716,000.00 as at March 31, 1996. Between March, 1996 and

November, 1997, when the company went into liquidation, Walbaum was in sole control

of DR. When the liquidation occurred in November, 1997 the liquidator found few DR

assets. It may be that DR is insolvent. The plaintiffs’ question is how a healthy company

can become an insolvent company. They argue that Walbaum has denuded DR of its

assets to his benefit and the benefit of AR and Tamwal. They asked that Walbaum and

AR return the assets so that the liquidation can proceed and so that the value as at March,

1996 can be retained.

- 163 -

[469]

Joyce’s opinion began with the values in an internal DR Balance Sheet report

(P4-B9) which indicated a net worth of $526,932.00, and then adjusted for:

(a)

Bad debt recovery potential (a positive adjustment of

$20,000.00);

(b)

(c)

Inventory (a positive adjustment of $16,250.00);

Work in progress (a positive adjustment of

$67,000.00);

(d)

(e)

Equipment (a positive adjustment of $47,907.00);

Investment in 610554 Sask. Ltd. (a positive adjustment

of $22,507.00);

(f)

Goodwill (a positive adjustment of $91,575.00); and

Corporation tax payable (a negative adjustment of

$64,000.00).

(g)

and other adjustments to arrive at $716,000.00.

[470]

The plaintiffs also argues that Walbaum, and eventually AR, over time took

or received improperly $341,136.00 of DR assets, a discounted number, based on Joyce’s

recalculation of Walbaum’s shareholder loan at P4-G6. Though Joyce would generally

accept the opinions of Morrison, who would have the first hand knowledge of DR’s bad

debt recovery potential, inventory, WIP and equipment, he did analytical work to test

Morrison’s views for reasonableness. His analytical work can be found in the

spreadsheets he compiled based on DR’s historical experience as found in its past

financial statements.

- 164 -

[471]

MorrisonalsoclaimsfordivisionoftheprofitwhichDRmadeafterMorrison

left the company based on a projection by Joyce. Based on an average of DR’s income

between 1993 to 1996, Joyce calculated that there should be $200,000.00 of profit for the

period March 1996 to liquidation. With respect to profits made, the plaintiffs argue that

the income that went out the door is excessive. In 1996, Walbaum took salaries of

$118,063.00 and in 1997, Walbaum took salaries of $142,554.00. They admit that

Walbaum should earn more if there is only one principal, but taking an excess of salary

is the spilling of the equity. They asked that Walbaum put back the net profit after wages

into DR. To do so would restore the company’s value. They argued that the Tourangeau,

supra case, as cited in Waxman, supra, mandated a return of profits where there was a

breach of fiduciary duty.

[472]

They argue that P4-C12- 6, the liquidator’s calculation of the shareholders

loan is incomplete. There are many things which are not included in the shareholders

loan. They argue that there are many abuses which began in approximately 1990 about

which Morrison was reluctant to complain. The abuse accelerated in the years 1990 to

1995. They argue that the court should find that the distribution of equity had to be

returned as in Waxman, supra.

[473]

Counsel for the plaintiffs urged me to ignore the liquidation. In liquidations,

normally both shareholders suffer a loss. She argued that what happened here was that

all of DR moved to AR and that the absence of value of DR is not attributable to the

liquidation. She argued that there was inventory and equipment and that a liquidator

could not spend the money to find out what went on with DR. The plaintiffs point, for

example, to E1, which shows that DR bought lots of assets in the 1996/1997 fiscal year.

The liquidation did not destroy DR, it was already a shell when the liquidation happened.

- 165 -

[474]

The plaintiffs argue that the forensic work which Morrison did showed how

DR was denuded chunk by chunk by Walbaum. The $716,000.00 value includes an awful

lot of equipment and inventory and 18 months of profit that should have been there. AR

took DR’s intrinsic value such as it was. If AR were a start-up then it would, for a period

of time, suffer losses but it didn’t. DR became AR in one seamless act.

[475]

The plaintiffs’ counsel argued that there was goodwill in the company and

pointed to paragraph 14 of their brief respecting the statement in Waxman on goodwill.

The company carried on even though Morrison was not directly involved in the business,

that it was not a case of personal goodwill since the business carried on without Morrison.

The argument for goodwill is supported by the profit of AR during its first year. This was

strong and showed an increase to income stream.

[476]

The plaintiffs’ counsel argued that Joyce’s expert testimony was to be

preferred over Jess’. His experience and qualifications were better. He had seen both

sides of the finances and generally understood the plumbing and heating business. Both

experts agreed that the book value is not the FMV. Joyce made adjustments to the book

values and tested for reasonableness and as well, cautioned Morrison regarding pie in the

sky expectations when it came to Morrison providing him certain parts of the information

he used. Joyce was fair in his calculations because in B14, he made negative as well as

positive adjustments to values.

[477]

The plaintiffs argued that Jess’ qualifications were inferior to Joyce’s and he

had never done a FMV calculation of a corporation himself. Because of this, the plaintiffs

argue that Jess is incapable of expressing an opinion on FMV. Jess’ opinion of value,

based on the December 31, 1995 statement, is of no assistance because he did not do the

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statement himself. He did not work on Joyce’s adjustments to the DR value in March,

1996. Jess admits that Morrison, as field manager, would have the best knowledge of bad

debt, inventory, work in progress and equipment. The plaintiffs argued that Morrison was

best placed to know about inventory, work in progress and equipment and inventory

accumulated based on how busy they were and these would have grown as sales

increased.

[478]

There were petty cash withdrawals which had taken place over a period of

time. Walbaum’s explanation for round numbers, to get petty cash, to giving employees

money for per diems did not ring true. Up to 1995, there was no system for per diems.

Morrison, Leier and Deneve testified there were no per diems.

[479]

A number of DR cheques, found at D4, were deposited to AR. These

happened while DR was in Walbaum’s control and they must be repaid.

[480]

The plaintiffs argue that the rent charged by Tamwal did not have to be

charged since DR already had a compound, and was a diversion of equity that went to

Walbaum. Moreover, Tamwal admits that it owes money to DR.

[481]

The plaintiffs argue, at page 25 of their brief, that Walbaum is not credible.

The plaintiffs claim that with respect to the off-set of the defendants, that there are no

documents brought forward substantiating the claim for $86,000.00 although there are

a couple of working papers. This claim is not fleshed out. In any event, even if this were

for warranty work done on behalf of DR by AR, there were no documents to substantiate

this and no authorization was given or shown to AR to do this. There is only a letter from

Milani which is limited in scope.

- 167 -

[482]

The plaintiffs argued that the defendants have brought forward documents

selectively and have not given full disclosure. For example, not all of the documents

regarding Karen Walbaum, Walbaum’s former wife, were disclosed. Likewise, not all of

the CRA documents were disclosed. They referred to the case of Doust v. Schatz 2002

SKCA 129, where no documents were brought forward and there were consequences and

costs. The plaintiffs argue that many of the documents are no longer present. The

documents which Jess produced are secondary documents and it would have been

incumbent on the defendants to ask Jess to keep the documents if there was litigation.

[483]

TheplaintiffsarguedthatWalbaumpurposelyandmethodicallydenudedDR

of its assets and also failed to produce records which hampered the plaintiff’s case. This

behaviourshouldattractpunitivedamagesof$10,000.00. Theplaintiffsseekprejudgment

interest and costs in the usual manner.

15.2

The Defendants

[484]

The defendants argued that DR and Morrison are owed nothing after the AR

offsetting claim. With respect to the Dumur Loan, the defendants argued that Walbaum

had full authority to bind DR.

[485]

The defendants’ counsel argued that the interim agreement, which Walbaum

had with Morrison regarding repayment of the Loan, was terminated in July. There was

nothing further said about the Dumur Loan. After August, the defendants deny that the

Loan was wrongfully dealt with by Walbaum and improperly invested. There is not a

breach of trust. Morrison gave authority to Walbaum to deal with the Loan. Just because

the word “trust” was used does not mean that there was a trust. The three certainties of

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trusts have not been met. There is no intention. The agreement was terminated in any

event on July 23, at D2-11, after negotiations failed. At P1-64, there is a letter dated June

13 indicating that the money would be held in trust until negotiations are concluded.

There was a categorical rejection of negotiations by Sproule which terminated the

agreements. The subject matter of the trust was never clearly identified and Dumur was

never talked to with respect to specific amounts. With respect to the beneficiaries,

WalbaumandMorrisonmaynot absolutelybe the beneficiaries. The beneficiarywasDR.

It was the corporation’s money. This is unlike the Air Canada, supra case where there

was a specific wording with respect to the trust. Mulatz did not accept the trust if there

was one because he sent the money back. The money eventually got paid into DR’s

operating account.

[486]

The only reason Walbaum has sole control of the company was because of

a series of decisions that Morrison made to leave the company. They argue that this was

precisely like the situation in the Hobbs v. Dempsey, [2006] O.T.C. 34 (Ont. S.Ct. J.).

There was no attempt to hide anything from Morrison. Mulatz had been giving

documents to Sproule and Morrison had access to the premises. No bank accounts were

changed. No locks were changed except as explained. There is evidence that they were

not getting along and that the present testimony is revisionism on Morrison’s part. They

say that Morrison contemplated leaving in the summer of 1995 but concealed it until

December. Any relief for Morrison should be denied on the basis of willful and unjust

inequitable conduct respecting DR and failure to do his fiduciary duty to DR.

[487]

Respecting the argument that Walbaum did not provide documentation,

Morrison knew who the corporate solicitor was. He was still a director and he could have

gotten any records he wanted. He could have gotten a copy from Jess and he himself

- 169 -

could have told Jess to keep documents before they were destroyed. In 1996, Morrison

went to the DR office and reviewed the documentation but chose not to make copies.

Joyce went to Jess’ office and Jess gave them his files to review. Had Morrison talked to

people, he could have gotten any information which he now says is unavailable. With

respect to the 1996/1997 GL and petty cash records and receipts, Jess provided that.

Walbaum has disclosed all of the documents that he has. As well, some of the documents

are with CRA as a result of two audits. CRA audited and apparently showed nothing

wrong with petty cash. The audit was at Morrison’s insistence.

[488]

Theliquidatoracknowledgedthattherewereproblemswithliquidation. Their

account was reduced. The list of documents was generated by the liquidator a year after

they got them. It suggests that Sandbeck took the documents and might have lost some.

Within the first two weeks after liquidation, Walbaum requested a list of documents. It

would not make sense for Walbaum to destroy documents they would need to defend

against the CRA.

[489]

With respect to the computer, it was working at the time it was bought by

Morrison. It did not make sense to destroy the computer. Walbaum could have bought the

computer too. Adams indicated that the staff were working on a computer. Walbaum is

not sure how it got damaged. They argue that Morrison could have damaged the computer

to cast suspicions on Walbaum.

[490]

With respect to the valuation of DR, the starting assumptions of Morrison are

wrong. The valuation dated December, 1995 is critical because it is close to Morrison

leaving. The date of leaving should be the date of valuation, if any.

- 170 -

[491]

Morrison bears the responsibility of the consequences of liquidation. There

were in fact a lot of assets in the liquidation. The liquidator however, said that it was

almost insolvent. The company had $80,000.00 in the bank on the day of liquidation and

it had other assets and some liabilities. Had Sandbeck done a proper job, it would have

realized a lot more. Sandbeck was the agent of Morrison. The evidence indicates that

Walbaum assisted Sandbeck in the liquidation. Morrison provided no assistance on the

liquidation. The letter of Milani speaks to keeping track and details of time and expenses.

It points to an agreement with the liquidator. There would be no need to keep track of

these if there was no deal for an off-set. Jess prepared financial statements for the

liquidator and was paid for them. Moreover, the liquidator allowed AR to take over some

assets.

[492]

There was no hiding of AR and its creation was not underhanded. Walbaum

went to Mulatz to attempt to transfer the assets over at a fair value. There was a clause

regarding adjustment to the value if the court should order it. The agreement was to do

an orderly wind-down of DR and the liquidation order brought this matter forward.

Walbaum was running AR at the same time as DR. AR was started because DR could no

longer survive given the circumstances. Banks, insurance, bonding companies and

suppliers had questions and were creating problems. Running the company by himself for

18 months is further than Walbaum needed to go to discharge his duties.

[493]

With respect to source deductions, the liquidator should have dealt with this

issue. Money was paid into court 8 years after the fact. The liquidator had the money to

deal with the source deductions and not let the interest run up.

- 171 -

[494]

With respect to expert testimony, Jess was confirmed as an expert and he

reviewed the documentation before court. Joyce confirmed that a CA could provide an

opinionregardingthevalueofcorporations. TheunderlyingassumptionsofMorrisonand

Joyce are inaccurate. This leads to wrong numbers. B9, the March 31, 1996 internal

statement, is merely a snap shot in time and that this is clear looking at B10, the April

document, and B14. Joyce’s calculations are based on values provided by Morrison.

Moreover, Joyce’s evaluation is for the purpose of negotiating and was made in the

context of negotiating. Jess’ experience in the plumbing industry stemmed from 1974.

Jess would be on site and review the documents and initially the working papers. Jess put

together the financial history of the corporation and was best placed to give a value. To

suggest that Jess’ opinion should be discounted because he did not work on the details

is not tenable. It is not correct to say that Jess did not have first hand knowledge. After

Morrison left, Morrison did not have first hand knowledge of how petty cash was

handled.

[495]

The defendants argued that inventory fluctuates and WIP is difficult to

determine. The liquidator was in charge of making sure the equipment was collected. The

defendant admits that the FMV could be higher than book value. Goodwill was on the

books but it evaporated with liquidation. Jess argues that there is a real question as to

whose goodwill it is. D1, clause 7.6 speaks to the lack of goodwill on termination. Joyce

is not firm on the projection of profit. Morrison should not be entitled to profit in the

future if he did no work.

[496]

With respect to AR, to suggest that it would have starting year losses is not

proper. DR’s assets were not used to create AR profits. AR was profitable immediately

but had significant expenses to income. There is no evidence that AR collected DR

- 172 -

receivables apart from $39,000,00. DR had a legal obligation to employees after

liquidation. AR took over and paid the employees. It also finished off contracts. There

were some problems with billings and reversals. At P4-H1, there is a list generated by

Morrison himself which details work but no employees. Morrison was not there in 1996

and 1997. Page 3 relates to employee cards for a time period that AR did not exist. The

plaintiffs’ wrongly take a snapshot of the company and ask the court to infer things from

it without looking for documentation to give context.

[497]

Morrison admitted that he has an outstanding shareholders loan and he has

tools valued at $500.00. With respect to petty cash, there is no substantiation that

Walbaum got a personal and improper benefit. There is only a bunch of numbers.

[498]

With respect to the offset, although Adams indicated that there was no

written agreement for an offset Walbaum said that there was a handshake deal with

Sandbeck. When DR was terminated, warranty work and efficiency work needed to get

done. AR did it.

[499]

Regarding Rose Street, the liquidator was to deal with that asset and they did

not deal with it. There is no evidence of what became of it.

[500]

Walbaum argued that the assets of DR were not shifted to AR by him and

that he took no improper benefit from DR. He did not denude it of assets. There is no

breach of fiduciary duty or any other claim against AR and Walbaum.

[501]

There is no claim against Tammy. The defendants deny that there should be

punitivedamagespaid. Regardingpre-judgment interest, defencearguesthatareasonable

- 173 -

period of interest should be 3 to 4 years. It should not have to take 10 years to get the

matter to court.

15.3

The Plaintiffs’ Reply

[502]

In their reply, Ms. Lee indicated that if you compare the two lists of

documents from the liquidator, they coincide except for the GLs. Morrison had no right

to get AR information. Regarding a $53,000.00 cheque, Walbaum said he received the

money. Walbaum should have brought forward records with respect to this. His salary

in DR was excessive. Respecting warranty work, there is no evidence of this beyond the

statement that it was done. In any event, the liquidators report at C12 refers to only 6

projects. The employees moved to AR on December 1, 1997.

[503]

Adams, at P14, asked for documents regarding Rose Street but does not get

any. There is no evidence of why rent was charged by Tamwal and what the reason was.

Respecting pre-judgment interest, this is like the withholding of a just debt. Walbaumhad

a benefit for these years and that benefit should be returned with interest.

16.

THE LAW

[504]

The relevant law respecting the Dumur issue is found in the case of Air

Canada, which dealt with the issue of breach of trust and liability as trustee and liability

as constructive trustee. This case enunciates the three certainties required for a trust at

para. 23:

- 174 -

23 In concluding that the relationship between M & L and the airline

was one of trust, the Court of Appeal relied on Canadian Pacific Air

Lines, Ltd. v. Canadian Imperial Bank of Commerce (1987), 61 O.R.

(2d) 233. Although the Court of Appeal's decision in that case (1990),

71 O.R. (2d) 63 (note), was brief, the reasons of the trial judge, at p.

237, went into greater depth:

In order to constitute a trust, an

arrangement must have three

characteristics, known as the three

certainties: certainty of intent, of subject-

matter and of object. The agreement ... is

certain in its intent to create a trust. The

subject-matter is to be the funds collected

for ticket sales. The object, or beneficiary,

of the trust is also clear; it is to be the

airline. The necessary elements for the

creation of a trust relationship are all

present. I find that such a relationship did

exist between CP and the two travel

agencies.

[505]

With respect to the liability of a stranger to the trust, the court said the

following at paras. 32, 33, 35 and 36:

32 ... What remains to be decided is whether the directors of M &

L should be held personally liable for the breach of trust on the

basis that they were constructive trustees. Whether personal

liability is imposed on a stranger to a trust depends on the basic

question of whether the stranger’s conscience is sufficiently

affected to justify the imposition of personal liability. See Re

Montagu’s Settlement Trusts, [1987] Ch. 264, at p. 285. The

authorities reflect distinct approaches to answer this question

depending on the circumstances of the case, and it is to these that

I shall now turn.

33 There are two general bases upon which a stranger to the trust

can be held liable as a constructive trustee for breach of trust. First,

although not directly relevant to this appeal, strangers to the trust

can be liable as trustees de son tort. Such persons, although not

- 175 -

appointed trustees, “take on themselves to act as such and to

possess and administer trust property”. ...

35 Second, strangers to the trust can also be personally liable for

breach of trust if they knowingly participate in a breach of trust. ...

36 Lord Selborne L.C., at pp. 251-52, set out the ways in which a

non-trustee can become responsible for a trust:

Those who create a trust clothe the trustee

with a legal power and control over the trust

property, imposing on him a corresponding

responsibility. That responsibility may no

doubt be extended in equity to others who are

not properly trustees, if they are found either

making themselves trustees de son tort, or

actually participating in any fraudulent

conduct of the trustee to the injury of the

cestui que trust. But, on the other hand,

strangers are not to be made constructive

trustees merely because they act as the agents

of trustees in transactions within their legal

powers, transactions, perhaps of which a

Court of Equity may disapprove, unless those

agents receive and become chargeable with

some part of the trust property, or unless they

assist with knowledge in a dishonest and

fraudulent design on the part of the trustees.

In addition to a trustee de son tort, there were traditionally

therefore two ways in which a stranger to the trust could be held

personally liable to the beneficiaries as a participant in a breach of

trust: as one in receipt and chargeable with trust property and as

one who knowingly assisted in a dishonest and fraudulent design

on the part of the trustees. The former category of constructive

trusteeship has been termed “knowing receipt” or “knowing receipt

and dealing”, while the latter category has been termed “knowing

assistance”.

[506]

With respect to the degree of knowledge of the stranger, the court said at

paras. 39 and 40:

- 176 -

39 The latter point may be quickly addressed. The knowledge

requirement for this type of liability is actual knowledge;

recklessness or wilful blindness will also suffice. ...

40 If the stranger received a benefit as a result of the breach of

trust, this may ground an inference that the stranger knew of the

breach. ...

[507]

With respect to the claim against the Walbaum Group and the Dumur

issue, Morrison cites Waxman, supra. Sanderson J., at para. 1305, sets out the principles

of knowing receipt or receipt based on constructive trust:

1305 The elements of knowing receipt were summarised [sic] by

Perell as follows: “(1) a trust or fiduciary relationship; (2) the

stranger receiving property from the trust or fiduciary relationship

in his or her own personal capacity [i.e. beneficially], and (3) the

stranger having actual or constructive knowledge that the property

was transferred to the stranger in breach of trust or fiduciary duty”

(at 110). “Constructive knowledge” means knowledge of facts

sufficient to put a reasonable person on notice or on inquiry of the

possibility of a breach of trust or fiduciary duty. Knowledge of the

trust alone is not enough. Failure to inquire as to the possible

misapplication of the funds grounds liability.

[508]

The Ontario Court of Appeal affirmed the trial judge’s finding that the one

brother in Waxman owed the other a fiduciary duty at para. 490 and 491:

490 She came to the fiduciary duty finding by two routes. First, given the

history of their lives and the way IWS had always been run, the brothers

were partners in the business. The incorporation of the business in 1956 did

not change that reality. She found that, as partners, Morris and Chester

owed each other fiduciary duties. Indeed Chester conceded as much in his

evidence.

491 Second, the trial judge applied the criteria developed in the

jurisprudence to determine the existence of a fiduciary duty absent a

traditionally recognized fiduciary relationship such as a partnership. She

found that whether one uses the approach of the majority or that of the

minority in the seminal case of Hodgkinson, supra, the conclusion is the

- 177 -

same: the brothers owed each other fiduciary duties. She summarized her

finding as follows at para. 1262:

I find that, in all of the circumstances here, there was

a fiduciary expectation that arose fromthe conduct and

the relationship of the parties. Chester owed Morris

fiduciary obligations in the exercise of his power and

discretion over financial and legal matters, even as

they affected Morris personally. They had a special

and close personal relationship as brothers. They had

a special and close business relationship as 50/50

partners, who had built IWS together. In the financial

and legal sphere, Morris was dependent on Chester

both in relation to IWS and personally. By his

conduct, Chester represented to Morris that their

personal and business interests were common,

identical and without conflict. Morrisreliedabsolutely

and completely on Chester in legal and financial

matters. Chester was fully aware of the trust and

confidence that Morris reposed in him and of Morris'

vulnerability.

However, the court at para. 505 observed:

505 The existence of a fiduciary duty depends on the precise circumstances

of the particular relationship, not on the presence of any legal precondition

such as the existence of a contract. Apt here is the phrase of Lord Scarman,

repeated by LaForest J. in Hodgkinson, at 413-14: "[t]here is no substitute

in this branch of the law for a meticulous examination of the facts".

[509]

The most recent treatment of the law respecting the fiduciary duties of a

director and officer of a corporation has been in BCE Inc. v. 1976 Debentureholders 2008

S.C.C. 69; (2008), 301 D.L.R. (4^th) 80. The court at paras. 37, 38 and 40 states:

37 The fiduciary duty of the directors to the corporation originated in the

common law. It is a duty to act in the best interests of the corporation. Often

the interests of shareholders and stakeholders are co-extensive with the

interests of the corporation. But if they conflict, the directors’ duty is clear -

it is to the corporation: Peoples Department Stores.

38 The fiduciary duty of the directors to the corporation is a broad,

contextual concept. It is not confined to short-term profit or share value.

- 178 -

Where the corporation is an ongoing concern, it looks to the long-term

interests of the corporation. The content of this duty varies with the

situation at hand. At a minimum, it requires the directors to ensure that the

corporation meets its statutory obligations. But, depending on the context,

there may also be other requirements. In any event, the fiduciary duty owed

by directors is mandatory; directors must look to what is in the best interests

of the corporation.

40 In considering what is in the best interests of the corporation, directors

may look to the interests of, inter alia, shareholders, employees, creditors,

consumers, governments and the environment to inform their decisions.

Courts should give appropriate deference to the business judgment of

directors who take into account these ancillary interests, as reflected by the

business judgment rule. The “business judgment rule” accords deference to

a business decision, so long as it lies within a range of reasonable

alternatives: see Maple Leaf Foods Inc. v. Schneider Corp. (1998), 42 O.R.

(3d) 177 (C.A.); Kerr v. Danier Leather Inc., [2007] 3 S.C.R. 331, 2007

SCC 44. It reflects the reality that directors, who are mandated under

s.102(1) of the CBCA to manage the corporation’s business and affairs, are

often better suited to determine what is in the best interests of the

corporation. This applies to decisions on stakeholders’ interests, as much as

other directorial decisions.

[510]

The SCC in BCE, supra also described the function of the business judgment

rule at para. 99:

99 The trial judge situated his consideration of the relevant factors in the

appropriate legal context. He recognized that the directors had a fiduciary

duty to act in the best interests of the corporation and that the content of this

duty was affected by the various interests at stake in the context of the

auctionprocessthatBCEwasundergoing. Heemphasizedthatthedirectors,

faced with conflicting interests, might have no choice but to approve

transactions that, while in the best interests of the corporation, would

benefit some groups at the expense of others. He held that the fact that the

shareholders stood to benefit from the transaction and that the

debentureholders were prejudiced did not in itself give rise to a conclusion

that the directors had breached their fiduciary duty to the corporation. All

three competing bids required Bell Canada to assume additional debt, and

there was no evidence that bidders were prepared to accept less leveraged

debt. Under the business judgment rule, deference should be accorded to

business decisions of directors taken in good faith and in the performance

of the functions they were elected to perform by the shareholders.

- 179 -

[511]

Thecourtobservesthattheoppressioncaseshavefurtherclarifiedthecontent

of the fiduciary duties. The court then goes on to examine the factors of fairness and

reasonableness.

[512]

The Plaintiffs also cites Doust, supra, respecting the failure to produce and

disclose documents. Paragraphs 27 and 29 from the judgment of Tallis J. are relevant:

[27] The integrity of the administration of justice in both civil and criminal

matters depends in a large part on the honesty of parties and witnesses.

Spoliation of relevant documents is a serious matter. Our system of

disclosure and production of documents in civil actions contemplates that

relevant documents will be preserved and produced in accordance with the

requirements of the law: see for example Livesey (Jenkins) v. Jenkins,

[1985] 1 All E.R. 106; 62 N.R. 23 (H.L.), Ewing v. Ewing (No. 1) (1987),

56 Sask. R. 260 (C.A.); Ewing v. Ewing (No. 2) (1987), 56 Sask. R. 263

(C.A.); Vagi et al. v. Peters, [1990] 2 W.W.R. 170; 81 Sask. R. 253 (C.A.);

R. v. Foster and Walton-Ball (1982), 17 Sask. R. 37 (C.A.), and Rozen v.

Rozen, [2002] B.C.J. No. 2192; 173 B.C.A.C. 102; 283 W.A.C. 102 (C.A.).

A party is under a duty to preserve what he knows, or reasonably should

know, is relevant in an action. The process of discovery of documents in a

civil action is central to the conduct of a fair trial and the destruction of

relevant documents undermines the prospect of a fair trial.

[29] The question whether the intentional spoliation of evidence is a

separate tort is not before us in this litigation: see Spasic Estate v. Imperial

Tobacco Ltd. et al.(2000), 135 O.A.C. 126; 188 D.L.R. (4th) 577 (C.A.). It

is open to a trial judge to impose sanctions or draw an adverse inference

from such conduct. In this case it was clearly open to the trial judge to take

thisconductintoaccountwhenconsideringmattersofreliability, credibility

and costs.

[513]

The derivative action of Morrison attempts to enforce Walbaum’s fiduciary

duty not only at common law but also under s.117 of the Act with respect to his conduct

both before Morrison left the corporation, to the date of liquidation and after that.

- 180 -

[514]

Our Saskatchewan Business Corporations Act in s.117 sets out the statutory

duties of a director and officer:

117(1) Every director and officer of a corporation in exercising his powers

and discharging his duties shall:

(a) act honestly and in good faith with a view to the

best interests of the corporation; and

(b) exercise the care, diligence and skill that a

reasonably prudent person would exercise in

comparable circumstances.

(2) Every director and officer of a corporation shall comply with this Act,

the regulations, articles, bylaws andany unanimous shareholder agreement.

(3) Subject to subsection (4) of section 140, no provision in a contract, the

articles, the bylaws or a resolution relieves a director or officer from the

duty to act in accordance with this Act or the regulations or relieves him

from liability for a breach thereof.

[515]

Section 18 (d) and (e) reads as follows:

18. A corporation or a guarantor of an obligation of the corporation may

not assert against a person dealing with the corporation or with any person

who has acquired rights from the corporation that:

...

(d) a person held out by a corporation as a director, an

officer or an agent of the corporation has not been duly

appointed or has no authority to exercise the powers

and perform the duties that are customary in the

business of the corporation or usual for such director,

officer or agent;

(e) a document issued by any director, officer or agent

of a corporation with actual or usual authority to issue

the document is not valid or not genuine; ...

- 181 -

except where the person has or ought to have by virtue of his position with

or relationship to the corporation knowledge to the contrary.

[516]

The law respecting punitive damages is set forth in the case of Whiten, supra,

at paras. 36, 68, 70 and 71:

36 Punitive damages are awarded against a defendant in exceptional cases

for “malicious, oppressive and high-handed” misconduct that “offends the

court’s sense of decency”: Hill v. Church of Scientology of Toronto, [1995]

2 S.C.R. 1130 (S.C.C.), at para. 196. The test thus limits the award to

misconduct that represents a marked departure from ordinary standards of

decent behaviour. Because their objective is to punish the defendant rather

than compensate a plaintiff (whose just compensation will already have

been assessed), punitive damages straddle the frontier between civil law

(compensation) and criminal law (punishment).

68 Second, there is a substantial consensus that coincides with Lord Pratt

C.J.’s view in 1763 that the general objectives of punitive damages are

punishment (in the sense of retribution), deterrence of the wrongdoer and

others, and denunciation (or, as Cory J. put it in Hill, supra, at para. 196,

they are “the means by which the jury or judge expresses its outrage at the

egregious conduct”).

70 Fourth, theincantationofthetime-honouredpejoratives(“high-handed”,

“oppressive”, “vindictive”, etc.) provides insufficient guidance (or

discipline) to the judge or jury setting the amount. Lord Diplock in Cassell,

supra, at p. 1129, called these the “whole gamut of dyslogistic judicial

epithets”. A more principled and less exhortatory approach is desirable.

71 Fifth, all jurisdictions seek to promote rationality. In directing itself to

the punitive damages, the court should relate the facts of the particular case

to the underlying purposes of punitive damages and ask itself how, in

particular, an award would further one or other of the objectives of the law,

and what is the lowest award that would serve the purpose, i.e., because any

higher award would be irrational.

- 182 -

17.

DECISION

The Context

17.1

[517]

The plaintiffs’ claim is based on events which happened between 11 - 18

years prior to trial.

[518]

Morrison, on his own behalf and on behalf of DR, seeks what amounts to a

judicial audit of his day-to-day dealings with Walbaum in DR. Some of the claims for

adjustment and accounting made by Morrison go back to the late 1980's. Included in this

is a request that the shareholders loan accounts of Walbaum be adjusted to add in all of

the alleged improper benefits received by Walbaum over the years.

[519]

Walbaum and Morrison worked together as partners in DR for many years.

Morrison’s absence from the business of DR after December, 1995, Walbaum’s defacto

control of DR thereafter, their negotiations to buy Morrison out of DR, Walbaum’s move

to AR and the liquidation of DR by Morrison forms the context of the events about which

the parties tendered evidence.

[520]

After Morrison left DR there was initially a period of uncertainty as to

whether he would return. But by the spring of 1995, Morrison had decided that he would

not return. After a personal meeting with Walbaum, it was determined that he would be

bought out by Walbaum. Lawyers became involved. Mulatz acted for DR and Walbaum.

Sproule acted for Morrison. The details and progress of these negotiations is set forth in

and spread throughout the various documents tendered by each side.

- 183 -

[521]

Mulatz initially invited Morrison to meet by his letter of April 23, 1996 (P1-

29) followed by Sproule’s letter of April 24, 1996 (P1-30). A meeting was held on May

2 between Walbaum and Morrison and their lawyers. The understanding and agreements

reached between Morrison and Walbaum at the May 2 meeting (P10) are contained in a

without prejudice memo which Mulatz sends with his letter of May 14, 1996.

[522]

The salient points were that the parties would work toward buying Walbaum

out of DR, Morrison would receive financial disclosure regarding DR, and Walbaum

would within a month come up with a proposal buying out Morrison. In the interim, the

status quo would be maintained, Walbaum would operate DR and give Morrison ongoing

financial disclosure and Morrison could carry on his own business.

[523]

By May 30, 1996 (P1-39), Morrison had reviewed the DR financial

information and had instructed Sproule to make an offer to Walbaum that he would

accept a buyout of $310,000.00. The parties and their lawyers met again on June 12, 1996

(P1- 40) to discuss financial statements and valuations.

[524]

On July 19, 1996 (D2-11A), Mulatz makes a counter offer based on the

December 31, 1995 financial statement of DR (P4-B5). Mulatz’s proposal is rejected by

Sproule on July 23, 1996 (D2-11B) and he advises Mulatz that Morrison will be re-

assuming an active role in DR while he reviews his options. Sproule asks that no cheques,

instruments or agreements be signed without Morrison on an interim basis and advises

that Morrison is having professional advisors review the financial statements of DR.

Sproule asks Walbaum to get independent counsel.

- 184 -

[525]

Up to that point it appears from what I will say later that Walbaum had

operated DR on a day-to-day basis without the involvement of or communication to

Morrison as was contemplated by the May 2 memo. Nor is there evidence that Morrison

sought to be involved in the operational disclosure of DR set out in that memo. Likewise

despite Sproule’s letter of July 23, 1996, Morrison never did assume an active

management role or even show any interest in the day-to-day operations of DR. Walbaum

was left in defacto control of DR. Morrison was busy with his own new plumbing

business in competition with DR.

[526]

Walbaumretainednewsolicitors(theOliveWallerFirm)byAugust12, 1996

(D2-12)andthereafteraperiodoffurthernegotiationsensuedbetweenthepartiesthrough

their lawyers. Morrison filed an application to liquidate DR in August, 1996 but the

motion was adjourned sine die in September, 1996 while the two sides attempted to value

the company with a view to Walbaum buying Morrison out. This negotiation continued

at a slow pace into July of 1997. By August 19, 1997, negotiations had broken down and

Morrison’s solicitor gave notice that Morrison wished to proceed with the liquidation

(P12). The liquidation motion proceeded in late September, 1997 (P12).

[527]

All the while between July 23, 1996 and the date of the hearing of the

liquidation motion, Walbaum continued to operate DR without any involvement of or

communication with Morrison, nor did Morrison seek to be involved in or communicate

with DR. The liquidation order was granted November 13, 1997. All the while Morrison

continued to be an officer and director of DR.

- 185 -

The Authority of Walbaum

17.2

[528]

TheevidenceindicatesthatMorrisonhadleftthecompany, wasinitiallynon-

communicative and left Walbaum hanging as to what was happening. In the spring of

1996, there was some uncertainty as to Morrison’s status. The employees at DR were not

certain whether he would come back. Dumur was aware that he was staying away from

the company and was being told by Walbaum that it was not certain whether Morrison

would return to work. By late spring, after the May meeting, Morrison was running his

own company in competition with DR. Morrison put into question the authority of

Walbaum to act unilaterally on behalf of DR after he left. Prior to May 2 there was no

agreement between the two circumscribing Walbaum’s ability to manage DR. There was

no unanimous shareholder agreement. Morrison testified that during the time he and

Walbaum were operating DR, either could make final decisions and joint agreement was

not required. Morrison acknowledged that as president, Walbaum could, according to the

by-laws of DR, enter into binding contracts on behalf of DR.

[529]

Morrison argues that he was left out of the decision making in DR during

1996. I find that this is his own fault on all the evidence. I find that Walbaum had actual

authority to act on behalf of DR and to enter into agreements and otherwise operate the

day-to-day business of DR and make decisions on behalf of DR. The bylaws of DR do

not restrict the authority of Walbaum and paragraph 56 of Bylaw No. 1 makes it clear that

Walbaum has authority to bind DR. Morrison intentionally withdrew from all decision

making at DR from December 22, 1995 on. Morrison testified that he left DR and left it

up to Walbaum to run the corporation and expected he would do that. He told Walbaum

to look after the office and he stated he authorized Walbaum to do what he had to do to

protect DR. He did that deliberately and after some thought. Morrison testified that he left

- 186 -

the details of the Loan to Walbaum and acknowledged that he expected Walbaum to look

out for DR’s interests and gave him full authority regarding this. Morrison testified that

Walbaum had the authority to give the credit on the Loan. I find that on all the evidence

that Morrison consented to Walbaum operating DR on his own and making business

decisions after he left in December, 1995.

[530]

Although the May 2 memo agreement gave Morrison some input into the

operations of DR and would have restricted Walbaum’s authority, neither Walbaum or

Morrison acted on this aspect. There is no evidence that Morrison ever sought to act on

the May 2 understanding respecting the operating of DR or complained that it was not

being followed. In any event, it was without prejudice according to the May 2 memo.

Thereafter Walbaum continued to make decisions and operate DR and Morrison, by his

own non-involvement, consented to that or at least acquiesced in Walbaum doing just

that. Morrison did not follow through on his counsel’s notice on July 23, 1996 that he

would return to DR. This further underscores that Morrison, despite understandings or

agreements, effectively consented to Walbaum operating DR and making business

decisions for DR by himself. I find that the May 2 undertaking had a limited time

application respecting Walbaum’s general authority in any event.

[531]

Section 117 of the Act sets out the duty of a director and officer. Although

both Walbaum and Morrison remained directors and officers of DR throughout, the only

one of them that continued to fulfil his duties as a director and officer generally was

Walbaum. Morrison argues that by virtue of the May 2 agreement, he could leave and

compete with DR.

- 187 -

[532]

Of note is that s.117(3) states that a director is not relieved of his duty under

s. 117(1) by a contract. Therefore the May 2 memorandum of what the parties had agreed

on an interim basis did not, in a general sense, despite its terms, absolve Morrison of his

duties to DR. The non-competition aspect of the understanding went directly against the

duties Morrison had to DR. It appears that it was hoped that there would be a quick

buyout of Morrison given the short time frame in which the first buyout proposal had to

be made, but when negotiations became protracted, Morrison was technically in breach

of s.117. He did not resign as a director or officer. However this breach does in my view

not disentitle DR from claiming proper relief. It is against this back drop that Walbaum’s

authority to act for DR must be assessed. He was the only active director and officer left.

[533]

Section 18 of the Act enshrines the indoor management rule vis-a-vis third

party corporations dealing with DR’s officers, directors or agents. As such, it does not in

itself create the authority to act but merely acts as a shield for a third party where the

authority of a corporate agent is questioned by the corporation.

[534]

Morrison argues that s.18(d) and (e) prevents Walbaum from dealing with

such issues as the Loan, Rose Street and McAra Street. I find that these issues were part

of the ordinary, usual and customary business of DR despite that it was first and foremost

a plumbing company and as explained earlier, Walbaum had actual authority to deal with

them. Morrison had acquiesced in DR purchasing Rose Street earlier that year. I find that

Walbaum and Morrison discussed and agreed that DR could be used as an investment

vehicle for them. All of these projects were consented to by Morrison, acquiesced in by

Morrison or initiated by Morrison. Walbaum had the right and duty as a director and

office and the authority to continue dealing with them alone in Morrison’s absence. This

- 188 -

is supported by Morrison’s earlier testimony that he left the operation and management

of DR to Walbaum.

[535]

The plaintiffs argue that Dumur and Dumur Co. had knowledge that

Walbaum lacked authority with respect to the Loan and McAra Street. There is no

evidence of this based on his relationship with DR, Morrison and Walbaum. All Dumur

knew was that Morrison had left DR and Walbaum continued to operate and manage it.

Dumur’s experience was that Walbaum had negotiated the interest, payment date and the

security documents for the Loan and the McAra Street transaction all without the

involvement of Morrison. In short, Dumur and Dumur Co. did not have an actual

knowledge that they could not deal with Walbaum alone in regard to repayment of the

Loan and McAra Street. The correspondence in my view does not fix Dumur and Dumur

Co. with such knowledge. Nor would Dumur ought to have known to the contrary given

the circumstances for the same reasons.

[536]

The bottom line is that Morrison initiated both the Loan transaction and the

McAra Street purchase as explained later while he was still at DR and made those

agreements with Dumur. Approval of both Morrison and Walbaum was technically not

needed. Morrison testified that each could make binding decisions for DR. Section 18 of

the Act affords Dumur Co. and Dumur protection in this case.

17.3

Dumur, The Loan, McAra Street and The Credit

[537]

I find that Morrison made the Loan agreement with Dumur in principle.

Morrison had the initial discussions with Dumur in late 1995 about helping his company

to purchase a piece of equipment by lending them money. Before Morrison left, he

- 189 -

conveyed to Walbaum that he was in agreement with making the Loan to Dumur. He

testified that he left all other details with respect to the Loan including interest rate, terms

ofpaymentandpreparationofsecuritydocumentstoWalbaum. Whetheryoucharacterize

Morrison’s non-involvement with the company in 1996 as a failure or a refusal, it is by

all accounts intentional. Walbaum was therefore left to his own devices and judgment to

finalize the Loan with Dumur, which he did over a period of time between January and

March, 1996. The initial documenting of the Loan and the negotiation of terms were all

things which were to the benefit of DR and Walbaum cannot be faulted for these. He took

proper steps to negotiate interest and repayment terms and to document the Loan and

secure it for DR’s benefit. Ultimately the terms were a personal guarantee of Dumur,

security on the turret punch, interest at 12% per annum and repayment by June 30, 1996.

I find that Morrison consented to Walbaum looking after all of these details and in any

event, Walbaum had the corporate authority to finalize this.

[538]

As Walbaum was dealing with and trying to finalize the Loan, the issue of

the purchase of McAra Street fromDumur and his company intervened. This was an issue

which, on the testimony of Walbaum and Dumur, was initiated by Morrison.

It was an issue which Morrison left for Walbaum to manage in his absence. Morrison

testified that he was not in favor of buying McAra Street. Dumur testified that he believed

he had a handshake deal with Morrison to purchase the property. He had know Morrison

for a long time as a friend. Walbaum believed this as well based on his discussions with

Dumur. Morrison admits that he talked to Dumur about this deal but denies any

agreement with Dumur. Morrison admits that Dumur may have assumed they had an

agreement.

- 190 -

[539]

I believe the evidence of Dumur on this point and find that they had a

handshake deal for DR to buy McAra Street. I support my belief by the fact that Morrison

admitted using the property to clean out the company vans in December, 1995 and also

talked to the tenant, Eagle, about the possibility that they might have to move. As it was,

Eagle took the hint and left the property. Dumur testified that he saw all this as merely

DR taking possession after they had agreed to buy it. This was certainly not an

unreasonable view on Dumur’s part. These facts are consistent with there having been a

verbal deal made by Morrison to buy McAra Street.

[540]

In the spring of 1996, with Morrison gone and Walbaum left to fend for

himself at DR, he initially tried to put off Dumur regarding the purchase of McAra Street

by saying he needed Morrison’s signature to make the purchase. It was unclear whether

Morrison was coming back at that time. However, Dumur at some point began to talk

about legal action if the deal was not finalized and pointed out that he had cooperated in

properly documenting the Loan to Dumur Co. and only wanted similar documentation

prepared with respect to the purchase of McAra Street. In short, Dumur was pushing.

With Morrison gone, the terms and details of the McAra Street purchase were left for

Walbaum to negotiate. Because Morrison was out of the picture, Walbaum finalized the

purchase of McAra Street through his own company, Tamwal with the initial intention

of rolling McAra Street over into DR in the future.

[541]

The purchase terms of McAra Street included other financing in the amount

of $26,600.00. Based on Dumur’s testimony, he believed that he might get this as cash

since the balance of the price was the assumption of the mortgage. Walbaum then

arranged the adjustments on the purchase so that Dumur would carry this portion and

initially calls it a repayment of a debt owing to him. Mulatz then tries to explain how that

- 191 -

would work to FBDB indicating that ultimately Dumur Co. will be paid because it will

be a set-off against the Loan. Mulatz then realizes that because of an ongoing buyout,

negotiations between Morrision and Walbaum that might not be appropriate and writes

Shutter to explain that a Promissory Note would be given to Dumur Co. which would

protect Dumur Co.

[542]

As time went on and Dumur was being pressed for payment of the Loan by

DR, Dumur demanded to directly set-off the $26,600.00 which DR would owe it against

the money Dumur Co. owed to DR on the Loan. Dumur set this money off

notwithstanding that the money was owed by Tamwal rather than DR. I accept

Walbaum’s evidence that Dumur forced this direct credit on him. But I also find that he

consented to and acquiesced in it. There was substantial DR money at risk which had to

be repaid and his actions vis-a-vis Dumur to get substantially all the money back, in my

view, were reasonable. He had authority vis-a-vis Dumur to agree to the credit on the

Loan. Morrison did not know about the credit nor would he. He had left the corporation

and the events surrounding the credit unfolded at a time when Morrison states that he did

not know what he was going to do and was non-communicative with Walbaum. Morrison

testified that Walbaum had the authority to give the credit.

[543]

Based on my previous comments, I find that all of the dealings that Walbaum

had with Dumur with respect to the Loan and purchase of McAra Street were done at a

time and in circumstances where Walbaum had the lawful authority to negotiate and

finalize both deals vis-a-vis Dumur. However, the manner in which the credit originated

and how Walbaum and Tamwal dealt with it much later was in my view not in the best

interests of DR as I will explain.

- 192 -

17.4

The Trust

[544]

Dumur knew that Dumur Co. owed $120,000.00 plus interest to DR for the

Loan. Dumur first got notice of any alleged trust by the letter dated June 13, 1996 from

Mulatz (P1-64) which read in part:

“... has instructed the law firm to request that any payments made to DR ...

under [the loan] be paid to Gerrand Mulatz, in trust, until such time as we

advise further.

The shareholders of DR ... are currently engaged in negotiations resolve

ownership of the company, and until such negotiations are concluded, this

will be held in trust by us.”

The letter from Kanuka to Dumur dated July 11, 1996 (Dumur 1-20) said in part:

“We act as solicitors for Mr. Alec Morrsion. As you are aware, Mr.

Morrison is a shareholder and director of DR ...

We wish to confirm the agreement of our client to Dumur Industries Ltd.

repaying its indebtedness to DR ... by delivering the amount due to Gerrand

Mulatz in trust ... .”

This letter was conveyed to Dumur Co. by the Mulatz letter dated July 12, 1996 (Dumur

1-21) which stated in part:

“We enclose correspondence whichwehavereceivedfromthesolicitors for

Alec Morrison directed to Dumur Industries and yourself relating to the

sums that are owed to DR ... We understand that upon delivery of this

correspondence that you will attend to payment of the outstanding balance

which we undertake to hold in trust until such time as Dwayne Walbaum

and Alec Morrison have agreed to disposition of the funds.”

- 193 -

This was followed up by the fax memo (Dumur 1-24) from Dumur to Gerrand dated

August 7, 1996 which stated in part:

“Please find attached a copy of a letter addressed to DR ... with reference

to loan payable by Dumur Industries. Acceptance of these figures by

Dwayne and Alec our bank will be instructed to make payment in trust to

your office.”

[545]

What is clear is that as far as Dumur Co. and Dumur knew prior to June 13,

1996, the relationship between Dumur Co. and DR was that of debtor and creditor.

Although the letters are addressed to Dumur, there is no indication that he is acting other

than on behalf of his corporation. Dumur Co. was the debtor. That is clear from the Loan

documentation. The question is whether these series of letters and the memo mentioned

earlier converted the relationship of debtor/creditor to a trust relationship and impressed

the Loan with a trust as argued by the plaintiffs.

[546]

The plaintiffs cite the airline ticket cases, Canadian Pacific Air Lines, supra,

and especially the Air Canada, supra, case as similar to facts in this case. Although there

is perhaps no quarrel with the law in these cases, the facts here are substantially different.

In both cases cited by the plaintiffs, there was an express trust agreement whereby monies

collected for the tickets remained the property of the airline and were to be held in trust

by the travel agency. In this case, the money at all times belonged to DR. The fact that

Walbaum and Morrison were shareholders and may have wanted to set aside the money

as a fund which would play a part in the settlement of their shareholder’s dispute, did not

make them owners of the money. The use of the words “in trust” and reference to

“agreement”, in the exchange of correspondence mentioned earlier, does not in my view

make Morrison and Walbaum the owners of the money.

- 194 -

[547]

Morrison argues that a trust was created and that Dumur and Dumur Co.

knowingly assisted a breach of trust. I reject this argument. The three certainties of

intention, subject matter and objects or beneficiaries are in my view not present.

[548]

There was in my view no intention on all the evidence to create a trust as

between DR and/or Morrison and Walbaum and Dumur Co. and Dumur. The evidence

on the whole is that this was like a direction to pay. Once the money was paid into

Mulatz’s office, it was his obligation to hold it in his trust account. Once the money was

paid to Mulatz, Dumur discharged his obligation under the direction to pay. Walbaum

provided him a receipt (Dumur 23).

[549]

Dumur was aware, based on Mulatz’s June 13 letter, that the reason for

payment into Mulatz’s trust was the buyout negotiations. However the knowledge of this

by Dumur does not fix him with the fiduciary obligations of a trustee. This is only context

for him. He is not a party to Morrison and Walbaum’s buyout dealings as such. Dumur

cannot be faulted for not inquiring further when the money was returned to his lawyer.

All the correspondence respecting payment requested that he deal with Mulatz, who was

still at the time of payment and throughout the spring and summer of 1996, the DR

corporate lawyer. It is reasonable under the circumstances for Dumur to accept what

Mulatz is telling him as the corporate lawyer. This is so despite the evidence that

Morrison spoke to him over the summer and inquired about the money to ensure it would

be paid to Mulatz. Merely inquiring about the money does not make Dumur Co. a party

to the trust or a constructive trustee or liability as a stranger to the trust as set out in the

cases cited. The facts in this case do not result in the imposition of a constructive trust

based on knowing receipt..

- 195 -

[550]

When looked at in context, the exchange of correspondence set out earlier

and the use of the words “in trust” do no more than create a direction to pay. In deed, the

July 11, 1996 letter from Hleck Kanuka confirms Mr. Morrison’s agreement to having

Dumur Co. repaying “its indebtedness” to DR. Apart from the letters, there is nothing to

indicate to Dumur that he is a trustee of the money or is obligated in some way other than

to pay it into Mulatz’s trust account. The words “in trust” do no more than refer to what

will happen to the money when it arrives at the Gerrand Firm. Morrison testified that

Dumur was waiting for direction and Sproule’s letter was just telling Dumur who the

payee was. Morrison stated that Dumur’s obligation was to pay the money and Mulatz

to hold it in his trust. This is in fact what Dumur did. It is the Gerrand Firm which in their

July 12, 1996 letter agrees to hold the money in trust until Walbaum and Morrison have

agreed to its disposition.

[551]

As it was, Mulatz sent the money back to Dumur and asked them to pay it

directly to DR. Dumur testified that from his point of view, he was looking for a release

from DR for the indebtedness of his company. He got that release from Walbaum. The

plaintiffs suggested that Dumur participated in some improper and fraudulent scheme.

This is not brought out by the facts. Dumur was instructed by both the Gerrand Firm and

by the Kanuka firm to pay the money to the Gerrand Firm. He complied with that. At no

time did Dumur have any dealings with Morrison, other than Morrison’s calls for the

repayment of the money. Nor did he have any dealings with the Kanuka firm. The sole

liaison on this was the Gerrand Firm. Morrison argues that he never agreed to have the

funds paid to DR directly by Dumur Co. In fact, Morrison by virtue of the letters had

agreed to have the money paid to DR’s lawyers and in the end DR got the money less the

credit. Having complied with the terms of the direction to pay, Dumur cannot be faulted

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for not inquiring into the niceties and the background of why the Gerrand Firm wanted

the money to be paid directly to Walbaum and DR.

[552]

The factual situation here is similar to that in Federal Distributors Ltd. v.

Low Sinosky et al. (1981), 16 Sask. R. 203 where in the context of a garnishee summons,

Walker J. had to decide whether funds were not attachable because they were being held

in trust. This case was recently cited by Currie J. in Bruce Schapansky Auctioneers Inc.

v. Bobcat of Regina 2006 SKQB 442, who at para.10 thereof quotes Walker J. as follows:

10 The defendant in that case argued that the funds could not be attached

because they were being held in trust for unsecured creditors. In concluding

that the funds were attachable, Mr. Justice Walker said at paras. 5-6:

[5] ... Just because the funds may have been placed in

a trust account does not make them unattachable. Just

because the funds were received in trust does not make

them unattachable. Just because the funds are held in

trust does not make them unattachable. All of this,

without more, does not make the funds unattachable.

The judgment debtor put the money in the hands of the

garnishees and is entitled to have it back on request.

There is no trust in the strict sense in favour of any

individual unsecured creditors or unsecured creditors

as a class. They have no legal or equitable right to the

fund. It was an administrative arrangement set up by

the defendants and is still subject to their control. The

“trust”, so called, involves only the defendants and the

garnishees.

[6] The applicant cited Bank of Montreal v. Chantry

and Chantry, [1979] 5 W.W.R. 470. Much of the

reasoning in it applies here, since there is, in theory

and result, no difference between a trust that is

complete and a trust that never was. The key is that, at

the time of attachment, the money in the trust account

was, in truth, not subject to a trust in favour of some

third party, but reflected only a debt owing from the

garnishees to the defendants. That the money was

given by the defendants or the defendant company to

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the garnishees with general instructions to pay

undesignated creditors, and possibly accepted by the

garnishees “in trust”, as opposed to for general

purposes, does not change the situation. There is no

proof that any third party has any legal interest in this

fund. It seems to me that, since no third party has an

interest in the fund, the defendants could maintain an

action for it against the garnishees, and that it would

vest in the corporate defendant's trustee in bankruptcy

in the event of insolvency. It is beyond question that

the defendants have a beneficial interest in the fund.

There is no condition left unperformed as far as third

parties are concerned, for no third parties have or ever

had rights in respect of it. Only the defendants are

beneficially interested in the fund. ...

[553]

Likewise in Susin v. Swartz 2001 O.J. No. 5464; 111 A.C.W.S. 3d 836 (Ont.

SCJ), Seppi J. in the context of a decision respecting a negligence claim and limitations

law had the opportunity to review the circumstances surrounding the opening of a special

account by a contractor to ensure that certain receipts would be used to fund a specific

construction project. The bank unilaterally withdrew monies from that account for other

purposes and the funding for the project collapsed. The contractor sued the Bank to

recover the monies wrongfully transferred. At para. 49, Seppi J. observed:

49 QDL’s claim against BMO to recover the monies wrongfully transferred

was for consequential damages arising from BMO’s breach of its

agreement. It is not a claim of the beneficiary of a trust against the trustee.

On the evidence of Mr. Iskierski, which I accept, the account was not a trust

as between QDL and BMO, but rather an account subject to agreement

between QDL, the bank and Pitts that no money would be transferred out

of the special account without the three required signatures. It was the

breach of this agreement that gives raise to QDL’s claim against BMO.

Accordingly, a six-year limitation period would apply.

[554]

In both cases, the court found that there was not a trust. On the facts of this

case, I find that the relationship of debtor/creditor between Dumur Co. and DR had not

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changed by virtue of the lawyer’s letters respecting payment into trust conveyed to

Dumur and Dumur Co. There was no trust. It was at most an administrative arrangement

which DR and the shareholders of Dr had with Dumur Co. and Dumur as to whom the

money would be paid. There was never any entitlement on Morrison or Walbaum’s part

to receipt of the money. The most that can be said is that it was the intention of the parties

the money was to be tied up at the DR lawyer’s office until there was an agreement

[555]

The evidence was that money was in fact received by Walbaum on behalf of

DR and invested and it appears held separately from DR funds until nearly a year later

when Walbaum testified it was put into the DR account. I reject the suggestion that the

money was dissipated by Walbaum.

[556]

The plaintiffs argue that Dumur and his company should be held liable to pay

the money again to Morrison. Dumur Co. has paid for the Loan in full and received a

release for it. Walbaum had the authority, as explained earlier, to give that release even

with the credit but even if there was such an agreement, the money remained DR money

and Dumur having paid this money is not in my view, obligated to pay it again nor pay

the credit back. Walbaum had the authority to negotiate the credit against the Loan.

[557]

There is, in my view, nothing in all of the evidence which suggests that

Dumur was aware of any fraudulent or dishonest action by him paying the money directly

to Walbaum on behalf of DR after the money is returned by Mulatz. Indeed there was no

complaint from Morrison after the money was not held in trust that some trust had been

breached. The characterization of this arrangement in the pleadings as a trust is in my

view clever but unmeritorious. There is no trust arrangement.

- 199 -

[558]

17.5

The claim against Dumur and Dumur Co. is dismissed.

The Experts

[559]

Both Morrison and Walbaum placed great emphasis on the work of their

experts in attempting to value DR and in Morrison’s case, to show that the assets of DR

were denuded by Walbaum. Joyce’s testimony and work attempted to show that at March

31, 1996, DR had a FMV of $716,000.00 (P4-B14), and for the 18 month period

Walbaum ran it alone, that Walbaum stripped DR of more than $341,136.00 of assets and

that DR should have had added profits of $200,000.00.

[560]

As I will explain later, the valuation of DR in December, 1995 or March 31,

1996 ignores the fact that DR continued to be operated as a going concern until

liquidation or shortly before liquidation. It is of little help to know now what these values

were 1 ½ years before the liquidator got control of the company except insofar as

Morrison argues that DR had substantial value in March, 1996. However the financial

experts were important to help explain and for the court to understand the financial

dealings of DR before and after liquidation.

[561]

After listening to the qualifications of both Joyce and Jess and of the

evidence each gave and the way they dealt with the financial information presented to

them, I prefer the evidence of Jess such as it is relevant. Although Joyce may have

slightly more and perhaps a broader range of experience with small business and

valuations, Jess had the more intimate knowledge about the practices and policies of DR.

I found Jess to be forthright in giving his evidence, knowledgeable and conscientious.

- 200 -

[562]

JoycewasbroughtintothepictureduringnegotiationsbetweenMorrisonand

Walbaum in 1996 to review financial data and to determine what in May, 1996 might be

the FMV of the company. Morrison testified that the initial calculations as to FMV were

done by Joyce for the specific purpose of negotiating a shareholder’s buyout with

Walbaum. To that extent those calculations represent Morrison’s negotiating position

despite the fact that during testimony Joyce was at pains to indicate that he and Morrison

were trying to be reasonable. The valuation of the company was prepared in the context

of a buyout negotiation where the parties were positional. Each side had a different view

of the FMV. Jess was not involved with the December 31, 1995 statement which was

advocated by Walbaum as the basis for FMV. Although his office did it, Jess did not do

an evaluation of DR as such but merely took the position at trial that the December 31,

1995 value was reasonable and questioned Joyce’s valuation. The valuation (found at

B14) in my mind represents Joyce advocating Morrison’s FMV position taken in the

spring of 1996. After negotiations broke down in the summer of 1996, the parties spent

the next 10 months exploring getting an independent valuation done by someone else.

This confirms that the valuations, Joyce’s on the one side, and Walbaum using the

December 31, 1995 book value with adjustments on the other side, were ultimately

bargaining positions. Both of those valuations have been recycled in this trial as

appropriate values to be used by the court. However, both advocate a side and are not

helpful to find on objective FMV even if it were necessary to look at FMV in March,

1996. I would reject Joyce’s FMV calculation for the reason alone that it merely

represents a bargaining position rather than an objective valuation prepared by an expert

for this trial.

[563]

Joyce in his FMV calculations in several cases relies on blatant guesses

provided by Morrison with respect to the value of certain assets. He acknowledged for

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some adjustments there was no documentary backup. These guesses do not appear to be

in keeping with the historical financial treatment and approach to those items used by Jess

or the company. Moreover, this reliance on assumptions and information which are

blatant guesses and in my view the reliance on an unrepresentative March 31, 1996

financial statement leads to his testimony and an evaluation which is flawed. Later he

appears to have approached his task with a mind set that Walbaum was stealing from the

company. Morrison made Joyce aware of his theories of Walbaum’s alleged misconduct

between May and June, 1996. Whether he arrived at this view independently or got this

from Morrison matters not. I find that the objectivity which the court requires of an expert

witness, as in this case, has been compromised. This view is evidenced in the document

P4-D17. The letter dated October 9, 1998 is a critique of Jess’ September 30, 1997 DR

financial statement which was accepted by the liquidator and on the basis of which the

liquidator filed the tax return. He reviewed documents at DR of Deloitte’s and Dudley’s

but did not speak to Jess about DR. He acknowledged that it would have been a good idea

to do that. D17 became the preclude to G6, Joyce’s report to Morrison dated December

7, 1998 which ultimately becomes part of Joyce’s expert evidence at B14. D17 in several

places speaks of Walbaum’s plan to strip DR. An example of this is his statement that

Rose Street was an investment used by Walbaum to remove assets from DR for his own

benefit. He later comments that company payments or write-offs were intended to strip

DR of its assets so that there would be nothing left for Morrison. He has approached his

task assuming that Walbaum had a plan to strip DR and was merely verifying this.

Although Joyce, in my view, gave his evidence to the best of his ability and when asked

questions attempted to answer honestly and forthrightly, his work on the financial aspects

of DR, his overall responses and approach were in my view colored by this mind set and

make his conclusions suspect.

- 202 -

[564]

In Kozak v. Funk (1995), 136 Sask. R. 12, Klebuc J. (as he then was) at para.

16 quotes with approval an Ontario case where this issue was raised:

16 In Perricone v. Baldassarra, (1995) 7 M.V.R. (3d) 91 (Ont. Gen. Div.),

at p. 99, the trial judge held that where the expert assumes the role of an

advocate, he or she can no longer be viewed as an expert in the legally

correct sense; instead her or his evidence “must be viewed as advocating the

case of a party with the attendant diminishment in the credibility”. In

Perricone, the trial judge suggests the guidelines laid out in National Justice

Compania Naviera SA v. Prudential Assurance Co. (“The Ikarian Reefer”),

[1993] 2 Lloyd's Rep 68 are applicable to weighing the credibility and

admissibility of expert evidence. Those guidelines are paraphrased at p. 99:

1. Expert evidence presented to the court should be,

and should be seen to be, the independent product of

the expert uninfluenced as to form or content by the

exigencies of litigation.

2. An expert should provide independent assistance to

the court by objective unbiased opinion in relation to

matters within his or her expertise. An expert witness

should never assume a role of advocate.

3. An expert should state the facts or assumptions on

which the opinion is based and should not omit to

consider material facts which detract from that

opinion.

4. An expert should make it clear when a particular

question or issue falls outside of the expert's expertise.

5. If an expert’s opinion is not properly researched

because insufficient data is available, this must be

stated with an indication that the opinion is no more

than a provisional one.

[565]

This case and passage was recently quoted in Martin v. Inglis 2002 SKQB

157; 218 Sask. R. 1. The most recent case to rely on Perricone, supra is Deemar v.

College of Veterinarians of Ontario, 2008 ONCA 600; (2008), 298 D.L.R. (4^th) 305 at

para. 22:

- 203 -

22 Here the Discipline Committee found that Dr. Leslie had “strayed

from the function of an expert” and had taken on “the role of advocate

and possibly the role of the trier of fact”. The Discipline Committee

noted that an expert must have a minimum requirement of

independence and cited authority that “if the person rendering the

evidence assumes the role of advocate, he or she can no longer be

viewed as an expert in the legally correct sense ...”. Perricone v.

Baldassara, [1994]O.J. No. 2199atpara. 17. Dr. Leslie’sdemonstrated

lack of the independence provided an ample basis for the Discipline

Committee's to refuse to accept Dr. Leslie as an expert witness.

On all the evidence I find that Joyce has become too much of an advocate for Morrison,

both at trial and before when he prepared the FMV valuation, the calculation of corporate

income for 18 months and the re-calculation of the shareholders loan and I would also

reject them on this basis.

[566]

Jess had been DR’s exterior accountant for many years and prepared its

financial statements and working papers. It might be argued that the evidence of Jess

because he has worked as the accountant for DR for so long may also be suspect.

However, I find no indication of this. Morrison, in his testimony, never complained in the

past that Jess had done the books of the company improperly or that he was biased in

favour of Walbaum. Nevertheless, he questioned at trial the appropriateness or accuracy

of some of Jess’ calculations where it suited his case. Morrison’s evidence was that he

found that Jess, in preparing the financial statements of DR, probed and questioned

various items and had discussions with him and Walbaum with respect to the financial

statements. Although Jess also relied on information provided by Morrison and Walbaum

to him in the preparation of the financial statements, Morrison could find no complaint

with Jess’ work in the preparation of the statements. I find that Jess had a reasonable

approach to the line items in the financial statements and to the extent possible attempted

and did provide an accurate picture of the financial status of the company based on

- 204 -

financial records which were provided to him and in discussion with both Morrison and

Walbaum. The evidence on the whole was that Jess was careful in the preparation of the

financial statements. The calculations and working papers of Jess were referred to by

Morrison and used to illustrate and support some of the issues raised by him. On the

whole, I can find no issue with Jess’ calculations and I find that the work set out in his

working papers and financial statements have not been impugned by the plaintiff’s case.

I accept that his calculations and working papers contained in the financial statements of

DR are generally accurate and that he tried to do his work in a professional and unbiased

manner.

[567]

This is supported by the fact that the liquidator relied on Jess to create the

last pre-liquidation financial statement for DR and allowed him to keep and review the

records of DR for that purpose. The liquidator filed tax returns based on Jess’ last

financial statement and based its report to the court on the DR shareholder loans on Jess’

work which in my view is at least circumstantial affirmation of the accuracy and

reasonableness of his approach to the financial affairs of the company right up to

September 30, 1997.

[568]

In addition to my findings that Joyce’s evaluation were flawed because it

represents a bargaining position and because Joyce is too much of an advocate, I find that

when the valuation is looked at in detail, it cannot stand. The FMV calculation which

Joyce has done based on the March 31, 1996 financial statement (D4-B9), is in my view,

suspect. I am not convinced it is a fair or accurate starting point. Morrison admits that the

date was arbitrary. Joyce admitted that his calculations were only as good as the

underlying information and that if Morrison’s information is flawed, so is his. Morrison

had decided the appropriate date for valuation and provided him with many values on

- 205 -

which he relied with nothing more than Morrison’s word. Joyce relies on just Morrison’s

word respecting 5 out of 6 of the asset value adjustments he makes. The sixth adjustment

to assets is goodwill and uses the previous 5. These as will be dealt with later are mere

guesses about such things as bad debt recovery, inventory, work in progress and

equipment. Joyce testified that he relied on Morrison’s best judgment but did not have

the underlying documents to support this.

[569]

Additionally, Joyce’s work relies in part on printouts from the broken

computer which I find are suspect. Martens testified that full recovery of the records did

not take place and Morrison chose which records to print. There was substantial evidence

the cumulative affect of which was that taking the numbers off the internal computer

printouts would not give an accurate financial picture. Walbaum testified that there were

inputting delays of cost allocations and other adjustments which were required which

were customarily made by DR’s employees and accountants. Morrison as well admitted

that possibly there were inputting delays. Morrison acknowledged that the March 31,

1996 statement was incomplete and needed adjustments yet he used this as a starting

point. Joyce indicated that for his valuation, he did not have the April, 1996 statement

which told a different story of DR’s financial. Joyce admitted that his calculation of gross

profit of 39% based on the March 31 statement was substantially higher (50%) than DR’s

historical gross profit and that it raised some questions for him. He mused that the extra

profit could have been moved to the 1996 year because of the small business limit. This

conflicts with the testimony of Jess and Walbaum which I accept who indicated that

billing was never adjusted because of the small business limit. Joyce testified that he felt

Morrison had not given him a full explanation about this. When he saw the April, 1996

statement alongside the March statement, the two did not make sense to him. This should

have raised serious questions about the appropriateness of the use of the March numbers

- 206 -

but it did not. I find the March 31, 1996 financial data not representative of the financial

status of DR for that date.

[570]

Even though during the negotiation Walbaum’s lawyers were prepared to

propose adjustments to the December 31, 1995 interim statements, the effect of which

were to increase the value of the company for negotiation purposes, these do not

necessarily indicate that Joyce’s adjustments are valid.

[571]

Joyce adjusted the accounts receivable up on the advice of Morrison and

his view of bad debts. Morrison, during the time he was at DR, would not have been

supervising this aspect of the business. Morrison admitted that receivables and liabilities

fluctuated daily. Jess every year reviewed this item with DR. Apart from Morrison telling

Joyce some accounts are recoverable, there has not been shown a sound accounting or

business basis for this adjustment. The debts identified are over 120 days and he did not

know if holdbacks were included. He acknowledged that 120 day receivables were hard

to collect and not usually on the balance sheet. Morrison admitted that if one looked at

a specific day, the valuation of receivables and liabilities would vary. I find this

adjustment improper. In any event, by the time of the liquidation, the issue would be moot

since the accounts would have been collected or written off.

[572]

Joyce also makes an inventory adjustment of $16,250.00. Although this is

an area with which Morrison had some familiarity before he left, curiously he did not see

the inventory he claims DR had after he left. He was at DR to review the financial

information in May, 1996 and looked generally but did not look at the inventory although

he could have done so. He testified in discovery that he did not know what inventory,

equipment and tools were at DR because he was only there a couple of days in 1996.

- 207 -

Joyce never looked at the inventory either but relied on Morrison to come up with a rough

estimate. He testified he did not know the inventory practices of DR apart from what

Morrison told him. Morrison makes his adjustment, it seems, on the basis that the

inventory in the financial statement is too low. Morrison testified that there was no

inventory control systembefore he left DR. He admitted that some of the inventory would

be considered garbage by some people. He said it was his best guess and he assumed it

would remain. Joyce assumes that with the stated income, the inventory should be higher

but admits that he was not current with the policy of plumbing companies with respect

to carrying inventory. Morrison indicated that he and Jess had several discussions

regarding inventory and Jess would challenge him on the inventory level. It was a safe

assumption that the inventory level in the financial statements are the end result of such

challenges. There is no proper basis for such an adjustment. In any event, the inventory

at liquidation would have changed.

[573]

With respect to the equipment adjustment given by Morrison to Joyce,

Morrison had prepared the list, obtained ad hoc market values and with Joyce, discounted

those values. The values were Morrison’s estimates. There is no indication that Morrison

looked at the equipment when he visited DR in May. There is evidence that his list was

made from memory after he came out of seclusion and included items which belonged

to third parties or may no longer have been at DR for various reasons. He claims that the

equipment in the DR statements is valued too low. He admitted that the equipment was

not new and at one point testified that he thought that it would keep its value or

appreciate which I find hard to believe. The evidence indicates that much of it was

purchased second hand and was older to begin with. There was not a full list of

equipment presented by either side during the trial. At liquidation, the equipment and

tools would be different than at March, 1996. This adjustment is not supported by the

- 208 -

evidence. Morrison stated it was possible he made a mistake and the tools were worn out

or thrown away.

[574]

Jess testified that he dealt with Morrison in the past regarding WIP. Joyce

adjusted WIP. He testified this was Morrision’s number and the margin for error was

large. He testified this item was the single most difficult thing to value. He referenced

$62,712.00, on the unearned revenue line of D1-14, the December, 1995 interim

statement of DR, which is the other side of WIP and represents overbilled work. He

testified that Morrison looked at what was in progress and what was billed and at the

working papers for unearned revenue but did not understand how it was arrived at. It

seemed higher than it should be. He was not aware of DR billing practices. The basis for

this adjustment was Morrison’s calculation (P4-B24) of WIP and invoices based on DR’s

December 31, 1995 statement. It appears therefore that this was an adjustment based on

a December 31, 1995 calculation. I find that the approach here is inconsistent. It relies on

Morrison’s analysis of WIP for a point in time three months before the valuation date for

the rest of his entries. Despite Jess’ dealings with him in the past, I am not confident that

Morrison knew the WIP as at March 31. The adjustment is inappropriate. This work

would have been billed prior to the liquidation. Its calculated value at March 31, 1996

is now moot, in any event.

[575]

The investment re 610544 Saskatchewan Ltd. was a receivable. Joyce

added $22,507.00 to the investment line being additional expenses for Rose Street.

Morrison said this was just a number that he and Joyce agreed on but he was not saying

it was positive. Morrison had told him it related to an investment which had nothing to

do with him and he should not share this loss and Joyce added it. He was not made aware

by Morrison that he had executed the corporate guarantee for the Loan for this property.

- 209 -

This adjustment was made just because Morrison said he did not want to be responsible

for it. Morrison acknowledged at trial that there was possibly no claim regarding this.

There was no further investigation by Joyce. Adjustment is, in my view, inappropriate.

[576]

Joyce indicates that by his calculations, the goodwill as at March 31, 1996

is $100,000.00. Joyce again bases his calculations on the March 31 numbers which are

faulty and on Morrison’s estimates respecting the adjustments which are in my view

unsupported. Curiously he testified that the differences in the March and April, 1996

internal statements do not affect his opinion. Morrison testified that the share purchase

agreement was valid. Joyce was unaware of the share purchase agreement para. 7.6 which

indicated no goodwill was to be looked at in the case of a withdrawing shareholder.

Despite Joyce’s mathematical calculations showing an element of goodwill, this prior

question as to whether goodwill is corporate or personal must be asked. Joyce attempts

to show mathematically that corporate goodwill does exist. The fact that Morrison was

able to leave DR and within 6 months set up his own company and continued to operate

this company, in my view indicates that goodwill, at least in the plumbing business, is

more personal than corporate. This was the situation in Jordan, supra cited by the

plaintiffs.

[577]

Jordan, at paras. 54 to 56 indicates that there was in that corporation no

corporate goodwill:

54 Office systems and procedures were in places which were continued

by Ms. Murre’s new company. While Ms. Murre and Ms. van Nes

disagreed on the benefits of the systems they had in place, I cannot find

that what was in place contributed to marketable goodwill.

55 Jordan Inc. had a client base with whom both principals had

established reputations. I agree with Mr. Arvanitis, however, that is was

- 210 -

Ms. Murre and Ms. van Nes who performed the key functions for the

business. These functions included preparing the proposals and quotes

and designing and monitoring the projects. From the evidence of both

principals, I find the clients contacted and dealt with them.

56 I accept the evidence of Mr. Arvanitis that any goodwill associated

with this young business should be attributed to the presence of Ms.

Murre and Ms. van Nes. If the company had been sold to a third party

purchasor, they would have been essential to the continuation of the

business. This is supported by the fact that, since the demise of Jordan

Inc., both principals were successful in setting up their own companies

which provide the same services and serve a similar client base. I also

rely on the fact that the principals were key persons for the plaintiff

company. They possessed the skills and knowledge to serve the clients.

The evidence supported a finding that the clients specifically contacted

and dealt with the principal with whom they had a personal

relationship.

[578]

This is a situation similar to Jordan, supra respecting goodwill. Each of

Morrison and Walbaum were able to set up a new business based on their personal

relationships in the industry and not corporate goodwill.

[579]

I accept the evidence of Jess that in a plumbing industry, the goodwill of

the company, especially one such as DR where 85% of the work was commercial, is only

as good as the next accepted tender. It is clear from all of the evidence that the plumbing

industry is a competitive one and that apart from service jobs, how well a company does

and the amount of business it has is largely dependent on whether it is the successful

bidder for projects. This applies to DR. In my view this also militates against DR having

substantial or any “corporate” goodwill on March 31, 1996. I would additionally find that

Morrison is a withdrawing shareholder in any event and by the terms of 7.6 of the share

purchase agreement, is not entitled to have goodwill included in any valuation. However

in my view, the issue of goodwill is moot since Morrison chose to put the company into

liquidation and upon that happening, any goodwill the company had, as Joyce confirmed,

was zero.

- 211 -

[580]

The general approached used by both Morrison and Walbaum was to ask

the court to use financial calculations and FMV’s for the company which were done at

a time when the company was still operating and in effect decide between two approaches

to the valuation of the company. In my view, all that fell by the wayside once the

company was liquidated. What Morrison asks in this case is that I value DR as a going

concern and ignore the liquidation. This is not appropriate. I accept neither the March 31,

1996 valuation of Joyce or Walbaum’s assertion that the company should be valued as

at December 31, 1995.

[581]

In my view the starting point for the valuation of the company is what the

liquidatorrecoveredonNovember13, 1997plusanyproperadjustmentswhicharisefrom

any proven improper acts or management of DR by Walbaum. The liquidator was tasked

with calling in the assets of the company and to some extent this was accomplished

although some questions were raised as to how effective this was given that Sandbeck

was sick and it appears on the evidence that some tasks in the liquidation were

substantially delayed or not attended to by Sandbeck. Nevertheless, the effect of the

liquidation was to shut down the company and to crystalize the assets and liabilities of

the company at the liquidation date. It is a trite point that a company which is a going

concern has more value than a company which is in liquidation. Liquidation often ensures

fire sale values for a company’s assets. However, it was Morrison’s choice to be proceed

in this fashion and with it came certain disadvantages. Morrison argues that he had no

choice but to do this and was forced to go back to court after Walbaum attempted to

transfer assets to DR by the agreements prepared by Mulatz. The fact is that the

liquidation motion had been argued prior to those agreements. Negotiations had broken

down in August. It appeared liquidation was inevitable. The need for liquidation can be

attributed to both Morrison and Walbaum.

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[582]

The approach I will therefore use is to determine if any of the adjustments

made by Joyce at P4-G6, a recalculation of the shareholders loan which purports to assess

Walbaum alleged misconduct, are substantiated on the evidence. Morrison alleged that

Walbaum was stripping the company of assets after he left and had not accounted for

various benefits while they were working together.

[583]

Joyce’sworkonG6reliesheavilyonMorrison’sforensicworkwhichIwill

detail later and which I do not accept for the most part and on the unsubstantiated advice

of Morrison as to some values. Jess kept detailed calculations of Morrison and

Walbaum’s shareholder accounts over the years prior to Morrison leaving DR. There is

no evidence that Morrison ever objected as to how these were handled despite yearly

meetings where this would have been looked at by Morrison and Walbaum. Morrison

testified that the shareholder loans were discussed and agreed to for past years. The

evidence on the whole suggests that Morrison consented to how they were handled and

I so find. Morrison admitted that his information given to Joyce about Walbaum taking

any proper benefits regarding 226 Cornwall Street, 309 Lorne Street, the Saskatchewan

Beach cottage and 3630 Berthiaume Bay were guesses without an substantiation. All of

these matters occurred before Morrison left DR, some many years before. Joyce

nevertheless added $87,500.00 to Walbaum’s shareholders loan based on these guesses.

The numbers are unsupported. Walbaum denies any improper benefit received in any

event and I accept his testimony. Even if there were a benefit, I find that they are

subsumed into Jess’ shareholder loan calculations of benefits for the past years to which

Morrison consented.

[584]

With respect to the petty cash calculations of Joyce in G6, these again rely

on the attached listing of what Morrison believes are suspicious petty cash entries

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totalling $231,904.00 between November, 1990 and October, 1997. He testified that

because of lack of documents, he had to make certain educated guesses. Walbaum

indicated that he paid per diems to employees and gave general reimbursements. I believe

him. Joyce testified that he did not know what the petty cash procedure was at DR and

if it was taken into account in Jess’ shareholder loan calculations. Jess testified that he

monitored the petty cash issue particularly. Historically there were lots of unattributed

petty cash usages. He said that as a result he scanned the GL and if there was something

personal, he would move it to the shareholders loan and discuss it with both. He said

there were no problems regarding this. He indicated that the petty cash analysis survived

two CRA audits and there is evidence it did. These audits look for personal benefits

which look like corporate expenses. The fact that CRA did not complain about petty cash

expenses gives some circumstantial weight to the argument that they were DR expenses.

I have no reason to believe Jess did not continue to monitor petty cash and make

appropriate adjustments after Morrison left. I find that Jess would have moved, and did

move, any personal petty cash to Walbaum’s shareholders loan account before and after

Morrison left in the normal course and that Morrison’s list to Joyce is no more than a list

of any petty cash that is unattributed plus any Walbaum got. It is speculation and it is not

proven that Walbaum received these amounts personally.

[585]

Joyce also included in his calculation the allegedly unexplained capital

contribution of $6,400.00 prior to September 30, 1996. Jess treats and explains it as a

valid contribution in his calculations in P4-C6. I am not prepared to find that the

contribution did not happen. Jess testified that his work was reviewed by his partner and

that the $6,400.00 does represent a contribution. Morrison argues that if it is a

contribution through the company, then he should get a similar amount. This will be dealt

with and subsumed in the context and part of a re-adjustment of Walbaum’s income for

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the 1995/1996 year. Apart from it being challenged, it has not been proven that it was not

a capital contribution as the documents indicated.

[586]

Joyce also adjusts an 1993 NSF cheque allegedly by Walbaum. There is

little information on this apart from the fact that Morrison alleges happened. This would

have been dealt with by Jess in the normal course. Morrison has not met the onus on this

issue. The adjustment for Ken Cooke is without merit. Although there is documentation,

a job cost report, respecting Cooke, it was not certain there was a loss after adjustments

are considered. Morrison admitted it was a snapshot in time and it comes from an

incomplete job cost report. Likewise, the Sim condo entry of $18,036.27 is reflected in

a work progress report but the evidence on a whole indicates that although Sims’ name

was on this report, the work was in fact on Rose Street as part of the investment. It again

is an incomplete snapshot in time. In any event I find that it relates to DR’s proper

investment in Rose Street. There is no evidence Sim or Walbaum received an improper

benefit. The document is from the broken computer which is suspect. This is not a proper

adjustment.

[587]

It is clear that in the early 1990s, both Morrison and Walbaum’s wives as

well as their sons received salary from DR for little or no work. They agreed on this. It

was part of the corporate give and take between the two shareholders. It should not now

be adjusted. The adjustment regarding Watts Electric furnace instals and Gary Keller

totalling $6,000.00 are subsumed in Jess’ historical accounting for shareholders benefits.

These were known well before Morrison left DR. Morrison himself did under the table

work while at DR and admitted rising DR assets personally. I find that if these benefits

were in fact received by Walbaum that Morrison consented to it even if there was no

adjustment made in the past. There will be no adjustment respecting this.

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[588]

The liquidator at P4-C7, page 7, in its report to the court accepts Jess’

calculations respecting the shareholders loan and assesses it at $38,187.39. More

importantly the liquidator states that it is providing that number to the court pursuant to

its duties under the order to prepare an accounting of the drawings and withdrawals or

appropriation of assets by each of the shareholders during the years 1990 - 1997. In short,

Jess’s shareholders loan calculation for Walbaum correctly encapsulates the necessary

adjustments which Morrison and Walbaum agreed on over the years between themselves

and is a correct analysis for the purposes of liquidation and this trial.

[589]

IfindthatWalbaumdidnotimproperlyreceivemoniesorbenefitsfromDR

for the foregoing items as calculated by Joyce. I accept Jess’ calculations of the amount

owing for Walbaum’s shareholder loan. I find that Walbaum did not breach any fiduciary

duties to DR or to Morrison respecting the foregoing issues.

[590]

The issues of the Community Bond, legal and accounting fees, Tamwal

receivable management and salary adjustments and the credit of $26,600.00 and excess

wages will be dealt with later.

[591]

Joyce also calculated that that from March, 1996, to liquidation that DR

achieved a profit of $200,000.00 based on DR’s average net income after tax from 1993

to March 31, 1996 of $126,566.00. This includes the calculation of a 6 month period

ending March 31, 1996 found at Appendix D of B-14 in the amount of $243,566.00. The

average yearly income of $128,566.00 is then extrapolated to the date of liquidation and

the result is an estimate of $200,000.00. Joyce in his examination in chief called this a

rough estimate. It is based on the faulty March 31, 1996 numbers.

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[592]

From a review of the March 31, 1996 income statement, it is unclear if

there was any allowance for management salaries. All of the 1993 to 1995 numbers used

by Joyce relied on external statements which included all adjustments. Appendix D had

no such adjustments and Joyce did none to insure accuracy. The revenue for 1996 was

slightly less than for 1995 which had net income of $150,099.00. I would have expected

them to be similar. What Joyce’s calculation does is ignore the actual net profit made at

the end of the 1996 and 1997 year as calculated by Jess in favour of a mathematical

calculation. The 1996 profit was reduced because of higher management salaries as was

the 1997. In 1996 there was a loss of $9,365.00. I find this calculation suspect. As well,

it overlaps with Joyce’s adjustment of excess wages for 1996 ($108,000.00 - $60,000.00)

and 1997 of $171,544.66. This period of time can be dealt with best by an adjustment of

those excess wages. I do not accept this evaluation of lost profit.

[593]

I will deal with the issues of Walbaum’s salary in excess of normal wages

and the salary of family members and certain of the other miscellaneous adjustments on

page 2 of G6 (later in this decision) as part of Morrison’s forensic work.

17.6

Morrison’s Forensic Work

[594]

Morrison spent substantial time during testimony going through various

issues and providing calculations which tended to show that Walbaum in his view

received an inappropriate benefit, made poor judgments which hurt the company or to

show that there were more assets than first meets the eye. I have dealt with some of those

allegations previously. Morrison started from the assumption that because DR had

substantially less assets in liquidation than as a going concern that Walbaum must have

divested it of those assets. His view is fueled by the fact that Walbaum incorporated AR

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in September and by the middle of October was telling third parties that he would be

operating under the name of AR respecting the commercial and industrial work.

Walbaum had opened AR accounts on October 17, 1996. He continued to operate AR

thereafter out of the previous DR premises. Morrison’s calculations were based largely

on his analysis of both the DR documentation, which was examined by him and Joyce in

the summer of 1996, and documentation received from the broken computer and on

guesses which Morrison made. Many of these calculations were done by Morrison

himself. Although he called an expert, Joyce, to provide a calculation and explanation of

the value of the company in 1996, Joyce did little work on reviewing Morrison’s forensic

work. As it is, Morrison makes certain assumptions that certain things happened,

supported by incomplete financial data. I have no confidence that the assumptions which

he makes are valid or that the calculations which arise from his work, which although

detailed, are reliable. On the whole, I find Morrison’s review of the financial data and

evidence suspect and incomplete.

17.7

The Effect of Liquidation

[595]

The plaintiffs argue that as of March 31, 1996, DR had a net worth of

$716,821.00. I have not accepted that. We do know that as at September 30, 1997, just

prior to liquidation by virtue of exhibit D1-16, the DR financial statement shows a net

worth of at least $320,728.00. This was prepared by Jess and accepted by the liquidator.

The Plaintiffs complain that between January, 1996 and November 13, 1997, DR was

transformed from a company with a substantial net worth to one worth nothing.

Unfortunately the plaintiff underestimates the effect that a liquidation would have on a

going concern. Suddenly assets which are used in the business and generating income for

the business may be worth nothing or next to nothing and be sold at fire sale prices

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because of liquidation. Most companies would be lucky to get book value for their assets

if sold. Although the September 30, 1997 statement at D1-16 shows accounts receivable

of $465,619.00 by September 24, 1998, the liquidator had only collected $23,492.67. If

one looks at the accounts receivable line on exhibit P4-C1, C6 and C7, the liquidation

reports spanning the period from November 12, 1997 to January 20, 1999, it is clear that

at least after September 24, 1998, no further receivables were collected by the liquidator.

Why this is so unclear and apart from wanting the addresses of some of the debtors, it

appears little was done thereafter. The sum of $49,970.00 was due from shareholders,

$26,251.00 was corporate income tax receivable and $84,560.00 was tied up in

receivables from 610544 Saskatchewan Ltd. i.e. the Rose Street investment, which was

a bad debt, and Tamwal Investments Ltd. Added to this were capital assets of $26,745.00.

The capital assets are the only assets with which there may be some question as to real

value, the others being all money assets. The capital assets were sold for approximately

$23,000.00. Later AR paid the liquidator a further sum of $2,573.24. This compares

favorably with the book value.

[596]

The liquidator collected received $82,361.00 from its efforts on behalf of

DR. As assets go, the sum of $84,560.00 was tied up in the Rose Street and Tamwal

receivable. The sum of $49,970.00 was owed from both the shareholders. These numbers

alone total $216,891.00. The liquidator claims an additional amount of $39,164.00

wrongfully diverted to AR. This puts the potential initial recoverable assets to at least

$255,000.00 compared to net book value worth $320,725.00 including Rose Street which

was a write-off. Admittedly the liquidator’s statement shows creditors but it is common

ground that none of DR, Morrison or Walbaum have been sued on these and it is at this

date an open question whether in any event these debts are now statute barred of them

having been incurred prior to November, 1997.

- 219 -

[597]

The plaintiffs complain that the AR April 30, 1998 statement shows

substantial accounts receivable implying that the DR receivables may have ended up

there. There is no evidence of that other than $39,000.00 of DR deposits to AR. AR was

beginning to operate in October and November, 1997 and by April, 1998 had operated

at least 6 months. AR also shows substantial current liabilities. Although the plaintiffs

argue that AR has built his business on the back of DR, this has not been proven by the

plaintiffs. Even Joyce testified that Walbaum had been in the industry for a long time. It

is not a surprise that he had business immediately. Apart from the use of DR employees

who did AR work, the plaintiffs has not proven on a balance of probabilities that any of

the DR assets were improperly moved to AR or used by it. This is so notwithstanding the

fact that AR continued in the same premise and used the same phone number as DR had.

Walbaum testified that he believed he had been authorized by Sandbeck to continue in

the old premises and he did just that. I accept from the correspondent that Sandbeck knew

Walbaum was operating AR from the old premises and I infer that he did not object to it

based on all the evidence.

[598]

The unvarnished reality in the summer of 1997 was that the plaintiffs had

argued his application to put DR into liquidation. The motion was under reserve at the

time and it was obvious with the two major shareholders being at an impasse that

liquidation was inevitable. Both at that time continued to be officers and directors of DR

but Morrison had left DR long ago and was happily operating his new business. Walbaum

testified that in the summer of 1997, before the liquidation, DR was under stress. There

was uncertainty regarding their bonding and guarantees. Suppliers were beginning to get

nervous. For Walbaum the stark reality was that his source of livelihood i.e. DR, would

soon cease to exist and it appeared the business was beginning to crumble. It would be

unreasonable to argue that Walbaum could not in the summer and fall of 1997 begin to

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position himself for life after DR. He sent out notices to suppliers on September 24, 1997

(P4-H33). Walbaum confirmed AR was running as of October 1, 1997 and by October

17, had opened accounts under the AR name. Walbaum was running two businesses at

once. He tried to transition into AR in a structured but nevertheless unilateral way by

signing agreements for a transfer of assets to AR which understandably were set aside by

the court and voided. However I do not necessarily see this as nefarious. The void

agreements did have a price adjustment clause which made the transition subject to court

supervision. It was nevertheless a self-help remedy on his part.

[599]

I do not fault Walbaum for relying on his personal contacts and goodwill

to continue making a living after DR. This is exactly what Morrison did in the spring of

1996 and thereafter. The re-invention of Walbaum from DR to AR was acquiesced in by

the liquidator who allowed him to continue using some of the DR assets during the early

part of the liquidation which included use of the old DR premises. By December 2, 1997

(P13), it appears that an agreement had been reached with the liquidator to have DR

employees move to AR effective December 1. The employees of DR were also used by

AR initially. Again, acquiesced in by the liquidator. The employees were freed up by the

liquidation and were fair game for rehiring. From the plaintiffs’ read-ins we know

Walbaum had talked to Sandbeck who agreed to pay the employees up to the end of

November and then lay them off so that he could hire them. There were employee issues

because from the liquidator’s report (P4-B12, p. 6) it appears the liquidator paid out

$25,430.00 to Labour Standards on undisputed actions by former employees. By

December 1, 1997, Deloitte had released its interest in the DR vehicles to AR for

$1,100.00. OnceDRceasedtoeffectivelyoperatebecauseofliquidation, ARmerelytook

over the premises and phone number again acquiesced in by the liquidator. The premises

would in any event have been available since DR was no longer operating. To argue that

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Walbaum should have moved out of the DR premises, not hired any of the laid-off DR

employees and not used substantial personal contacts to seek business from some of the

same builders with which he had worked with in the past would be unreasonable. After

all, DR was no longer seeking to do future work for these people and could no longer

service them. Moreover, it appears that the liquidator knew all of this. I infer that he

consented to this happening. There is no indication that the liquidator demanded any

payment for this. The liquidator was not going to run the day-to-day operations of DR.

Although running DR and AR simultaneously for 2 months is a conflict and a breach of

Walbaum’s fiduciary duty, in context, it is a minor breach which I will deal with later.

17.8.

Loss of Records

[600]

It is obvious that Morrison has spent substantial time reviewing such

financial documents as he had. However the plaintiffs argue that they have had some

difficulty in fully presenting their case because the loss withholding or destruction of

documents relevant to the dispute. They ask that an adverse inference be drawn with

respect to Walbaum and AR, regarding any of the relevant documents to the dispute. I am

not prepared to do that. It is clear that for many of Morrison’s financial claims there is not

a shred of documentation. Implicit in Morrison’s position is an admission that these

claims have not been otherwise proven. He seeks to have the court deem his financial

assertions to be proven by finding that he is prevented from doing so by Walbaum’s

misconduct. There is no merit to this kind of approach.

[601]

MorrisonreviewedanyDRdocumentsherequiredinitiallyinMayof1996.

He and Joyce also attended at Jess’ office to review DR documents in Jess’ possession.

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These documents were in existence until well into 2003 when Jess destroyed them in the

normal course . Morrison took no steps to preserve them for his litigation.

[602]

Morrison makes the point that by the date of the liquidation, there were few

documents to seize. Morrison argues that he has not had access to missing bank records

and cancelled cheques all of which are more important than the computer printout of the

DR GL for 1996 and 1997. I disagree. Jess explained that the GL is the record of all

financial transactions of the company. From the GL, items are categorized and adjusted

to make financial sense of the transactions. This would seemto be an especially important

financial document for the purposes of this action and that was available to Morrison.

[603]

On November 13, 1997, the liquidator took possession of DR and its

records. The liquidator on the evidence attended to the DR premises on the day of

liquidation with a bailiff and secured the premises. Walbaum and his staff left the

building temporarily. There is no evidence that Walbaum prior to the bailiff arriving

secreted or destroyed any financial documents on the DR premises. It is clear that there

were some gaps in the records that the liquidator received from DR. However what is

clear is that the liquidator attended with a bailiff at the DR premises and took whatever

records DR had in its possession at that time. This is subsequently reflected in the lists

of records and an additional list updating the first list. In fact, a review of the updated list

of documents created by the liquidator at D2-24B shows a significant amount of financial

data. I infer that substantially all of the DR financial documentation was present at DR

when the liquidator took over the premises. There were additional documents with Jess

who was trying to work on the September 30, 1997 year end. These documents included

the 1996/1997 GL for DR. Jess delivered the 1996/1997 GL and petty cash files to the

liquidator on December 24, 1997. Morrison could have reviewed all of these if he wanted

- 223 -

to. As it is his forensic analysis draws on all kinds of computer statements of AR and DR

as well as time cards and records for employees and work progress reports. I find that

early on Morrison had access to the financial documents needed in order to do an

analysis.

[604]

Morrison argues that prior to receiving the DR computer, Walbaum

downloaded the records of DR, AR and Tamwal and those records have not been

disclosed. If there were significant and important documents germane to this liquidation

which Morrison required for his case, he could have made an application for disclosure.

He did not. This applies with equal force to the Rose Street documents. Walbaum said

he had none and that Sim operated Rose Street. This is consistent with the evidence of

how DR invested in Rose Street. Sim was the one with experience in land investment and

was the manager of it.

[605]

The liquidator was in possession of the computer immediately prior to sale

and could have copied the disk or have printed off the records that were on the disk.

There was no evidence that it was done or that Morrison asked for it. The liquidator

complains in its report at P4- C12 that certain documents respecting certain projects have

not been forthcoming from Walbaum and AR. Walbaum indicates that he has provided

all of the document that are in his possession with respect to the projects of DR. He

indicates that the invoices and purchase orders which the liquidator seeks are actually in

the warranty books which were provided to the liquidator. These concern projects done

after Morrison left. It is unclear where the missing documents are. The plaintiffs argue

that I should draw an adverse inference that Walbaum has secreted or destroyed the

documents. I am not prepared to do that. Given the volume of financial data which the

liquidator did have in its possession, there are understandably gaps.

- 224 -

[606]

The plaintiffs also complain that Walbaum or someone connected to him

has damaged the computer purchased by Morrison from the liquidator. The evidence is

that when the computer was delivered by the liquidator to Ms. Lee on behalf of

Morrison, it was subsequently delivered to Mr. Martens. Martens testified that someone

tried to trash the computer. The hardware parts of the computer were damaged and the

disk was erased. The plaintiffs allege that the physical damage to the computer was done

with an apparent intent to destroy the files and make the files inaccessible. The disk is not

damaged. It is merely erased. There is no evidence who damaged the computer. Morrison

urges me to infer that it is Walbaum or someone associated with Walbaum with his

knowledge and agreement. I am not prepared to make that inference on all the evidence.

Adams was present with the computer. She cannot say who damaged it. She said that at

no time did she see the cover off the computer or see it being damaged. Walbaum denies

it was him.

[607]

By the time that Morrison received the computer, he had already examined

the hard copy financial data that he thought was relevant at DR and allowed his expert

to do an evaluation of DR. He obviously had a plan to do further financial investigation

by buying the computer hoping to prove Walbaum stripped DR of assets. He was most

hampered by the fact the disk was erased. The hardware damage alone would not

necessarily destroy the files although they may make the files temporarily inaccessible.

If he had a concern about that data, he could have alerted the liquidator to download the

data. Once the hardware problem was overcome, the disk could be accessed. As one

would expect with a computer that is being sold, the disk would be erased despite the fact

that Morrison was the person buying it. I do not see anything nefarious in this. The fact

that the computer was damaged and the information on the disk erased, does not in my

- 225 -

view support an adverse inference that Walbaum has kept significant relevant documents

from Morrison which has compromised his ability to conduct his case.

[608]

Generally speaking, it is desirable in litigation that a party who seeks

disclosure of documents when confronted with a party who denies having them or refuses

to disclose them, take the appropriate procedural steps to compel disclosure rather than

acquiesce in what may or may not be non-disclosure and complain about it later at trial.

Perhaps he was confident that the retrieval of documents from the broken computer

would be enough. The plaintiffs made no application to the court to compel the disclosure

of these alleged missing or destroyed non-disclosed documents despite the protestations

of Walbaum that he did not have them. The only inference that I can draw from this is

that the documents themselves were not crucial to the plaintiffs’ case or at least not

crucial enough to have the court review whether or not Walbaum either had these

documents and was not producing them, or destroyed them. On all the evidence, the facts

are unlike those in Doust, supra. I cannot draw an adverse inference against Walbaum on

the whole.

17.9

Breach of Fiduciary Obligations

[609]

The plaintiffs argue that Walbaum has breached his fiduciary obligations

to the company in various ways as set at page 19 and 20 of their trial brief. Morrison

impugned various behaviours acts and decisions of Walbaum reaching back to the late

1980s and forward past the liquidation. I will review these issues raised by Morrison and

determine whether Walbaum has failed to do his fiduciary duty under s.117. Although

he generally has not failed in this, there are in my view specific instances where he has

in fact breached his obligations to DR.

- 226 -

[610]

The duty of a director and officer is set out in the BCE, supra, Waxman,

supra and Chiu, supra cases and as set out in s.117 of the Act. Whether or not there has

been a breach of fiduciary duty is fact specific because the court is dealing with an

equitable remedy.

[611]

It is common ground that as a director and officer of DR that Walbaum

owes DR a fiduciary duty. In Waxman, the court found that one brother owed the other

a fiduciary duty. However, this was a situation where the court found that the fiduciary

duty was owed on the basis firstly that the brothers had incorporated their partnership and

secondly that a duty also arose because one brother over the years became the protector

of the others personal and business interests and the other one was relying on him to act

in their mutual best interests. In this case, there is no such partnership or familial bond.

Each of Morrison and Walbaum had their own areas of influence and control in DR and

although each relied on the other, there was no dependency such as occurred in Waxman.

There was an arms length element to their relationship. I find that Walbaum’s fiduciary

duty was owed to the corporation and not to Morrison.

[612]

In Chiu, supra, one director carried on a competing business while the

corporation was a going concern and when this caused the corporation to lose its major

contract, unilaterally transferred all assets to a new company with a consideration except

for inventory. In the case at bar, there is no indication that Walbaum did anything but

operate DR to the best of his ability in the absence of Morrison up to the point in October,

1997 when it became clear that DR would no longer exist. Walbaum acted in DR’s best

interests generally until that time unlike the director in Chiu.

- 227 -

[613]

In Jordan, supra, a director again started a new business while the old

business was a going concern rather than attempting to wind up the company.

[614]

The Jordan case at paras. 29-31 sets out a good statement of the law:

29 Thus, directors are prohibited from putting themselves in positions

where their duty to act in the best interests of the corporation and their

self-interest conflict. If directors use their positions to obtain a profit or

other benefit for themselves, then they are required to give up the

benefit to the corporation. I find that, as a director, Ms. Murre took

advantage of a business opportunity which was not in the best interests

of the plaintiffs when she set up her company.

30 Similarly, the duty to act “honestly” prohibits directors from acting

fraudulently in relation to the company; they are not to deprive the

corporation of some assets or benefits which the corporation is entitled

to for their own gain. In most cases, where there is a breach of fiduciary

duty, the fiduciary has made some profit or received some advantage at

the expense of the corporation. Here, I do not find that, as a director,

Ms. Murre was acting fraudulently, but I do find she failed to act in the

best interests of the plaintiffs when she commenced an operation for her

own gains and best interests.

31 Although it is not a breach of a fiduciary duty for a director to

terminate his or her relationship with a corporation and go into

competition with it, a fiduciary cannot compete with the corporation

while he or she remains in her capacity as a fiduciary. The conflict

between the personal interests of the fiduciary and her duty to act in the

best interests of the corporation is obvious in such situations and the

courts, traditionally, have provided reliefwheneverany competitionhas

been found. In Re Thomson, [1930] 1 Ch. 203, the court granted relief

against an executor who entered into competition with a business

owned by the estate for which he was responsible.

[615]

Whether there has been a breach of these duties requires in my mind a

broad contextual and conceptual approach. Part of this is keeping in mind whether there

is a good business explanation for certain acts, the reasonable expectations of the parties

and business realities not merely narrow legalities. Did the impugned conduct harm the

- 228 -

corporation as a whole? I find that some of it did. The court can turn to equitable

principles to devise appropriate remedies for breach of fiduciary duty.

[616]

Morrison raises questions about the appropriateness of the Rose Street

investment. Morrison testified that if DR did work on Rose Street that it would be dealt

with in Walbaum’s shareholder loan. Morrison agreed to this investment from the outset

and in fact, assisted in providing financing documents for it. Morrison testified that he

thought there may be no claim for it. Walbaum indicates that he does not know what

happened to Rose Street but that after liquidation he was urging the liquidator to attempt

to sell the interest in Rose Street to a third party. This project was left for Walbaum to

manage when Morrison left the company and did not return. The fact that Rose Street

was a financial drain on DR, in my view cannot be laid at the feet of Walbaum. As

explained earlier, the loss on this should not be treated as part of the value of DR whether

as at March 31, 1996 or at liquidation for the purposes of this action. It appears that it

may have been an unwise investment in retrospect but the initial acquisition of it and

Walbaum’s dealing with it in Morrison’s absence, in my view shows nothing

inappropriate or anything that would provide to Walbaum any benefit. There is no

fiduciary breach by Walbaum regarding this.

[617]

Likewise with respect to McAra Street, I find that this project was initiated

by Morrison and managed to the best of his ability by Walbaum. Ultimately this property

was not put into DR because of Morrison’s absence. However, DR money was spent on

upgrading the property and it appears DR had use of the property for some time for

storage. Morrison testified that they always were short of space. Whether or not the

property was actually needed to provide a compound for DR in my view begs the

question. It was in fact used by DR for a period of time and DR got some benefit for it.

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[618]

It is clear that Tamwal owes DR some money. This is based on calculations

by Jess which I find to be accurate and reliable as far as they go. Jess figures in his

worksheet in P4-K19 accord with those in the March 31, 1998 Tamwal financial

statement at $27,959.00. It takes into account at K19 the credit of $26,600.00 and the

original DR deposit for McAra Street $7,546.33. K19 also refers to cheque 3383 which

is referred to at K30 respecting the Pippen bill of $15,381.05. Although Jess accepts

Walbaum’s advice that DR is responsible for this bill, this should be a Tamwal

responsibility as landlord and should be added. DR as tenant should not have to pay for

the renovations and pay rent. Additionally DR was deprived of interest on the $26,600.00

when Dumur Co. paid the Loan. This figure is $1,552.39 as at September 25, 1996 and

should be added to the $26,600.00. I find that the total owing by Tamwal to DR is

$44,892.44.

[619]

I find that Walbaum has breached his fiduciary duty in the respect of

McAra Street only in that he attempted to negotiate an initial credit for himself on

McAra Street which resulted in him having to consent and agree to Dumur Co.’s

reduction of the Loan repayment by $26,600.00. Walbaum put himself in a conflict of

interest using what started as a DR purchase. Had he not tried to get the credit on McAra

Street and just paid cash there would be no issue that the full loan would have been

repaid. The credit is now owed by Tamwal to DR. When McAra Street was sold, there

were sufficient monies in Tamwal to recover the credit and the balance of the monies

owed by Tamwal to DR. Walbaum was an officer and director of Tamwal at the same

time as he was the director and officer of DR. Walbaum had a duty to DR to insure that

DR was protected in circumstances where as here, there was substantial money in

Tamwal to pay its debts. He failed to do so. He was in a conflict again. Walbaum failed

to cause Tamwal to honor its duties. This was another conflict situation for Walbaum and

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I find that he breached his fiduciary duty to DR in this respect. I find him jointly liable

with Tamwal to pay the amount determined earlier.

[620]

The Jordan, supra case is the most similar to this case. The court there

observed that the company should have been liquidated. I find that Walbaum was

technically in breach of his duty to DR by starting AR and operating it at the same time.

The damage done however is attenduated by the fact that DR was going into liquidation.

It was no longer a going concern as such. Accordingly the damage done to DR by this

breach was in my view minimal given the context. I find that a fair award to compensate

DR for this is $15,000.00 and Walbaum shall pay this to DR.

[621]

With respect to salary taken by Walbaum in 1996 and 1997, the amount

requires adjustment. Walbaum took management salaries of $118,063.00 fro 1995 and

1996 and $142,554.00 for 1996 and 1997. I find that the $6,400.00 that Morrison

questions on the shareholders loan account, if it was a draw from DR, will be accounted

for with this adjustment. Based on the September 30, 1997 statement for DR, nearly all

of the operating profit for that year was paid to Walbaum. Morrison was still a

shareholder in the company. The revenue for the September 30, 1997 year was within

$40,000.00 of the September 30, 1995 revenue of DR. However, expenses were higher

in the 1997 year. Walbaum had operated the company without the benefit of Morrison

for that year. He had hired a person to replace Morrison as an estimator. Morrison and

Walbaum had always shared the profits equally despite the absence of a unanimous

shareholders agreement to that effect. In my view, it was however inappropriate for

Walbaum to take such large salaries and a breach of his fiduciary duty. However, it is

not a proper case for an equal division. I find that taking the salaries for those years taken

by Walbaum was unreasonable and amounted to the divesting by Walbaum of some of

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the profits of DR. An appropriate salary would be $106,915.00 for 1996/1997 and

$88,547.00 for 1995/1996 rather than the amount taken by Walbaum. Walbaum will pay

the difference of $65,154.50 to the liquidator on behalf of DR.

[622]

Morrison also argues that Walbaum failed in his duty to DR to withhold

taxes on wages thereby leaving DR with a current tax of over $100,000.00, most of it

interest. Although Adams testified that it relates to the period before November 13, 1997,

it is not clear that Walbaum was responsible for this. The letter of Jess (D2-7B) merely

indicates that as of September 30, 1997, source deductions were underpaid by

$13,275.00. There is no evidence Walbaum deliberately failed to pay this. This

remittance was not due until October 30, 1997. That Jess testified he knew of no source

deductions after September 30, 1997, I take to mean that he actually does not know if any

were made, not that there were none made since by November 13, matters except for the

September 30, 1997 statement were out of his hands. After November 13, 1997, the

liquidator took over. There is no indication that the liquidator addressed source

deductions owing from before or after the liquidation despite having the money to do so.

DR operated with the assistance of Walbaum and with employees until at least December

1, 1997 when the employees became AR employees. The CRA letter to Sandbeck dated

August 13, 1998 (P4-C9) shows that as a result of an assessment dated April 21, 1998

that a total of $46,901.30 (which included $6,200.00 of interest) was owing. By October

9, 1998 (P4-C12) it had grown to $66,236.84. It was clearly part of the liquidators

mandate to deal with this. In short, the evidence is unclear how the source deductions

arose and why and how much is pre and post liquidation. When the company went into

liquidation there was enough money to pay the original withholding assessment.

Apparently the liquidator did not do so. DR had not gone bankrupt and there should have

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been no issue regarding this. Morrison has not proven that Walbaum breached his

fiduciary duty in this respect.

[623]

Morrison also complains that AR took over DR contracts but continued to

use DR labour and material for those jobs without cost to AR. As explained, it is not

unreasonable that AR would begin servicing the contracts that DR had. DR ceased to

operate at the request of Morrison and these customers were up for grabs. Even Joyce

testified that the liquidator had allowed Walbaumto take over the contracts and Walbaum

had years in the industry. With respect to using the DR labour and materials, there is

some indication that perhaps DR employees were doing some AR work. Morrison

attempted to show in the P4-H tabs that DR resources were used by AR. I am generally

not satisfied that his work was accurate or reasonable. It is an attempt to do a lay audit

of early AR invoices which in my view has many gaps and is incomplete. He has

accomplished this only to the extent that he has reviewed the hard copy time records of

the DR employees and matched them up to AR invoices sent after liquidation. Walbaum,

however, does not dispute the time cards found at H3. However, the value of the invoices,

in my view, would be improper as a measure of this item because the invoices are not

themselves in evidence and there is no way to know whether they reflect work done

wholly by DR employees and expense DR material.

[624]

Morrison created a list of large and small jobs which he says AR took over

or invoiced where DR employees had worked on the project and DR inventory had been

used. Morrison was in no way involved in these projects and apart from the

documentation that he used, some of it from the broken computer, Morrison had no

personal knowledge of these jobs. With respect to the large projects, I am not satisfied

that AR received any particular benefit from these based on Morrison’s forensic work

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which is in my view suspect. Morrison attempts to use the work progress reports which

show profit margins substantially higher than DR’s historical profit as a springboard for

his argument that AR must have received some benefit from DR resources. It is clear that

the records from the broken computer are incomplete and individual records are merely

point in time records subject to further input and adjustments. The excessive profit

margins are in my view an indicator that costs have not been properly allocated and

adjustments have not been made. He also stated that it was just his theory. This issue has

not been proven by Morrison.

[625]

With respect to the small jobs, there is some evidence based on Morrison’s

analysis of the time records at P4-H3, which were hard copy matched to H1, that some

DR employee’s time may have ended up invoiced by AR. I am prepared to accept

Morrison’s time calculations on this issue because they are based on hard copy DR time

cards and employee cheques. Some of it may be attributed to DR employees continuing

to work on AR projects at the pleasure of the liquidator. There is some evidence that there

were understandings in place between Walbaum and Sandbeck regarding the operation

of DR. Unfortunately the evidence from Walbaum was not clear about what these were

and Sandbeck was called by neither party. However based on a review of P4-H1 and H3,

approximately 914 hours were expended by the employees while with DR before they

became AR employees. The evidence indicates that the employees were paid by DR. I

find AR has received a benefit from the use of those employees for which it should

reimburse DR and I am satisfied that 914 hours is the measure of that benefit. The H3

cheques to employees show hourly rates for employees which vary from $7.00 per hour

to $20.00 per hour with many in the $15.00 - $18.00 per hour range. A fair way to deal

with this issue is to use an average rate. Using a $18.00 per hour rate times 914 hours, this

amount is $16,452.00. It was incumbent on Walbaum to ensure that all DR benefits

- 234 -

received from DR were paid back as part of his fiduciary duty. Walbaum claims a set-off

for AR which I will deal with later. Walbaum was a director of DR at all times and the

fact that he thought AR was owed money by DR and his failure to pay these benefits over

to the liquidator puts him in a position of conflict. He has in this respect breached his

fiduciary duty and AR has received the benefit. Both AR and Walbaum are jointly

responsible to repay $16,452.00 to DR.

[626]

With respect to Sherwood Community Bond, it appears that some of this

money has gone to Walbaum. Jess, at P4-F8 as at September 30, 1997, calculates the

realizable amount as $9,000.00 after all adjustments. The sum of $3,000.00 was received

by Walbaum in April, 1996 (F8). It does not appear to be accounted for in Jess’

shareholdersloancalculations. Afurther$2,481.00wasreceivedJune30, 1998according

to the liquidator (P4-C12, page 6). Walbaum has a duty to return $5,481.00 to DR.

[627]

With respect to the redirection of the Loan monies after Dumur Co. paid

them to Mulatz, this is not a breach of Walbaum’s fiduciary duty to DR. The evidence

was that DR received the money and got the benefit of it. Even if it were a breach of an

agreement with Morrison, at most the money was to be held for the purpose of

negotiations, which in July, 1996, appeared to be over. I see nothing nefarious in

Walbaum cashing the Levesque investment which held the DR money just prior to

liquidation. The evidence was that suppliers were becoming difficult to deal with and it

is understandable that DR may have required greater liquidity. There is a question raised

respecting a further $50,000.00 investment at Levesque. It has not, on all the evidence,

been proven that Walbaum received this money improperly.

- 235 -

[628]

With respect to the failure to repay his shareholders loan of $38,187.39,

Walbaum has acknowledged that he owes this and he will repay this to DR.

[629]

The allegation that DR paid wages to Walbaum’s wife and son has no

merit. There is no breach of fiduciary duty. It was clear from the evidence that in the early

years family members of both Morrison and Walbaum were getting paid with little or no

work done. Some of this was caught by a CRA audit. This is subsumed in Jess’

accounting for this period. With respect to Tammy Walbaum, as I will detail later, she has

earned the money paid to her.

[630]

With respect to the divesting of DR of assets and being in competition with

DR, I have dealt with Walbaum’s breach of fiduciary duty earlier. It has not been proven

except as mentioned before that there was a wholesale improper transferring of assets to

AR. Morrison uses as an example assets which he says were not part of the auction.

Morrison paid $21,500.00 for DR assets but argues that from a list completed by him of

items DR paid for in the 1996/1997 years, there were substantial assets unaccounted for.

Although we have a list of what DR is alleged to have bought, we have no list in evidence

which of these same items apart from a few referred to in testimony were purchased by

Morrison. Walbaum testified that many items were bought and used up, or broken, or

stolen at job sites or given away. I am not confident that the list of Morrison’s accurately

depicts what was at DR when the liquidator secured the premises. There is no indication

that Walbaum secreted any assets just prior to the liquidator attending DR. Morrison

argues that AR was able to operate in its first year without capitalized equipment.

Curiously DR operated with a similar lack of capitalized equipment on its books.

Walbaum testified that many companies got along with only small tools because the

plumbing suppliers now do a lot of the manufacturing aspect of plumbing. The list made

- 236 -

as it is from pure invoices is by itself without context and its accuracy is suspect. There

is no evidence of actual assets which AR received and used which can be traced to DR.

Morrison merely makes the list and asks the court to infer that AR now has all of them.

I cannot draw that influence from the evidence. Morrison has failed to prove that

Walbaum took virtually all of DR’s physical assets without accounting for them and AR

got a benefit and that there is a fiduciary breach by Walbaum.

[631]

It has not been proven that Walbaum used DR to pay for personal expenses

including personal legal fees or accounting fees. I find that the Shirkey fees were for DR

business and that the Mulatz, Olive Waller Firm bills and Dudley bills paid by DR were

appropriately for DR work as documented by Jess. Morrison argues that the Shirkey fees

are related to his divorce from his first wife Karen. Walbaum denies this and says it

relates to some work on a theft of items from DR. I believe Walbaum. The legal fees to

the Olive Waller Firm, in my view, were substantially for DR’s benefit to defend the

liquidation application. Walbaum was asked by Morrison’s lawyer to seek counsel other

than the usual company lawyer, Mulatz, and he did that. Essentially DR, upon being

served with the motion for liquidation, was fighting for its existence. In that respect,

Walbaum’s interests and DR aligned. However, that does not mean that the bill is not

properly a DR responsibility. With respect to the Dudley bill, it was in fact reduced and

I find that the reduced bill was a DR responsibility. Jess has properly accounted for all

these bills. I cannot find on all the evidence that there has been a breach of Walbaum’s

fiduciary duty on this issue.

[632]

The sum of $39,163.95 of DR funds were wrongfully deposited to the AR

account. I am prepared to accept that because of banking difficulties and the fluid state

of corporate affairs near liquidation that these mistakes were made. Walbaum admits this

- 237 -

but seeks to set the repayment off against monies Walbaum says are owing by DR to AR.

I find that AR has deposited this amount to its account and that subject to what I will say

about the set-off of AR, this money belongs to DR and will be repaid by AR.

[633]

Morrison has also determined that $23,919.00 of the leasehold

improvements were made at 333 Dewdney Avenue and AR got the benefit of it for 3

years. The liquidator made no claim for this despite his knowledge that AR was

operating out of the former DR premises. I find that expanding the DR space and

renovatingwasamatterofWalbaum’sbusinessjudgmentwhichinmyviewwasproperly

exercised and in good faith. Morrison has admitted that when a tenant leaves or loses the

lease that many leaseholds revert to the landlord. This is what happened. Although

Walbaum tried to value a benefit before the liquidation in one of the voided agreements,

there was no legal obligation for AR to pay once DR ceased to lease it. The leaseholds

were done at a time when it was not certain that there would be a liquidation and there

was some hope of a buyout. I cannot say on all the evidence that there is a breach of

Walbaum’s fiduciary duty or AR got the improper benefit.

[634]

With respect to the DR cheques to Walbaum after September 30, 1997,

Morrison cites $83,791.00 in cheques. These are found at F9 and include the $53,000.00

cheque as well as some petty cash cheques. It has not been proven that the petty cash

cheques went to Walbaum for an improper purpose. Merely making the allegation

without mere does not shift the burden of proof from Morrison. Although Walbaum in

his discovery states he received the $53,000.00, I accept his explanation that it was

credited back to the DR account. The credit found at P4-F10 shows an identical amount

and I infer that this amount reflects the credit for the cheque. I am prepared to find that

Walbaum received $27,353.15 after September 30, 1997 for the November 7 and

- 238 -

November13cheques. Thesumof$15,000.00wouldbeareasonableremunerationgiven

what has transpired. There is a breach of fiduciary duty for taking excessive salary and

Walbaum shall repay $12,353.15.

[635]

Morrison argues that Tamwal falsely charged rent and other charges to DR

in 1996 and 1997. While 333 Dewdney Avenue was expanded and doubled, there is

evidence that McAra Street was used and continued to be used by DR and that the rent

was not unreasonable. This is in my view a matter of business judgment by Walbaum on

behalf of DR and there is no evidence that such judgment was unreasonably exercised.

There is no breach of any fiduciary duty by Walbaum here in that respect and no claim

against Tamwal respecting this.

17.10

Walbaum’s Credibility

[636]

Morrison argued that Walbaum was just not credible in his testimony.

Although I found Walbaum to be less precise than Morrison and more concerned with the

big picture, I did not find him less credible than Morrison. I do not find Morrison’s

allegations of discrepancies regarding income splitting, the course of negotiations and

whether an old cabin had plumbing or not and other issues cogent examples of lack of

overall credibility. It may well be for example that between the fall of 1996 and the fall

of 1997, negotiations did go dark from Walbaum’s point of view. It appears that

negotiations were moving slowly and were mainly being handled by the lawyers.

Likewise, Walbaum’s view of Morrison’s competition with DR and the use of the DR is

not particularly convincing that Walbaumis less credible. The May 2 agreement allowing

Morrison to compete is ineffective at law as long as Morrison remained a director and

officer of DR. This was agreed at a time when it was hoped that there would be a quick

- 239 -

buyout. This did not happen. What Walbaum did was acquiesce in Morrison’s breach of

his duty to DR but still considered it a breach.

[637]

The evidence surrounding the handling of petty cash per diems and the

$53,000.00 cheque does not diminish his credibility. I have already found that Walbaum

returned the $53,000.00. The rebuttal evidence of Deneve does not convince me that

others did not receive per diems. I do not find the discrepancies in Walbaum’s testimony

fatal to his credibility. He had the details and sequence of some events wrong. However,

most witnesses testifying about events and documents from 13-14 years ago would make

errors. The general demeanor and the manner in which Walbaumanswered questions was

satisfactory and does not cause me to find Walbaum is a less credible witness.

17.11

[638]

[639]

Pattern of Behavior

Morrison points out Walbaum’s pattern of behavior as nefarious.

I find that on all the evidence there was nothing in Walbaum’s pattern of

behavior or the facts generally which tended to show that Walbaum was improperly

acquiring DR assets for himself or AR.

[640]

Morrison’scomplaintthatWalbaumusedDR’sstatusasasignificantclient

to obtain free materials for himself prior to 1998 is not unusual. The evidence was that

the suppliers were willing to provide free material and did so. Morrison chose not to take

advantage of what appeared to be a common custom. Morrison assumes that Dr is

diminished thereby. This is not so. These kinds of exchanges actually strengthen the

contractor/supplier relationship if anything. There is in my view nothing improper in this.

- 240 -

[641]

Morrison at pages 27 - 29 of his closing argument lists other instances of

behavior which he alleges should be sanctioned taken as a whole. I cannot say on all the

evidence that it shows an inclination on Walbaum’s part to denude DR of its assets given

my comments made about specific issues before. The accounting which Morrison now

seeks to have 12 years after the event has in my view been mostly accomplished by the

financial work of Jess and his employees which was done every year.

17.12

The All-Rite Off-Set

[642]

The claim by AR is for its off-set against DR is set out at P16, the work of

Jess. I do not fault Jess’ work in calculating the amount. However the lack of

documentary evidence of a general agreement with Sandbeck is undisputed. There was

no such agreement entered into by the liquidator. Although Walbaum testifies that

Sandbeck told him to keep track of credits and debits respecting the two companies,

Walbaum admitted that there is no authorization from the liquidator to incur the amounts

claimed. Adams confirmed this. I suspect that Walbaumwas at this stage expending AR’s

monies on some DR work to calm the general contractors and suppliers which had prior

to and during the liquidation been nervous about their relationship with DR. Walbaum

testified that he had provided a list of debits and credits to Sandbeck but was not able to

produce a copy of it. The liquidator as well did not produce such a document. If AR

expended the money it did, as calculated by Jess then I find that it did so without the

liquidator’s authorization and for its own long term benefit.

17.13

Tammy Walbaum

- 241 -

[643]

With respect to the claim against Tammy Walbaum, I can find nothing

improper with respect to her dealings with DR. I am satisfied that she worked for what

she earned and that her pay was reasonable. The evidence as a whole indicates that she

made a valuable contribution to the DR operation before and after Morrison left DR. I see

no evidence of conversion of DR assets to her use. The claim against her is dismissed.

17.14

Punitive Damages

[644]

I find no factual basis for punitive damages. The Whiten, supra case makes

it clear at paragraph 36 that punitive damages are awarded against a defendant in

exceptional cases for malicious, oppressive and high-handed conduct that offends the

courts sense of decency. On all the evidence, I do not find this is an exceptional case nor

do I find the conduct of Walbaum malicious, oppressive or high-handed given my

comments earlier in this decision. The conduct is not deserving of punishment.

18.

OTHER CAUSES OF ACTION

[645]

The claims for trespass, conversion and detinue although claimed were not

argued by the plaintiff. Except to the extent that I have found the defendants liable as

outlined previously, these claims are all dismissed.

19.

SUMMARY OF ADJUSTMENTS AND PAYMENTS TO BE MADE

- 242 -

A summary of the liability of the various defendants is as

follows:

1.

Return of unreasonable management fees/salary

(Walbaum liable)

$65,154.0

0

2.

3.

4.

5.

6.

7.

8.

Return of money owing by Tamwal to DR

(Walbaum and Tamwal are jointly liable)

44,892.00

Return of Bond Funds received by Walbaum

(Walbaum liable)

5,481.00

Payment of Walbaum’s shareholders loan

(Walbaum liable)

38,187.00

39,164.00

16,452.00

15,000.00

Repayment of cheques wrongfully diverted to DR

(AR and Walbaum jointly liable)

Repayment of employee time used by AR

(AR and Walbaum jointly liable)

Operating AR in competition to DR

(Walbaum liable)

Return of payments received by Walbaum

- 243 -

after September 30, 1997

(Walbaum liable)

12,353.15

_________________

$236,683.15

[646]

There will therefore be judgment for the amounts as set forth above against

the defendants as indicated. As provided for in the Order of McLellan J. dated April 20,

1999, all monies shall be paid to the liquidator.

20.

PRE-JUDGEMENT INTEREST

[647]

There will be prejudgment interest on the amount payable in accordance

with the rates set out in the Act for the applicable time period subject to my comments.

The derivative action was first brought to court in April, 1999 and the action commenced

April 20, 1999. It appears that the last discoveries were done in 2001. The court file

indicates that the matter was set for a pre-trial conference by way of motion in February,

2007. It then took about 18 months for the matter to be heard. There is a gap of 5 ½ years

where it appears no formal steps were taken to move this matter forward. In the

circumstances, I am exercising my discretion under s.5(3) of The Prejudgment Interest

Act, S.S. 1984-85-86, c. P-22.2 to refuse the award the usual prejudgment interest. This

matter could have been brought on sooner in court especially where some of the events

and issues dealt with were 17-19 years old. The plaintiffs are primarily responsible for

moving the action forward. However, I accept that the full 5 ½ year delay may not be

attributable to the plaintiffs solely given the various defendants and counsel. Accordingly

I find it has been proven just that the period for which prejudgment interest normally

calculated shall after calculation be reduced by 40%.

- 244 -

21.

THE SIM/TURNER COSTS

[648]

The defendants, Sim and Turner, shall have their costs as against the

plaintiffs. The plaintiffs argues that their ability to proceed was hampered by the lack of

documents. As indicated in my decision earlier, an application could have been made if

the document were important. The effect of the discovery questions read into evidence

respecting both the Rose Street investment and the Presuitti job was that the claim was

a weak one at best. I am surprised that the plaintiffs proceeded against Sim and Turner

without any documents and with the answers given to the discovery questions respecting

this claim. I reiterate my comments given in my reasons for granting the non-suit. These

defendants have been wholly successful and there is no reason not to allow costs in the

usual manner. Sim and Turner shall have their costs to July 16, 2007 and double costs

thereafter.

22.

COSTS

[649]

to.

The issue of costs between the plaintiffs and the defendants shall be spoken

J.

R.K. OTTENBREIT