IN THE SUPREME COURT OF BRITISH COLUMBIA

Transcription

1 IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Jordan Enterprises Ltd. v. Barker, 2015 BCSC 559 In the Matter of the Business Corporations Act, S.B.C. 2002, c.57, ss 232 and 233 and In the Matter of R.A.B. Ventures Ltd., R.A.B. Ventures #1 Ltd., R.A.B. Ventures #3 Ltd., R.A.B. Ventures #4 Ltd., R.A.B. Ventures (Falcon Heights) Ltd. Date: Docket: S Registry: Vancouver Between: And Jordan Enterprises Ltd. and Jeffrey Bickerstaff Robert A. Barker and R.A.B. Properties Ltd. Petitioners Respondents Before: The Honourable Mr. Justice Abrioux Reasons for Judgment Counsel for Petitioners: Counsel for Respondents: Place and Date of Hearing: Place and Date of Judgment: Stein K. Gudmundseth, Q.C. and Elyn Underhill Rhys Davies, Q.C. and Tijana Gavric Vancouver, B.C. February 16 and 17, 2015 Vancouver, B.C. April 13, 2015

2 Jordan Enterprises Ltd. v. Barker Page 2 Table of Contents I: INTRODUCTION... 3 II: BACKGROUND... 4 III: THE LEGAL FRAMEWORK... 7 A: Principles of Good Faith... 8 B: Principles of Best Interests... 9 IV: DISCUSSION A: Parties Positions B: Analysis V: CONCLUSION... 17

3 Jordan Enterprises Ltd. v. Barker Page 3 I: INTRODUCTION [1] The petitioners, Jordan Enterprises Ltd. ( JEL ) and Jeffery Bickerstaff, seek an order pursuant to ss. 232 and 233 of the Business Corporations Act, S.B.C 2002, c. 57 (the Act ) that either or both of them be granted leave to bring and have exclusive control of a proposed derivative action (the Derivative Action ) to be brought in the name and on behalf of the respondents R.A.B. Ventures Ltd. ( R.A.B. Ventures ), R.A.B. Ventures #1 Ltd., R.A.B. Ventures #3 Ltd., R.A.B. Ventures #4 Ltd., and R.A.B. Ventures Ltd. (Falcon Heights), collectively with R.A.B. Ventures referred to as the Ventures Group, against the proposed defendants R.A.B. Properties Ltd. ( R.A.B. Properties ) and Robert A. Barker. [2] The Derivative Action would include claims to recover monies allegedly improperly received by the proposed defendants, and would involve claims of breach of contract, taking of corporate opportunities, breach of statutory duties, negligent management of the Ventures Group business, negligent accounting, and conversion. [3] On September 20, 2013, the petitioner JEL and its founder, Ralph Jordan, by notice of civil claim commenced an action against the respondents and others pertaining to the business operations of the Ventures Group (the Jordan Action ). The plaintiffs in the Jordan Action allege that Mr. Barker misappropriated significant amounts of money from the Ventures Group. I shall refer to these allegations in greater detail below. They also advance many of the same allegations that the petitioners seek to advance against the respondents in the Derivative Action. [4] The defendants in the Jordan Action filed a response to civil claim on November 8, 2013 in which they allege, inter alia, that most of the breaches alleged by JEL and Mr. Jordan and the losses said to result from those breaches did not arise from obligations owed to JEL and Mr. Jordan, but rather the duties alleged were owed to the Ventures Group and any losses were losses of the Ventures Group by those companies for which compensation cannot be claimed.

4 Jordan Enterprises Ltd. v. Barker Page 4 [5] On March 10, 2014, I was appointed judicial case management judge of the Jordan Action. It is set to proceed to trial for 20 days commencing January 25, [6] This petition was filed on September 26, 2014 and the response was filed on December 24, [7] For the reasons that follow, the petition is granted. II: BACKGROUND [8] The essential background facts are not in dispute, although it is clear that there is considerable dispute between Messrs. Jordan, Bickerstaff, and Barker pertaining to the details of their interactions over the years. [9] The following summary of those facts that do not appear to be in dispute is largely taken from the petitioners written submissions. [10] JEL and R.A.B. Properties each own 50% of the shares of R.A.B. Ventures. That company has a number of wholly-owned subsidiaries. [11] Mr. Jordan is the founder of JEL and Mr. Barker, a chartered accountant, is the controlling shareholder of R.A.B. Properties. [12] The Ventures Group has operated for many years as a property developer, subdividing lands and building homes. As well, the Ventures Group has worked with third party companies in joint venture developments. [13] According to the petitioners, until 2012, Mr. Barker had direct day-to-day control of the affairs of the Ventures Group and was the sole signing authority. Mr. Jordan, through JEL, provided the financial wherewithal for the Ventures Group to undertake the development projects. [14] The petitioners say that Mr. Barker s contribution to the enterprise was operating the development projects and Mr. Jordan s role was to provide below market rate financing so the projects could happen. Little of the arrangement between Messrs. Jordan and Barker was set out in writing even though millions of

5 Jordan Enterprises Ltd. v. Barker Page 5 dollars worth of projects were undertaken and millions of dollars of profits were earned (net income before taxes being $40.9 million for the years 2006 to 2013). [15] There is now a dispute concerning what the agreement was between Messrs. Jordan and Barker and whether Mr. Barker has properly accounted for the Ventures Group monies. [16] The main area of dispute concerns the management fee that Mr. Barker, through R.A.B. Properties, was to receive. The questions for determination on a trial are essentially what the agreement was initially, whether that agreement subsequently changed, and, if so, in what respects. Dependent on that determination, the management fee may total anywhere between $1.792 million and $5.392 million. [17] In 2012, Mr. Bickerstaff became the president of JEL and a director of the Ventures Group in place of Mr. Jordan who was in his early eighties. [18] Mr. Bickerstaff made enquiries of Mr. Barker concerning the arrangement for the payment of management fees and sought information concerning the accounting of the Ventures Group, which Mr. Jordan and JEL allege had been under the control of Mr. Barker. [19] Mr. Bickerstaff had many concerns relating to the information he was gathering with regard to the financial affairs of the Ventures Group, and which are detailed in his affidavits. These led to the commencement of the Jordan Action. The response filed in that proceeding pleads that Mr. Jordan and JEL have no status to bring certain claims as they are claims of the Ventures Group. [20] The Jordan Action is premised on Mr. Jordan and JEL being in a joint venture relationship or partnership with Mr. Barker and R.A.B. Properties that would permit claims to be made directly by the parties based on the relationship being one of a joint venture operating through companies or as a de facto partnership in an ongoing business relationship.

6 Jordan Enterprises Ltd. v. Barker Page 6 [21] From the affidavits filed in this proceeding, the following issues exist between the parties: was there an agreement respecting management fees in the amount of $5,000 per residential unit in return for which Mr. Barker would cover the over-head cost; has Mr. Barker breached that agreement by claiming additional management fees; has Mr. Barker breached the agreement by not covering all of the overhead costs; where projects were undertaken by other developers in a joint venture with the Ventures Group were management fees nevertheless payable to R.A.B. Properties; has Mr. Barker properly accounted to the Ventures Group for the monies he or his companies received for managing developments for joint venture developers; has Mr. Barker breached his duties as a fiduciary; did Mr. Barker and/or R.A.B. Properties at Mr. Barker s direction improperly charge fees and personal expenses; did Mr. Barker breach his duty as an accountant in failing to ensure that there were comprehensive accounting records; and did Mr. Barker prepare and file corporate income tax returns that included excessive management fees and improperly charged personal expenses. [22] The business affairs of the Ventures Group are in the process of being wound up but further profits are anticipated.

7 Jordan Enterprises Ltd. v. Barker Page 7 III: THE LEGAL FRAMEWORK [23] The parties generally agree on the applicable principles. The starting point is the provisions of sections 232 and 233 of the Act. Section 232 describes the availability of derivative actions and provides: 232 (1) In this section and section 233, "complainant" means, in relation to a company, a shareholder or director of the company; "shareholder" has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section. (2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company (a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or (b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection. (3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise. (4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company. [24] Section 233 concerns the powers of the court in relation to derivative actions and provides, in part: 233 (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if (a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding, (b) notice of the application for leave has been given to the company and to any other person the court may order, (c) the complainant is acting in good faith, and

8 Jordan Enterprises Ltd. v. Barker Page 8 (d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended. (2) Nothing in this section prevents the court from making an order that the complainant give security for costs. (3) While a legal proceeding prosecuted or defended under this section is pending, the court may, (a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and (b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate. [25] The s. 233(1) requirements that are in issue in this proceeding are whether the petitioners are acting in good faith and if it appears to the court that it is in the best interests of the Ventures Group for the Derivative Action to be brought. [26] A consideration of the evidence is required. The test is not the one on an application to strike pleadings under Rule 9-5 of the Supreme Court Civil Rules where the pleaded facts are assumed to be true. A: Principles of Good Faith [27] The onus is on the applicant to establish that the derivative proceeding is being brought in good faith. There is no presumption of good faith. Evidence must be adduced to establish good faith: Luft v. Ball, 2013 BCSC 574 at para. 46, citing Creative Realty Corp. v. 333 Terminal Holdings Ltd., 2011 BCSC 638 at para. 19. [28] The test for good faith is whether the action is brought for the primary purpose of pursuing the claim on the company s behalf. Factors to consider include: (i) the applicant s belief in the merits of the proposed action, (ii) existing disputes between the parties, and (iii) alleged ulterior motives. See Luft v. Ball at para. 46, citing Bennett v. Rudek, 2008 BCSC 1278 at para. 46.

9 Jordan Enterprises Ltd. v. Barker Page 9 [29] The applicant s belief in the merits of the intended action is not determinative of good faith, but, if accepted by the court, is a prima facie indication that the applicant is acting with proper motives: Discovery Enterprises Inc. v. Ebco Industries Ltd.(1998), [1998] B.C.J. No at para. 5, 50 B.C.L.R. (3d) 195. [30] Ultimately, the existence of good faith is a question of fact to be determined on all of the evidence and the particular circumstances of the case: Luft v. Ball at para. 46, citing Lost Lake Properties Ltd. v. Sunshine Ridge Properties Ltd., 2009 BCSC 938 at para. 56. [31] If the intended action does not appear to be frivolous or vexatious, it could reasonably succeed, and it is in the interest of the shareholders for it to be brought, leave to bring the action should be given: Holdyk v. Adolph, 2012 BCCA 37 at para. 19, citing Re Marc-Jay Investments Inc. and Levy (1974), 50 D.L.R. (3d) 45 at 47 (Ont. H.C.). [32] A dispute between shareholders does not necessarily indicate that one is acting in bad faith. This is even so in a situation where directors have failed to respond adequately or at all to alleged significant financial irregularity, have failed to provide full access to the financial records of the company despite a court order, and/or have not properly considered the request to commence an action for the company: Carr v. Cheng, 2005 BCSC 445 at para. 16. B: Principles of Best Interests [33] When embarking on an analysis of the principles pertaining to the best interests of the company, the threshold for the applicant to meet is that there is an arguable case that the derivative action is in the interest of the corporation: Luft v. Ball at para. 53, citing Gartenberg v. Consolidated Stone Industries Inc., 2005 BCCA 462 at para. 26. [34] There is a slight difference in the language between the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the CBCA ), s. 239(2)(c) under which Luft v. Ball was decided and the Act, s. 233(1)(d). Where s. 239(2)(c) of the CBCA

10 Jordan Enterprises Ltd. v. Barker Page 10 provides, it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued, s. 233(1)(d) of the Act provides instead, it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended (emphasis added). [35] Appears or appears to the court does not mean trying the case. It encompasses a determination of whether the proposed action has a reasonable prospect of success or is bound to fail, whether a defence raised is bound to be accepted, and whether the potential relief will justify the cost and inconvenience to the corporation: Luft v. Ball at para. 54, citing Discovery Enterprises Inc. v. Ebco Industries Ltd. (1997), [1997] B.C.J. No at para. 20, 40 B.C.L.R. (3d) 43, aff d (1998), 50 B.C.L.R. (3d) 195; Mikulic v. Peter, 2013 BCSC 941 at para. 11; Holdyk v. Adolph at para. 19. [36] There is no distinction between the test that a case is arguable and the test that a case has a reasonable prospect of success : Carr v. Cheng at para. 21. [37] For a court to determine whether an action has a reasonable prospect of success, it must know what the cause of action is, the facts alleged to give rise to it, and the loss alleged to have been suffered by the corporation: Mikulic v. Peter at para. 12. [38] Best interests can only be interpreted as speaking to a more rigid consideration of what is good for the corporation than what would be required under interest. Best interests can be defined as the maximization of the value of a corporation. It is best for a corporation to be profitable, well-capitalized, and with strong prospects. The deterioration of a corporation s financial stability should be avoided. See Carr v. Cheng at para. 25. [39] In Carr v. Cheng, leave to bring a derivative action was granted. Madam Justice Dillon found that the core financial stability of the corporation in question was threatened and the inconvenience to the corporation of engaging in litigation was outweighed by the potential for the resolution of financial uncertainty. She held that

11 Jordan Enterprises Ltd. v. Barker Page 11 the intended action had no appearance of being either frivolous or vexatious and that it could reasonably succeed. IV: DISCUSSION A: Parties Positions [40] The petitioners position is that they have demonstrated that there is an arguable case that the Derivative Action has a reasonable prospect of success. Accordingly, it is in the best interests of the Ventures Group that it proceed. They point to the response filed by the defendants in the Jordan Action which specifically places in issue to whom the alleged duties were owed, that is JEL, Mr. Jordan, or the Ventures Group. [41] They also submit that there is clearly an arguable case insofar as the terms of the agreement relating to management fees is concerned, whether the agreement was varied, and, if so, the terms of that variation. [42] They submit that if Mr. Barker s claims to the substantial management fees are not successful then those fees will have to be repaid and the Derivative Action will be to the obvious benefit of the Ventures Group. [43] Insofar as the requirement of good faith is concerned, the petitioners allege that they have been attempting to obtain proper documentary production for a year and a half and there has only been partial compliance by the defendants in the Jordan Action. They say their motives cannot be questioned. Mr. Bickerstaff s affidavits set out the background facts that led to the Derivative Action, in particular financial and accounting improprieties. [44] Further evidence of their good faith is that they have retained Ms. Jennifer Blacklock, a forensic investigative accountant, to conduct a financial review which they anticipate will be completed in the summer of [45] If leave is granted, then they say the Derivative Action should be set to proceed to trial at the same time as the Jordan Action in January That way the

12 Jordan Enterprises Ltd. v. Barker Page 12 claims of JEL, Mr. Jordan, and the Ventures Group will be before the court at the same time. [46] The respondents position is that the petitioners have not satisfied the good faith requirement. Mr. Jordan s affidavit is far less detailed than one would expect for a proceeding such as this. Essentially, he has adopted what Mr. Bickerstaff has to say and it was Mr. Jordan, not Mr. Bickerstaff, who had personal involvement in most of those matters that gave rise to the Jordan Action and the Derivative Action. The defendants in the Jordan Action maintain their position that most of the claims in that action should be those of the Ventures Group. [47] The respondents concede that there are valid issues that need to be addressed, including the terms of the agreement relating to management fees charged by Mr. Barker and whether certain fees charged related to personal or joint venture expenses and the like. [48] They argue, however, that the Derivative Action is premature since Ms. Blacklock s forensic accounting is not yet completed. Relying on Luft v. Ball, they say the petition should be dismissed with liberty to reapply after the results of the forensic audit are known. [49] Insofar as the best interests of the company are concerned, the respondents argue that the various claims set out in the Derivative Action should be examined separately since the reasonable prospect test weeds out those potential actions that are frivolous or that are bound to fail. See Carr v. Cheng at para 22. [50] The respondents are not prepared to abandon the portion of their response in the Jordan Action that the plaintiffs claims in that action are primarily those of the Ventures Group. That is because they assert that the plaintiffs in that action cannot circumvent what are properly corporate claims by framing them as personal actions.

13 Jordan Enterprises Ltd. v. Barker Page 13 B: Analysis [51] When I apply the principles to which I have referred to the circumstances of this proceeding, I conclude the petition should be granted. [52] In my view, the Derivative Action is in the best interests of the Ventures Group. The defendants in the Jordan Action have pled that most of the alleged duties owed by Mr. Barker and R.A.B. Properties were owed to the Ventures Group, not JEL. They are not prepared to abandon that position in the Jordan Action if the petition here is dismissed. [53] In their written submission, the respondents review the various proposed claims and submit that there is either no issue to be litigated and/or that Mr. Barker has a reasonable explanation for what occurred. [54] I will not review each proposed claim individually in these reasons for judgment although I have in fact considered them separately. In my view, the petitioners have established that there is an arguable case for all the claims advanced in the Derivative Action, although I acknowledge that some are stronger than others. I also recognize that perhaps Mr. Barker s explanations will be accepted but that is not necessarily the case. Some of the proposed claims also have a far more significant monetary value than others. [55] I accept that some of the proposed claims are close to the line insofar as whether their pursuit is in the best interests of the Ventures Group or whether they should be weeded out. For example, there is a claim for loss connected to property at and Sylvan Drive in Chilliwack, British Columbia ( Sylvan Drive ). That claim is to the effect that the Ventures Group was put to risk and expense to redeem that property which was sold for the payment of taxes. The respondents say that taxes owing are an expense that would have to be paid in any event and that no quantum of additional expense beyond the taxes was provided. They say that there may have been some minor expenses incurred with the late payment of taxes and restoring the numbered company that owned the property, but that it would not be in the best interests of the Ventures Group to pursue such a small claim.

14 Jordan Enterprises Ltd. v. Barker Page 14 [56] The respondents rely on Mikulic v. Peter in support of their position that the Sylvan Drive claim, and certain other claims, should not be pursued. However, in Mikulic v. Peter, Mr. Justice N. Smith stated: [13] No draft notice of civil claim has been put forward on this application. That is not necessarily a bar to granting leave, but the basic elements of the cause of action that would be contained in such pleadings should at least be discernible from the petition and supporting affidavit on the leave application. [57] In contrast, in the case at bar, the basic elements of this particular claim, as with all the other claims, are set out in the Derivative Action. The prosecution of this claim with its potential for a modest recovery if successful will not impact in any meaningful way the length of time required for the preparation and/or hearing of the Derivative Action, in particular, the substantial claims relating to whether management fees were payable on lot sales even if a house was not built on that lot, or the payment of fees on Joint Venture projects. [58] When I consider the other claims sought to be included in the Derivative Action, I conclude that many contain common issues which include the terms of the management agreement, whether it was varied, and numerous accounting matters. [59] Without in any way trying the case, the evidence before the court is sufficient to establish that the petitioners have an arguable case. It includes that Mr. Baker or R.A.B. Properties at Mr. Barker s direction: increased the management fee and imposed additional fees without authorization; failed to cover all overhead costs of the Ventures Group contrary to the management fee agreement; used the Ventures Group to pay personal expenses or expenses that in any event were not expenses of the Ventures Group, such as expenses incurred in the construction of his daughter s home, the cost of employing Mr. Mike Pecchia and Mr. Rick Deck when they were not employees of the Ventures

15 Jordan Enterprises Ltd. v. Barker Page 15 Group, and personal benefits and expenses for two friends, Mr. Steven Harder and Mr. Ron Mulhern; received monies personally that should have gone to the Ventures Group; put the Ventures Group to risk and expense to redeem Sylvan Drive from tax arrears and auction; breached the duty of care and duty to act in the best interests of the Ventures Group in handling the financial management of a hydroelectric dam construction project (the Versatile Project ); took advantage of real estate development opportunities that were properly those of the Ventures Group, including an Osoyoos development project and a shopping centre development project; and withheld financial information including unaccounted for reports and documents from previous years, although the respondents note that the petitioners do not allege any losses under this heading. [60] The petitioners have also satisfied the good faith requirement. The respondents are correct that Mr. Jordan did not himself respond to certain of the statements made by Mr. Barker in his evidence. But when I consider the evidence of the petitioners as a whole, including that of Mr. Bickerstaff, I conclude that the purpose of pursuing the Derivative Action is for the benefit of the Ventures Group, that there is merit in those claims, and there is no ulterior motive. After all, it is the respondents who have taken the position in the Jordan Action that the claims are properly those of the Ventures Group. [61] The fact I have concluded that the proposed claims satisfy the threshold requirements for leave to bring the Derivative Action does not in any way preclude the respondents from applying to have one or more of what they consider to be weak claims dismissed pursuant to the summary trial provisions of the Supreme Court Civil Rules.

16 Jordan Enterprises Ltd. v. Barker Page 16 [62] I do not accept the respondents submission that the petition should be dismissed with liberty to reapply after the Ms. Blackstock s forensic audit is complete. [63] First of all, while the respondents have made significant documentary disclosure, it is incomplete. In particular, they have not provided an electronic version of the relevant files notwithstanding the lengthy time frame that has elapsed since the request was initially made. [64] Secondly, the trial of the Jordan Action had been originally scheduled for January 2015, but was then adjourned by consent to January [65] The respondents appear to acknowledge that there are substantive issues to be addressed between the parties in relation to whom were owed the duties that are alleged to have been breached. They also appear to acknowledge that some of the proposed claims, such as personal expenses claimed by Mr. Barker, are those of the Ventures Group as opposed to JEL. [66] Were I to accept the respondents submission that the Derivative Action is premature and should await the results of the forensic accounting, then that may well result in a bifurcation of the process relating to JEL s claims on the one hand and those pertaining to the Ventures Group on the other. That, in my view, is not in the best interests of the Ventures Group. [67] Furthermore, to wait several months prior to determining whether the Derivative Action should proceed may well result, if leave were then granted to bring the Derivative Action, in a further adjournment of the Jordan Action. That is because the JEL Action and the Derivative Action ought to proceed to trial at the same time. [68] I would add that leave to pursue the Derivative Action being granted will not affect the ongoing operations of the Ventures Group. By agreement, the parties have a process in place for the payment of management fees as the business affairs of the Ventures Group are being wound up.

17 Jordan Enterprises Ltd. v. Barker Page 17 V: CONCLUSION [69] The petition is granted. The petitioners are granted leave to commence and prosecute legal proceedings as set out in Schedule A to the petition in the name and on behalf of the Ventures Group against Mr. Barker and R.A.B. Properties. [70] The Derivative Action is to be commenced by April 30, 2015 and JEL is authorized to control the conduct of the proceeding at its expense. [71] I order that the Derivative Action be set for trial at the same time as the Jordan Action, being January 25, 2016, and I direct that, once pleadings are closed in the Derivative Action, a judicial management conference occur in regards to both actions on or before June 15, [72] Subject to any factors pertaining to costs, which the parties have leave to bring to my attention, the petitioners are awarded their costs of this proceeding at Scale B. Abrioux J.