Dun-Rite Plumbing & Heating Ltd. et al. v. Walbaum et al., 2009 SKQB 174

• Judge: Ottenbreit, J.
• Court: Court of Queen's Bench of Saskatchewan (Canada)
• Case Date: May 14, 2009
• Jurisdiction: Saskatchewan
• Citations: 2009 SKQB 174;(2009), 338 Sask.R. 36 (QB)

Dun-Rite Plumbing v. Walbaum (2009), 338 Sask.R. 36 (QB)

MLB headnote and full text

Temp. Cite: [2009] Sask.R. TBEd. MY.042

Dun-Rite Plumbing & Heating Ltd. and Alec Keith Morrison (plaintiffs) v. 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)

(1999 Q.B.G. No. 959; 2009 SKQB 174)

Indexed As: Dun-Rite Plumbing & Heating Ltd. et al. v. Walbaum et al.

Saskatchewan Court of Queen's Bench

Judicial Centre of Regina

Ottenbreit, J.

May 14, 2009.

Summary:

Morrison, on his own behalf and on behalf of Dun-Rite Plumbing & Heating Ltd. (Dun-Rite), sued the Walbaum group of defendants, Dumur and his numbered company (the Dumurs), Sim, Turner, Fazakas and Gabriel Construction Ltd. The principal defendant was Walbaum, who had been an equal shareholder with Morrison in Dun-Rite. Dun-Rite had been liquidated in 1997. The principal allegation against Walbaum was that he diverted virtually all of Dun-Rite's assets to himself, his companies and his wife. The plaintiffs claimed that the Sims, Gabriel Construction and the Demurs were involved in the divestiture of the assets. The claims against Fazakas and Gabriel Construction were settled. The claim against Sim and Turner was dismissed as a result of a non-suit application.

The Saskatchewan Court of Queen's Bench allowed the action in part against Walbaum and his two companies and dismissed the claim against the other defendants. The court assessed damages.

Company Law - Topic 4125

Directors - Compensation - Fees - Excessive - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - Both were directors - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - The parties did not reach a consensus on the fair market value - Dun-Rite was placed into liquidation - Morrison, on behalf of himself and Dun-Rite, sued Walbaum and others - The Saskatchewan Court of Queen's Bench, in determining the fair market value, stated that the salary taken by Walbaum in 1996 and 1997 required adjustment - Walbaum took management salaries of $118,063 for 1995 and 1996 and $142,554 for 1996 and 1997. Based on the September 30, 1997 statement for Dun-Rite, nearly all of the operating profit for that year was paid to Walbaum - Morrison was still a shareholder - The revenue was within $40,000 of the September 30, 1995 revenue - However, expenses were higher - Morrison and Walbaum had always shared the profits equally despite the absence of a unanimous shareholders agreement to that effect - It was inappropriate for Walbaum to take such large salaries and a breach of his fiduciary duty - However, this was not a proper case for an equal division - The taking of the salaries was unreasonable and amounted to the divesting by Walbaum of some of the Dun-Rite's profits - An appropriate salary was $106,915.00 for 1996/1997 and $88,547.00 for 1995/1996 - Walbaum was to pay the difference of $65,154.50 to the liquidator - See paragraph 621.

Company Law - Topic 4165

Directors - Powers - To manage business and affairs of corporation - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - Morrison agreed in principle to loan money to Dumur - Morrison left the details respecting the loan to Walbaum - In December 1995, Morrison went on vacation and did not return to work - Walbaum finalized the loan with Dumur - On May 2, 1996, during negotiations to buy out Walbaum, the parties entered into a without prejudice agreement which, inter alia, gave Morrison some input into Dun-Rite's operations and restricted Walbaum's authority - It was also agreed that Morrison could start a competing business - Walbaum continued to make business decisions and operate Dun-Rite - Morrison remained uninvolved and commenced a competing business - The Saskatchewan Court of Queen's Bench rejected an assertion that Walbaum had acted outside of his authority - Morrison effectively consented to Walbaum operating Dunn-Rite and making decisions by himself - The May 2 undertaking had a limited time application respecting Walbaum's general authority - The May 2 agreement could not absolve Morrison of his duties owed to Dun-Rite as a director (Saskatchewan Business Corporation Act, s. 117(3)) - The non-competition agreement went directly against Morrison's duties to Dunn-Rite - It was against that back drop that Walbaum's authority had to be assessed - He was the only active director and officer left - Section 18 of the Act (the indoor management rule) did not prevent Walbaum from dealing with the loan to Dumur or property transactions - Those issues were part of Dun-Rite's ordinary, usual and customary business, despite that it was first and foremost a plumbing company - All of the transactions were either consented to, acquiesced in or initiated by Morrison - Walbaum had the right and duty as a director and officer and the authority to continue dealing with these matters in Morrison's absence - Technically, approval of both Morrison and Walbaum was not required - Section 18 of the Act afforded Dumur protection - See paragraphs 528 to 543.

Company Law - Topic 4262

Directors - Duties - General principles - Fiduciary duty - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - Each was a director - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - The parties did not reach a consensus - Morrison had Dun-Rite put into liquidation - While the liquidation was pending, Walbaum commenced a competing business (All-Rite) - He continued to operate Dun-Rite - The liquidator acquiesced in Walbaum's transition to All-Rite and permitted him to continue using some of Dun-Rite's assets during the early part of the liquidations, including the use of Dun-Rite's premises and employees - An agreement was reached with the liquidator to have Dun-Rite's employees move to All-Rite - Morrison, on behalf of himself and Dun-Rite, sued Walbaum and others - The Saskatchewan Court of Queen's Bench stated that to argue that Walbaum should have moved out of the Dun-Rite's premises, not hired any of the laid off employees and not used his substantial personal contacts to seek business was unreasonable - Dun-Rite was no longer seeking to do future work for those purposes and could no longer service them - The liquidator was not going to run the day-to-day operations of Dun-Rite - Although running Dun-Rite and All-Rite for two months was a conflict and breach of Walbaum's fiduciary duty, it was a minor breach - See paragraphs 595 to 599.

Company Law - Topic 4262

Directors - Duties - General principles - Fiduciary duty - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - Both were directors - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - The parties did not reach a consensus on Dun-Rite's fair market value - Morrison, on behalf of himself and Dun-Rite, sued Walbaum and others - Morrison asserted, inter alia, that Walbaum breached his fiduciary obligations to Dun-Rite - The Saskatchewan Court of Queen's Bench stated that "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 corporation as a whole? ..." - See paragraph 615.

Company Law - Topic 4264

Directors - Duties - General principles - Remedies for breach of fiduciary duty - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - Both were directors - In December 1995, Morrison went on vacation and did not return to work - Walbaum, on behalf of one of his companies (Tamwal) made an offer to purchase property from Dumur's company (Dumur Co.) for $120,000, payable by other financing of $26,600 and a mortgage - The $26,600 was to be documented by a promissory note from Tamwal to Dumur Co. which the latter was to assign to Dun-Rite - The promissory note was to be credited against a $120,000 loan that Dun-Rite had made to Dumur Co. - The Saskatchewan Court of Queen's Bench held that Walbaum breached his fiduciary duty in that he attempted to negotiate an initial credit for himself which resulted in having to consent and agree to Dumur Co. reducing the loan repayment by $26,600 - Walbaum put himself in a conflict of interest using what started as a Dun-Rite purchase - Had he not tried to get the credit and paid cash there would have been no issue that the full loan would have been repaid - The credit was not owed by Tamwal to Dun-Rite - When the property was sold, there was sufficient monies in Tamwal to recover the credit and the balance of the monies owed by Tamwal to Dun-Rite - Walbaum was an officer and director of both Tamwal and Dun-Rite - Walbaum had a duty to Dun-Rite to insure that Dun-Rite was protected in circumstances where there was substantial money in Tamwal to pay its debts - By failing to do so he was in conflict and breached his fiduciary duty to Dun-Rite - Walbaum was jointly liable with Tamwal to pay the amount owing to Dun-Rite - See paragraphs 617 to 619.

Company Law - Topic 4264

Directors - Duties - General principles - Remedies for breach of fiduciary duty - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - Each was a director - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - The parties did not reach a consensus - Morrison had Dun-Rite put into liquidation - While the liquidation was pending, Walbaum commenced a competing business (All-Rite) - He continued to operate Dun-Rite - The liquidator acquiesced in Walbaum's transition to All-Rite and permitted him to continue using some of Dun-Rite's assets during the early part of the liquidation, including the use of Dun-Rite's premises and employees - Some of Dun-Rite employees' time was invoiced by All-Rite - An agreement was reached to have Dun-Rite's employees move to All-Rite - The Saskatchewan Court of Queen's Bench estimated that approximately 914 hours were expended by the employees while with Dun-Rite before they became All-Rite employees - Using an average rate of $18 per hour, it worked out to $16,452 - It was incumbent on Walbaum to ensure that benefits received from Dun-Rite were paid back as part of his fiduciary duty - Walbaum was a director of Dun-Rite at all  times and the fact that he thought All-Rite was owed money by Dun-Rite and his failure to pay those benefits over to the liquidator put him in a position of conflict - He breached his fiduciary duty and All-Right received the benefit - All-Rite and Walbaum were jointly responsible to repay $16,452 to Dun-Rite - See paragraphs 623 to 625.

Company Law - Topic 4266

Directors - Duties - General principles - Breach of fiduciary duty - What constitutes - [See Company Law - Topic 4125 , Company Law - Topic 4165 , both Company Law - Topic 4262 and both Company Law - Topic 4264 ].

Company Law - Topic 4266

Directors - Duties - General principles - Breach of fiduciary duty - What constitutes -Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - Morrison and Walbaum agreed to have a loan owed by Dumur Co. paid to Dun-Rite's corporate lawyer (Mulatz) in trust pending the buyout negotiations - Dumur, as instructed, forwarded a cheque to Mulatz to pay out the balance of the loan - The funds were returned to Dumur's lawyer (Shutter) - Mulatz advised Shutter to deal directly with Dun-Rite - Walbaum came to Shutter's office, picked up the cheque and signed a discharge on Dun-Rite's behalf - Walbaum invested the money on Dun-Rite's behalf - Dun-Rite was placed into liquidation - The Saskatchewan Court of Queen's Bench held that the redirection of the loan monies was not a breach of Walbaum's fiduciary duty to Dun-Rite - Dun-Rite received the money and got the benefit of it - Even if it were a breach of the agreement with Morrison, at most the money was to be held for the purpose of negotiations, which appeared at that time to be over - Also, there was nothing nefarious in Walbaum cashing the investment just prior to the liquidation - Suppliers were becoming difficult to deal with and it was understandable that Dun-Rite required greater liquidity - See paragraph 627.

Company Law - Topic 4311

Directors - Duties to company and shareholders - Duty to act in the best interest of the corporation - [See both Company Law - Topic 4262 ].

Company Law - Topic 4521

Officers and agents - Authority - General - [See Company Law - Topic 4165 ].

Company Law - Topic 5763

Sale of shares - Valuation - Basis for valuation - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - The parties did not reach a consensus on Dun-Rite's fair market value - Morrison had Dun-Rite put into liquidation - Morrison, on behalf of himself and Dun-Rite, sued Walbaum and others - The Saskatchewan Court of Queen's Bench stated that the general approach used by both Morrison and Walbaum in determining Dun-Rite's fair market value was to ask the court to use financial calculations which were done at a time when the company was still operating and in effect decide between the two valuation approaches - All that fell by the wayside once the company was liquidated - The court could not value Dun-Rite as a going concern and ignore the liquidation - The starting point for the valuation was what the liquidator recovered on November 13, 1997, plus any proper adjustments which arose from any proven improper acts or management of Dun-Rite by Walbaum - The effect of the liquidation was to shut down Dun-Rite and to crystalize its assets and liabilities at the liquidation date - Liquidation often ensured fire sale values for a company's assets - However, it was Morrison's choice to proceed in that fashion and with it came certain disadvantages - The need for liquidation could be attributed to both Morrison and Walbaum - See paragraphs 580 to 582.

Company Law - Topic 5765

Sale of shares - Valuation - Goodwill - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - The parties did not reach a consensus on Dun-Rite's fair market value - Morrison, on behalf of himself and Dun-Rite, sued Walbaum and others - The Saskatchewan Court of Queen's Bench accepted the evidence of Walbaum's expert (Dun-Rite's external accountant) that in the plumbing industry, the goodwill of a company, especially one like Dun-Rite where 85% of the work was commercial, was only as good as the next accepted tender - The plumbing industry was competitive and that, apart from service jobs, how well the company did and the amount of business it had was largely dependant on whether it was the successful bidder for projects - This applied to Dun-Rite and militated against Dun-Rite having substantial or any corporate goodwill - Additionally, pursuant to the share purchase agreement, Morrison was not entitled to have goodwill included in any valuation - Further, the issue of goodwill was moot, since Morrison placed the company into liquidation - See paragraphs 576 to 579.

Evidence - Topic 7000.2

Opinion evidence - Expert evidence - General - Expert witness - Disqualification - Bias - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - Morrison retained an expert (Joyce) to determine the fair market value of Dun-Rite - Walbaum relied on Dun-Rite's exterior accountant (Jess) to determine fair market value - Morrison, on behalf of himself and Dun-Rite, sued Walbaum and others - The principal allegation against Walbaum was that he diverted virtually all of Dun-Rite's assets to himself, his companies and his wife - At trial Morrison placed reliance on Joyce - The Saskatchewan Court of Queen's Bench held that the objectivity that the court required of Joyce had been compromised - Joyce had become too much of an advocate for Morrison, both at trial and prior to trial when he prepared the valuation, the calculation of corporate income for 18 months and the re-calculation of the shareholders loan - Joyce's evaluation represented a bargaining position - Although it was arguable that the evidence of Jess was suspect because of the length of time that he had worked as Dun-Rite's accountant, there was no indication of such - The court accepted that Jess's calculations and working papers contained in the financial statements of Dun-Rite were generally accurate and he tried to do his work in a professional and unbiased manner - Further, when Joyce's evaluation was looked at in detail, it could not stand - See paragraphs 559 to 579.

Evidence - Topic 7002

Opinion evidence - Expert evidence - General - Acceptance, rejection and weight to be given to expert opinion - [See Evidence - Topic 7000.2 ].

Interest - Topic 5004

Interest as damage (prejudgment interest) - General principles - Discretion of judge - The Saskatchewan Court of Queen's Bench exercised its discretion under s. 5(3) of the Prejudgment Interest Act to deny successful plaintiffs the usual prejudgment interest where there was a 5.5 year gap where no formal steps were taken to move the matter forward - The matter could have been brought on sooner especially where some of the events and issues dealt with were 17 to 19 years old - The plaintiffs were primarily responsible for moving the action forward - However, some of the delay might not be attributable to the plaintiffs solely given the various defendants and counsel - The court directed that the period for which prejudgment interest was normally calculated be reduced by 40% - See paragraph 647.

Practice - Topic 4154

Discovery - General principles - Time for application for discovery - The Saskatchewan Court of Queen's Bench stated that "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 [the principal defendant] 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 [the defendant] either had these documents and was not producing them, or destroyed them. ... I cannot draw an adverse inference against [the defendant] on the whole." - See paragraph 608.

Trusts - Topic 308

Creation of trust - General - Words which create a trust - Morrison and Walbaum were equal shareholders in Dun-Rite Plumbing & Heating Ltd. - In December 1995, Morrison went on vacation and did not return to work - Negotiations respecting the buyout of Morrison from Dun-Rite ensued - Morrison and Walbaum agreed to have a loan owed by Dumur Co. paid to Dun-Rite's corporate lawyer (Mulatz) in trust pending the buyout negotiations - Dumur, as instructed, forwarded a cheque to Mulatz to pay out the balance of the loan - The funds were returned to Dumur's lawyer (Shutter) - Mulatz advised Shutter to deal directly with Dun-Rite - Walbaum came to Shutter's office, picked up the cheque and signed a discharge on Dun-Rite's behalf - Morrison asserted that the loan was impressed with a trust, and that Dumur Co. and Dumur knowingly assisted in breaching the trust - The Saskatchewan Court of Queen's Bench rejected the assertion - The money at all times belonged to Dun-Rite - The fact that Morrison and Walbaum, as shareholders, might have wanted to set aside the money as a fund which would play a part in the settlement of their dispute, did not make them owners of the money - Neither did the use of "in trust" and the reference to "agreement" in the exchange of correspondence make them the owners - The three certainties of intention, subject matter and objects were not present - This was like a direction to pay - Once paid, Dumur's obligations were discharged and it became Mulatz's obligation to hold the money in his trust account - Dumur's knowledge of the buyout did not fix him with the fiduciary obligations of a trustee - He was not a party to the buyout dealings - He could not be faulted for not making further inquiries - The use of "in trust" did no more than refer to what would happen to the money when it arrived at Mulatz's office - In the end Dun-Rite received the money - See paragraphs 554 to 558.

Trusts - Topic 325

Creation of trust - Methods of creation - By agreement - General - [See Trust - Topic 308 ].

Trusts - Topic 345

Creation of trust - Requirements of - Certainty of subject matter of trust - [See Trust - Topic 308 ].

Trusts - Topic 354

Creation of trust - intention - Certainty of intention - [See Trusts - Topic 308 ].

Trusts - Topic 372

Creation of trust - Purpose or object - Certainty of objects - [See Trusts - Topic 308 ].

Cases Noticed:

Canadian Pacific Air Lines Ltd. v. Canadian Imperial Bank of Commerce (1987), 61 O.R.(2d) 233 (H.C.), refd to. [para. 455].

Air Canada v. M & L Travel Ltd., Martin and Vaillant, [1993] 3 S.C.R. 787; 159 N.R. 1; 67 O.A.C. 1; 108 D.L.R.(4th) 592, refd to. [para. 455].

Waxman et al. v. Waxman et al., [2002] O.T.C. 443; 25 B.L.R.(3d) 1 (Sup. Ct.), affd. (2004), 186 O.A.C. 201; 44 B.L.R.(3d) 165 (C.A.), refd to. [para. 466].

Chiu et al. v. Universal Water Technology Inc. (2004), 45 B.L.R.(3d) 313 (Ont. Sup. Ct.), refd to. [para. 466].

Jordan Inc. et al. v. Jordan Engineering Inc. et al., [2004] O.T.C. 687; 48 B.L.R.(3d) 115 (Sup. Ct.), refd to. [para. 466].

Tourangeau v. Taillefer et al., [2000] O.T.C. 71; 94 A.C.W.S.(3d) 650 (Sup. Ct.), refd to. [para. 466].

Whiten v. Pilot Insurance Co. et al., [2002] 1 S.C.R. 595; 283 N.R. 1; 156 O.A.C. 201; 2002 SCC 18, refd to. [para. 467].

Schatz v. Doust (2002), 227 Sask.R. 1; 287 W.A.C. 1; 2002 SKCA 129, refd to. [para. 482].

Hobbs et al. v. Dempsey et al., [2006] O.T.C. 34 (Sup. Ct.), refd to. [para. 486].

Aegon Capital Management Inc. et al. v. BCE Inc. et al., [2008] 3 S.C.R. 560; 383 N.R. 119; 301 D.L.R.(4th) 80; 2008 SCC 69, refd to. [para. 509].

BCE Inc. et al. v. 6796508 Canada Inc. et al. - see Aegon Capital Management Inc. et al. v. BCE Inc. et al.

Federated Distributors Ltd. v. Low et al. (1981), 16 Sask.R. 203 (Q.B.), refd to. [para. 552].

Schapansky (Bruce) Auctioneers Inc. v. Bobcat of Regina Ltd. et al. (2006), 290 Sask.R. 24; 2006 SKQB 442, refd to. [para. 552].

Susin et al. v. Swartz, [2001] O.T.C. 973; 111 A.C.W.S.(3d) 836 (Sup. Ct.), refd to. [para. 553].

Kozak v. Funk; Kozak v. Nutter (1995), 136 Sask.R. 12 (Q.B.), refd to. [para. 564].

Martin v. Inglis (2002), 218 Sask.R. 1; 2002 SKQB 157, refd to. [para. 565].

Deemar v. College of Veterinarians (Ont.), [2008] O.A.C. Uned. 420; 298 D.L.R.(4th) 305; 2008 ONCA 600, refd to. [para. 565].

Counsel:

Diana Lee and Jennifer L. Koschinsky, for Dun-Rite Plumbing & Heating Ltd. and Alec Keith Morrison;

Patrick N. McDonald, Q.C., for Robert Sim and Rosemarie Sim;

Dave Bishop, for Dwayne Walbaum, All-Rite Plumbing & Heating Ltd., Tamwal Investments Ltd. and Tammy Walbaum;

Ken Karwandy, for defendants, Robert Dumur, 593340 Saskatchewan Ltd. and Dumur Industries.

This action was heard by Ottenbreit, J., of the Saskatchewan Court of Queen's Bench, Judicial Centre of Regina, who delivered the following judgment on May 14, 2009.