The McDonnell Group LLC v. Control Mobile Inc.

2018 BCSC 1098 The McDonnell Group LLC v. Control Mobile Inc. IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: The McDonnell Group LLC v. Control Mobile Inc., 2018 BCSC 1098 Date: 20180621 Docket: S184130 Registry: Vancouver Between: The McDonnell Group LLC Petitioner And Control Mobile Inc., Control Inc. and Kathryn Loewen Respondents Before: The Honourable Mr. Justice Mayer Oral Reasons for Judgment In Chambers Counsel for the Petitioner: F. McDonnell Counsel for the Respondents Control Mobile Inc. and Control Inc.: T.C. Louman-Gardiner For the Respondent Loewen: No appearance Place and Date of Trial/Hearing: Vancouver, B.C. June 12 and 14, 2018 Place and Date of Judgment: Vancouver, B.C. June 21, 2018 Introduction [1] The petitioner, McDonnell Group LLC, brings this application for a declaration that it is owed the sum of $558,350.06 inclusive of interest accruing to May 23, 2018, by the respondents, Control Mobile Inc. and Control Inc., pursuant to a security agreement and revolving loan note both dated January 23, 2018. The petitioner seeks judgment against the respondents for this amount plus interest at the rate of 12.6% per annum accruing after May 23, 2018. [2] In these Reasons, I will refer to Control Mobile Inc., a B.C. company, and its wholly-owned subsidiary Control Inc., a Delaware company, collectively as "Control" and I will refer to the McDonnell Group, LLC, as "TMG" for consistency with the reasons of Justice Sewell. [3] Control is a technology company that develops data analytic software for users and providers of online payment systems. TMG is a Florida-based company that operates a technology investment fund. The other respondent, Kathryn Loewen, is the founder of Control and was CEO or involved or responsible for the management of Control through until approximately March of 2018. I understand that she is the only remaining director of Control at this time. John McDonnell III, who had become a shareholder of Control Mobile Inc. in March of 2017, was appointed the company's CEO in November of that year. John McDonnell III is also general counsel to and a limited partner of TMG. [4] Control struggled to raise equity financing on terms acceptable to the majority of its preferred shareholders and, by or before November of 2017, its monthly expenditures were exceeding its monthly revenues. In December of 2017, TMG made a proposal to provide Control with a credit facility in the amount of $500,000 US, and at that time made an initial advance on an emergency basis to Control in the amount of $100,000 US. [5] On January 23, 2018, TMG and Control entered into a revolving loan note ("the Note"), under which TMG established a credit facility in favour of Control in the amount of $500,000 US. On the same day, Control granted TMG a charge on their present and after-acquired real and personal property to secure all indebtedness to TMG pursuant to a security agreement ("GSA"). TMG alleges that it made a series of other advances between January and March of 2018 to Control totalling $300,000 US. [6] In early March of 2018, TMG called its loan on the basis that Control was in default of its obligations under the Note and GSA and sought to compel Control to enter into voluntary foreclosure pursuant to s. 61 of the Personal Property Security Act, R.S.B.C. 1996, c. 359 [PPSA]. Control objected to entering into voluntary foreclosure. On March 27, 2018, TMG filed a petition seeking, amongst other relief, the following: an order for judgment and enforcement of its security interest in respect of amounts advanced pursuant to the Note and GSA; an order overturning Control's objection to voluntary foreclosure and, in the alternative, an order under s. 61 of the PPSA appointing a receiver. [7] TMG alleges that it made two other emergency advances to Control in mid and late March of 2018 of $50,000 US and $43,140 US and a final advance in early April of 2018 of $45,443.22 US, pursuant to an interim loan agreement. Exclusive of interest, the total amount alleged to have been advanced by TMG between December of 2017 and April of 2018 is $538,582.22 US. [8] The initial petition was heard by Justice Sewell on April 11, 2018. At paragraph 13 of his reasons, Justice Sewell stated that [as read in]: The admitted facts in this case are that the petitioner advanced considerable sums to the respondents pursuant to agreements that were negotiated at arm's length and approved by the board of directors of the respondents. The Security Agreement contains a provision that the petitioner is entitled to enforce its security upon an event of default occurring. [9] Sewell J. found that Control was insolvent and that there had been a material adverse change in the affairs of the respondents, both of which constituted a default under the terms of the GSA and provided TMG with an immediate right to enforce its security. Sewell J. was not prepared to grant judgment for the debt, stating at para. 32 of his reasons that he was not satisfied on the material before him that he could determine the proper amount owing to the petitioner which is in dispute. In addition, although he was not prepared to grant an order overturning Control's objection to voluntary foreclosure, Sewell J. did find that it was just and convenient to appoint a receiver to, amongst other things, provide a degree of protection to TMG for the amount owing to it by Control. Justice Sewell imposed certain limitations on the receiver's power to sell any assets of Control which were set out in the receivership order. Justice Sewell provided in his reasons that TMG was at liberty to make an application for a summary trial or make an application for summary judgment pursuant to Rule 9-7 of the Rules of Court with respect to a determination of the amount owing by Control to TMG resulting in the application which was heard by me on June 12, 2018. [10] With respect to the status of Control at this time, the receiver is now managing a sale process for Control as a going concern. Counsel for TMG says that, as far as TMG is aware, it is the highest bidder and is still negotiating the terms of an agreement to purchase Control's assets. Counsel for TMG advises that it has submitted an offer to purchase the assets of Control through a subsidiary and seeks to apply any amount declared by this Court to be due and owing under the terms of the Note and GSA as a credit on the purchase price for such assets should its bid be accepted by the receiver. [11] With respect to the purported advances, TMG contends that it made advances which I have already stated, but again total $538,585.22 US. TMG says, together with accrued interest to March 23, it is owed $558,350.06 US, excluding its costs of recovery. The Alleged Advances [12] The first is an alleged advance made December 20, 2017, for $100,000 US. The evidence establishes that Kathryn Loewen signed a demand promissory note on that date promising to pay the sum of $100,000 US. The demand promissory note stated that it was the intention that the sums advanced would be considered an advance under the Note which has been previously defined. In addition, John McDonnell has provided screenshots of banking records showing that transfers of $50,000 US were made to the bank account of Control totalling $100,000 US in transfers on December 20 and December 22, 2017. Kathryn Loewen says in her affidavits filed in support of this application that $50,000 US was transferred to Control Inc. of which $34,000 US was retained by that company and the remaining $16,000 US was forwarded to Control Mobile Inc. [13] The second is an alleged advance made January 22, 2018, for $150,000 US. The evidence establishes that a draw request and officer's certificate dated January 23, 2018, requesting an advance of $100,000 US was signed by Kathryn Loewen on behalf of both Control companies. Kathryn Loewen admits that on January 22, 2018, $150,000 US was transferred to Control Inc. and says that, from that amount, $70,000 US was forward to Control Mobile Inc. [14] The third and fourth alleged advances were made February 8, 2018, in the amount of $100,000 US and February 27, 2018, in the amount of $50,000 US. The evidence establishes that a draw request and officer's certificates dated February 8 and 27, 2018, requesting advances totalling $150,000 US under the Note were signed by John McDonnell III on behalf of both Control companies. Kathryn Loewen admits that $150,000 US was transferred to Control Inc. in February of 2018, but says that, from that amount, $90,000 US was forwarded to Control Mobile Inc. [15] The fifth alleged advance was made on March 14, 2018, in the amount of $50,000 US. TMG has provided evidence confirming that a transfer of $62,925.70 CA was made to the account of its counsel, Fasken's, and has provided a copy of a certified cheque from Fasken's to Rise Innovations Inc., Control Mobile Inc.'s payroll service provider, for a lesser amount, being $58,254.13 CA. This transfer was not made pursuant to a draw request under the Note, but, according to TMG, was made on an emergency basis to protect TMG's collateral in Control. [16] The sixth alleged advance was made on March 23, 2018, in the amount of $43,140 US. Again, this transfer was not made pursuant to a draw request under the note, but, according to TMG, was a further emergency transfer made to protect TMG's collateral in Control. I was not taken to any documents showing a transfer for this amount to any Control company, although there is a screenshot showing a deposit of $50,000 US to Control Inc.'s account on the same day and an entry in the general ledger prepared by that company's accountants showing a deposit of that amount on that date, that amount being $50,000 US, not the $43,000 US claimed. [17] The final alleged advance totalling $45,445.22 US was made on April 10, 2018, in two tranches with $46,691.29 CA advanced to Control Mobile Inc. and $8,402.17 US advanced to Control Inc. These amounts were provided pursuant to an interim loan agreement dated April 10, 2018, which provided that the advances were secured by the Note and the GSA. Control's Position on the Advances [18] At the hearing of this matter, Control admitted that it is indebted to TMG for the interim loan amounts advanced to Control Mobile Inc. and Control Inc. in April of 2018 in the amount of $46,691.29 CA and $8,402.17 US and for a further $176,000 US, being the portion of the advances made in December 2017 and January and February 2018 which made their way to the account of Control Mobile Inc. and which Control admits were used for that company's operations in Vancouver. [19] With respect to the balance of the amounts claimed to have been advanced by TMG to Control, Control says that without further document disclosure and an opportunity to examine a representative of TMG, presumably John McDonnell III, it is unable to say whether the screenshots of bank records, general ledgers, or other financial documents disclosed demonstrate that the relevant disputed advances were made pursuant to the Note and GSA for which Control is indebted. As well, Control says that with respect to some or all of the advances which are in dispute, that these funds were advanced by TMG, a company in which John McDonnell III is directly involved, to accounts of Control over which John McDonnell III had exclusive control. Accordingly, Control says that John McDonnell III is in the unique position of being directly associated with the claimant, TMG, and is the only person who can provide evidence with respect to the receipt and use of the advances in dispute by the respondents, Control. As a result, Control says that with respect to the disputed amounts of the advances, it is not suitable to summarily determine whether a debt is owning to TMG for these amounts. Analysis [20] Control has admitted and I am satisfied that Control is indebted to TMG for the amounts advanced in April of 2018 pursuant to the interim loan agreement, those amounts being $46,691,29 CA and $8,402.17 US. In addition, Control has admitted and I am satisfied that Control is indebted to TMG the amount of $176,000 US. [21] With respect to the balance being the disputed portion of the advances, TMG argues that the financial records of Control and, in particular, general ledgers of Control Inc., indicate that all or most of the amounts advanced by TMG were utilized to pay Control's operating expenses. That may have been the case, but I am not satisfied based on the evidence put before me and after hearing the argument advanced by TMG that all of the disputed advances were made pursuant to the terms of the Note and GSA and thereby or otherwise constitute a debt owing to TMG. I agree with the submissions of Control that further discovery either of documents or of a personal representative TMG is required. [22] I am cognizant of the argument of Control and Ms. Loewen that the advances could have been made by TMG as part of a scheme to put Control into default of the Note and GSA and thereby facilitate a hostile takeover of Control. For this reason, they contend that the amounts advanced may not constitute debt. I note the advice of counsel that Control has commenced a separate action alleging a breach of fiduciary duty arising from the transactions in issue. Given my reasons already stated, it is not necessary to determine whether these allegations which are highly speculative at this time have any validity. I did not want to ignore them in my Reasons. Conclusion [23] I find that the amount of money advanced pursuant to the Note and secured by the GSA granted by Control Mobile Inc. and Control Inc. includes the following: $46,691.29 CA advanced on April 10, 2018; an amount in Canadian funds equivalent to $8,402.17 US also advanced on April 10, 2018; an amount in Canadian funds equivalent to $16,000 US advanced on December 22, 2017; an amount in Canadian funds equivalent to $70,000 US advanced on January 22, 2018; and finally, and I do have a question on this, an amount in Canadian funds equivalent to $90,000 US advanced in February of 2018. [24] Now, before I continue on with my conclusion, I am going to have to hear from the parties as to how to allocate that particular advance, the $90,000 US, because it is my understanding that there were two advances in February and it is not clear to me as to which amount -- whether that should be attributed to the first advance in February or in part that or the second. So if counsel are in a position to speak to that now or want to make further submissions to me in writing. I say that because it will be necessary to calculate interest, obviously, accruing on that amount. So the dates are relevant. [25] MR. LOUMAN-GARDINER: Subject to hearing my friend on this, it may -- I am content and I would suggest that my friend and I probably can see if we can work it out ourselves and, if we cannot, to very, very, very briefly submit something back to Your Lordship, but I would expect we should be able to solve that problem ourselves with Your Lordship's reasons -- [26] THE COURT: Yes, that is fine and I will -- [27] MR. LOUMAN-GARDINER: -- and I do not -- it should not be an issue, I would expect. [28] THE COURT: Okay, that is fine, because -- all right. Let me continue on, then. [29] In addition, I find that Control Mobile Inc. and Control Inc. are indebted to TMG for the amounts set out above and liable to pay these amounts plus interest at the rate of 12.6% per annum from the dates advanced; and with respect to the calculation of interest, if the parties are unable to agree, they are directed to submit their dispute with respect to the same to the registrar. The registrar can assist you with the calculations, but again, Mr. Louman-Gardiner, I suspect you will be able to canvass some arrangement on that. [30] Finally, with respect to the relief sought by TMG regarding the balance of the advanced funds, that portion of TMG's application is adjourned. [31] Now, the issue of costs in respect of the initial application before Justice Sewell and this application, there were no submissions on that and, given my reasons, things may have changed. So I am going to invite counsel, first of all, to speak to that now and if counsel are not in a position to respond to that, then we can discuss what the next step shall be for the purposes of determining costs. The point is we still have outstanding issues that have not been finally resolved, so. [SUBMISSION RE COSTS] [32] THE COURT: So, then, this is what I will do. With respect to costs, given that there are related proceedings in which both parties are involved at this time, I am going to defer making any order with respect to costs. Either of the parties are at liberty to make further application to the Court with respect to costs of the application made before Justice Sewell and the costs of the application heard before me on June 12, 2018, and just leave it at that. [SUBMISSIONS RE ORDER ON DECLARATION OF SECURITY] [33] THE COURT: Yes, well, I get your point. I think, with respect to my order, Mr. McDonnell, that my order does make it clear that those amounts are owing pursuant to the security agreement, so implicit in that is -- and then, of course, we have the reasons of Justice Sewell, as well. [34] MR. MCDONNELL: Right. [35] THE COURT: So I think implicit in that is an acknowledgment that those agreements were valid and I do not know what else -- I am looking at the notice of application. The orders that were sought included a declaration that the amount of money secured by the security agreement, which is defined, is X and then judgment for that amount. So my order actually provides the declaration that you are seeking, albeit for a lesser amount. [36] MR. MCDONNELL: Yes, I am satisfied with that. Thank you. Just -- [37] THE COURT: All right. [38] MR. LOUMAN-GARDINER: Yes, and to be clear, yes, I expect the form of order will track the notice of application and that will not be an issue. [39] THE COURT: That is fine. All right, and again, in terms of this application, the petitioner is at liberty to do as it sees fit with respect to the balance. It is not precluded from making -- from continuing with that portion of its claim in these proceedings, but my expectation is that the respondents would have the ability to carry out additional discovery including oral discovery. [40] MR. LOUMAN-GARDINER: I mean the matter has still -- the order of Mr. Justice Sewell referring to the trial list still has not been -- [41] THE COURT: It has not been. [42] MR. LOUMAN-GARDINER: -- set aside. That is still extant with the exception of what Your Lordship has granted judgment on today. [43] THE COURT: Correct. All right. So, hopefully, that is clear enough. If there are any further questions, gentlemen, make them now, otherwise you will have to follow up. All right. "Mayer J."