Hollinger Inc. et al. v. Radler et al.

2006 BCSC 1712 Hollinger Inc. et al v. Radler et al

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Hollinger Inc. et al. v. Radler et al., 2006 BCSC 1712 Date: 20061114 Docket: S066896 Registry: Vancouver Between: Hollinger Inc., Domgroup Ltd., 4322525 Canada Inc., 10 Toronto Street Inc. and Sugra Limited Applicants And: F. David Radler and F. D. Radler Ltd. Respondents Before: The Honourable Madam Justice Wedge Oral Reasons for Judgment In Chambers November 14, 2006 Counsel for Applicants John J. L. Hunter, Q.C. George J. Pollack Counsel for Respondents Murray A. Clemens, Q.C. Geoffrey B. Gomery Place of Trial/Hearing: Vancouver, B.C. [1] THE COURT: On October 25, 2006, Hollinger Inc. and related companies, to who I will refer collectively as "the applicants" or "Hollinger Inc." obtained an ex parte Mareva injunction from a judge of this Court against F. David Radler and his company F. D. Radler Ltd. [2] The injunction is said to be in aid of proceedings that Hollinger Inc. commenced against Mr. Radler in Ontario approximately 11 months ago. No proceedings have been brought by Hollinger Inc. against Mr. Radler in British Columbia. [3] Mr. Radler lives in British Columbia and owns a home here. He also apparently operates some of his business interests from here. This Court accordingly has personal jurisdiction over Mr. Radler. [4] Hollinger Inc. says it has a justiciable right before this court as a result of proceedings

underway in Ontario. [5] I have been provided with case authority for the proposition that this court does not require an underlying cause of action in order to issue a Mareva injunction in aid of proceedings commenced in another jurisdiction. [6] Those authorities appear to be inconsistent with Rule 45 of our Rules of Court, which does require a party seeking injunctive relief to commence an action in British Columbia. There are circumstances in which an applicant is entitled to rely on the inherent jurisdiction of the court, as was the case in Brotherhood of Maintenance of Way Employees Canadian Pacific System Federation v. Canada Pacific Ltd., [1996] 2 S.C.R. 495 [BMWE]. That case involved a labour dispute arising under a collective agreement governed by federal labour legislation. There is ample authority for the proposition that in such circumstances, the Court's inherent jurisdiction permits it to issue interim relief. BMWE has been adopted in two judgments of this Court, but in both cases proceedings had been commenced at the time injunctive relief was sought. [7] That is not the case here. However, in light of the conclusions I have reached on the substantive issues in this application, I will not consider any further the question of whether there must be an underlying cause of action to clothe the Court with jurisdiction to consider an application for interlocutory

relief such as a Mareva injunction. [8] Hollinger Inc. has also asked for relief under the oppression provisions of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 [CBCA]. While the CBCA is cited in the Notice of Motion, it not clear on what basis the relief is sought. The only proceedings that have been brought by Hollinger Inc. against Mr. Radler under the CBCA are before another judge in Ontario and have been for some two years now. No application has been made to transfer those proceedings here. That application, whatever its nature, is accordingly dismissed. [9] The ex parte injunction obtained by Hollinger Inc. was time limited. It expired November 9, 2006, but was extended by my order until at least the completion of this application and delivery of my reasons. [10] The injunction, like most Mareva injunctions, is sweeping and highly intrusive in its terms. It prevents Mr. Radler and his company from transferring, encumbering, assigning or disposing of any of his assets, real or personal, wherever situated. Hollinger Inc. now applies to extend the injunction until the Ontario proceedings are concluded. Those proceedings are as yet in their very early stages. [11] Hollinger Inc. also seeks an order requiring Mr. Radler to provide an affidavit setting out full particulars of his assets and those of his company. [12] Mr. Radler has applied to have the ex parte

Mareva injunction set aside and resists any extension of it. Discussion [13] It is well settled that the test for obtaining a Mareva injunction has two elements, both of which must be satisfied. First, the applicant must have a strong prima facie case on the merits. Second, the applicant must establish there is a real risk that the defendant is about to remove or dispose of his assets. [14] In support of both prongs of the test, Hollinger Inc. filed an affidavit sworn by G. Wesley Voorheis, who is a director of Hollinger Inc. and has held that position since May of 2006. Mr. Voorheis is the chair of the company's litigation committee. Most of his affidavit is based on information and belief. That information and belief is derived from certain investigation reports, and a series of judgments rendered by the case management judge in Ontario, Mr. Justice Colin Campbell, in the various proceedings that have been launched against Conrad Black, Mr. Radler and other former directors of Hollinger Inc. and Hollinger International. It also derived from two judgments rendered in the Delaware proceedings brought against Mr. Black and others. [15] Mr. Voorheis relies substantially on three documents, which counsel for Hollinger Inc. describes as "the key foundational documents" on which its application rests. [16] First, Hollinger Inc. relies on a series of reports issued by the Inspector

appointed by Mr. Justice Campbell in response to an application by Hollinger Inc. under s. 299 of the CBCA. Mr. Justice Campbell appointed the Inspector on October 13, 2004. Primary reliance was placed on the Inspector's tenth report, dated November 14, 2005, which I understand to be the most recent of the reports. It is not, however, the last report of the Inspector, who has emphasized in his tenth report that there is much yet to be done in his investigation. [17] The second foundational document is a report referred to by Mr. Voorheis as the Breeden Report. The Breeden Report was in fact authored by a three-person committee struck by the board of directors of Hollinger International to investigate the actions of its former directors, including Mr. Black and Mr. Radler. The three members of the committee are directors of Hollinger International. Their legal counsel and advisor was Richard Breeden. [18] The Breeden Report was completed and submitted to the US Securities and Exchange Commission and the District Court of Illinois in August of 2004. It is 525 pages in length. I will refer to it again in due course. [19] The third foundational document is a plea agreement Mr. Radler entered into in September of 2005 with the Attorney for the Northern District of Illinois. [20] The remaining documents on which Mr. Voorheis based his information and belief are various. In total the

affidavit and appended exhibits were 4,850 pages in length. I have not read all 4,850 pages, but I have read all of the materials identified by Mr. Pollack, counsel for Hollinger Inc., in a list entitled "Key Exhibits," which he provided the Court at the outset of this four-day hearing. I have also reviewed all other documents to which I was specifically referred in the course of the hearing by counsel for both the applicants and the respondents. The applicant must establish a strong prima facie case [21] As already noted, there are two tests that must be satisfied. I will turn now to the first of those, which is whether the applicant has established a strong prima facie case. The centrepiece of the applicant's case against Mr. Radler is his involvement in a scheme concerning the payment of "non-competition" fees paid to Mr. Radler, Mr. Black and other directors of Hollinger Inc. and Hollinger International upon the sale by Hollinger International of its various newspaper holdings and other publishing concerns. [22] Upon the disposition of a newspaper or periodical, Mr. Radler and others took a percentage of the sale price in return for agreements not to compete with the new owner. These payments were, in fact, either unnecessary or ought to have been paid to Hollinger International. The investigation into these non-competition fees take up hundreds of pages of the Inspector's

reports, the Breeden Report and other documents. [23] However, a succinct description of the agreements concerning the non-competition fees and related transactions is contained in Mr. Radler's September 2005 plea agreement. Mr. Radler acknowledged in the plea agreement that between January of 1999 and May of 2001, he devised and participated in sustained fraudulent transactions whereby he and other directors of Hollinger Inc. entered into non-competition agreements pursuant to which they received fees which should have been paid, if at all, to Hollinger International. [24] The plea agreement describes in detail the numerous transactions in which Mr. Radler, while in a position of confidence and trust as CEO and director of Hollinger International, defrauded the company of significant amounts of money and at the same time defrauded the Canadian tax authorities. In total, Mr. Radler received over $7 million in these payments. He has acknowledged in his plea agreement that all of the transactions were fraudulent. [25] I have concluded that Hollinger Inc. has established a strong prima facie case against Mr. Radler with respect to his participation in the non-competition fee scheme. I wish to make clear, however, that Hollinger Inc. has met this requirement solely on the basis of Mr. Radler's plea agreement and its description of the fraudulent transactions concerning the

non-competition fees. Absent from the materials filed by Hollinger Inc. is any cogent or admissible evidence with respect to any other allegations against Mr. Radler. There are serious deficiencies in the affidavit of Mr. Voorheis with respect to the remaining allegations. I will turn to those deficiencies later in these reasons. The applicant must establish a real risk of dissipation of assets [26] It is not enough, however, that Mr. Radler has admitted to serious misconduct or that the case against him appears to be strong. The requirement that the applicant show a real risk of removal or disposition of assets by the respondent is independent of the court's assessment with respect to the strength of the claim. It is on this prong of the test that the application of Hollinger Inc. runs aground. [27] As noted, Mr. Radler's plea agreement is evidence which establishes a strong prima facie case against him. However, Hollinger Inc.'s reliance on the plea agreement cuts both ways, as does other evidence relating to the steps Mr. Radler has taken since his removal as a director of Hollinger Inc. and Hollinger International in November 2003. [28] At the time of his removal as a director, Mr. Radler advised that he would provide full restitution to Hollinger International for his involvement in the non-competition fee scheme. That offer of restitution was disclosed in a press release

issued by Hollinger Inc. on November 17, 2003 (Exhibit 31 in the proceedings). The first actions brought to recover funds from former directors were commenced in January of 2004. [29] Mr. Radler made the restitution payments in June 2004. Restitution was in the amount of $9.3 million, which represented the initial $7 million in non-compete payments plus interest. In management circular issued by Hollinger Inc. on March 4, 2005, shareholders were advised of the following: In 2004, F. David Radler repaid the International approximately $9.3 million US on account of non-compete payments received by him in prior years, inclusive of accrued interest. [30] The indictment against Mr. Radler was filed in Illinois on August 18, 2005. As noted previously, the plea agreement was concluded in September of 2005. It reflects the understanding of the prosecuting attorney that Mr. Radler had already made full restitution with respect to the fraudulent payments. [31] Further, Mr. Radler's ongoing activities are being monitored by a probation officer. One of the terms of the plea agreement is that Mr. Radler: Provide full and truthful information to the court and the US probation officer regarding all details of his economic circumstances. [32] As a result of his plea agreement, Mr. Radler is on a tight leash. Under the agreement, the prosecuting attorney has agreed to recommend a sentence of 29

months incarceration to the sentencing judge. Sentencing has been deferred until the completion of the criminal proceedings against Mr. Black. Mr. Radler has agreed to cooperate with the prosecution in those proceedings, which are scheduled to begin next spring. [33] A reading of the plea agreement would suggest that any whiff of impropriety on Mr. Radler's part before that time will bring the plea agreement to an end, in which case he runs the substantial risk of a much longer period of incarceration. [34] With respect to this second stage of the inquiry, a brief chronology of events concerning the litigation is instructive. It is as follows: o The non-competition payments were received between 1999 and 2001. o Mr. Radler was removed as president and chief operating officer of Hollinger International and a member of its board of directors on November 17th, 2003, and he agreed at that time to make full restitution. o In May of 2004, proceedings were initiated in Delaware against Conrad Black and others. o In June of 2004, Hollinger Inc.'s board formed a litigation committee to oversee steps taken by Hollinger against its former directors; in August of 2004, a different committee assumed the litigation committee's duties. o In September of 2004, Justice Colin Campbell ordered an Inspector's investigation under s. 299 of the CBCA. In his reasons for the order (Catalyst Fund

General Partner I Inc. v. Hollinger Inc., [2004] O.J. No. 3886 (Ont. Sup. Ct.)), Campbell J. noted the following at para. 50: As a fact finder, the inspector should deal with the gathering of information, not determine rights. o In late 2004 and early 2005, journals of Conrad Black implicating Mr. Radler and others in the misappropriation of funds while in a position of trust with Hollinger Inc. and Hollinger International were produced to the American legal counsel of Hollinger Inc. o Proceedings were initiated by Hollinger Inc. against Mr. Radler in Ontario in mid 2005. Counsel for Mr. Radler moved to strike the pleadings, but new counsel for Hollinger Inc. sought an adjournment to redraft the pleadings. No amendments were ever drafted, however, and that action has remained dormant since late 2005. o In January 2006, a new action was commenced against Mr. Radler and F. D. Radler Ltd. The ex parte injunction was sought in aid of that action. In the past almost 11 months, nothing has been done by Hollinger Inc. to move the proceedings forward. Pleadings are not yet completed, and no demand for discovery of documents has been made. [35] The obvious question arising from this chronology is why Hollinger Inc. has waited so long to bring the injunction application. Where is the "immediate risk" of dissipation of assets? [36] Hollinger Inc. has advanced a number of reasons. Its

first and central argument is that I can and should infer from Mr. Radler's fraudulent conduct that he will attempt to dispose of or conceal his assets. In my view, that is not a necessary inference. As I have already noted, Mr. Radler has entered a guilty plea and made restitution at least with respect to the non-competition payments. While that may be too little, too late for Hollinger Inc., it is nevertheless relevant to the dissipation issue. More importantly, Mr. Radler's "economic circumstances" (in the words of the plea agreement) are being closely monitored. [37] In addition, if past conduct per se established a basis for a Mareva injunction, they would be issued as a matter of course in every case involving corporate fraud. That is not the law in this province. [38] Hollinger Inc. has made other allegations of misconduct on the part of Mr. Radler, relying principally on the Inspector's reports and the Breeden Report. However, I have concluded that Hollinger Inc. has not established a prima facie case with respect to those allegations. [39] The Inspector's reports cannot be received as evidence by this Court. The Inspector was appointed under the CBCA. The Inspector is not subject to cross-examination on his reports and is not compellable as a witness. His report is not admissible in evidence in any proceedings beyond the reach of the CBCA (Catalyst Fund General I Inc.

v. Hollinger Inc., [2005] O.J. No. 2191 (Ont. Sup. Ct.)) at paras. 30 to 36). [40] Nor, in my view, does the Breeden Report provide a proper foundation for Mr. Voorheis' information and belief. For the most part, reliance on the report amounts to reliance on double hearsay. Despite Mr. Hunter's able arguments on this point, I do not agree that the purpose for which this report is tendered is other for than its truth. If the affiant in this case, Mr. Voorheis, is relying on the report to make out a prima facie case against Mr. Radler, then the purpose for which the report is being tendered is its truth. [41] Secondly, the Breeden Report was authored by at least three individuals, all members of the board of directors of Hollinger International. It is not clear which aspects of the report are attributable to which of the authors. One thing is clear, however; this is not a report confined to the recital of facts. [42] The report is replete with expressions of opinion such as the following: At the outset, the energies of many people went into building Hollinger into a major publishing enterprise. Over time, however, Hollinger went from being an expanding business to becoming a company whose sole preoccupation was generating current cash for the controlling shareholders with no concern for building future enterprise value or wealth for all shareholders. Behind a constant stream of

bombast regarding their accomplishments as self-described "proprietors", Black and Radler made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way they could devise. The Special Committee knows of few parallels to Black and Radler's brand of self-righteousness, and aggressive looting of Hollinger to the exclusion of all other concerns or interests, and irrespective of whether their actions were remotely fair to shareholders. The Special Committee believes that the events at Hollinger were driven in large part by insatiable pressure from Black for fee income from Hollinger to prop up the highly levered corporate structure of Ravelston and HLG, and to satisfy the liquidity needs he had arising from the personal lifestyle Black and his wife had chosen to lead. The intensity of the pressure for tens of millions in cash payments to Black, irrespective of corporate performance or the fairness of transactions to shareholders, led to a series of abusive transactions in which Hollinger was a victim of Black and Radler's ravenous appetite for cash. (Breeden Report, Executive Summary at. p. 10) [43] Phrases such as "corporate kleptocracy" abound. The tone of the Breeden Report is not unlike the overall tone of the Voorheis affidavit, which is marred, in my view, by argument, speculation and invective. [44] The second ground advanced by

Hollinger Inc. in support of its "immediate risk" argument concerns events that allegedly occurred in August of this year at the former Hollinger Inc. offices in Vancouver. This was the only allegation advanced by Hollinger Inc. as evidence of recent misconduct on Mr. Radler's part. In his affidavit, Mr. Voorheis deposed that Mr. Radler attended the Vancouver office (which he continued to use with the knowledge and consent of Hollinger Inc.) late in the evening of August 18, 2006, after Hollinger Inc. had had the locks of the building changed by an ex parte court order. [45] Mr. Voorheis characterized Mr. Radler's conduct as surreptitious, done under the cloak of darkness and with the intent of taking, destroying or scattering documents. This allegation appears to be based primarily on material contained in the Inspector's tenth report. The Inspector, in turn, must have obtained much of his information from third party sources. [46] In fact, Mr. Radler did not sneak into the office in the dead of night. He arrived at the office on the morning of August 19 to find employees standing on the sidewalk unable to enter the building. Neither he nor anyone else previously occupying the building was told of the existence of the court order. A security guard told Mr. Radler the locks had been changed because the building had been sold. Mr. Radler wanted access to his office to obtain his

personal belongings and documents belonging to him. He accordingly called a locksmith who, in the course of business hours on August 19, let Mr. Radler and others back into the building. [47] Mr. Radler took six boxes of documents and personal effects. It was not until later on August 19 that he became aware of the court order. Legal counsel became involved. Mr. Radler contacted legal counsel in Vancouver and eventually a consent order was reached with Hollinger Inc. as to the contents of the boxes of documents Mr. Radler had in his possession. The documents were listed and provided to legal counsel. [48] The Inspector's report contains numerous misinformation about the events of August 18 and 19. Submissions were made to Campbell J., and, as a result, the Inspector was to obtain more information and provide follow up to the original reporting of events. However, nothing further was ever done by the Inspector concerning this incident. [49] This innocuous event was described by Mr. Voorheis as an example of Mr. Radler's willingness to abscond with and destroy documents. That characterization of the events of August 19, 2006, is completely at odds with the facts. [50] Hollinger Inc. argued that certain asset transfers initiated by Mr. Radler gave rise to an inference that he was about to dissipate his assets. First, Mr. Radler transferred his one-half interest in his Vancouver

home to his spouse in November of 2004. [51] Second, Mr. Radler has, or may have, disposed of his interest in a company known as Alberta Newspaper Group Inc. ("Alberta Inc."). A company known as Glacier Ventures International Corporation has recently purchased 50 percent of Alberta Newspaper Group Ltd. Partnership ("Alberta Partnership"), which owns and operates a group of community newspapers in southern Alberta. According to the Voorheis affidavit, these newspaper assets owned by Alberta Partnership may have previously been owned by Alberta Inc. A numbered company of whom Mr. Radler is sole director is a general partner of Alberta Partnership, and Alberta Inc. is its limited partner. [52] There is no evidence as to Mr. Radler's financial interest in the Glacier transaction. However, a memorandum dated July 12, 2006, from Alberta Inc. to its shareholders, apparently authored by Mr. Radler, discusses the transaction then under active consideration. The transaction involved the sale of a 50 percent interest in Alberta Inc. to a purchaser described as Madison Ventures. The contemplated purchase price was $33.9 million. It is not clear whether the transaction ever took place. [53] The July 12, 2006 memorandum states, in part, the following: I have an offer to sell 50% of the F. D. Radler Ltd. interest in Alberta Newspaper Group Inc. from Madison Ventures or its associates. While

this offer continues to be an option, on the basis that we all came in together and should exit proportionately, I have tentatively managed to construct an alternative deal to a 50/50 joint venture with Madison and the assets of the Alberta Group, which I assume is preferable. The deal would be structured on an income trust model with Alberta owning 50% percent and Madison owning the other 50%. The estimated proceeds from the deal are outlined on Schedule "A" attached. [54] The schedule contains all of the financial aspects of the transaction. There is nothing surreptitious or suspicious about this transaction that I could detect. It is consistent with other evidence which suggests Mr. Radler continues to do business in the newspaper publishing industry. [55] The liquidation of a business asset, absent evidence of an intention to defeat creditor's claims, does not satisfy the test of immediate risk. There is no evidence here that liquidation of the asset, if it did occur, was for the purpose of avoiding judgment. There must, in my view, be evidence of an intention to remove the proceeds from the jurisdiction, or evidence from which such an intention could reasonably be inferred. Neither can be said of the transaction described in the July 12, 2006 memorandum. [56] With respect to the transfer of Mr. Radler's one-half interest in his home to his spouse in 2004, there are other

remedies available to Hollinger Inc. if it suspects this was a fraudulent conveyance. No steps have been taken in that regard. [57] Hollinger Inc. also points to the fact that F. D. Radler Ltd. has "migrated" to other provinces in the past two years. Again, there is no evidence to suggest that registration of the company elsewhere in Canada was done for an improper purpose. In Silver Standard Resources Inc. v. Joint Stock Co. Geolog, [1998] B.C.J. No. 2117 (B.C.S.C.) Mr. Justice Shaw said the following: I am not prepared to go so far as to hold that a Mareva injunction should never be issued where funds or assets are being removed from the province in the ordinary course of business and there is no evidence of any scheme to avoid judgment creditors. There might be special circumstances where such an order is warranted, although at present, I cannot imagine what those circumstances might be. I am, however, of the opinion that such an order should not generally be made. [58] That conclusion was upheld by the court of appeal at Silver Standard Resources Inc. v. Joint Stock Co. Geolog (1998), 168 D.L.R. (4th) 309 (B.C.C.A.). [59] Hollinger Inc. argued that because Mr. Radler is embroiled in litigation with various entities, I should infer he will attempt to dissipate his assets. Again, that is not an inference I can draw on the evidence. Were it a general inference to be drawn

where a defendant is involved in multiple proceedings, Mareva injunctions would be the rule and not the exception. [60] Finally, I turn to the issue of delay. Hollinger Inc. has failed in my view to provide any compelling reason for the inordinate delay in bringing this injunction. The second action it commenced against Mr. Radler was initiated almost a year ago. That action has, to say the least, proceeded at a very relaxed pace. This application for injunctive relief is the first step taken in the action since it was initiated in January of 2006. [61] The central reason advanced by Hollinger Inc. for the delay is that until mid-2005, directors of the company were making decisions "that were not truly in the company's best interests." That, in my respectful view, does not explain the delay since that time. The other assertions as to why the application has been brought only now are not supported by the evidence. [62] I accept the argument of Mr. Radler's counsel that evidence delay is more significant in the context of interlocutory applications. The very fact of the delay may be evidence that the risk is not immediate or significant enough to warrant relief until trial. The inference I draw from the inordinate delay is that there is no legitimate apprehension of immediate risk of dissipation on the part of Hollinger Inc. [63] For the above reasons, the application of

Hollinger Inc. to extend the injunction fails. (Discussion) [64] THE COURT: Mr. Radler's application to set aside the ex parte application is dismissed as being moot, otherwise it would have been granted. (Discussion) [65] THE COURT: There will be an order for costs. Mr. Radler is entitled to his costs on a party and party basis in any event, payable forthwith. (Discussion) [66] THE COURT: In the circumstances, I think it appropriate to give the applicants time to appeal my order. [67] The extension of the injunction will, however, be subject to the conditions sought by Mr. Gomery. The injunction will be extended for a two-week period with the following conditions. [68] First, it does not preclude F. D. Radler Ltd., now known as North American Newspapers Ltd., from making business or legal expenses in the usual and ordinary course of business. [69] Second, it does not preclude Mr. Radler from making personal, business or legal expenditures in the usual and ordinary course, nor does it preclude him from making payments with respect to taxes. On that basis, the injunction is extended to the 28th of November, 2006. "C.A. Wedge, J." The Honourable Madam Justice C. A. Wedge