Royal Bank of Canada v. Shaw

2016 BCSC 2285 Royal Bank of Canada v. Shaw

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Royal Bank of Canada v. Shaw, 2016 BCSC 2285 Date: 20161107 Docket: S147482 Registry: Vancouver Between: Royal Bank of Canada Plaintiff And Kirk Shaw, Stacey Shaw and Roots Properties Inc. Defendants Before: The Honourable Mr. Justice Voith Oral Reasons for Judgment In Chambers Counsel for the Plaintiff: W. Skelly E. Savage, A/S Counsel for the Defendants: M.P. Katzalay Place and Date of Trial/Hearing: Vancouver, B.C. October 27, 2016 Place and Date of Judgment: Vancouver, B.C. November 7, 2016 [1] THE COURT: The plaintiff seeks to strike the jury notice that has been filed by the defendants. Overview [2] The plaintiff commenced a foreclosure proceeding against Roots Properties Inc. ("Roots") on September 24, 2014 (the "Roots Foreclosure"), and commenced an action against Mr. and Mrs. Shaw on September 26, 2014. [3] On October 28, 2014, Mr. and Mrs. Shaw filed a response to civil claim. On that same day, Roots filed a response to petition in the Roots Foreclosure. It is common ground that the defences set out in these pleadings were substantively similar. Mr. and Mrs. Shaw have also filed a counterclaim against the plaintiff. [4] On July 4, 2016, this Court, with the consent of the defendants, made an order consolidating the action against Mr. and Mrs. Shaw and the Roots Foreclosure in a single action with the single style of

cause that is apparent on the face of these Reasons for Judgment. In doing so, the Court ordered that the actions be consolidated into a single proceeding for all purposes. [5] On August 8, 2016, the plaintiff secured a trial date with the consent of counsel for the defendants, which contemplated a ten-day trial commencing on February 26, 2018. The defendants thereafter filed a notice requiring trial by jury on September 8, 2016. No issue arises with respect to the extension of time that the plaintiff requires under Rule 12‑6(5)(a) of the Supreme Court Civil Rules, B.C. Reg. 168/2009 to bring this application to strike the defendants' jury notice. [6] Significant document disclosure on the part of all parties has taken place. Thus far, the plaintiff alone has produced nearly 3,000 documents. The plaintiff has conducted extensive examinations for discovery of Mr. Shaw, though numerous requests for information arising from that discovery remain outstanding. The examinations for discovery of Mrs. Shaw, the plaintiff, and of Roots, have not taken place. No expert reports have been exchanged. Background to this Action [7] The history of events that led to the present dispute are, in large measure, uncontroversial. Mr. Shaw founded Insight Film Studios Inc. ("Insight") in 1990. He built Insight into the largest independent film and production company in Canada. Insight produced as

many as 42 film and television productions each year and employed several hundred people, directly or indirectly. Insight, like many Canadian studios and production houses, relied on refundable labour tax credits offered by the Government of Canada and most provincial governments to finance its productions. Labour tax credits were offered by these governments with a view to encouraging the development of a domestic film and television production industry and to attracting productions from other countries who would employ skilled Canadian workers on their productions. [8] In order to produce a film or television production, Insight would incorporate a wholly‑owned subsidiary production company for the purpose of financing and producing a project. In the course of doing business, Insight created more than 120 such production companies. Each production company would hire most, if not all, of its production employees from Insight and would be invoiced by Insight for the services provided by its employees. The production company would then be eligible to claim a labour tax credit from provincial and federal governments based on, inter alia, the amount invoiced by Insight. [9] Insight began to borrow money from the plaintiff in 2001. Prior to commencing production, Insight or the production company would commission an independent third party opinion from an accounting firm as to the

estimated value of the tax credits that the production company was entitled to. Lenders, including the plaintiff, would then rely on that opinion to lend money to the production company. Typically the plaintiff would lend the production company 90% of the value of the estimated labour tax credit. Under the terms of a typical loan agreement, the plaintiff would receive a financing fee up front, and it would set up two credit facilities; the first was used to pay for the production of the projects, the second was to be used to pay the bank. [10] Once the production was complete, the production company filed its tax return, claimed its labour tax credit, and used those funds to repay the loans to the plaintiff. In the usual course, the production company would then be dissolved. [11] In the material period and up to 2008, the Canada Revenue Agency allowed production companies to claim labour tax credits based on 65% of the invoice issued from a non‑on‑site company. In 2008, the CRA retroactively changed its policy and its approach to calculating labour tax credits. More than 70 Insight productions were affected by the change, and the change in policy significantly affected Insight's tax obligations. It also affected Insight's lenders, including the plaintiff. Having lent money on the expectation that loans would be repaid from labour tax credits, the plaintiff faced a shortfall

that had to be recovered from either the production companies or from the guarantors of those production companies. It is here that Mr. and Mrs. Shaw, as well as Roots, are directly involved. [12] Mr. Shaw provided guarantees for four separate production companies ("the Four Production Companies") in the total amount of $780,000. Mrs. Shaw was jointly and severally liable for $125,000 of this amount. Roots also provided a guarantee, secured by a mortgage over the Shaw family home, for Insight in the amount of $325,000 (collectively "the Guarantees"). [13] At one time, Insight owed tens of millions of dollars to the plaintiff and to other lenders. [14] In April 2009, the plaintiff made demand of the defendants and of Insight under various credit agreements, guarantees, and other loan documents. It is at this point that matters become less clear and more contentious. [15] Mr. Shaw and Insight, over the ensuing years, participated in what all parties describe as the "Recovery Project". The Recovery Project had Mr. Shaw and Insight working to recover as much revenue as possible to pay off outstanding loans to the plaintiff and to other lenders. The plaintiff and other lenders entered into various forbearance agreements with Insight under which the plaintiff agreed not to enforce its rights for a period of time. One term of these forbearance agreements provided: . . . prior to

taking steps to realize on the Prodco [guarantees] and/or Shaw Guarantees, the Lender will give Kirk Shaw and the other Shaw Guarantors 10 days to propose a settlement of their liability under the Shaw Guarantees and the Prodco Guarantees, provided that the Lender's only obligation respecting such a settlement will be to consider same in good faith, without any obligation to accept same. [16] It is relevant that Mr. Shaw and Insight worked closely with two speciality accounting firms ("the Accounting Firms") to assist with the Recovery Project. Insight retained the Accounting Firms directly. An important aspect of the work done by the Accounting Firms was to allocate various labour and other expenses to various films and production companies. This is significant because this allocation exercise, as I understand it, contained within it some elements of discretion and judgment. The import of this issue is that certain expenses or fees or costs could be allocated either to various production companies or to the Four Production Companies whose loans were guaranteed by the defendants, thereby affecting both the amounts that remained outstanding by the Four Production Companies and the amounts that were guaranteed by the defendants. [17] Furthermore, it is relevant that Mr. Shaw was paid a salary for his ongoing work and efforts in the Recovery Project. Ultimately, various lenders,

including the plaintiff, recovered approximately 90% of the sums they had advanced to Insight or its various production companies. [18] This action, as I have said, is limited to the guarantees that Mr. Shaw and Mrs. Shaw provided with respect to the Four Production Companies and the guarantee and mortgage provided by Roots. The amount being claimed by the plaintiff in this action under the Guarantees and the mortgage is approximately $850,000 plus interest. Rule 12-6(2) and the Issues raised by the Defendants [19] Rule 12‑6(2) identifies a number of legal issues or types of dispute that must be heard by a court without a jury . In particular, Rule 12‑6(2)(c), which the plaintiff argues is relevant, provides: (2) A trial must be heard by the court without a jury if the trial relates to (c) the redemption or foreclosure of a [property] [20] Rule 12‑6(5)(a) in turn provides: (5) Except in cases of defamation, false imprisonment and malicious prosecution, a party on whom a notice under subrule (3) has been served may apply (a) within 7 days after service for an order that the trial or part of it be heard by the court without a jury on the ground that (i) the issues require prolonged examination of documents or accounts or a scientific or local investigation that cannot be made conveniently with a jury, (ii) the issues are of an intricate or complex character, or (iii) the extra

time and cost involved in requiring that the trial be heard by the court with a jury would be disproportionate to the amount involved in the [exercise] [21] Each of the foregoing provisions, and the subparagraphs within them, give rise to a separate or distinct body of law. Before turning to these authorities, however, it is useful to understand the nature and breadth of the issues that are raised in or by the consolidated action. [22] The plaintiff's action is comparatively straightforward. It seeks to collect on the Guarantees that were signed by each of the defendants and to enforce the mortgage that was given by Roots. [23] The defendants' positions, on the other hand, are numerous and varied. When I say this, I am referring to the issues raised in the defendants' response to civil claim and in the counterclaim filed by Mr. and Mrs. Shaw and, to a lesser extent, on the evidence or positions advanced by Mr. Shaw at his examinations for discovery in support of these defences. There are several broad themes, as well as several specific causes of action advanced in the defendants' response to civil claim and in the counterclaim filed by Mr. and Mrs. Shaw. These themes include, inter alia: a) That the forbearance agreements included various express and implied terms. Those express and implied terms included both an obligation to deal with the defendants either equitably or in

good faith, as well as restrictions on how the cost of the Recovery Project would be allocated to the Four Production Companies. Specifically, it is argued that no legal or professional expenses associated with the Recovery Project could be allocated to these companies. b) That the Guarantees signed by the defendants were limited to guarantee the loans for the purposes of producing films and did not extend to the expenses incurred during the Recovery Project. c) That representatives of the Accounting Firms made various representations to the defendants and that those representations are binding on the plaintiff. This assertion gives rise to questions of agency and of implied and/or ostensive authority. d) That the fees charged by the Accounting Firms and by certain law firms involved in the Recovery Project, which were allocated to or borne by the production companies were excessive. This assertion will require expert evidence in order to be properly advanced. e) That Mr. Shaw was compensated, while working on the Recovery Project, at a "rate far below what he could have earned on the open market". This assertion may also require expert evidence and it advances a claim based on quantum meruit. f) That the failure of the plaintiff to relieve the defendants of their obligations has unjustly enriched the plaintiff. g) That the defendants and Insight relied on representations made

by the plaintiff that it would act in good faith when enforcing the Guarantees. The defendants plead that these representations "estopped the plaintiff from relying strictly on the terms of the forbearance agreements or the guarantees". h) That the plaintiff had broad discretion on how to allocate labour costs and the defendants were vulnerable to the plaintiff in the exercise of this discretion. These considerations, in turn, it is argued, give rise to a fiduciary duty on the part of the plaintiff to both consider the interests of the defendants and to act in good faith. i) The defendants also argue that the plaintiff improperly allocated various categories of costs to the Four Production Companies. [24] These broad themes give rise to the following specific causes of action and legal issues: 1) breach of implied and express terms in the Guarantees and forbearance agreements; 2) breach of an obligation to act in good faith arising either in contract or by virtue of various representations or by virtue of the plaintiff's fiduciary duty to the defendants; 3) agency; 4) unjust enrichment; 5) quantum meruit; 6) estoppel; 7) breach of representation; 8) breach of fiduciary duty to consider or act in the interests of the defendants; and 9) improperly incurring excessive professional fees and improperly allocating those professional fees. [25] With this backdrop, I return to the

relevant legal framework for each of Rules 12‑6(2) and 12‑6(5). The Relevant Framework [26] The general legal framework that pertains to an application to set aside a jury notice is well established. In Han v. Cho, 2008 BCSC 1192, Madam Justice Griffin succinctly said: [12] There is a common law right to a jury. A party ought not to be deprived of this important right except for cogent reasons: King v. Colonial Homes Ltd., [1956] S.C.R. 528 at 533. [13] In Nichols v. Gray (1978), 9 B.C.L.R. 5 (C.A.), Craig J.A. explained the plaintiff's entitlement to a jury in civil cases (at 10): A plaintiff is entitled to trial by jury, except in certain types of cases specified in the Rules, and he can be deprived of this right only if a party opposing a trial by jury establishes "clearly" that one of more of the exceptions in R. 39(20) [the predecessor to Rule 39(27)] is applicable. McDonald v. Inland Natural Gas Co. (1966), 57 W.W.R. 87 at 95. [14] In McDonald v. Inland Natural Gas Co. (1966), 57 W.W.R. 87 (B.C.C.A.), Branca J.A. commented at 95 that "while the right of a trial by jury goes back far and is imbedded deeply in the history of our law, and while a litigant is not to be deprived of that right unless he is clearly within an exception created by law, where such an exception applies, that right should be refused." [15] The onus is on the applicant seeking to set aside a jury

notice to show that the party who selected trial by jury is not entitled to that mode of trial: Creasy v. Sweny (1942), 57 B.C.R. 457, [1942] 3 W.W.R. 457 (C.A.). [27] The relevant case law also establishes an analytical framework for each of the subparagraphs in Rule 12‑6(5). In Nichols v. Gray (1978), 9 B.C.L.R. 5 (C.A.), Lambert J.A. at paras, 44-46, determined that Rule 12‑6(5), or its predecessor provision, required that a judge engage in a two‑step process of fact finding and discretion. First, a judge must make findings of fact on the basis of the evidence in relation to the subrules; second, a judge must exercise his or her discretion as contemplated by the subrule. Since judicial discretion is applied differently to these sub‑provisions, it flows logically that these sub‑provisions should be treated disjunctively rather than as factors in a holistic assessment. If it were otherwise, the nature of the discretion to be applied in any given case would be ambiguous. The two‑step analysis that was established in Nichols was recently confirmed in Rados v. Pannu, 2015 BCCA 459 at para. 7. i) Rule 12‑6(2)(c) [28] Rule 12‑6(2)(c) "relates to foreclosure of a mortgage". It is clear that the words "relates to" in Rule 12‑6(2) have been interpreted more narrowly than the lay meaning of those words would suggest. This has been the case for a very long time. [29] In Han, Griffin J.

addressed the various predecessor provisions to Rule 12‑6(2). At paragraphs 19-20, she referred to and relied on numerous authorities, including common law cases that had been decided much earlier. That survey revealed a consistent and longstanding recognition that for a matter to "relate to" one of the legal issues or categories of legal dispute identified in Rule 12‑6(2), that matter must "form the main or central issue in the action"; see Whiteway v. Nyack, [1980] B.C.J. No. 993 (C.A.) at para. 14. [30] Additionally, it is necessary "to look at what is, in reality, the action to be tried"; see Hopper v. Drake (1903), 10 B.C.R. 17 at para. 2. [31] In this case, the Roots mortgage, though part of a consolidated action, is not "a main or central issue" in the action. Furthermore, though the Roots mortgage provides the plaintiff with its only secured claim, it cannot be said that that mortgage is "in reality" what this action is about. [32] Accordingly, I do not consider that Rule 12‑6(2)(c) is properly engaged or that it provides a basis to set aside the jury notice. ii) Rule 12‑6(5)(a)(ii); "the issues are intricate or complex [in nature]" [33] I have addressed this consideration first because it dominates and is determinative of this application. Various factors or considerations assist in fixing the relative complexity of an action. In Andersen v. Porter, 2000 BCSC 1000,

Wilson J., at para. 14, provided examples of such factors. Several of those examples were, however, primarily directed to a medical malpractice action. Counsel for the plaintiff provided me with various authorities that arise in the commercial context and that are both relevant and helpful. [34] In Bank of Montreal v. Stephen and Stephen, [1983] P.E.I.J. No. 33 (S.C.), the plaintiff bank sued on a guarantee. The defendants were placed into receivership. Large J., said: [5] The plaintiff states the issue is to determine the legal liability of the guarantors under the Bank of Montreal form of guarantee. The defendants state that the issues are: (1) were the defendants discharged from their guarantee because of a material alteration in the original contract to finance entered into by the plaintiff and Michael Bros. Ltd.; (2) is Michael Bros. Ltd. legally indebted to the plaintiff at all or to the extent claimed in the statement of claim; (3) was Michael Bros. Ltd. legally in default of any indebtedness to the plaintiff when demands for payment were made upon the defendants under their guarantee; (4) were any lawful demands made upon the defendants under their guarantee; (5) were the defendants discharged from their guarantee either in whole or in part by reason of any impairment of collateral securities of Michael Bros. Ltd. held by the plaintiff. [35] On the face of it, the

issues in Stephen were much more straightforward than the issues raised in this case. Nevertheless, Large J.concluded: [19] that a jury would be hard-pressed to sort out the facts. The trial judge could very well risk having his instructions misapplied, misinterpreted or ignored. [36] In arriving at this decision, Large J. relied on several authorities. One such authority was Butler v. Charlottetown, [1944] 3 D.L.R. 350 (P.E.I. S.C.), where the court, at para. 8, identified various categories of cases that were not suitable for determination by a jury, including "cases in which the major issues are questions of law, and the issues of fact are either negligible in importance, or so interwoven with the issues of law as to make trial without a jury preferable". [37] These comments and concerns are apposite in this case. [38] In Bank of Montreal v. Citak, [1997] O.J. No. 4518 (C.J.), the defendant bank commenced an action to enforce a personal guarantee against the plaintiff. The plaintiff filed a jury notice that the defendant then applied to set aside. One aspect of the decision relates to the prohibition in s. 108(2.11) of the Ontario Courts of Justice Act, R.S.O. 1990 c. C. 43 against an equitable claim being determined by a jury. Rule 12‑6 contains no such prohibition. [39] The other aspect of the decision is, however, relevant. Farley J. looked at the pleadings to determine

"the pith and substance of the claims"; see Citak para. 21; and Royal Bank of Canada v. Johnson, [1984] B.C.J. No. 2947 (S.C.) at para. 7, where Gibbs J., relying on an earlier authority, said that the character of an action is to be determined "from the issues raised on the pleadings". [40] In Citak, Farley J.said: [22] In my view, the 1997 Action raises issues of considerable complexity which make the action ill-suited for a jury. These issues include the equitable duties of a privately appointed receiver (coopers) and a secured creditor (the Bank) to the debtor (Marco-Polo) and particularly whether Coopers was in breach of its equitable and/or statutory obligations owed to Marco-Polo in the disposition strategy and implementation and whether the inventory was disposed of in good faith and in a commercially reasonable manner. See Levy-Russell, supra, at pp. 192-197, where Lane J. found that these duties involved the consideration and application of complex legal principles as to the powers and duties of a private receiver under a security agreement. In addition, the contractual duties of Coopers under clause 10 of the General Security Agreement and its statutory duties under s. 247 of the Bankruptcy and Insolvency Act, R.S.O. 1985, c. B-3, as amended, must be considered and reconciled (or otherwise if appropriate). The foregoing mixed questions of fact and law involving the

existence and scope of the equitable, statutory and contractual duties of Coopers and the Bank to Marco-Polo and whether such had been breached, are, in my view, inappropriate for consideration by a jury: see Oliver v. Gothard (1992), 11 C.P.C. (3d) 342 (Ont. Gen. Div.) at pp. 347-8. Here what we have is a receivership situation involving allegations of negligence, bona fides, contractual rights, realization on security and conversion, which are ill-suited for a jury to consider. The jury should not be expected to perform extremely difficult (verging on the nearly impossible) tasks. See Moase Produce Limited v. Royal Bank of Canada (1985), 56 Nfld. & P.E.I.R. 130 (P.E.I.S.C.) at pp. 131-2; and 389118 Ontario Ltd. v. Alpine Electronics (Canada) Ltd., [1989] O.J. No. 1189 (H.C.J.). [41] Though the foregoing descriptions do not mirror the various issues that have been raised by the response or the defence in this action, it is clear that there is considerable overlap, both factually and legally, in those issues. [42] Finally, in Oakleigh Properties Ltd. v. Kebet Holdings Ltd., [1993] B.C.J. No. 247 (S.C.), the court said: 2 The plaintiffs allege in their statement of claim that they entered into an agreement to lease premises in Richmond from the defendants for a term of 10 years. They allege that the defendants repudiated the agreement. They further plead that the defendants owed

them "a fiduciary duty, as well as a general duty of care", and that the breaches of the lease are also breaches of "their fiduciary duty and general duty of care", and claim general damages "for breach of contract, breach of fiduciary duty and negligence", as well as special and punitive or exemplary damages. 3 The defendants have pleaded a general denial, and further allege that any agreement that was made was subject to certain conditions that were not performed. They allege that "the document was not one which, in law, could create enforceable relations". In a reply, the plaintiffs allege that the defendants "have waived and/or are estopped from alleging the breach....of conditions". 10 But with respect, the pleadings do not define the issues in the way that counsel for the plaintiff now describes them. In addition to the question of the existence of a contract, there are issues with regard to the existence of a duty of care and more questions as to the existence of a fiduciary duty. These are essentially questions of law, although, of course, they rely ultimately on proof of a factual basis for the legal theory. Questions of a breach of the alleged duty of care and fiduciary duty should present a jury with no more difficulty than questions of breach of contract, but when it comes to the assessment of damages, the trial judge may well have to instruct the jury on the almost

metaphysical distinctions between damages in contract and in tort. The jury will also have to be instructed on the issues of estoppel, waiver and acquiescence. The room for misunderstanding and confusion here is almost limitless; to give one fairly simple example, counsel were at odds before me on whether the pleadings here allege that a contract was created by estoppel, and whether any contract can be created by estoppel or whether estoppel only prevents a party from raising certain defences to the existence of the contract. [43] Once again, these comments and concerns do not mirror the issues that are presented in this case. Nevertheless, there is significant congruence in these issues. [44] In the present case, the defendants raise no less than eight different equitable and legal causes of action. Their pleadings also raise numerous other legal concepts such as agency and estoppel. Carefully analyzed, there are literally several dozen distinct issues of law or issues of mixed fact and law that are raised. Let me provide one example of this. The defendants assert, as I have said, that the plaintiff owes them a duty of good faith. The plaintiff's obligation of good faith, however, is said to potentially arise in no less than four different ways: expressly, impliedly, by representation, and as a result of a fiduciary obligation. That duty of good faith is then said to have

created various distinct obligations. For example, a duty to allocate expenses in a particular way or, for example, a duty to give the defendants credit for their role in the Recovery Project when enforcing the Guarantees or, for example, a duty to reasonably consider any settlement proposal the defendants might make. [45] Each of the various potential bases for an obligation of good faith, in conjunction with the content of that obligation, would have to be explained to the jury. I am mindful that courts consistently recognize the intelligence of juries; see Bartram v. GlaxoSmithKline Inc., 2016 BCSC 1409 at para. 11; Cliff v. Dahl, 2012 BCSC 276 at para. 28; and Gulamani v. Chandra, 2009 BCSC 1042 at para. 43. [46] I am also mindful that the onus on a party seeking to strike a jury notice is "not easily satisfied"; see MacPherson v. Czaban, 2002 BCCA 518 at para. 17. [47] However, there has to be a tipping point. That tipping point is reached when the intricacy or complexity of the issues raised by an action actually impede or undermine the efficacy of the trial process and the confidence that the parties can have in the trial's outcome. In this case, this might arise in several ways. There would be a level of factual complexity in recounting or describing the evidence of how various costs were allocated to different production companies. Mr. Shaw's discovery evidence

suggests that it may be necessary to turn to hundreds of different spreadsheets to address those allocations. [48] The charge to the jury would also be complex; see Collette v. Cartier Partners Securities Inc., 2005 BCSC 501 at para. 31. [49] It will be difficult to form questions for the jury; see Holland v. Hallonquist (1968), 63 W.W.R. 207 (B.C.C.A.) at 219 para. 41; and Collette at para. 3. [50] There is little doubt that there would be various alternate questions posed to the jury with the risks that are attendant to that exercise; see Collette at para. 32 and Stephen at para. 19. [51] Still further, this is not a case where the primary issues are factual in nature. In cases where the dominant or central issues are legal, the jurisprudence recognizes that there is a benefit in providing a judge somewhat more time for reflection -- that there is greater need for a mature consideration of the matters; see Holland at 219-220, and McDonald v. Inland Natural Gas Co. Ltd. (1966), 57 W.W.R. 87 at 96 (B.C.C.A.). [52] This is to be compared with the role of a jury in circumstances where all of the various issues raised by the parties are likely to be determined in either hours or in a day or two. In Collette, Macaulay J. summarized these concerns and, at para. 39, said: [39] Where the legal issues are novel or complex, necessarily time-consuming to resolve, and render the charging

process impracticable, the issues may be considered too complex and intricate for trial by jury [53] Each of these comments and concerns is apposite in this case. These concerns, without more, as I have said, are dispositive of this application. I do not consider that I need address either Rule 12‑6(5)(a)(i) or (iii) that the plaintiff relied on. [54] Accordingly, I consider that the jury notice that has been filed by the defendants should be struck and that the plaintiff is to have the costs of this application. [55] Is there anything that arises from that, counsel? [56] MR. KATZALAY: No, My Lord. [57] MS. SAVAGE: No, My Lord. [58] THE COURT: All right. Thank you both. "Voith J."