Safeway Holdings (Alberta) Ltd. v. Cactus Ridge Estates Inc.

2014 BCSC 2237 Safeway Holdings (Alberta) Ltd. v. Cactus Ridge Estates Inc.

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Safeway Holdings (Alberta) Ltd. v. Cactus Ridge Estates Inc., 2014 BCSC 2237 Date: 20141128 Docket: 50830 Registry: Vernon Between: Safeway Holdings (Alberta) Ltd. Petitioner And Cactus Ridge Estates Inc., Gordon Hoover, Farouk Shah and Cactus Ridge Retirement Residence Ltd. Respondents Before: The Honourable Madam Justice Hyslop Reasons for Judgment Counsel for the Petitioner: J.C. Boschert Counsel for the Respondent, Farouk Shah: S.A. Wilson Counsel for the Respondent, Gordon Hoover: J.G. Hanley Counsel for the corporate respondents, Cactus Ridge Estates Inc. and Cactus Ridge Retirement Residence Ltd. B. Hardwick Place and Date of Hearing: Vernon, B.C. November 21, 2014 Place and Date of Judgment: Vernon, B.C. November 28, 2014

INTRODUCTION [1] The petitioner, Safeway Holdings (Alberta) Ltd. ("Safeway"), in their notice of application, seeks a judgment in the amount of $8,867,474.75, which they allege, as of November 17, 2014, is owing by the respondents, Gordon Hoover ("Hoover") and Farouk Shah ("Shah"), plus the costs of this application. [2] However, Safeway verbally amended its application seeking judgment of $2,666,666.66 against each Hoover and Shah, and costs of this application. [3] The basis of this application is a guarantee given by William H. Kujat ("Kujat"), Hoover and Shah dated April 19, 2009 to secure the indebtedness of Cactus Ridge Estates Inc. ("Cactus Estates") to the HSBC Bank Canada ("HSBC"). The amount of the guarantee is limited to $8,000,000.00, jointly and severally, plus interest (the "guarantee"). [4] This guarantee, together with other securities, was assigned to Safeway by HSBC on August 8, 2012. [5] Cactus Ridge Retirement Residence Ltd. ("Cactus Retirement") signed a guarantee dated September 30, 2011, guaranteeing all of the present debts, future debts and liabilities of Cactus Estates. This guarantee was also assigned to Safeway.

THIS ACTION [6] This is a foreclosure. The real property which is the subject matter of the foreclosure is a retirement facility located at Osoyoos, British Columbia. The court granted an order nisi in favour of Safeway on September 27, 2013. The redemption period was for six months. The amount required to redeem the property is $11,057,947.09, plus interest calculated at: a rate of interest at 2.5% per annum in excess of the Prime Rate designated by the HSBC Bank Canada from time to time, compounded monthly not in advance as well after as before each of maturity, default and judgement, being a current daily rate of $1,659.54, subject to change on the last day of each month; (Order of Madam Justice Russell granted September 27, 2013) [7] The real property has not been redeemed. [8] The claim by Safeway against Hoover and Shah is contained in the petition: The Petitioner applies to this Court for: 11. Judgment against the Respondents Gordon Hoover and Farouk Shah pursuant to a Guarantee dated April 5, 2009, for the amount of EIGHT MILLION ($8,000,000.00) DOLLARS.

BACKGROUND [9] Cactus Estates is an Alberta company incorporated pursuant to the laws of Alberta, as is Cactus Retirement. Cactus Retirement is solely owned by Cactus Estates. [10] The shareholders of Cactus Estates are equally owned by Shah Building Design Ltd. ("Shah Design"), Agassiz Developments Ltd. ("Agassiz") and Safeway, whose respective principals are Shah, Hoover and Kujat. Shah is the sole shareholder of Shah Design, Hoover is the sole shareholder of Agassiz and Kujat is a 99 percent shareholder of Safeway. Kujat, Shah and Hoover are the directors of Cactus Estates. [11] The Cactus Estates' retirement facility was financed by HSBC and secured by a construction mortgage dated May 31, 2006. The retirement facility was completed in 2010. At that time, the mortgage in favour of HSBC became a conventional mortgage. [12] Cactus Estates defaulted under the terms of the mortgage. This resulted in HSBC demanding full payment due under the mortgage and their other securities. [13] Shah Design and Agassiz sought an extension from HSBC so as to find replacement financing. HSBC was prepared to grant the extension, however, Safeway was not prepared to sign the required document for the extension. [14] Unbeknownst to Agassiz and Shah, Safeway purchased, and HSBC assigned to Safeway the mortgage and all other security documents, including the personal guarantee of Kujat, Shah and

Hoover. [15] Safeway started this foreclosure petition on February 25, 2013. In the petition, Safeway sought judgment only against Hoover and Shah under the guarantee. [16] Upon Safeway taking the assignment of the mortgage and other securities, Safeway started to run Cactus Estates as if it was an owner, installing Estancia Investments Inc. ("Estancia") to operate the retirement facility in place of Cactus Retirement. Estancia is associated with Kujat and Safeway. [17] Madam Justice Russell granted an order nisi on September 27, 2013, with the six-month redemption period. The application for judgment against Shah and Hoover was adjourned generally. Madam Justice Russell states, in rejecting the appointment of a receiver sought by Safeway: [4] With respect to the appointment of a receiver manager, it is my view that on the case law and on the legislation that it is neither just nor convenient to appoint Estancia as a court-appointed receiver manager. I accept that it is the de facto receiver manager in this case, but I take Mr. Wilson's point that on the case law it is a receiver manager under an instrument at this point and its rights are so confined. In my view it would be inappropriate for this court to exercise its equitable jurisdiction to retroactively validate the appointment of the receiver-manager. I agree as well that what this amounts to is a shareholders' dispute

and that there are fiduciary obligations which need to be considered in that context. [18] A lawsuit was commenced in Alberta by Safeway against Agassiz and Shah Design seeking contributions from them for Safeway's shortfall in operating expenses for the retirement facility. Although the parties are not the same in the Alberta action, two of the respondents are the corporate shareholders of Cactus Estates who still own the retirement facility.

ANALYSIS [19] Hoover and Shah oppose granting a judgment in favour of Safeway in any amount. [20] The purpose of this hearing is to determine the liability, if any, of Shah and Hoover under the guarantee that HSBC assigned to Safeway. However, as I stated earlier, this application and the pleadings on which it is based, is about the guarantee, not the financial responsibility of Kujat, Hoover and Shah amongst each other. Both Shah and Hoover argue that they have defences against the guarantee that they executed in favour of HSBC, who then assigned it to Safeway. Those defences to the guarantee relate to Safeway's behaviour since receiving the assignment of the mortgage and the other securities. [21] Hoover and Shah allege that as Safeway did not join Kujat as a respondent, it may be that Safeway has released Kujat who is the operating mind of Safeway. Hoover and Shah also argue if one of the co-guarantors is released, then it is also for the benefit of the other co-guarantors, Shah and Hoover. [22] Shah argues that in a petition they have no ability to add Kujat as a third party or file a counter-petition. [23] Hoover and Shah also argue that Estancia is not a proper party to be a receiver, as it is not neutral and it is in a conflict of interest as a result of its relationship with Safeway and Kujat. Hoover and Shah argue that as directors they have been excluded from the

operation of Cactus Estates. [24] Hoover and Shah argue that the actions of Safeway and Estancia are not lawful. In Royal Bank of Canada v. W. Got & Associates Electric Ltd., [1997] 6 W.W.R. 715 at para. 15, the Alberta Court of Appeal wrote: [15] All counsel concede that they can find no reported Canadian case wherein a party obtaining a court order for receivership is not protected from any liability arising from that order. In the peculiar circumstances of this case where the order was improperly obtained, the question arises whether the Bank is protected by the usual legal immunities. The appellant's counsel characterized the order as a preservation order. In my view, however, it was much more than that. [25] Further, Shah and Hoover argue that the guarantee must be interpreted in accordance with the laws of Alberta. The guarantee states: 25. This Guarantee shall be construed in accordance with the laws of the Province of Alberta and shall be deemed to have been made in such Province and to be performed there, and the Courts of such Province shall have jurisdiction over all disputes which may arise under this Guarantee, provided that nothing herein contained shall prevent the Bank from proceeding at its election against the undersigned in the courts of any other province or country. If the undersigned becomes resident outside the Province referred to in this paragraph 25

then the undersigned hereby submits to the jurisdiction of the courts competent jurisdiction of the Province referred to in this paragraph 25 in respect of any proceeding hereon. Service of any process upon the undersigned may be made by ordinary mail in an envelope addressed to the following address: or in any other manner permitted by law. [My emphasis] [26] There is a strong argument to made that the guarantee is to be interpreted pursuant to the laws of Alberta, despite allowing Safeway, as holder of the guarantee, to commence an action against the guarantors in another province or country. The guarantee goes on to state that if the guarantors, Kujat, Shah and Hoover, become resident outside the province; that is Alberta, then they submit to the jurisdictions of the court in which they are resident. Nothing in that clause states that any other law will be imposed. There is no expert evidence before me as to the law in Alberta so as to construe this guarantee. These comments that relate to the laws in which the guarantee is to be construed is not intended to bind any other judge who is required to decide the law under which the guarantee is to be interpreted. [27] Hoover argues that Safeway is a mortgagee in possession. Hoover states that Safeway has the obligation to operate itself as a diligent owner. Hoover alleges there is mismanagement of the retirement facility

resulting in a decrease in the value of the security which is sufficient to discharge Shah and Hoover's obligations under the guarantee. Further, Hoover alleges that there has been mismanagement and negligence on the part of Safeway causing prejudice to Shah and Hoover sufficient to discharge Hoover and Shah's obligation, or at least decrease the amount under the guarantee. These are all potential defences that can be raised by Shah and Hoover. [28] Madam Justice Fitzpatrick in TCC Mortgage Holdings Inc. v. Alysen Place Developments Inc., 2011 BCSC 383, writes: [16] The degree to which courts should weigh the evidence on this type of application was discussed by Mr. Justice Hood in Southeast Toyota Distributors Inc. v. Branch, [1997] B.C.J. No. 1426 (S.C.). He stated that some weighing of the evidence is necessary to determine whether a triable issue had been raised: [61] The test is not a high one. While some cases say that the evidence should not be weighed, I would suggest that some weighing is necessary because the court has to look at the evidence in order to conclude whether there is a bona fide triable issue or whether the asserted defence is bound to fail. See the leading decision of the Court of Appeal in Memphis Rogues Ltd. v. Skalbania and N.M. Skalbania Ltd. (1982), 38 B.C.L.R.

193. There the defendant asserted oral understandings or agreements in the face of, and inconsistent with a promissory note and a guarantee agreement signed by him. Affidavits had been filed in response to the assertions made by the defendant in his affidavit. Mr. Justice Seaton, speaking for the court, emphasized that those affidavits could not be looked at to resolve an issue, but only to determine whether there was an issue. And he found on the evidence before him that there was no factual basis in existence on which to find a triable issue. [62] Bald assertions in a given case may not be enough to resist the order nisi, and to justify the transfer of the proceedings to the trial list. This will depend to some extent on the state of the defendant's evidence or case at the time of the application. If he has basically presented his case, then assertion would probably not be enough. On the other hand if the evidence or facts upon which the defendant relies are not within his knowledge or control, and there is a real possibility of a factual base being developed as the trial proceeds, then assertion may be enough. Each case of course will stand alone on its particular circumstances. See Memphis Rogues. [29] I conclude that there is a triable issue relating to the guarantee which can be tried in the normal course or by summary trial. [30] Although Safeway changed the amount of

the judgment they sought against Hoover and Shah, they have also changed the cause of action on which Safeway bases its claim. Safeway now seeks relief pursuant to s. 34 of the Law and Equity Act, R.S.B.C. 1996, c. 253 [LEA], and in particular s. 34(3) as follows: (3) A co-surety, co-contractor or co-debtor is not entitled to recover from any other co-surety, co-contractor or co-debtor, by the means referred to in subsections (1) and (2), more than the just proportion to which, as between those parties themselves, the other co-surety, co-contractor or co-debtor is justly liable. [My emphasis] [31] Hoover, Shah and Kujat's relationship with Safeway, pursuant to the guarantee, is that of co-guarantors of Cactus Estates' liabilities limited to $8,000,000.00 and interest. That relationship continues even after the debt is settled with Safeway: Abakhan v. Halpen, 2008 BCCA 29. Neither Shah nor Hoover have paid any money on the guarantee. There is no evidence before me that Kujat has paid on the guarantee so as to seek payment from his co-guarantors, Shah and Hoover. There is no evidence before me that Kujat has paid an amount or amounts beyond his proportionate share as required under s. 34(3) of the LEA. [32] In this case, before a judgment can be considered pursuant to the LEA, the petition should have claimed this relief. Safeway is not a co-surety, it is the holder of the

guarantee. Safeway has no status to seek relief pursuant to s. 34(3) of the LEA. [33] None of the guarantors have paid off the obligation under the guarantee. In order to seek relief under s. 34(3) of the LEA, one or more of the guarantors must show that they paid more than their proportionate share of the guarantee. [34] Safeway argues that they are a trustee for Kujat because Kujat is the principal of Safeway and that Safeway, having paid HSBC, translates into Kujat having paid the guarantee. There are no facts or law placed before me to support this argument. [35] I dismiss Safeway's claim for judgment in the amount of $2,666,666.66 against each Shah and Hoover as being not only premature, but also Safeway cannot make this claim. I also make it clear that the validity of the guarantee has not been heard on its merits. [36] I order that the issue of liability under the guarantee and any amount owing on the guarantee go to the trial list in British Columbia. [37] Shah, Hoover, Cactus Estates and Cactus Retirement will have their costs of this application pursuant to Appendix B, Scale B of the Supreme Court Civil Rules, B.C. Reg. 168/2009. "H.C. Hyslop J." HYSLOP J.