Décision

JS 0964    SUPERIOR COURT
CANADA
PROVINCE OF QUEBEC
DISTRICT OF			MONTREAL
No:		500-05-000829-844
DATE:	January 7th 2003
______________________________________________________________________
IN THE PRESENCE OF:				THE HONOURABLE	JOEL A. SILCOFF, J.S.C.
______________________________________________________________________
HOWARD BACKMAN DOLORES BACKMAN
Plaintiffs
v.
THE CANADIAN IMPERIAL BANK OF COMMERCE
Defendant
______________________________________________________________________
JUDGEMENT
______________________________________________________________________

I.          INTRODUCTION

[1]        The plaintiffs, indirectly through their wholly-owned family holding corporation, were the controlling shareholders of Invar Industries Inc. ("Invar").  Theyclaim damages from the defendant, Invar's bankers, in the amount of $1,400,000 resulting from the alleged unwarranted abusive and premature manner in which it recalled its loans and realized upon its security.

[2]        The defendant denies liability, alleging an absence of "lien de droit" (privity) between the parties and that, in any event, the plaintiffs' rights of action are prescribed.  The defendant asserts moreover that, in recalling its loans and realizing on its security, it acted reasonably and that it did not abuse any of its rights or breach any of its obligations, either contractual or extra-contractual.  Finally, it asserts that the damages claimed by the plaintiffs are non-existent, or grossly exaggerated and that, in any event, are not the direct result of the defendant's acts or omissions.

 

II.         PERTINENT FACTS

[3]        The pertinent facts can be summarized as follows.

[4]        Prior to September 26^th, 1980, the plaintiffs were the sole beneficial shareholders of all of the issued and outstanding shares of the capital stock of Invar.

[5]        On September 26^th, 1980, the plaintiffs transferred their beneficial interest in the shares of Invar to Invar Industries (1979) Limited, ("Invar (1979)"). In consideration of the transfer, Invar (1979) issued and allotted to the plaintiffs a corresponding number, in value, of shares in the capital stock of Invar (1979). 

[6]        Thus, Invar (1979) became the sole beneficial shareholder of all of the issued and outstanding shares of the capital stock of Invar and the plaintiffs, the resulting sole beneficial shareholders of Invar (1979).

[7]        In either 1967 or 1968, Invar initiated a banking relationship with the defendant and obtained a line of credit to assist it in its commercial operations.

[8]        During the ensuing years Invar established and maintained a close commercial working relationship with the defendant, dealing with its branch situate at 265 St. Jacques in the City of Montreal.

[9]        Invar, its predecessor Industrial Valve Reseating Limited, and its affiliate Invar Industries of America were, from 1964 to 1982, in the business of selling compressor related products such as valves, piston rings and rod packing, servicing process valves and compressors as well as in manufacturing compressor valves and valve actuators, the latter designed primarily for emergency shut down systems in nuclear reactors.

[10]      From the time Invar first began its banking relationship with the defendant, it grew from a corporation consisting of 4 employees with annual sales of approximately $86,000 in 1967, to a corporation with 43 employees and annual sales of approximately $2,302,000 in 1981.

[11]      In 1980, in order to meet market demands, Invar expanded its plant facilities and other capital assets.

[12]      In the spring of 1980, Invar's line of credit with the defendant was set at $200,000.  At such time, however, Invar was already indebted to the defendant in the amount of approximately $250,000, being over-drawn on its line of credit by approximately $50,000.

[13]      In March 1980, Invar requested an increase in its line of credit from $200,000 to $300,000 and justified its request on projected increased sales, a corresponding increase in accounts receivable and a necessary increase in inventory.

[14]      Invar's request was approved by the defendant subject to the following conditions, namely:

(i)   Capital expenditures were limited to $125,000; and

 

(ii)  Any withdrawal, advances to directors or dividends were limited in total to $65,000 per year.

[15]      In December 1980, Invar requested a "special loan" from the defendant in the amount of $300,000, the purpose of which was to provide bridge financing for its capital expenditures, pending receipt of a long term financing commitment from RoyNat Inc.

[16]      At the same time Invar requested an increase in its line of credit from $300,000 to $500,000.  At the time, Invar was indebted to the defendant in the amount of approximately $550,000; that is, once again, over-drawn by approximately $50,000.

[17]      Invar's request for a special loan of $300,000 and an increase in its line of credit to $500,000 was approved by the defendant subject to the same conditions previously referred to above.

[18]      In an internal memo, dated April 27^th, 1981, addressed by the then vice-president and regional manager of the defendant to Mr. Leslie Sanderson, at the time branch manager of the defendant's 265 St. Jacques branch, he wrote:

"It is noted that loans to directors of $72,000 were granted during the first seven months of the fiscal year. On that basis, the total for the year will be much higher than in previous years and require a dividend which the company's cash flow may not be able to absorb.  The principals should be made aware of the need for the company to build up its net worth."

[19]      As of May 13^th, 1981, Invar was in default under its loan agreements with defendant, being $125,000 over-drawn on its line of credit of $500,000 and being significantly short of the inventory and receivable margin requirements set out in the relevant loan agreements.

[20]      During the same period, Invar requested an additional special loan in the amount of $120,000 in order to satisfy one of the requirements made by RoyNat Inc., pending disbursement of a pending government grant.  The special loan of $120,000 was to be repayable on or before August 1982 and subject to the following conditions, namely:

(i)   Capital expenditures were limited to $775,000;

(ii)  Any withdrawals, advances to directors or dividends were limited in total to $85,000; and

(iii)Prior approval by the defendant before the declaration of any dividend to the shareholders.

[21]      In the fiscal year ended June 30^th, 1981, the operations of Invar were not as profitable as they had been in the previous 14 years.  The plaintiffs attributed this downturn in Invar's profitability to the following reasons, namely:

(i)   A major plant expansion costing over $1,000,000;

(ii)  A general downturn in business throughout Canada in the month of February 1981;

(iii)A fire which caused the plant of Invar to shutdown for a period of two weeks in the month of February 1980 resulting in disruptions in the Corporation's control machinery well into the 1981 fiscal year;

(iv)A subsequent disruption in Invar's production due to the fire;

(v)  Inadequate proceeds from insurance to cover the loss suffered due to the fire;

(vi)A series of thefts beginning in the early part of 1980 ending in May 1981; and

(vii)            High interest rates payable by Invar to the defendant and its other creditors which were at times as high as 24% per annum.

[22]      In the Notes to Invar's Audited Financial Statements for the year ended June 30^th, 1981, under the heading "16 - CONTINGENCY", the Corporation acknowledges:

"The working capital deficiency, the negative results of the operations and the failure to meet pre-determined financial ratios relative to the Small Business Development bond contractual agreement, are facts, which taken as a whole, can possibly jeopardize the company's ability to pursue its normal course of business."

(the Court's emphasis)

[23]      Also reflected in the Audited Financial Statements for the fiscal year ended June 30^th, 1981, is a dividend to the holders of the common shares of the Corporation in the amount of $140,000.  According to Mr. Backman, the dividend was a simple accounting entry, made necessary in order to wipe out advances made by Invar to the plaintiffs during the course of the year.  The effect of this operation was however, to reduce the assets of Invar by a corresponding amount which otherwise would have been reported as an asset in the form of a "loan to shareholders". 

[24]      In light of the precarious financial condition of Invar at that time, as is acknowledged in the Notes to its Audited Financial Statements, the payment of the dividend may very well have been in contravention of the provisions of Section 42 of the Canada Business Corporations Act.  In such case, the plaintiffs' liability as directors of Invar would have been engaged.

[25]      Seeing the downturn in Invar's profitability, the plaintiffs caused Invar to take a series of cost cutting measures in order to attempt to deal with the financial strain on the Corporation.  These measures included:

(i)   The creation of strict purchasing controls to reduce inventory;

(ii)  Reducing sales and travelling expenses;

(iii)Reducing personnel;

(iv)Consulting with Mr. André Giroux of Coopers & Lybrand in order to seek advice with respect to a possible financial restructuring of the Corporation; and

(v)  Attempting to sell production equipment of the Corporation which was under utilized.

[26]      In August 1981 the plaintiffs listed for sale their city residence in the Town of Mount Royal.

[27]      At the same time, seeing that Invar was regularly over-drawn on its line of credit and considering its failure to meet the margin requirements contained in the relevant loan agreements, Mr. Sanderson advised the plaintiffs of the need for an important injection of additional capital.

[28]      On this subject, on November 6^th, 1981, in an internal memo addressed by the defendant's regional office to Mr. Sanderson, entitled "Return of Irregular Liabilities Oct. 21/1981", it is written:

". . . we cannot be expected to carry a substantial open position indefinitely and the principals should be pressed to hold up payments as much as possible until this situation is resolved."

[29]      On November 10^th, 1981, Invar was yet again in default under its loan agreements with defendant, being $83,000 over-drawn on its line of credit of $500,000 and being significantly short of the inventory and receivable margin requirements set out in the relevant loan agreements.

[30]      A meeting was held, at the request of Mr. Sanderson, in order to discuss the Corporation's strained finances.  In attendance at the November 10^th, 1981, meeting were Mr. Sanderson, his assistant-manager, Mr. Gauthier, as well as both plaintiffs and the controller of Invar, Mr. Michel Fournier.

[31]      The proof is contradictory as to precisely what occurred at the meeting and what documents were presented by the plaintiffs to Mr. Sanderson during the course of the meeting.  The plaintiffs maintain that the documents included a revised sales forecast, an operating budget, a cash flow analysis and indications of possibilities of re-financing.

[32]      According to the plaintiffs, during the meeting, after a short time, Mr. Sanderson leaned forward in his chair in an aggressive manner and "slowly and deliberately swept his desk clear of part of the material (the documents) presented by the plaintiffs.  .  .". 

[33]      Mr. Sanderson denies having dealt with the documents in such a fashion.  He acknowledges however, and the proof is uncontradicted in this respect, that he clearly indicated to the plaintiffs that the information and projections contained in the documentation produced was not good enough.

[34]      Mr. Sanderson maintains further that during the course of this meeting, he told the plaintiffs that a minimum injection of $300,000 additional capital was required.  At the very least, he does acknowledge having said that, in the event that the additional capital injection was not forthcoming, "I want my money back."

[35]      The plaintiffs do not deny Mr. Sanderson's testimony to the effect that he required an injection of additional capital.  Mr. Backman confirms having informed Mr. Sanderson that the plaintiffs had their house for sale on the market since August 1981.  Mr. Backman advised further that other alternatives were being explored to raise additional capital, namely the sale of Invar's western operations and a possible capital investment from an unnamed friend or business associate.

[36]      According to Mr. Backman, at that time, "We knew we had to find the money."

[37]      The Court retains, from the testimony of Mr. Sanderson, that the amount of additional capital thought necessary by him at the time, corresponds substantially to the amount that each of the experts, heard independently on behalf of the parties, required in order that they may be in a position to prepare a valuation of Invar "on a going concern basis."

[38]      The November 10^th, 1981 meeting ended with Mr. Sanderson advising the plaintiffs that unless corrective measures were taken forthwith, he would be obliged to insist upon receiving additional security.

[39]      On November 12^th, 1981, Mr. Caron, an accountant with Maheux Noiseux, Invar's auditors, telephoned Mr. Sanderson in order to clarify the bank's requirements as made known to the plaintiffs by Mr. Sanderson during the course of the November 10^th, 1981 meeting.

[40]      On November 13^th, 1981, with the knowledge and consent of the plaintiffs, the defendant mandated Maheux Noiseux to act on its behalf in order to study and report upon the financial condition of Invar.

[41]      In an Internal Memorandum dated November 16^th, 1981, addressed by Mr. Sanderson to the defendant's vice-president and regional general manager, he reports on the current status of the Invar accounts.  Certain extracts of the Internal Memorandum bear repeating, namely:

"Company's auditors, Maheux, Noiseux, Roy & Associates, represented by Mr. Maurice Caron, concurred with our view that a new injection of capital was needed.  He further confirmed that capital expenditures in the last 12/24 months have been made without consultation with them and he felt that the proper financing was not put in place at the outset.  As advised, he feels that Company is basically sound but lacks a proper management control which the Manager had discussed with Backman back in February/March, and Mr. Fournier was brought in at the end of April, beginning of May.

Mr. Caron, concurred with our thoughts that an independent consultant should make a full examination of the situation and offered his firm's services.

(. . .)

The Backmans' have their home in Vermont up for sale and this should net approximately $100,000 and will be invested into the company.  Late Friday it was learned that they may have a buyer.  At the same time it was learned that a friend and/or relative may be able to invest $100,000 into the business as well.  Officials feel that they need only temporary help from now until spring and this may be the case, however, from our position it is impossible to determine this, and consequently the reason for the above-mentioned report from an outside source is felt to be a necessity in order to determine the proper course for the Bank to take.

(. . .)

Cheques will continue to be issued only with our concurrenceand advances should stay close to present levels.  Any adverse developments will be immediately advised."

(the Court's emphasis)

[42]      On November 25^th, 1981 a further meeting was called by Mr. Sanderson and attended by the plaintiffs.  Mr. Sanderson reported that Invar was still over-drawn on its line of credit and was still in default to meet its margin requirements.  During the course of the meeting, Mr. Sanderson renewed his demands for an injection of additional capital and requested, in the interim, the additional personal guarantee of Mrs. Backman.

[43]      In a letter dated November 25^th, 1981 addressed by the plaintiffs to Mr. Sanderson, they undertook to give to the defendant a collateral mortgage on their principal residence in the town of Mount Royal, their secondary residence in Stowe Vermont and on a 31 foot Dufour sailboat owned by them.  The plaintiffs specified that,

"These collateral mortgages to be given on December 7, 1981 if the sale of Invar's western operations and the 20% of Invar's shares to IIC Mechanical Products Ltd, of 364 Supertest Road Downsview (Toronto) Ontario, M3J 2M2, at a price of two hundred and fifty thousand dollars ($250,000.00) and sixty thousand dollars ($60,000.00) respectively is not finalized prior to this date."

[44]      The sale of Invar's western operations and the sale of the 20% of Invar shares to IIC Mechanical Products Ltd did not take place by December 7^th 1981, as promised by the plaintiffs and no additional capital was injected in the Corporation.

[45]      On November 27^th, 1981, Maheux Noiseux issued their First Report.

[46]      In December 1981, Mr. Backman consulted with Monsieur André Giroux of Coopers & Lybrand concerning possible alternatives to address Invar's failing financial condition, including the possibility of a Proposal to the creditors.

[47]      In December 1981, Maheux Noiseux issued a supplementary report entitled "Analysis of the Financial Position".  Certain extracts of the December 1981 Maheux Noiseux report are retained as confirming the precarious financial condition of Invar, namely:

-     "Gross margin has deteriorated constantly since 1980, . . .;

-     The situation as of October 30, 1981 is very tight.  (. . .) total debt is approximately $1,500,000 which is clearly too high in relation to equity.

-     This situation originated mainly from two major decisions by management,

i)    the decision to declare high dividends on retained earnings, so that no equity was built-up.

ii)   A decision to expand at a time when growth in sales was limited and actually negative as of October 30, 1981.

-     The pressure from suppliers is strong and action will have to be taken very shortly in order to avoid legal action from them."

[48]      On December 24^th, 1981, the plaintiffs signed a Collateral Deed of Mortgage in favour of the defendant, hypothecating their principal residence in the town of Mount Royal.

[49]      In an Internal Memorandum dated January 8^th, 1982, addressed by Mr. Sanderson to the defendant's vice-president and regional general manager, he confirms,

"Referring to our telephone conversation (Sanderson/Mullins), we confirm having advised that we met with Mr. Howard Backman, President of Invar Industries Ltd, and André Giroux from Coopers & Lybrand, and were told that they were studying the possibility of making a proposal to all the ordinary creditors of Invar to postpone existing payments for 9/18 months or until the sale of some shares of the company and/or a merger and/or new capital could be injected."

[50]      In a subsequent Internal Memorandum dated January 15^th, 1982, addressed by Mr. Sanderson to the vice-president and regional general manager, he confirms having enlarged the Maheux Noiseux mandate by giving to this firm,

". . . a mandate to protect the Bank's interest by controlling the purchases and the payables and also to maintain a close supervision over the receivables." 

[51]      The Internal Memorandum confirms that Mr. Backman had promised his full cooperation and that he was advised to come up with an injection of additional capital of $100,000 by month's end.

[52]      In an Internal Memorandum dated January 15^th, 1982, addressed by the vice-president and regional general manager to Mr. Sanderson, he confirms the enlargement of the Maheux Noiseux mandate and specifies:

"Should there be any rapid deterioration in our position we will not hesitate to call our loan."

[53]      On January 15^th, 1982, Mr. Sanderson left for a three week vacation.

[54]      Four days later, on January 19^th, 1982, Mr. Alain Charbonneau, the consultant employed by Maheux Noiseux, reported that $92,000 worth of cheques were issued by Invar without the defendant's prior approval; the whole contrary to the specific requirements of the defendant, previously communicated to Mr. Backman and agreed to by him.

[55]      On January 20^th, 1982, Mr. Sanderson was informed by telephone that Mr. Backman had been at the branch, thrown his keys on Mr. Sanderson's desk and had allegedly said; in effect:

 "If Sanderson wants to run the business, the keys are on his desk.". 

[56]      Mr. Backman denies ever having made this statement and having thrown the keys on Mr. Sanderson's desk.

[57]      Mr. Sanderson claims to have attempted to communicate immediately with the plaintiffs by telephone but to no avail.  Thereafter, seeing his inability to reach either of the plaintiffs, he instructed his assistant-manager, Mr. Gauthier, to deliver a letter of authorisation to Mr. André Giroux of Coopers & Lybrand appointing them as agents for the purpose of enforcing the defendant's security rights under Section 178 of the Bank Act and a Registered General Assignment of Book Debts of Invar.

[58]      The text of the January 20^th, 1982 letter addressed to Mr. Giroux bears repeating verbatim.  He writes:

"                                                                                                 January 20, 1982

 

BY HAND

 

Mr. André Giroux

c/o Coopers & Lybrand

630 Dorchester Blvd. West

Montreal, P.Q.

 

Dear André:

 

Re: Invar Industries Ltd.

Attached hereto is your letter of mandate, along with our letter addressed to Invar Industries Ltd. demanding payment of our currently outstanding loans.  Also attached are copies of our security forms.

As verbally indicated, it is our hope that an influx of capital and/or sale of this business can be arranged in the near future.  With this in view, it is our wish that you not allow the Bank's position to deteriorate, but at the same time, if it is possible, keep the place in operation.

We shall await your advices with interest in due course, and as advised, Mr. Backman has been advised.

Yours truly,

Original signed by

L.A. Sanderson

 

L.A. Sanderson

Manager"

(the Court's emphasis)

 

[59]      Similarly, the text of an Internal Memorandum dated January 20^th, 1982, addressed by the vice-president and regional general manager to Mr. Sanderson bears repeating verbatim.  He writes:

"Au Directeur To the Manager					Nom Name        Invar Industries Limited
	265 St.James Street Montreal, P.Q.				Unsatisfactory: Unproductive
Du vice-président et directeur général régional Montréal From the vice-president and regional general manager Montreal Date                                             January 20, 1982
		Referring to Form 1833 dated January 15 and to our telephone conversations (Sanderson/Mullins), the account is classified as above and please submit Forms 33 Basic without delay.      We record having authorised you to call the loans today and to appoint Andre Giroux of Coopers Lybrand to take control of our security and act as our Agent.      It was agreed to delay the liquidation process for a few days to permit the company to reach a decision regarding a proposal to its creditors and to allow Backman some time to raise $100,000 to be injected in the company.  We consider this amount is the minimum which we could accept if the proposal is accepted and we agree to let the company operate.  We would of course take into consideration our Agent's preliminary report and opinion at that time.
		JNRM/ca/HO		original signed by: r.j..mullins     R.J. Mullins Superintendent  "

(the Court's emphasis)

[60]      On January 22^nd, 1982, Mr. Backman telexed Mr. Sekouti, the alleged potential investor and stated, inter alia, the following:

"Bank has appointed receiver to protect assets.  Have spoken to Bank of Commerce manager, Les Sanderson 876-2155 who indicates their intention to try to save company.  Receiver should consider proposal to unsecured creditors totalling 500,000 for 40 to 50 cents on dollar XXXX which will forgive 250,000 - 300,000 which adds to equity.  Note that 249099 on balance sheet now transferred to equity as contributed capital.

(…)

Vendors (Mr. & Mrs. Backman) agrees (sic) to add 150,000 from sales proceeds of Montreal home estimated 280,000 net.  … Suggest you commit to lend company to maximum of 300,000 at prime with letter of credit to trustee for 100,000 usable at time of successful creditor acceptance of proposal as above.  Balance 100,000, 60 days after proposal acceptance and 100,000 after vendor adds 150,000."

(the Court's emphasis and additions)

 

[61]      On January 25^th, 1982, Mr. Giroux delivered his Preliminary Report.  Certain extracts of his Report bear repeating, namely:

-     ". . . I wish to confirm that on January 21, 1982 I have taken possession of the accounts receivable and inventories of the above noted company assigned to you . . .;

-     (…)

-     Due to the nature of the company's customers and the type of products sold and services rendered, I recommend to not signify the accounts receivable at this time to avoid certain practical problems in collecting the accounts.

-     (…)

-     We decided not to change locks given the fact that the company has advised us that it is presently in discussion with a potential buyer or investor and also given the nature of the inventory.  The president (Mr. Backman) is of the opinion that to change locks would create panic with certain key employees. . . .;

-     (…)

-     The president of the company informed us that he is presently in negotiation with Mr. Sekouti but he has not supplied us with any details on these negotiations."

(the Court's emphasis and additions)

[62]      The Proposal to unsecured creditors referred to in Mr. Backman's telex of January 22^nd, 1982 was not made.  There is no admissible evidence of any response or of any further negotiations between Mr. Sekouti and Mr. Backman and the requested financial commitment of $300,000 was not forthcoming. 

[63]      On January 27^th, 1982, RoyNat Inc. made a demand for immediate repayment of $485,658.88, being the outstanding balance of loans due by Invar as at January 26^th, 1982.

[64]      On January 28^th, 1982, the plaintiffs met with Mr. Sydney Pfeiffer, Trustee in bankruptcy, who recommended that each of them immediately make a personal Assignment in bankruptcy under the Bankruptcy and Insolvency Act.[1] 

[65]      Shortly thereafter, Mr. Pfeiffer met with Mr. Sanderson to advise him that each of the plaintiffs would be filing personal Assignments in bankruptcy. Mr. Sanderson immediately telephoned Mrs. Backman and advised her that, in his opinion, personal bankruptcy was not necessary or, at the very least was premature.  He informed her that he believed the defendant's position and security would be sufficient to cover Invar's indebtedness and that if any shortfall should arise, it would be minimal.  Mrs. Backman was unresponsive.

[66]      In an Internal Report dated January 21^st, 1982, referring to the Collateral Mortgage on the plaintiffs' principal residence, Mr. Sanderson wrote:

"The property was recently put on the market by the owners for an asking price of $350,000.  In view of market conditions, a quick sale is not expected.  However, over the next three months into spring, conditions should improve.

Collateral security is held in support of personal guarantees from Howard and Dolores Backman, each for full liability.  Consideration will be given to calling on the guarantees and acquiring the house once final liquidation of the Company's assets is complete."

(the Court's emphasis)

[67]      Between January 20^th, 1982, the date of the Demand for payment made by the defendant and February 4^th, 1982, the date of the Assignment in bankruptcy of Invar, there was no communication between the plaintiffs and the defendant other than a telephone call from Mr. Sanderson to Mrs. Backman following the visit from Mr. Pfeiffer, discouraging her from making the personal Assignment in bankruptcy.  No requests or proposals were made to the defendant by either of the plaintiffs, or on their behalf, seeking a suspension of, or postponement in, the realization process. 

[68]      On February 1^st, 1982, each of the plaintiffs filed personal Assignments in bankruptcy.

[69]      On February the 4^th, 1982, rather than making the Proposal under the Bankruptcy and Insolvency Act to Invar's creditors, as Mr. Backman suggested in his telex to Mr. Sekouti of January 22^nd, 1982, he caused Invar to file an Assignment in bankruptcy.

[70]      Following receipt of Notice of Invar's Assignment in bankruptcy, Mr. Sanderson instructed Coopers & Lybrand to signify Invar's debtors with Notices of Assignment of their respective Accounts Receivable.  The Court takes particular note of the fact that the Notices of Assignment of the Accounts Receivable were only signified on Invar's debtors after February 4^th, 1982, following Invar's Assignment in bankruptcy.

[71]      On February 10^th, 1982, the defendant formally called upon Mr. Backman to honour his personal guarantee.  The defendant does not exercise its hypothecary recourse on the plaintiffs' personal residence in the town of Mount Royal.

[72]      On or about February 16^th, 1982, the Trustee in bankruptcy, acting on behalf of the plaintiffs' personal estates, accepted an Offer to Purchase their principal residence in the town of Mount Royal for an amount of $ 300,000, less brokers' commission.  The Deed of Sale was signed on June 15^th, 1982.

[73]      In a letter dated August 27^th, 1982, addressed by the defendant's Mr. J.R. Kearns to the Trustee in bankruptcy, he confirms that after liquidation of the assets of Invar, the shortfall which is claimed from the plaintiffs is $27,127.08.

[74]      By judgment dated October 12^th, 1982, the plaintiffs' personal Assignments in bankruptcy were annulled on the basis that at the time of the Assignments, the plaintiffs' assets substantially exceeded their liabilities.  The plaintiffs' principal creditors, including the defendant and RoyNat Inc., consented to the annulment of the Assignments in bankruptcy having been paid all amounts owing to them by the plaintiffs.

[75]      On January 23^rd, 1984, the plaintiffs instituted the present proceedings against the defendant, RoyNat Inc. and the Montreal Trust Company claiming from them solidarily, damages in the amount of $ 2,875,000 plus an additional amount, on behalf of Mrs. Backman, of $230,000.

[76]      On June 30^th, 1987, the plaintiffs discontinued their action against RoyNat Inc. and the Montreal Trust Company in consideration of the payment of $22,000 and granted each of the said defendants, a full and final quittance.

[77]      On February 18^th, 1991, counsel for the plaintiffs called upon Invar's Trustee in bankruptcy to institute proceedings against the defendant, similar in nature to the present proceedings.  With their demand, the plaintiffs filed, contemporaneously, a joint Proof of Claim as unsecured creditors of Invar in the amount of $205,000; said amount representing the alleged loss in equity in their principal residence following the sale of their residence by the Trustee in bankruptcy acting pursuant to their respective personal Assignments in bankruptcy.

[78]      On April 18^th, 1991, the Invar Trustee replied stating that he had no intention of pursuing this matter or of reopening the estate.

[79]      On March 9^th, 1992, the plaintiffs filed a Petition for Permission to Proceed on Refusal of Trustee to Act (Section 38, Bankruptcy Act).  The defendant was not made a party to this proceeding.  The plaintiffs' Petition for Permission to Proceed was granted by Rectified Judgment dated June 25^th, 1992.

[80]      On April 30^th, 1995, the Trustee assigned and transferred to the plaintiffs,

"… all of the right title and interest of the bankrupt Invar Industries Limited in any claim that the said bankrupt has or may have as more fully described in the proceedings which have been instituted against the Canadian Imperial Bank of Commerce, …(in the present file)".

 

III.        POSITIONS OF THE PARTIES

(i)         The Plaintiffs

[81]      The Plaintiffs' arguments are summarized in the following extracts of Plaintiffs' Second Re-Amended Declaration.

"54.       On January 20 1982, shortly after the foregoing payment of the Velan order the aforementioned Mr. Gauthier, Defendant assistant manager, made formal demand upon the Company for the immediate payment of the sum of Four Hundred Eighty Five Thousand Dollars ($485,000.00) together with Six Thousand Six Hundred Forty-Six Dollars and Thirteen Cents ($ 6,646.13) representing interest, …;

55.       Shortly after the presentation of the said letter Exhibit P-6, Defendant's agent presented Plaintiff Howard Backman with a second letter which stated in part, "pursuant to Section 178 of the Bank Act and to our General Assignment of Book Debts and for that purpose, we have appointed André Giroux C.A. of Coopers & Lybrand as our agent" …, Defendant thereby confirming its intention to take possession of the Company's assets for the purpose of liquidation;

56.       In fact, Defendant did not take actual physical possession until January 26, 1982, when its aforementioned agents, Coopers & Lybrand:

a)   stopped the normal operation of the Company;

 

b)   dismissed the Company's employees and sent them home except for those needed to count inventory;

 

c)   padlocked all entrances to the building;

 

d)   advised the security service not to allow Plaintiffs on Company premises unless accompanied by representatives of Coopers & Lybrand;

 

e)   advised Bell Canada to cancel the Company's services;

 

f)    posted notice on the Company's door that the Company was under receivership;

 

57.       The above taking of possession of Company's assets by Defendant, was irregular, malicious and abusive in breach of the fiduciary duty owed by Defendant to the Company in that:

a)   despite the assurances of Defendant's manager Mr. Sanderson, that Defendant would provide the necessary financial support to the Company in consideration for the additional security given by Plaintiffs, Defendant at all times relevant hereto had no intention whatsoever to support the Company, but rather, intended to proceed with the realisation of its security to the extreme prejudice of Defendant, waiting only until the payment of the Velan order;

b)   Defendant clearly knew that in taking possession immediately after the payment of the Velan order, said taking of possession would prevent Plaintiffs from concluding the sale of their shares in the Company to the aforementioned Mr. N. Sekouti which would have permitted Plaintiff to pay off Defendant in full;

c)   Defendant's aforementioned agent Mr. André Giroux C.A., having studied the condition of the Company on behalf of Plaintiff with the full knowledge of Defendant, prior to his appointment as agent for Defendant, knew or should have known that the Company was a viable entity, which did not require immediate liquidation to protect Defendant's rights;

d)   Defendant's refusal to communicate with Plaintiffs following the delivery of the report by Maheux, Noiseux so as to permit Plaintiffs to point out the inadequacies of the said report constitutes clear evidence of the bad faith of Defendant's manager Mr. Sanderson;

e)   Defendant failed to take any reasonable steps to consider any alternatives to the immediate liquidation of the assets of the Company;

 

58.       Without prejudice to any of the foregoing and under strict reserve thereof the said taking of possession was entirely irregular and illegal in that:

a)   it was effected without having given the Company sufficient notice to repay Defendant, the delay within which the Company was supposed to pay the amount demanded being illusory, the circumstances requiring a delay of at least sixty (60) days;

b)   in virtue of Section 178(3) of the Bank Act, Defendant did not have the right to take possession of the Company's inventory, raw material and work in progress as the Company was a manufacturer coming within Section 178(1)(b) of the Bank Act;

c)   without prejudice to the foregoing and under strict reserve thereof Defendant's agent negligently disposed of the assets of the Company between the end of January 1982 and May 1982 by failing to take the necessary steps to obtain reasonable value for the assets of the Company which were sold piece by piece, at the distress prices, and in particular:

(a)  the finished goods were never shipped thereby depriving the Company of the receivables which would have become payable;

(b)  the work in progress was never completed so that same never could be sold;

(c)  a multiple spindle drill and a boring machine each worth approximately $75,000.00 which were sold for $5,000.00;

(d)  a hardness tester worth $3,200.00 that was sold for $75.00;

(e)  a boring mill worth $25,000.00 that was sold for $5,000.00;

(f)   a fork lift truck worth $8,500.00 that was sold for less than $2,000.00;

(g)  the jigs, patterns, molds, fixtures and special tooling which were the heart of the business itself were never evaluated so same could be sold separately but were either sold with other items or mysteriously disappeared;

(…)

60.    The said liquidation of the Company's assets on a piecemeal basis, was accordingly unnecessary as the hypothec on Plaintiffs' family home, and the accounts receivable of the Company were known by Defendant to be adequate to fully secure Defendant's claim;

61.    Without prejudice to any of the foregoing and under strict reserve thereof, the fees, disbursements, and commissions charged by the agents for Defendant were grossly exaggerated and unreasonable, particularly in view of the grossly unsatisfactory recovery with respect to the sale of the said assets, said charges, when added to the interest charges of Defendant, constitute a charge relating to the loan of money from Defendant which is clearly excessive and usurious, and in violation of the Interest Act for which Plaintiffs are further entitled to claim and collect the damages more fully set forth hereinafter;

62.    Accordingly, as a direct result of all of the foregoing conduct of Defendant and/or its employees and/or agents for whom it is legally responsible, Plaintiffs are entitled to claim and collect from Defendant the following sums namely:

a)	the value of Plaintiffs' shares in the Company based on the Company's actual value as a going concern at the time of its liquidation;	$750,000.00
b)	security of employment for Plaintiffs and Plaintiffs two sons, opportunity for investment income, travel and entertainment expenses, medical, dental, life and disability insurance coverage;	$150,000.00
c)	loss of personal income for one year as a result of the termination of the Company's activities;	$150,000.00
d)	loss of equity in the family home;	$200,000.00
e)	damage to Plaintiffs good name and reputation;	$50,000.00
f)	exemplary damages for the violation of Plaintiffs fundamental rights in their property;	$50,000.00
g)	pain and suffering, mental anguish and loss of enjoyment of life;	$50,000.00
	TOTAL	$1,400,000.00"

(ii)        The Defendant

[82]      The defendant's arguments are summarized in the following extracts of its (i) Requête en Irrecevabilité de l'Action des Demandeurs; and its (ii) Défense Particularisée Amendée.  

(i)         Requête en Irrecevabilité de l'Action des Demandeur

"3.  Il y a absence de lien de droit entre les demandeurs et la défenderesse;

 4.   De plus, l'action des demandeurs est prescrite;"

(ii)        Défense Particularisée Amendée  

"39. Il n'y a aucun lien de droit entre les demandeurs et la défenderesse;

 

40. Tous les soi-disant dommages allégués sont ceux de la compagnie Invar dont l'action est prescrite;

 

41. Sans préjudice aux allégués de la défense en ce qu concerne l'illégalité de la demande en vertu de la Loi sur la faillite, tout recours du syndic au bénéfice de la compagnie Invar était prescrit au moment de la requête de juin 1992;

 

42. Les demandeurs n'ont subi aucun dommage;

 

43.La défenderesse, après avoir soutenu la compagnie Invar malgré le non-respect du contrat entre les parties pendant presqu'une année, a légalement rappelé son prêt et exécuté ses garanties; elle ajoute que, tel qu'il appert de la déclaration aux paragraphes 3 et 4 en particulier, les demandeurs connaissaient parfaitement les droits et obligations de la compagnie Invar, s'identifiant avec elle."

 

 

IV.        QUESTIONS OF FACT AND OF LAW

[83]      The Court identifies and proposes to analyse the following determinative questions of fact and of law. 

(i)   What is the juridical foundation of the plaintiffs' contractual recourse? 

-     Has the defendant abused its contractual rights in calling its loan? in taking possession ? and in realizing on its security by liquidating Invar's assets?

-     Relativity of contracts - As indirect shareholders of Invar, through the intermediary of a holding company interposed, do the plaintiffs have a sufficient legal interest to bring the present proceedings?

-     What rights of action against the defendant, if any, were assigned to the plaintiffs by Invar's Trustee in bankruptcy?  Were these rights of action prescribed?

(ii)  What is the juridical foundation of the plaintiffs' extra-contractual(delictual) recourse? 

(iii)Assuming the existence of a valid contractual or extra-contractual (delictual) recourse, what damages are properly owing to the plaintiffs?

(iv)If the Court were to award damages in favour of the plaintiffs, in light of the release granted by the plaintiffs in favour of former solidary co-defendants, RoyNat Inc. and the Montreal Trust Company, should the Court reduce the amount otherwise payable to the plaintiffs by the share of those defendants they have released?

(v)  If the Court were to award damages in favour of the plaintiffs, should it also award the "Additional indemnity" contemplated by articles 1056 c. and 1078.1 C.c.B.C.?

 

V.         ANALYSIS

[84]      Prior to the commencement of proof and hearing on the merits of the present action, the Court heard arguments relating to the defendant's Requête en Irrecevabilité de l'Action des Demandeurs.  The Court reserved judgment on the defendant's Requête and proceeded with proof and hearing on the merits.  In the following analysis, the Court will deal together with the merits of both of defendant's Requête en Irrecevabilité de l'Action des Demandeurs as well asthose of the principal action.

(i)  What is the juridical foundation of the plaintiffs' contractual recourse? 

-     Has the defendant abused its contractual rights in calling its loan?  in taking possession? and in  realizing on its security?

[85]      The Court finds that the defendant acted reasonably, in good faith and in accordance with its rights in calling its loan, in taking possession and, subsequently, in realizing on its security.

[86]      Under certain circumstances and notwithstanding that a loan may be "payable on demand", the Courts have held that a bank may be held accountable to its customer for damages occasioned by its acts in calling its loan and in realizing on its security in an abusive and precipitous manner.  Although each case must be decided in light of its particular circumstances, as a general principle, a bank is required to grant to its debtor a reasonable time to pay.  It should, moreover, abstain from liquidating its security in a precipitous manner.[2] 

[87]      In Mister Broadloom Corp. v. Bank of Montreal et al[3], the Court reviewed the applicable principles in determining what is a reasonable delay:

"While the law is clear that the plaintiff had to give a reasonable time to pay after demand was made, in determining what is a reasonable time, regard must be had to the amount of the loan, the risk to the creditor of losing his money or the security, the length of the relationship between the debtor and creditor, the character and reputation of the debtor, the debtor's ability to raise money in a short period, the circumstances surrounding the demand and other relevant factors."

[88]      Under the terms of the most recent Application for Credit made on behalf of Invar by the plaintiffs, the parties acknowledged that  ". . . any line of credit granted as a result of this application may be withdrawn by the Bank at any time in whole or in part."

[89]      Under the terms of the Loan Agreement in force between the parties, relating to Section 178 security, it is provided in paragraph 5:

"In case of breach of the provisions of this agreement the Bank may at its option declare all money owing by the undersigned to the Bank to be due and payable, and on such declaration being made the said monies, including all bills and notes (whether payable on demand or otherwise) in respect thereof, shall thereupon be due and payable."

[90]      As previously noted, as far back as June 30^th, 1981, Invar was experiencing serious financial strain.  The Corporation was regularly overdrawn on its line of credit and generally failed to meet the margin requirements contained in the applicable loan agreements.

[91]      Moreover, notwithstanding the specific covenants agreed to in consideration of the defendant's agreeing to grant to Invar, from time to time, both the "Special Loans" as well as the various increases in the authorised line of credit, the plaintiffs, in contravention of Invar's covenants and, in particular without obtaining the prior approval of the defendant, proceeded to declare dividends to the shareholder of Invar far in excess of the limits agree to by them.  These excessive dividends were ultimately received by plaintiffs personally.

[92]      At the meeting held in Mr. Sanderson's office on November 10^th, 1981, called to discuss methods of addressing Invar's financial and liquidity problems, he made it abundantly clear to the plaintiffs that the information provided by them and their financial projections were inadequate and unacceptable.  He advised the plaintiffs of the urgent need for an injection of additional capital in the minimum amount of $300,000.  He warned the plaintiffs that in the event that such additional capital injection is not made, "I want my money back."   There is no ambiguity in Mr. Sanderson's remarks and they are not contested. 

[93]      Mr. Sanderson's testimony concerning his warning the plaintiffs of the need for additional capital is indirectly corroborated by Mr. Backman when he says, referring to the meeting of November 10^th, 1981 and to Mr. Sanderson's comments, "We knew we had to find the money."

[94]      Promises were made to comply with Mr. Sanderson's demands.  More than sufficient time was granted to the plaintiffs to find the additional capital and, although in the months that followed they always promised compliance, none was forthcoming.

[95]      Mr. Backman advised Mr. Sanderson that the plaintiffs had their house on the market for sale since August of 1981 and that they hoped, with the proceeds of this sale, to inject further capital into Invar.  He advised further that other alternatives were being explored to raise additional capital, namely the sale of Invar's western operations and the possible capital investment from a friend or business associate.  None of these avenues materialized.

[96]      Delays were extended to the plaintiffs to realize their undertakings and to inject the necessary additional working capital into Invar.  None of the plaintiffs' undertakings were realized by year end 1981.

[97]      As far back as June 30^th, 1981, Invar's management acknowledged its working capital deficiency.  That notwithstanding, they chose to declare excessive dividends to its shareholder.  As was previously remarked, in the Notes to the Audited Financial Statements for the year ended June 30^th, 1981, the Corporation acknowledged:

"The working capital deficiency, the negative results of the operations and the failure to meet pre-determined financial ratios relative to the Small Business Development bond contractual agreement, are facts, which taken as a whole, can possibly jeopardize the company's ability to pursue its normal course of business."

(the Court's emphasis)

[98]      In light of the precarious financial condition of Invar, the defendant retained Maheux Noiseux Roy et Associés as consultants and gave them a mandate to protect it's interests by controlling the purchases and payables of Invar as well as by maintaining a close supervision over the collection of accounts receivable.  Although Mr. Backman had undertaken to provide his full cooperation with the defendant's consultant, including without limitation the requirement that all cheques of Invar be issued only upon obtaining the defendant's prior approval, on January 19^th, 1982, Maheux Noiseux reported that $92,000 worth of cheques were issued by Invar without obtaining the required prior approval.

[99]      Moreover, as appears from an Internal Memorandum of the defendant, the contents of which are not credibly contradicted, by the end of 1981 and in the month of January 1982, the plaintiffs began to demonstrate their own serious concerns and lack of confidence in the financial affairs of Invar.  They considered the possibility of making a Proposal to Invar's creditors.

[100]    The Court finds that the defendant was more than reasonable in granting Invar sufficient delays to secure the much needed injection of additional working capital.  The uncontradicted evidence establishes that this request was initially made by Mr. Sanderson during the summer of 1981.  It was repeated during the meeting of November 10^th, 1981 and again at the meetings held on November 25^th, 1981, in December 1981 and finally in January 1982.  Although, during this period, many undertakings to secure the injection of additional working capital were made by the plaintiffs, none of these undertakings were forthcoming.  The Court can only question the seriousness of the plaintiffs in making these undertakings and their good faith in this regard.

[101]    With respect to the potential investor, Mr. Sekouti, with the exception of a telex sent to him by Mr. Backman on January 20^th, 1982, suggesting the possibility of Invar making a Proposal to its unsecured creditors and asking him for an injection of $300,000 working capital, no further admissible evidence is made with respect to any follow-up on this requested investment on the part of the plaintiffs or of Mr. Sekouti.

[102]    Mr. Sanderson claims that he was advised that on the morning of January 20^th, 1982, Mr. Backman attended at his office and threw the keys to Invar's premises on Mr. Sanderson's desk saying, in effect, "If Sanderson wants to run the business, the keys are on his desk."

[103]    Mr. Backman denies ever having left the keys to Invar's premises on Mr. Sanderson's desk.  He testified that he only had one set of keys and that he could not have left them in Mr. Sanderson's office since he required these keys in order to allow him continued access Invar's premises.  At another time he testified that, after calling the loan, the defendant's agent immediately changed the locks to the premises and denied him access to the premises.  If the latter testimony is to be believed, what possible use could Mr. Backman have for the keys to the former locks?  The Court finds Mr. Backman's tesetimony in this regard lacking in credibility.

[104]    The Court finds that the testimony of Mr. Sanderson with respect to Mr. Backman's throwing the keys on his desk, is more probable and more credible.

[105]    After calling its loan on January 20^th, 1982 and until such time as Invar made its voluntary assignment in bankruptcy, the defendant took all reasonable means to preserve the financial integrity of Invar.  The mandate given by the defendant to Mr. Giroux on Janaury 20^th, 1982 specifically states "… it is our wish that you not allow the bank's position to deteriorate, but at the same time, if it is possible, keep the place in operation."

[106]    The Court is satisfied, on the balance of probabilities, that Mr. Giroux did not cease the operations of Invar at the time of taking possession; he did not change the locks and he did not signify the accounts receivable to Invar's debtor until Febraury 4^th, 1982, after Invar had filed an Assignment in bankruptcy.

[107]    Between January 20^th, 1982 and February 4^th, 1982, the date of Invar's voluntary Assignment in bankruptcy, the plaintiffs had ample opportunity to avert the crystallising of the taking possession by the defendant and the realizing on its security.

[108]    There is no evidence whatsoever of any objection being made by either of the plaintiffs to the defendant's taking possession of Invar's assets.  On the contrary, in his telex to Mr. Sekouti of January 22^nd, 1982, Mr. Backman advised Mr. Sekouti that the defendant had appointed a receiver, . . . "to protect assets."  He confirms further that Mr. Sanderson indicated that the defendant intends ". . . to try to save the company."

[109]    There was no follow-up by Mr. Backman with Mr. Sekouti on his telex of January 22^nd, 1982. The next time Mr. Backman sees or speaks with him is approximately one year later.

[110]    There were no requests for any additional delays made to the defendant by either of the plaintiffs.  No commitments of any kind were made by Invar or by the plaintiffs as to when, of if, they would ever repay the outstanding indebtedness. Moreover, there is no evidence that any negotiations were pursued by the plaintiffs with other potentially interested third party investors which could possibly have resulted in the injection of the needed additional working capital. 

[111]    In the circumstances, the Court finds that the defendant would have been within its rights after calling the loan, to take immediate measures to realize on its security.  The fact is, however, that the defendant nevertheless delayed taking such measures until February 4^th, 1982 and only then, after Invar had made its Assignment in bankruptcy, did it proceed to realize upon its security.

[112]    The obligation upon co-contracting parties to conduct themselves in good faith and to abstain from exercising their rights in an excessive and unreasonable manner, as imposed by the jurisprudence and now codified in the Quebec Civil Code,[4] is not a one-way street.  In any given contractual relationship between a bank and its customer, these obligations are mutual and are incumbent upon both parties.

[113]    Although the Court is satisfied that, in the circumstances, the defendant acted in a fair and reasonable manner and that it did not abuse its contractual rights, the same assessment cannot be made with respect to the plaintiffs' conduct in its dealings with the defendant, as far back as the summer of 1981.

[114]    As is more fully discussed in the following pages of the present judgement, the experts heard on behalf of each of the parties respectively, confirm that Invar was in serious need of a significant injection of additional working capital in order to continue its operations "as a going concern" - a minimum injection of $360,000.

[115]    The precarious nature of Invar's financial position is confirmed by plaintiffs' own expert, Mr. Donald J. Chazan of S.N.G. Consultants.  Commenting on his Balance Sheet analysis, he states at page 7 of his report:

"17,      Part I of Schedule VII focuses on Invar's liquidity.  Invar was in a working capital deficiency position throughout the second half of 1981.  Its current assets dropped from being 20% more than its current liabilities (on June 30, 1980) to 20% less than its current liabilities (on October 31, 1981 and December 31, 1981).  Invar's quick ratio -- in effect, its current ration, without accounting for inventory -- dropped from 0.9/1 (on June 30, 1980) to 0.4/1 (on October 31,1981), and increased slightly to 0.5/1 (on December 31, 1981).  From a liquidity perspective, the CIBC had reason to be concerned."

(the Court's emphasis)

[116]    Mr. Chazan pursues his Balance Sheet analyses and concludes at page 9 of his report:

". . . (F)rom a capitalisation perspective, the CIBC had reason to be concerned.  Furthermore the Bank was correct in insisting that the Backmans either put in additional equity capital into the Company or seek outside equity funding for Invar.  Invar's equity capitalisation, in the last quarter of 1981, was significantly below the level that it should have been, given the debt burden which the Company was carrying."

(the Court's emphasis)

[117]    In Houle v. Banque Canadienne Nationale[5], with respect to the right of a bank to recall its loan, L'Heureux-Dubé, J. wrote:

"The right to recall a loan as soon as financial difficulties are noticed is perhaps the key security for an institution or individual providing a rotating line of credit.  With the possibility of other creditors taking recourses that could preempt the lendor's rights, no creditor should have to be in a less advantageous position than any other.

In the present case, the bank's recall of the loan was taken after report was completed surrounding the financial circumstances of the company.  This report indicated that there were sufficient reasons for the bank to demand payment, and no evidence was adduced to indicate that the bank's conclusions were not reasonable.  The bank exercised its right to recall the loan after a reasoned decision, based on objective economic factors.  There is no evidence that there were any extraneous considerations to that decision and nothing demonstrates that the demand was made [translation] " without reasons based on the risk to his debt or his security".  It follows that the respondents have been unable to prove that the bank's decision was taken for reasons which it had not assessed in good faith and which were not pertinent.  Therefore, I must conclude that the recalling of the loan was not in itself an abuse of the bank's contractual rights.  That, however, is not the end of the matter.

(. . .)

When a bank recalls a loan, the demand for payment serves to put the debtor in default.  It this demand is to have any meaning, then there must be a reasonable time given to respondent to it.  There seems to be unanimity in Quebec doctrine on this subject, (…)

(. . .)

While, of course, it may be quite legitimate for a creditor to request immediate payment of a loan payable on demand, the principle of reasonable delay demands that such creditor not realize its securities or take possession of assets before giving the debtor, depending on the circumstances of each case, a reasonable delay to meet its obligations.  What must be examined are the sanctions taken by a creditor after the demand for payment, and the manner in which those sanctions are exercised."

[118]    The reasoning of L'Heureux-Dubé, J. is very much applicable to the present case save and except, however, that in the present case, for the reasons previously mentioned, the Court is of the view that a reasonable delay was granted between the time of the demand for payment made on January 20^th, 1982 and the crystallization of the taking of possession and the realization on the security which only occurred after February 4^th, 1982, following the filing of Invar's Assignment in bankruptcy.

[119]    The Court concludes that the defendant acted appropriately and in a reasonable manner in calling its loan, in taking possession and in realizing on its security.  It did not commit any fault which could engage its responsibility.

[120]    Accordingly, for this reason alone, the plaintiffs' action could be dismissed. However, the parties are entitled to a decision on the other salient questions in dispute raised in the present proceedings.  Accordingly, the Court will, under reserve, proceed to analyse each of them.

-     Relativity of contracts - As indirect shareholders of Invar, through the intermediary of a holding company interposed, do the plaintiffs have a sufficient legal interest to bring the present proceedings?

[121]    The plaintiffs claim damages from the defendant resulting from the alleged abusive and premature nature in which it recalled its loans to Invar and subsequently realized on its security.  As previously mentioned the plaintiffs, indirectly through their wholly-owned family holding corporation, were the controlling shareholders of Invar.  The contractual relationship relevant to the present proceedings was between Invar and the defendant.  With the exception of providing their personal guarantee for the indebtedness of Invar, the plaintiffs were not, in their personal capacities, parties to any of the agreements between Invar and the defendant.

[122]    In the circumstances of the present case, the Court is called upon to determine whether the plaintiffs, in their capacity as indirect shareholders of Invar, have a sufficient interest to institute the present proceedings founded upon an alleged breach of an agreement entered into between Invar and the defendant?  More particularly, the Court is called upon to determine whether, in the circumstances, it is appropriate to pierce the corporate veil on the basis that it was, in fact, with the plaintiffs personally and not Invar, that the defendant contracted?

[123]    The principle of the relativity of contracts has long been codified in Article 1023 of the Civil Code of Lower Canada[6] :

"Art. 1023.        Contracts have effect only between the contracting parties; they cannot affect third persons, except in the cases provided in the articles of the fifth section of this chapter."

[124]    Article 55 of the Code of Civil Procedure provides:

"55.      Whoever brings an action at law, whether for the enforcement of a right which is not recognized or is jeopardized or denied, or otherwise to obtain a pronouncement upon the existence of a legal situation, must have a sufficient interest therein."

(the Court's emphasis)

[125]    The right of a shareholder of a corporation to institute legal proceedings claiming damages suffered by the corporation has been addressed definitively in Houle[7].  On this subject, L'Heureux-Dubé, J.  writes at page 156:

"It follows logically that if the abuse of a contractual right is to give rise to contractual liability, then only the parties to the contract may claim for the breach of that contractual obligation.  Third parties are excluded from any such claim."

L'Heureux-Dubé, J. continues, at page 167:

"Conversely, since a claim for abuse of contractual rights is based solely on contractual grounds, the contracting parties alone have a right of action.  From this flows the conclusion that the respondent shareholders in the present case, given that it was the company which contracted with the bank, have no right of action based on the contract, for the abuse by the bank of those contractual rights.  Such action is only open to the company, a party to the contract."

[126]    On the matter of piercing the corporate veil, as is suggested by the plaintiffs, L'Heureux-Dubé, J. wrote at pages 178 to 180:

"Almost a century ago, the case of Salomon v. A. Salomon and Co., supra, established the concept of an independent legal personality of a corporation, and it is often this very fact that attracts individuals to incorporate.  The limitation of liability to the interest one possesses as a shareholder, with the resulting exclusion of certain personal liability for the debts of the corporation is a key feature of the corporate format, which carries other advantages, including fiscal ones.  However, by choosing the benefits of this business structure, individuals must be prepared to accept the necessary consequences.

One of these consequences is that it is the corporation which suffers damages when there is a wrong to the corporation.  As early as 1901, Lord Davey of the Privy Council expressed this principle, in Burland v. Earle, [1902] A.C. 83, at p. 93:

Again it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself.

(. . .)

This is a clearly established principle and, I conclude, the correct position concerning shareholders' recourses.

The consequences of any other position would not be logical.  There would be no value to the corporate structure if whoever dose business with a corporation would, at the same time, become liable not only to the company but also to every shareholder for any damage that may be caused to the company. Wilson J. in Kosmopoulos v. Constitution Incurance Co., [1987] 1 S.C.R. 2 , so says at p, 11:

Having chosen to receive the benefits of incorporation, he [Mr. Kosmopoulos] should not be allowed to escape its burdens.  He should not be permitted to "blow hot and cold" at the same time.

(. . .)

Given my earlier conclusion that an abuse of contractual rights gives rise to contractual liability, and my view that it is not appropriate in this case to lift the corporate veil, the respondents, as shareholders of the company, can have no right of action based on the contract itself.  If they are to have any claim, it must therefore be based on delictual liability."

[127]    In this regard, see as well: Banque de Montréal v. Bail Ltée [1992] 2 S.C.R. 554 ; St-Paul Fire & Marine Insurance Co. v. Parsons & Misiurak Construction Ltd. [1996] R.J.Q. 2925 (C.S.);  Harpin v. Lessard, J.E. 2000-1729 (C.S.); Tardif v. Huot, 2001 B.E.-454 (C.S.); andCoté v. Les Hebdos Transcontinental, C.S. Joliette, N^o. 705-05-003336-987, 6 November, 2002, Croteau, J.

[128]    Applying the reasoning of L'Heureux-Dubé, J. in Houle to the present case, the Court finds that the plaintiffs, as indirect shareholders of Invar, can have no right of action founded upon an alleged breach of a contractual relationship between Invar and the defendant.  Any possible right of action against the defendant which the plaintiffs might have had could arise only from their capacity as either:  (i) the assignees of the litigious rights of Invar's Trustee in bankruptcy, which were apparently assigned to them; or (ii) on the basis of some extra-contractual (delictual) liability of the defendant.

[129]    The Court concludes that, in their capacity as indirect shareholders of Invar, through the intermediary of a holding company interposed, the plaintiffs do not have a sufficient legal interest to bring the present proceedings.

-     What rights of action against the defendant, if any, were assigned to the plaintiffs by Invar's Trustee in bankruptcy? Were these rights of action prescribed?

[130]    The plaintiffs allege at paragraphs 7 and 8 of Plaintiffs' Second Re-Amended Declaration:

"7.        Without prejudice to the foregoing, and under strict reserves (sic) thereof, although Plaintiffs, contend that the facts herein permit them to act in their own names, should any portion of the claim herein be held to be a claim of the Company, Plaintiffs have been duly authorized to take any action in their own name for any claim of the Company against Defendant by judgment of the bankruptcy division of this Honourable Court rendered June 25, 1992, pursuant to s. 38 of the Bankruptcy Act…

8.          Plaintiffs have fulfilled all of the formalities of the said judgment such that they are entitled to proceed herein in their own names to the extent that same may be necessary."

[131]    As previously stated, the Rectified Judgment of June 25^th, 1992, was rendered without contestation in response to the plaintiffs' Petition for Permission to Proceed on Refusal of Trustee to Act.  Although, at the time, the defendant herein had appeared through counsel in the present proceedings, and although it had more than a passing interest in the subject matter of the Petition, it was not given notice of presentation of the plaintiffs' Petition and was not heard in connection therewith. 

[132]    Conceivably, if in terms of strict procedural law, the plaintiffs were not required to give notice of presentation to the defendant of their Petition, a wholly different outcome might have occurred had the defendant been given the opportunity, in the interests of justice and fair play, of raising the arguments which it now raises in the present proceedings.  Although the Court may have certain serious reservations concerning the propriety of obtaining the Rectified Judgment without notice to the defendant, it is not required to and will not express any views in connection therewith. Moreover, the defendant has not sought previously, or in these proceedings, a revocation of the Rectified Judgment.

[133]    The Rectified Judgment provided, inter alia,:

"ORDONNE au syndic de signer aux requérants et à tout créanciers participant une cession et transport de tous les droits, titres et intérêts dans les biens et droits qui font l'objet  de ces procédures et de fournir tout livre, registre ou autre document lorsque requis de ce faire." 

[134]    The Trustee assigned its rights to the plaintiffs on April 3^rd, 1995.

[135]    To succeed in its Petition for Permission to Proceed on Refusal of Trustee to Act, Section 38 of the Bankruptcy and Insolvency Act[8] prescribes certain essential pre-conditions, including, inter alia, that the petitioner:

(i)   be a creditor of the bankrupt with a valid claim provable in bankruptcy;

(ii)  obtain the prior authorization of the Court to take proceedings in its own name; and

(iii)obtain the subsequent assignment by the Trustee of the rights of the bankrupt.

[136]    These, as well as the other pre-conditions contained in Section 38, are not simply procedural requirements. They are essential substantive pre-conditions to the exercise of a right in law which is purely statutory in nature and accordingly, must be strictly adhered to[9].

[137]    It is more than curious that neither plaintiffs had not previously filed a Proof of Claim as creditors in the Invar bankruptcy and only chose to file their joint Proof of Claim as unsecured creditors of Invar in the amount of $205,000 on February 18^th, 1991, (some nine years following the date of bankruptcy) contemporaneously with their request to the Trustee to institute proceedings against the defendant.  They assert that their claim is the result of the alleged loss in equity in their principal residence following the sale by the Trustee in bankruptcy named pursuant to the personal Assignments in bankruptcy made by each of them.

[138]    The evidence in the present proceedings does not support the validity of plaintiffs' joint Proof of Claim and the Court can only speculate as to why the Trustee did not see fit to contest it.

[139]    With respect to the other pre-conditions, the authorization of the Court to take the proceedings is found in the Rectified Judgment ofJune 25^th, 1992; while the assignment of the rights of the Trustee to the plaintiffs is found in the Assignment and Transfer of Rights dated April 30^th, 1995.  

[140]    The litigious rights assigned by the Trustee relate to the right to sue for damages allegedly suffered by Invar resulting from the defendant's fault and for which it is being held accountable.  The events for which the defendant is being held accountable occurred in January 1982, some thirteen years prior to the Assignment and Transfer of Rights.  Pursuant to Article 2260 C.c.B.C [10], such actions are prescribed by five years.

[141]    The plaintiffs assert that On January 23^rd, 1984, at the time the present proceedings were instituted, Invar's right of action was not yet prescribed. The defendant contest this assertion.  Such may or may not be the case, depending on whether the commencement date for the purpose of calculating prescription is January 20^th, 1982, the date of the defendant's demand for payment, rather than on February 4^th, 1982, the date the defendant crystallized its security interest. 

[142]    However, this question is purely academic.  What is critical is the fact that at the time the plaintiffs commenced the present proceedings, they had yet to obtain the authority of the Court and had not complied with the other requirements of Section 38 of the Bankruptcy and Insolvency Act.  At that time, they had no legal interest and no status to institute the present proceedings.

[143]    The plaintiffs assert that the Assignment and Transfer of Rights dated April 30^th, 1995, had a retroactive effect such that they are deemed to have been authorized, ab initio, to commence the present proceedings as assignees of the Trustee's rights as of January 23^rd, 1984.   There is no legal justification for this assertion.

[144]    In B.N.R. Holdings Ltd. v. Royal Bank[11], writing for the British Columbia Court of Appeal, Seaton, J. wrote:

"In cases under s. 38, …the plaintiff has no claim to present. Until the trustee assigns the claim the plaintiff has no status to start the action. That is not a mere technical error. The plaintiff has no cause of action absent the assignment. It can only receive the assignment after complying with the statute."

[145]    In Bank of Montreal v. Elliott et al.[12], Brossard, J. wrote:

"Je n'ai, pour ma part, aucun doute que l'absence de l'autorisation de poursuivre, obligatoire en vertu de la loi, rend celui qui ne se conforme pas à cette obligation incapable de poursuivre légalement, frappe de nullité la poursuite ainsi engagée et que cette nullité se traduit, à l'égard du poursuivi, par un préjudice certain, qu'il soit ou non de droit, car rien, dans le litige ainsi engagé, ne peut remédier à cette nullité.

Je me permets de faire miennes ces remarques du juge en chef Galipeault, dans l'arrêt Gauthier v. Lacroix précité à la p. 491:

«J'avoue avoir, sur le banc, ressenti beaucoup de sympathie pour la demanderesse dont le recours, paraît-il, serait prescrit si le jugement n'était pas infirmé, et avoir éprouvé beaucoup de difficulté à refréner ce mouvement si naturel.

Je me rends compte en ce moment, qu'il faut songer au défendeur lui-même qui est en droit d'attendre des tribunaux l'application de la loi dans toute son intégrité, si, réellement, par la prescription reconnue par la loi qui n'a jamais protégé les négligents, il est en droit d'être libéré du recours exercé contre lui.  Les parties doivent rester avec les mêmes avantages, recevoir la même somme de justice.» "

 

[146]    The Trustee could only transfer to the plaintiffs those rights of action which were valid and existing as of the date of the Assignment and Transfer of Rights.  The plaintiffs could not, acting under the authority of the Assignment and Transfer of Rights granted after Invar's right of action against the defendant was prescribed, cause to be revived, that right of action, which had been extinguished some time ago by operation of prescription.  Accordingly the Court finds that for this additional reason, the plaintiffs' action should be dismissed.

(ii)What is the juridical foundation of the plaintiffs' extra-contractual (delictual) recourse?

[147]    The plaintiffs contend that the defendant, over and above its contractual obligations to Invar, owed to each of them a distinct and independent legal obligation.  They claim that as a direct result of the defendant's fault, they suffered a total loss in the value of their shareholdings in Invar, a loss of security of employment for themselves as well as for their two sons, a loss of personal income for one year, a loss of equity in the family home, damages to their reputation as well as pain and suffering, mental anguish and loss of enjoyment of life.

[148]    On this subject, L'heureux-Dubé, J. wrote in Houle, at page 182:[13]

"(. . .)  If the respondents are to succeed, they will have to show, on the facts of this case, that the appellant bank had a distinct legal obligation to act reasonably towards them independently of its contractual obligation towards the company.

Finally, I would note that, in all but the most exceptional circumstances, the recall of a loan or the delay given for payment after the recall of the loan, even when abusive, would not result in delictual liability towards shareholders of a company.  Only contractual liability towards the company would arise.  Although an abusive demand for payment may have harsh effects on shareholders, in order to anchor liability towards them under art. 1053 C.C.L.C., there must exist a legal obligation that transcends the contractual ones.

In this case, as in any other case of delictual or quasi-delictual liability based on art. 1053 C.C.L.C., liability can only be established if the claimant proves fault, damage, and causality. . .."

[149]    In Houle, based on the particular facts of the relationship between the parties, L'heureux-Dubé, J. concluded that the defendant did indeed have a distinct legal obligation, founded in delict, to act reasonably towards the plaintiff independently of its contractual obligation towards the company.  Having concluded that the defendant breached its obligations, the Court found delictual liability on the part of the defendant.  In the present case, the proof does not justify such a conclusion. 

[150]    The plaintiffs claim to have anticipated receiving from Mr. Sekouti, imminently, an offer to purchase 50% of the shares owned indirectly by them in Invar and that the acts of the bank in making formal demand for payment on January 20^th, 1982 resulted in the cancellation of the said offer.  Other than Mr. Backman's testimony on this subject, which is seriously lacking in precision, consistency and credibility, the evidence does not support plaintiffs' allegations.

[151]    The plaintiffs have the burden to prove, on the balance of probabilities, that the defendant's fault was the direct cause of the cancellation of Mr. Sekouti's purported offer to purchase.

[152]    In Uni-Sélect Inc. v. Acktion Corporation, Tessier, J. wrote:

"Uni-Sélect doit prouver de façon prépondérante que, sans la présence d'Acklands dans ce tableau, elle aurait probablement acheté McKerlie-Millen et que, ce faisant, elle aurait probablement réalisé des synergies profitables, sources de bénéfices, eu égard à l'ensemble de son patrimoine, dont elle est ainsi privée.  Le fardeau de preuve lui incombe (art. 1203 C.c.B.-C.), laquelle doit être prépondérante; est prépondérante la preuve qui rend l'existence d'un fait plus probable que son inexistence (art. 2804 C.c.Q.).

La certitude n'est pas requise, mais la simple possibilité ne suffit pas.  La prépondérance est la probabilité: «n'est prouvé que ce qui est certain, voire ce qui est probable, mais jamais ce qui n'est que possible et encore moins ce qui est imaginé.»

Le tribunal doit apprécier la force probante des faits pertinents, desquels il peut tirer une conclusion.  Ces faits doivent être suffisamment «graves, précis et concordants» pour établir la probabilité du fait à prouver.  Les faits sont graves, lorsque le fait à déterminer s'infère logiquement du fait connu; ils sont précis, lorsque le fait inconnu découle forcément du fait connu et ils sont concordants lorsque, ensemble, ils tendent à établir l'existence du fait inconnu.  Il faut vérifier si, de l'ensemble de la preuve -- à distingue de chacune de ses composantes -- se dégage des faits graves, prévis et concordants qui fondent une présomption de faits, à l'effet que, en l'absence d'Acklands, Uni-Sélect aurait probablement procédé à cette acquisition et en aurait probablement tiré un bénéfice à raison des synergies convoitées.

L'optimisme et la confiance dans le succès d'un projet d'affaires ne suffisent pas en soi à en rendre probable la réussite."[14]

[153]    The plaintiffs, having failed to discharge their burden in this respect, the Court must conclude that, for this additional reason, their action should be dismissed.

[154]    Under reserve of the plaintiffs' foregoing contentions and the Court's conclusion in connection therewith, the plaintiffs' right of action founded upon extra-contractual (delictual) liability should be dismissed, said right having been extinguished by reason of prescription.  As a delictual recourse, the right of action is subject to a two year prescription period.[15]  The present proceedings were commenced on January 23^rd, 1984.  The plaintiffs contend that the starting point for the purposes of calculating prescription should be the date the defendants proceeded to realize on their security, i. e. substantially after January 20^th, 1982.  The defendants argue that the starting point for any right of action, if one existed should be calculated as of January 20^th, 1982, the date demand for payment was first made by the defendant or at the latest, January 21^st, 1982, the date of taking of possession by the defendant's agent.

[155]    In light of the views expressed above, the Court is not required to, and accordingly will not, address this factual issue in depth.  Suffice to say however, that although the jurisprudence may not be unanimous on the subject, in the opinion of the Court, the view most appropriate in the circumstances of the present proceedings is that the starting point for the purposes of calculating prescription was the moment when the plaintiffs could have acted to protect their rights, allegedly abused by the defendant.  The day when the alleged prejudice first manifested itself was either January 20^th or 21^st, 1982.  Although the full extent of the plaintiffs' damages had yet to be determined, the right of action, if it existed, was surely born with the defendant's calling its loan.  According to the plaintiffs, this act was the direct cause of the damages claimed.

[156]    It is to be remembered that the present proceedings were only commenced on January 23^rd, 1984, more than two years following the calling of the loan.  Accordingly, for this additional reason, plaintiffs' action should be dismissed.

 

(iii) Assuming the existence of a valid contractual or extra-contractual (delictual) recourse, what damages are properly owing to the plaintiffs?

[157]    The plaintiffs have failed to substantiate their right to either a contractual or extra-contractual (delictual) recourse against the defendant. The defendant is not at fault for the damages claimed and will not be held liable for the payment of same.

[158]    Accordingly, the Court does not propose to consider, in detail, each of the heads of damages claimed.  Suffice it to say that the Plaintiffs have failed to discharge their burden in this regard.  The amounts claimed, even if the defendant were to be at fault, which is not the case, are grossly exaggerated, indirect and in some cases claimed by the plaintiffs on behalf of other entities or persons. However, for the purposes of the present judgement, it may be relevant to consider certain aspects of the expert reports filed on behalf of each of the parties, only insofar as they confirm the assessment of the precarious financial condition of Invar at the time the defendant called its loan as well as during the months preceding.

[159]    The Court heard extensive testimony from experts called on behalf of the plaintiffs and the defendant respectively.  Mr. Donald J. Chazan of the firm S.N.G. Consultants testified on behalf of the plaintiffs.  Mr. Laurier Duchesne of the firm Raymond Chabot Grant Thornton testified on behalf of the defendant.  Expert reports were filed by each of them.

[160]    Both expert reports and the testimony given in support thereof dealt with the fair market value of the issued and outstanding shares of the capital stock of Invar as at January 26^th, 1982.  It is to be recalled that the plaintiffs, in their Second Re-amended Declaration claim an amount of $750,000 representing the alleged "… value of Plaintiffs' shares in the Company…"

[161]    Both Mr. Chazan and Mr. Duchesne are skilled professionals in their field.  Although they may arrive at significantly different conclusions with respect to valuations, the Court finds their respective expert reports and testimony to be both clear and credible.

[162]    Notwithstanding that the experts do not concur on the fair market value of Invar as at January 26^th, 1982, certain salient observations, similar in nature, are to found in each of their reports.  These common findings are most enlightening, particularly with respect to the serious under-capitalization of Invar and the urgency that the situation be remedied.

[163]    As to his conclusions concerning the fair market value of the Invar shares, Mr. Chazan writes at page 2 of his expert report:

"                                             Conclusion

Subject to the restrictions, disclaimers and assumptions noted in this report, and based on the information reviewed and relied upon (as noted herein), in our opinion, the "en bloc" fair market value of the Shares of the Company as at the Valuation Date, and unadjusted for the time value of money since January 26, 1982, ranges from $440,000 to $470,000 (see Schedule I)"

(the Court's emphasis)

[164]    As for Mr. Duchesne, his conclusions are found at page 2 of his expert report and read as follows:

 

"                                           2. Conclusion

"En nous appuyant sur les documents qui nous ont été soumis et que nous avons examines, sur les explications reçues et sur les analyses que nous avons effectuées, et compte tenu des hypothèses, réserves et limites notes dans ce rapport, nous somme d'avis que la juste valeur marchande du capital-action de la Société au 26 janvier 1982 se situait entre la valeur nominale de 1,00 $ et 50 000 $.  Nous présentons au chapitre 10.4 l'analyse et les raisons à l'appui de nos conclusions."

(the Court's emphasis)

[165]    The reasons for the significant variance in the valuation of the Invar shares as at January 26^th, 1982 is explained by the differences in the assumptions made and the methodology followed by each of the experts. 

[166]    What is most relevant and worthy of noting, however, is that in the case of both experts, the valuation arrived at is predicated on the assumption that an amount of not less than $360,000 of fresh capital must be injected into the Corporation.  Both experts agree that failing an injection of an amount of not less than $360,000 in additional working capital, the Invar shares would have a negative value and it would not be possible to value the shares "on a going concern basis."

[167]    Mr. Chazan, in his calculation of the fair market value of the Invar shares, incorporates in Schedule I of his expert report, the following adjustment:

"Working capital adjustment to yield a ratio of 1.1 : 1as at December 31,1981  (330,000)"

(the Court's emphasis)

[168]    In his testimony he confirms that even the amount of $360,000 may be inadequate and that, moreover, without this adjustment, (read injection), it would be impossible to express the value of the Invar shares "on a going concern basis " because the Invar shares would have a negative value.

[169]    Mr. Duchesne, in Annexe 1 of his expert report comes to a similar conclusion.  He incorporates a "theoretical injection of capital" of $360,000 and justifies his assumption in Note 6 contained in Annexe 3.1 of his expert report.  With respect to this adjustment, he notes:

"Injection théorique de capital minimale afin de redresser le fonds de roulement au minimum exigé par le prêteur à long terme (1,15)."

[170]    Although from a hypothetical and intellectual perspective the analysis of each of the experts, predicated on the assumption of a theoretical injection of a minimum additional working capital of $360,000 may be interesting, such assumption is unrealistic and accordingly cannot be retained.  The proof does not support the likelihood of an investment of such magnitude being available and forthcoming.

[171]      Accordingly, it matters not whether the Court might be disposed to agree with Mr. Chazen's methodology and valuation or that of Mr. Duchesne, in light of the critical assumption made by each of them, with respect to the need for an injection of additional working capital and the unlikelihood of such occurrence, neither valuation can be retained.

[172]    Moreover, seeing the Court's conclusions with respect to the absence fault and liability on the part of the defendant, it is not necessary to determine the appropriate fair market value to be attributed to the Invar shares.

 (iv) If the Court were to award damages in favour of the plaintiffs, in light of the release granted by the plaintiffs in favour of former solidary co-defendants, RoyNat Inc. and the Montreal Trust Company, should the Court reduce the amount otherwise payable to the plaintiffs by the share of those defendants they have released?

[173]    The present proceedings were originally commenced on January 23^rd, 1984, against the defendant, as well as against RoyNat Inc. and the Montreal Trust Company.  The plaintiffs claimed damages from all three defendants solidarily in the amount of $2,875,000 plus an additional amount of $ 230,000 on behalf of Mrs. Backman personally. As between the original defendants, the plaintiffs do not apportion their respective degrees of responsibility.

[174]    On June 30^th, 1987, the plaintiffs discontinued their action against RoyNat Inc. and the Montreal Trust Company and granted to each of them an unqualified full and final quittance.

[175]    Article 1184 C.c.B.C. provides:

"An express release granted in favour of one of joint and several debtors does not discharge the others; but the creditor must deduct from the debt the share of him whom he has released."

[176]    The defendant is entitled to benefit from the quittance granted by the plaintiffs to the two former co-defendants by having its liability to the plaintiffs, if any, reduced presumably by 2/3 of the claim.  Solidarity among debtors is presumed in commercial transactions[16]. However, although solidarity may be presumed, and accordingly the creditor may benefit from the consequences of solidarity, as between the co-debtors their rights and obligations inter se may vary from case to case and according to the degree of responsibility of each of them respectively for the damages to the plaintiff. 

[177]    In the present proceedings, seeing the discontinuation against the two former co-defendants and the absence of any evidence as to the apportionment of responsibility for the damages initially claimed by the plaintiffs against all three of the co-defendants, had the Court maintained plaintiffs' action against the sole remaining defendant, it would have been unable to apportion as between the original co-defendants inter se their respective degrees of responsibility and the corresponding deduction that must be made representing the share of those whom the plaintiffs had released.   

[178]    However, for the same reasons previously expressed, the Court is not required to deal with this issue.  The defendant is not at fault and will not be held liable for the payment of the damages claimed.

(v)If the Court were to award damages in favour of the plaintiffs, should it also award the "Additional indemnity" contemplated by articles 1056 c. and 1078.1 C.c.B.-C.?

[179]    The plaintiffs seek judgment in the amount of $1,400,000 with interest calculated thereon from the date of default in accordance with Articles 1056c and/or 1078.1(C.c.B.C.). 

[180]    Even if the plaintiffs' action were well founded, which is not the case, and assuming the Court would have awarded damages in their favour, the Court would not have awarded the additional indemnity, for the following reasons.

[181]    The additional indemnity calculated in accordance with articles 1056c or 1078.1 C.c.B.C. is not awarded automatically. It is subject to the discretion of the Court, exercised according to the circumstances in each case.

[182]    The present proceedings were commenced on January 23^rd, 1984.  An examination of the Plumitif Civil confirms that, without exception, the plaintiffs alone are solely responsible for the delays in seeing that the proceedings were put en état and inscribed for proof and hearing.  A delay of approximately sixteen years occurred between the commencement of the proceedings and the filing of the Inscription for Proof and Hearing.

[183]    The Court would have, moreover, refused to award the additional indemnity because the amounts claimed in the initial action were so grossly exaggerated that the seriousness of the plaintiffs' claims are indeed put in doubt.  In the initial Declaration, the plaintiffs claimed a total amount of $3,105,000.  This amount, in the circumstances of the present proceedings and in light of the evidence is, by the stretch of the imagination of the most skilled practitioner, grossly exaggerated, unrealistic and, perhaps, abusive.  By the time their Second Re-Amended Declaration is filed, the plaintiffs' claim is reduced to $1,400,000.  Even this reduced amount is far from being sustainable, based on the evidence.

[184]    The plaintiffs allege the delays in bringing their action to trial were due to their lack of adequate funding to support the litigation. The Court is not satisfied that, in the circumstances, this reason is fully justified or accurate.  With respect to the exaggerated amount of the initial claim, no explanation is offered to justify the original excessive amount and as to why the claim is subsequently reduced to less than half the original amount.

[185]    The defendant should not be penalized for the plaintiffs' inaction and grossly exaggerated claims[17].  Accordingly, the Court would not have awarded the additional indemnity as requested by the plaintiffs had the Court been disposed to maintain the plaintiffs' action.

 

VI.        COSTS OF DEFENDANT'S EXPERT WITNESSES

[186]    The defendant asks that the plaintiffs' action be dismissed with costs.  Expert evidence was heard on behalf of each of the parties.  As at October 25^th, 2002, the defendant's experts, Raymond Chabot Grant Thornton, have billed the defendant a total amount of $86,146.91 for their services in these proceedings; the whole as is detailed in the following statements of account:

November 5, 2001	$42,473.96
October 25, 2002	$43,672.95

[187]    The statements of account are not contested.  In light of the complexity of the questions of valuation and finance raised in the present proceedings and considering the importance of the expert reports and the testimony given in support thereof, the Court considers the amounts charged to be fair and reasonable.

 

[188]    FOR THESE REASONS, THE COURT:

[189]    DISMISSES the plaintiffs' action;

[190]    THE WHOLE with costs, including without limitation, the costs of expert witnesses fixed at $86,146.91.

 

	__________________________________ JOEL A. SILCOFF, J.S.C.

 

Mtre Lazar Sarna Mtre Asher Neudorfer
Sarna, Neudorfer
Mtre Robert Hackett
Paquette, Gadler
Attorneys for Plaintiffs
Mtre Suzanne Côté Mtre Fabrice Benoit
Stikeman, Elliott
Attorneys for Defendant
Dates of hearing:	October 21st to 31st  2002 inclusively.