DATE: 20030926

DOCKET: C38339-C38404

COURT OF APPEAL FOR ONTARIO

RE: C.C. PETROLEUM LIMITED, c.o.b. as BUDGET PETROLEUM (Plaintiff/Respondents) v. KAREN ALLEN, YVETTE ALLEN, ROBERT ALLEN, and EDWARD ALLEN JR. (Defendants/ Appellants)

BEFORE: CARTHY, DOHERTY and SHARPE JJ.A.

COUNSEL: Kenneth Jull for Karen Allen and Yvette Allen

Paul Le Vay and Brendan Van Niejenhuis for Robert Allen and Edward Allen Jr.

Hillel David and Richard Howell for the respondent

HEARD: September 2 and 3, 2003

On appeal from the judgment of Justice John O’Driscoll of the Superior Court of Justice dated June 5, 2002.

E N D O R S E M E N T

[1] The male appellants are brothers and are married to the female appellants. The brothers operated Payrite Petroleums (Payrite) which was in the business of supplying gasoline to retailers. Their wives owned all of the shares of Payrite and were also secured creditors of the company.

[2] The respondent (Budget) supplied gasoline to Payrite on terms which required Payrite to pay Budget some seven or eight days after delivery of the gas. Payrite was constantly indebted to Budget in varying, but always, large amounts. Although Budget had security for this indebtedness at one time, it had no security in the fall of 1996.

[1] By September 1996, Payrite was in serious financial difficulty and was in all likelihood insolvent. The brothers began to “kite” cheques among the various Payrite bank accounts, thereby increasing the apparent cash flow and camouflaging to some extent the financial difficulties of Payrite. Between September 1996 and early January 1997, Payrite continued to purchase gasoline from Budget and pay for it in accordance with the arrangement described above.

[2] On January 2, 1997, the female appellants wrote to Payrite acknowledging the Payrite’s dire financial straits and demanding immediate payment of the money owed to them by Payrite. The demand was served on the male appellants on January 9, 1997.

[3] The male appellants continued to order gasoline from Budget for about two weeks after receiving the demand letter. They gave Budget three cheques to cover some of the deliveries, but those cheques were not honoured. No cheques were provided for other deliveries made after January 9. The total value of the gasoline delivered by Budget after January 9, 1997 less provincial and federal taxes was $539,658.41. This was the amount awarded in damages by the trial judge.

[4] The cheque “kiting” was discontinued on about January 20,1997. Instead of continuing to circulate cash among the various accounts, the brothers caused about $400,000 to be paid out to themselves, their wives and their lawyers. Most of that money came from Payrite’s sale of the gasoline it acquired, but did not pay for, from Budget after January 9, 1997.

[5] In late January 1997, on motion by the female appellants, a private receiver was installed over the affairs of Payrite. A month later, Budget brought proceedings to petition Payrite into bankruptcy. Payrite was eventually petitioned into bankruptcy in July of 1997. This action has proceeded pursuant to an assignment to Budget by the trustee in bankruptcy of Payrite.

[6] At trial Budget alleged fraud and sought relief under the oppression provisions of the Business Corporations Act, R.S.O. 1990 c. B.16.

[7] In finding that Budget had established fraud, the trial judge said:

Here, the plaintiff had suffered grave economic loss as the result of the kiting operation…

From September 1996 to the end of January 1997, the defendants caused Payrite to purchase petroleum products from the plaintiff and Brown Fuels Ltd. knowing that Payrite was insolvent and with intent not to pay and with the intent of using the funds generated to pay themselves or others.

[8] The “kiting” of the cheques did not constitute a misrepresentation made by the appellants to Budget. Nor did the “kiting” cause Budget any economic loss. If anything, the “kiting” allowed Payrite to continue to pay its suppliers, including Budget, at the risk of economic loss to the banks. The “kiting” activity was properly part of the case, in that it demonstrated Payrite’s dire financial condition and served as a prelude to the events of January 1997. It did not however establish any fraud by the appellants against Budget.

[9] The trial judge also made a factual error when he found that there was no intention to pay Budget for its product from September 1996 to the end of January 1997. Budget was paid for all of its products until January 9, 1997. It was only after January 9 that the payments ceased.

[10] Despite the errors referred to above, we would uphold the trial judge’s finding of fraud and the damages awarded by him. It was common ground that Payrite received gasoline from Budget, sold it, and did not pay Budget for the gasoline. The detriment to Budget is obvious. There can also be no doubt that the gasoline was acquired from Budget on the basis of an implied representation by Payrite that it would pay for the gas in accordance with the established arrangement between Payrite and Budget. The crucial question insofar as the allegation of fraud was concerned was whether some, or all, of the appellants knew when the orders were placed that Payrite would not pay for the gasoline in due course and in accordance with the established arrangement.

[11] The evidence establishes beyond any question that all of the appellants knew that Payrite could not continue as a going concern after January 2, 1997, unless the female appellants were prepared to forego repayment of their debt. The evidence is equally clear that all appellants knew that the female appellants were not prepared to forego payment. The evidence also establishes beyond any doubt that the brothers continued to order gasoline from Budget as if it was business as usual, knowing full well that Payrite could not continue to operate. Finally, the evidence demonstrates that the brothers used money generated by the sale of the unpaid for gasoline to pay themselves, to repay debts owed to the female appellants, and to pay legal fees knowing full well that Budget would not be paid.

[12] The evidence also demonstrates that when the female appellants made their formal demand for repayment on Payrite they had no expectation that Payrite could repay its debt. Nonetheless, the female appellants did not act on their demand for some three weeks and instead allowed their husbands to continue to operate Payrite as if it was business as usual. During this period, the husbands accumulated significant cash through the sale of Budget’s gasoline and used that money for the benefit of themselves, their wives and their lawyer.

[13] On the totality of the evidence, the only reasonable conclusion is that the appellants had jointly decided to continue to order gasoline from Budget knowing full well that it would not be paid for, with the intention of using the funds generated by the sale of the gasoline to improve their own financial situation. On the evidence, a finding of fraud based on the gasoline purchases after January 9, 1997, was virtually unavoidable. The damages awarded by the trial judge are the appropriate measure of that fraud.

[14] As a creditor Budget did not have automatic standing to bring an oppression remedy under the Business Corporations Act. It could do so only at the discretion of the court. Given that the fraud claim provided an avenue for full vindication of Budget’s claim, we see no reason to have granted Budget standing under the Business Corporations Act. The trial judge made no order under that Act except to declare the conduct oppressive. That paragraph of the judgment should be struck.

[15] The trial judge awarded punitive damages against the appellants in the amount of $300,000. The propriety of that award is questionable on the facts as found by the trial judge. There is, however, no basis for an award of punitive damages when the fraud against Budget is limited to the events after January 9, 1997 and, in particular, to Payrite’s failure to pay for the gasoline delivered to it by Budget after January 9, 1997: see Performance Industries Ltd. v. Sylvan Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678 at 710-714.

[16] The trial judge also ordered that the secured claim of the female appellants against Payrite should be subordinated to the unsecured claim of Budget. It is an open question whether the trial judge had jurisdiction to subordinate the female appellants’ secured claims to the unsecured claims of Budget. We were advised, in the course of argument that the female appellants were paid by the trustee in bankruptcy long ago. The subordination order made by the trial judge is, therefore, of no consequence. Given the uncertain state of the law on this point, that portion of the judgment should be deleted as it is unnecessary.

[17] The appeal is allowed in part, the trial judgment is varied by deleting paragraphs 2, 3 and 4.

[18] As success on the appeal is divided, there will be no order of costs on the appeal.

“J.J. Carthy J.A.”

“Doherty J.A.”

“Robert J. Sharpe J.A.”