COURT FILE NO.: CV-12-9777-00CL

DATE: 2013-11-06

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Salvatore Fuda, Plaintiff

- v. -

Jim McIntosh Petroleum Engineering Ltd., Echo Energy Canada Inc., Gary Conn, Robert Moore, Robert Gilmore, and David Johnstone, Defendants

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL:
Patricia Virc and Jacob Mufad, for the Plaintiff

Gary W. Gibbs and Carina Lentsch, for the Defendant Jim McIntosh Petroleum Engineering Ltd.

Catherine Patterson, for the Defendants Gary Conn, Robert Moore and David Johnstone

Linda Smits, for the Defendant Robert Gilmore

HEARD: April 8, 9, 10, 16 and 17, 2013

ENDORSEMENT

Introduction

[1] On this motion, the plaintiff, a former director and chairman of the board of Echo Energy Canada Inc., seeks summary judgment in his favour of his claims against three former directors of the corporation, Gary Conn, Robert Moore and Daniel Johnstone, its former chief financial officer, Robert Gilmore, and its former petroleum engineering consultant, Jim McIntosh Petroleum Engineering Ltd. The action arises out of the plaintiff’s investment in shares in the corporation by way of participation in a private placement that closed in March 2008. The plaintiff’s investment became worthless after a receiver was appointed over the corporation’s assets in October 2010, and the assets were sold to a third party in March 2011. The plaintiff alleges a number of claims in negligent misrepresentation against the defendants. The defendants seek summary judgment in their favour dismissing the plaintiff’s action on a number of grounds, including an absence of a duty of care and an inability to establish reliance on any negligent misrepresentation, as well as the operation of applicable limitation periods.

BACKGROUND

The Parties

[2] Echo Energy Canada Inc. (“Echo”) was a public company listed on the TSX Venture Exchange having natural gas production operations in Ontario.

[3] The plaintiff, Salvatore Fuda (“Fuda” or the “plaintiff”) was a director of Echo from 2004 until his resignation in 2009. He was also the chairman of the board of directors from 2004 until his removal on December 31, 2007, and from December 4, 2008, when he was reinstated, until his subsequent resignation from the board.

[4] Gary Conn (“Conn”) was the chief executive officer and president of Echo from 2004 until December 2008. During that period, he also served as a director and a member of the reserves committee of the board of directors from March 3, 2005, onward.

[5] Robert Moore (“Moore”) was a director of Echo from 2004 until December 2008. He also served on the reserves committee of the board of directors from March 3, 2005, and the audit committee from June 29, 2006.

[6] David Johnstone (“Johnstone”) was a director of Echo from June 2006 until December 2008. He also served on the reserves committee and the audit committee of the board of directors from June 29, 2006. Johnstone is also the sole director and shareholder of T.W. Johnstone Company (“TWJ”), a corporation that constructed Echo’s pipeline and gathering system.

[7] Robert Gilmore (“Gilmore”) was engaged by Echo in October 2004 to provide accounting services to it, initially on an independent contractor basis. From January 2005 until his resignation in September 2008, Gilmore was the chief financial officer of Echo. He was neither a member of the board of directors nor a member of the reserves committee of the aboard.

[8] Oliver Nepomuceno (“Nepomuceno”) is a business associate of Fuda. Nepomuceno was a director of Echo from 2004 until his resignation subsequent to the events giving rise to this action. He served on the audit committee of the board of directors from June 29, 2006.

[9] Joseph Fuda is the son of Fuda. He was a director of Echo from 2004 until his resignation in 2010.

[10] James McIntosh (“McIntosh”) is a petroleum engineer who has carried on business through the defendant Jim McIntosh Petroleum Engineering Ltd. (“McIntoshCo”). McIntoshCo provided engineering reports to Echo regarding Echo’s gas reserves between 2004 and 2008 as described below. McIntoshCo also designed Echo’s pipeline and gathering system and supervised its construction.

[11] Challenge Gas Holding AB (“Challenge”) is a corporation incorporated under the laws of Sweden. It is understood that Challenge is owed, as to 51%, by Nepomuceno and, as to 49%, by the Fuda 2002 Family Trust. Exclusive Asset Management Inc. (“Exclusive”) is a corporation which is owned by Fuda.

[12] Challenge and Exclusive collectively owned approximately 31% of the outstanding common shares of Echo. In November 2007, Challenge, Exclusive and other shareholders associated with Fuda and Nepomuceno (collectively, the “Fuda Group”) owned or controlled 52% of the outstanding common shares of Echo.

Formation of Echo

[13] Echo is the continuing corporation resulting from the amalgamation in August 2004 of Echo Energy Inc. (“EEI”) and Pifher Resources Inc. (“Pifher”).

[14] EEI had been incorporated in 2000 to acquire certain oil and gas leases in Bayham Township, Ontario from a third party. By October 2003, EEI had approximately 29,000 acres under lease in Bayham and Malahide Townships. By June 2004, it had drilled 40 gas wells on this land. The board of directors of EEI consisted of Fuda, Joseph Fuda, Nepomuceno and Conn. Fuda was the chairman of the board and Conn was the president.

[15] Pifher had been incorporated in 1997. In 2001, Pifher started acquiring oil and gas leases. By October 2003, it had acquired leases on approximately 10,000 acres in Houghton Township, Ontario. By June 2004, it had drilled 19 gas wells on its lands and had acquired three existing wells. In 2004, Fuda was the chairman of the board of Pifher. At that time, Pifher was a public company whose shares were listed on the TSX Venture Exchange. The board of directors of Pifher consisted of Fuda, Joseph Fuda, Moore, Conn, Andrew Brandt (“Brandt”), a long-time friend of Fuda, and George Chilian.

[16] In February 2003, EEI and Pifher entered into a non-binding letter of intent respecting a proposed amalgamation of the parties. As Pifher was a public company, an independent committee of the board of directors of Pifher was formed consisting of Brandt and Moore to consider the terms of the proposed amalgamation (the “Independent Committee”). The Independent Committee engaged Dundee Securities Corporation (“Dundee”) to provide an opinion regarding the fairness of the amalgamation, from a financial point of view, to the minority shareholders of Pifher.

[17] In giving its opinion, Dundee relied, among other things, on: (1) reserve reports for Pifher and EEI prepared by R.B. Hutt (collectively, the “Hutt Report”); and (2) engineering valuation reports of the natural gas reserves and resulting cash flow prepared by McIntoshCo for Pifher and EEI as of December 31, 2003, in accordance with National Policy 2B under the Securities Act, R.S.O. 1990, c. S.5 (collectively, the “Initial December 2003 Report”). While the Hutt Report is in evidence, the relationship between the Hutt Report and the McIntoshCo reports which were prepared in reliance on the Hutt Report has not been made clear to the Court.

[18] The Initial December 2003 Report for Pifher was revised in February 2004 by McIntoshCo to comply with National Instrument 51‑101 (“NI 51‑101”), which came into effect in respect of Pifher after it filed its financial statements for the year ended December 31, 2003. The engineering reports of McIntoshCo for Pifher prepared as of December 31, 2003, in compliance with NI 51‑101, and for EEI prepared as of December 31, 2003, in compliance with National Policy 2B, are herein referred to as the “December 2003 Report”.

[19] In June 2004, the boards of EEI and Pifher issued a joint management information circular (the “Circular”) respecting proposed meetings of shareholders to approve the proposed amalgamation. The Circular contained, among other things, the Dundee fairness opinion described above and the December 2003 Reports.

[20] As mentioned, the amalgamation was completed in August 2004. The directors of the amalgamated entity, Echo, were Conn, Fuda, Joseph Fuda, Brandt, Moore, Nepomuceno and Michael Hunter, the operations manager (“Hunter”). Fuda directly and indirectly owned 21.7% of the outstanding shares of Echo through his ownership in, or control of shares of, Challenge and Exclusive and Nepomuceno indirectly owned 11% of the outstanding shares through his ownership of shares of Challenge. Conn owned 2.5% of the outstanding common shares of Echo.

(Complete text continues exactly as in the source, ending with:)

Wilton‑Siegel, J.

Date: November 6, 2013