COURT FILE NO.: CV-16-551366
DATE: 20211215
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
GEORGE LESLIE KEMENY
Plaintiff
– and –
CALLIDUS CAPITAL CORPORATION
Defendant
Michael P. Farace, for the Plaintiff
John D. Leslie and Mordy Mednick, for the Defendant
HEARD: April 12, 13, 14, 15 and 16 and June 16, 2021
STEWART J.
Nature of the Action
[1] The plaintiff George Leslie Kemeny (“Kemeny”) has brought this action against Callidus Capital Corporation (“Callidus”) and seeks enforcement against Callidus of an Irrevocable Direction executed by Esco Marine Inc. (“Esco”) and acknowledged by Callidus with respect to payment of fees for services to Kemeny.
[2] Callidus takes the position that it is not liable under the Irrevocable Direction or pursuant to any other argument advanced by Kemeny to justify recovery of the fees for services said to be owing to him from anyone other than Esco. Callidus argues that Esco agreed to pay Kemeny his fees, not Callidus.
Facts
[3] Until 2010, Kemeny had been Chief Financial Officer of Esco. At the time the events giving rise to his claim occurred, he was an independent professional financial advisor and consultant.
[4] Esco is a company incorporated in Texas, U.S.A. In April of 2014 Kemeny was engaged by Esco to assist in its efforts to obtain alternate financing for its operations.
[5] Callidus is a company incorporated in Ontario and provides lending solutions to businesses that cannot obtain financing from more traditional funding sources. It is not unusual for such businesses to require such funding when experiencing some financial distress, as Esco apparently was.
[6] As a result of Kemeny’s past dealings and discussions with Mark Wilk, Vice-President of Callidus (“Wilk”), Kemeny believed that Esco’s financing needs were of the type suitable to be addressed by Callidus.
[7] Kemeny made contact with Wilk for the purpose of arranging for Callidus to consider providing funding to Esco. Kemeny devoted his time to these arrangements and travelled to Texas to pursue them. The subsequent negotiations between Esco and Callidus as initiated by Kemeny advanced swiftly and appeared destined to result in a loan agreement. These negotiations were subject to confidentiality requirements and non-disclosure obligations.
[8] An Irrevocable Direction was prepared to govern payment of Kemeny’s compensation for his efforts in bringing the parties together and facilitating negotiations, as follows:
IRREVOCABLE DIRECTION
To: CALLIDUS CAPITAL CORPORATION
TD North Tower, 4320 – 77 King Street West
PO Box 212
Toronto, ON M5K 1K2
Attn: Mark Wilk
Vice President
AND TO: GEORGE LESLIE KEMENY (or as he may further direct in writing) (the “Consultant”)
RE: Credit Facility (the “Facility”) to be granted by CALLIDUS CAPITAL CORPORATION, or its affiliate/related party (the “Lender”) to ESCO MARINE INC. (the “Borrower”)
For $1.00 and other good and valuable consideration, the receipt from each of you and sufficiency of which is hereby acknowledged, the undersigned Borrower hereby irrevocably directs the Lender to pay to the Consultant, upon the closing of the Facility directly from the proceeds of the first drawdown made by the Borrower in connection with the Facility (and without further authorization from the Borrower) the sum of two per cent (2%) of the authorized amount of the Facility (regardless of whether a lesser amount is actually drawn down on closing or not), and such amount shall be held in trust for, and the property of, the Consultant, and this shall be your good and sufficient authority to do so. This Irrevocable Direction shall be governed and construed in accordance with the laws of the Province of Ontario Canada and the parties attorn to the exclusive jurisdiction of the Court of the Province of Ontario. This Irrevocable Direction may be executed in counterparts.
LENDER ACKNOWLEDGEMENT
Acknowledged by the Lender this _________ day of May, 2014.
CALLIDUS CAPITAL CORPORATION
Per:_________________________
Mark J. Wilk
Vice President
[9] A copy of this Irrevocable Direction had been prepared in draft by Kemeny’s lawyer and provided by Kemeny to Wilk for his review, editing and approval prior to its execution by any party.
[10] Wilk was free at any time to discuss the existence and contents of the Irrevocable Direction with anyone at Callidus he may have chosen to contact for that purpose.
[11] Wilk had suggested changes to the wording of the Irrevocable Direction and Kemeny’s lawyer had revised the document accordingly to adopt those suggestions.
[12] On May 1, 2014 the Irrevocable Direction was signed on behalf of Esco.
[13] On May 4, 2014 Kemeny provided Wilk with a copy of the Irrevocable Direction for execution by Callidus. The document was then signed by Wilk as Vice-President of Callidus under the heading of “Lender Acknowledgement”.
[14] At no time did Wilk ever suggest to Kemeny, either while discussing the Irrevocable Direction with him or at the time of signing it, that he did not or might not have authority to execute the document on behalf of Callidus.
[15] Given Wilk’s title as Vice-President of Callidus, and his being the sole person on behalf of Callidus engaged in the loan arrangements and preparation of the Irrevocable Direction, Kemeny believed that Wilk had the authority to enter into a binding agreement on behalf of Callidus and that Wilk had held himself out as having such authority.
[16] On June 20, 2014, an email was sent from Kemeny’s lawyer to Wilk attaching a letter regarding the Irrevocable Direction and requesting that the funds payable to Kemeny pursuant to the Irrevocable Direction be wired to him to be placed into his law firm’s trust account.
[17] On June 27, 2014, emails were exchanged between Wilk and Esco regarding a purported insufficient “availability” to pay Kemeny pursuant to the Irrevocable Direction.
[18] On that same date, emails were exchanged between Esco and Kemeny regarding Kemeny’s fee and advising that Callidus was taking the position that Kemeny’s demand for his fee presented a threat to the provision of any loan funds to Esco.
[19] Further emails were then exchanged between Wilk, Esco and Kemeny in which Callidus took the bald position that the Irrevocable Direction was not binding upon it. However, in his email of June 27, 2014 Wilk had stated: “We have consulted with our solicitors on the matter and they are of the opinion that Callidus may be subject to a lawsuit if the full amount of the funds are not sent to Les (Kemeny) at close”, thus suggesting at the very least an awareness of a potential liability.
[20] On June 27 and 28, 2014, additional emails were exchanged between Esco and Wilk in an effort to achieve a downward adjustment of what fee was to be paid to Kemeny pursuant to the Irrevocable Direction.
[21] On June 30, 2014 Kemeny sent an email to Callidus attaching an Acknowledgement prepared by Kemeny’s lawyer as had been requested by Callidus and Esco. The Acknowledgement reflected Kemeny’s willingness to accept a reduced fee (US$400,000.00) on certain terms as contained therein. This Acknowledgement stated as follows:
ACKNOWLEDGEMENT
TO: CALLIDUS CAPITAL CORPORATION (“Callidus”)
TD North Tower, 4320 – 77 King Street West
PO Box 212
Toronto, ON M5K 1K2
Attn: Mark Wilk
Vice President
AND TO: ESCO MARINE INC. (“Esco”)
16200 Joe G Garza Sr Rd.
Brownsville, TX 78521
Attn: Richard Jaross
Chairman
RE: Irrevocable Direction dated May 1, 2014 executed by Esco and acknowledged by Callidus in favour of the undersigned (“the Irrevocable Direction”)
The undersigned, George Leslie Kemeny (the “Undersigned”) confirms that upon receipt of the sum of $400,000 wired directly from Callidus to the undersigned’s solicitors (wire instructions attached as Schedule “A”) as part of the closing disbursements in connection with the closing of various loans made by Callidus to Esco that:
Notwithstanding anything contained in the Irrevocable Direction, the terms of the Irrevocable Direction shall be deemed to have been complied with in full; and
Esco and the undersigned shall be deemed to have released each other of all claims in respect of the Irrevocable Directions and payments made in connection therewith.
Failure to pay the amount of USD$400,000 as set out above shall result in the Irrevocable Direction remaining in full force and effect, unamended.
[22] Pursuant to this Acknowledgment Kemeny was prepared to accept the reduced amount if paid to him immediately at closing in accordance with the terms of the document. If not, the full terms of the Irrevocable Direction would remain in effect.
[23] On June 30, 2014, Callidus and Esco executed their loan agreement with respect to the provision by Callidus of a credit facility to Esco in the amount of approximately US$33,990,000.00.
[24] Callidus then made a series of loan advances to Esco in the amount of approximately US$22,000,000.00.
[25] Despite these advances and the discussions and correspondence that had preceded them, Callidus informed Kemeny once again by email that there was no “availability” to fund the fee payable to him. In Callidus’ estimation, the fact that the full amount of the advances had been earmarked by it to pay off all secured creditors so as to place Callidus in a sole first priority secured position, and its evident determination to pay various other substantial fees to itself and to a long list of advisors and other professionals, somehow excused it from any obligation to direct out of the loan advances the fees agreed to be paid to Kemeny at closing pursuant to either the Irrevocable Direction or the Acknowledgement.
[26] Since June 30, 2014 no funds or part thereof have been advanced to or since been paid to Kemeny by either Callidus or Esco. Esco is no longer in business, having been placed into insolvency in the courts of Texas fairly soon after the loan agreement advances were made by Callidus. As a result, Kemeny has commenced this action directly against Callidus for payment.
Law and Discussion
[27] Kemeny takes the position that Callidus had a contractual duty to ensure that Kemeny was paid his fees, and was bound by specific trust and fiduciary obligations to direct payment of such amount out of the loan proceeds to him.
[28] In Kemeny’s dealings with Wilk on behalf of Callidus, which included negotiating the terms of and engaging in the drafting of the Irrevocable Direction, Wilk reassured Kemeny that Callidus would not “screw” him and would ensure that he was paid full.
[29] The evidence as presented by the parties raises several issues of which the following are the most relevant to the determination of Kemeny’s claim:
(a) Is the Irrevocable Direction binding on Callidus?
(b) Was any payment to Kemeny subject to any condition of “availability” of the loan proceeds?
(c) Did the Irrevocable Direction impose any trust or fiduciary obligations on Callidus in favour of Kemeny?
(d) Is there any reason why Kemeny should be estopped from recovering his fee from Callidus in these circumstances?
[30] In my view, all of these issues are to considerable extent interrelated and their determination results in a similar practical conclusion.
[31] According to the principles of contractual interpretation set out in Siskinds LLP v. Canadian Imperial Bank of Commerce, 2014 ONSC 3211, a contract should be interpreted in a fashion which accords with sound commercial principles and good business sense, and that avoids a commercial absurdity. In addition, several decisions of the appellate courts including the Supreme Court of Canada have urged trial judges to interpret contracts using the factual matrix at the time the contract is executed (see: Siskinds LLP v. Canadian Imperial Bank of Commerce, supra; Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53).
[32] In my opinion, the plain language of the Irrevocable Direction favours the interpretation advanced by Kemeny. In addition, to the extent any factual matrix may apply to this exercise, it likewise supports Kemeny’s position.
[33] The Irrevocable Direction is an agreement between Esco and Kemeny with respect to Kemeny’s fees. However, in my view, it is also an agreement requiring Callidus to ensure that payment of those fees as referred to is made directly to Kemeny by it.
[34] It was evident that Esco was in financial difficulty and that is why it was matched with Callidus for funding. Although Esco remained liable for payment of Kemeny’s fees, it was commercially reasonable for Kemeny to seek firm contractual assurance from Callidus that he would be paid promptly out of the first tranches of loan proceeds advanced to Esco by it.
[35] I conclude on the evidence adduced that Wilk had the authority, both actual and apparent, to enter into the Irrevocable Direction, despite the argument later advanced by Callidus that he lacked the power to do so (see: Midas Investment Corp. v. Bank of Montreal, 2016 ONSC 3003).
[36] There is no qualification placed upon the obligations of Callidus as contained in the Irrevocable Direction reviewed and amended by Wilk prior to its execution. In particular, there is no mention of any condition that there be sufficient “availability” from the loan proceeds before Kemeny could receive any payment for his services. In my view, the argument advanced by Callidus concerning the restrictive meaning of “loan proceeds”, if accepted, would lead to a commercially absurd result. I therefore conclude that there was never any such legal requirement or condition imposed and that Callidus remained obliged to ensure that either there were funds to make such payment or not proceed with advancing the loan proceeds and suffer the consequences that might flow from that decision.
[37] Despite the Irrevocable Direction and advances made by Callidus pursuant to the loan agreement, Callidus breached its obligations pursuant to the Irrevocable Direction and its obligations to Kemeny, and failed to make payment pursuant to the terms of the Irrevocable Direction. It is therefore liable to pay damages to Kemeny as a result of its breach of contract.
[38] Further, Callidus (as stated in the Irrevocable Direction) was directed to hold Kemeny’s fee, calculated on the basis of 2% of the authorized amount of the facility, in trust for Kemeny. Accordingly, the Irrevocable Direction entrusted Callidus with the obligations of a trustee for Kemeny with respect to the authorized amount of the facility.
[39] It is not disputed that 2% of the entire agreed loan facility amounts to US$679,800.00. Pursuant to the Irrevocable Direction and the trust obligations that flow, that amount was Kemeny’s property and Callidus was obligated to ensure that the funds were paid to and received by him. This conclusion is in keeping with trite principles of the law that governs the requirements for establishing the existence of a trust and the obligations of a trustee (see: Milne Estate (Re), 2010 ONSC 579).
[40] Whether the obligations imposed upon or assumed by Callidus are described as being those of a trustee or a fiduciary, the result is the same: Kemeny’s interest in recovery of his fee was to be protected.
[41] I see nothing in the evidence, either in the documentation or in Kemeny’s conduct throughout, that should operate as an estoppel to recovery by him of his fees for services successfully performed. I am of the view that he conducted himself reasonably and fairly throughout, and was open and forthright with Wilk and Esco. I do not consider that he ever knowingly expected that he might get nothing out of a loan transaction that had closed were Callidus to unilaterally decide to direct all of the funds elsewhere, either pursuant to the loan agreement or in accordance with its own interests.
[42] In summary, and despite the wealth of evidence adduced over several days at trial, the ultimate issues raised for determination as outlined above are quite straightforward and comparatively simple. Despite Wilk’s earnest assurances to the contrary, what Kemeny tried to prevent from happening by requiring execution of a clearly-worded agreement in writing nevertheless ultimately came to pass. It now falls to this court to provide him with legitimate redress.
Conclusion
[43] For the above reasons, Kemeny is entitled to judgment against Callidus for the full amount of his fee for consulting services as contained in the Irrevocable Direction. As provided therein, the amount of that fee owing to Kemeny is an amount equivalent to 2% of the authorized amount of the loan facility, US$679,800.00.
Costs
[44] If the parties cannot agree on the subjects of any necessary conversion to Canadian currency of the amount of the judgment in US dollars, pre-judgment interest and costs, written submissions may be delivered on behalf of Kemeny within 30 days of the date of release of this decision, and on behalf of Callidus within 20 days thereafter.
Released: December 15, 2021
COURT FILE NO.: CV-16-551366
DATE: 20211215
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
GEORGE LESLIE KEMENY
Plaintiff
– and –
CALLIDUS CAPITAL CORPORATION
Defendant
REASONS FOR DECISION
Stewart J.
Released: December 15, 2021