Court File No. 31-208039-T ONTARIO SUPERIOR COURT

Court File No. 31-208039-T
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
IN THE MATTER OF THE BANKRUPTCY OF SHS SERVICES
MANAGEMENT INC./GESTION DES SERVICES SHS INC. and SHS
SERVICES LIMITED PARTNERSHIP of the City of Toronto, in the Province of
Ontario
FACTUM OF PAUL VERHOEFF, STEPHEN VERHOEFF AND THERESA LEA
(Motion returnable April 21, 2015)
Paliare Roland Rosenberg Rothstein LLP
155 Wellington Street West
35th Floor
Toronto, Ontario M5V 3H1
Gordon Capern (LSUC No. 32169H)
Tel: 416.646.4311
Fax: 416.646.4301
Email: [email protected]
Massimo Starnino(LSUC No. 41048G)
Tel: 416.646.7431
Fax: 416.646.4301
Email: [email protected]
Lawyers for Paul Verhoeff, Stephen Verhoeff
and Theresa Lea
TO:
See attached Service List
Court File No. 31-208039-T
ONTARIO
SUPERIOR COURT OF JUSTICE - COMMERCIAL LIST
IN THE MATTER OF THE BANKRUPTCY OF SHS SERVICES
MANAGEMENT INC./GESTION DES SERVICE SHS INC. and SHS
SERVICES LIMITED PARTNERSHIP
FACTUM OF THE RESPONDING PARTIES PAUL VERHOEFF,STEPHEN
VERHOEFF AND THERESA LEA
Motion returnable April 21, 2015
PART I. OVERVIEW
1.
Having commenced an action against three individuals with respect to their
involvement in the bankrupt entities, the trustee now seeks an order pursuant to s. 163
of the Bankruptcy and Insolvency Act compelling three individuals to be examined under
oath in these bankruptcy proceedings.
2.
The ordinary rule is that the court will not compel an individual to submit to an
examination under oath where the trustee has started an action against him or her.
3.
The trustee has not pointed to any exceptional circumstances which justify
departing from this general rule. In fact, the circumstances of this case suggest that
such an order would be manifestly disproportionate and unfair. The trustee already has
more than sufficient information in respect of the matters raised in the action that it has
started. Further, it has rights to oral and documentary discovery in the civil proceeding
which would be duplicative of these examinations.
In these circumstances, the
proposed examinations would be unfair to the individuals, and would deplete the
1
amounts available to pay Sears and Alaris, the estate's two senior creditors, to the
potential prejudice of the guarantors of the debts owed to Sears and Alaris.
PART 11. FACTS
A.
The entities and individuals involved in this motion
4.
The bankrupt, SHS Services Management Inc./Gestion des Services SHS Inc.
("SHS Inc.") is a company which was created in order to acquire the home services
business operated by Sears Canada Inc. ("Sears").1
5.
The bankrupt SHS Services Limited Partnership ("SHS LP") is a limited
partnership between SHS Inc. and Alaris Income Growth Fund Partnership ("Alaris").
SHS Inc. and SHS LP are collectively referred to as "SHS".
6.
Stephen Verhoeff and Paul Verhoeff were directors of SHS Inc. until in or around
October, 2013.2
7
Theresa Lea ("Lea") was an officer of SHS Inc. at all material times.
8.
The shareholders of SHS are, among others, certain family trusts associated with
the Verhoeffs and Lea.3
9.
SHS' senior creditors are Sears and Alaris.4
Examination of Darren Driscoll, held April 14, 2015 ("Driscoll Examination"), Responding Motion Record
("RMR"), Tab 1, p. 11, lines 14-18.
2 Affidavit of Michael Clements, sworn December 12, 2013 ("Clements Affidavit), RMR Tab 2, p. 242,
para. 6.
3 Trustee's First Report to the Court, MR Tab 2, p. 9, para. 9.
4 Clements Affidavit, RMR Tab 2, p. 250, para. 48.
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B.
The Receivership and Bankruptcy of SHS
10.
On December 13, 2013, SHS Inc. and SHS LP were placed into receivership.
PricewaterhouseCoopers Inc. is the receiver. SHS attributed its difficulties to the fact
that the anticipated volume of revenue had never approached the amounts represented,
anticipated or expected by Sears.5
11.
On January 7, 2014, near the beginning of the receivership proceedings Sears
made the following allegations:
(a)
SHS repaid amounts owing to Sears under a vendor tack back loan (the
"VTB Loan") prior to the loan being due and SHS' financial difficulties
stemmed from the unnecessary prepayment of the VTB Loan;6 and
(b)
On the very first day of its operations, without notice to Sears, SHS
immediately paid dividends to its four principals in the amount of
$8,000,000 and repaid a related party loan.7
12.
On July 31, 2014, Alaris made an application for an order adjudging each of SHS
Inc. and SHS LP as bankrupt, pursuant to the Bankruptcy and Insolvency Act8. The
bankruptcy
order
was
granted
on
or
about
August
11,
2014,
and
PricewaterhouseCoopers Inc. was appointed as trustee of the estates of SHS Inc. and
SHS LP (the "Trustee").9
Clements Affidavit, RMR Tab 2, p. 244, para. 23.
6 Affidavit of Daniel Westreich, sworn January 7, 2014 ("Westreich Affidavit"), RMR Tab 3, p. 257, para.
22(a).
7 Westreich Affidavit, RMR Tab 3, p. 257, para. 22(b).
8 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.
9 Trustee's First Report, MR Tab 2, p. 8, para. 1.
5
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13.
The inspectors in the bankruptcy of SHS Inc. include Darren Driscoll ("Driscoll"),
the Chief Financial Officer of Alaris, and Daniel Westreich ("Westreich", and, together
with Driscoll, the "Inspectors"), who is employed by Sears.1°
C.
The Notices of Examination
14.
The Inspectors have authorized the Trustee to conduct examinations of the
Verhoeffs and Lea11, and the Trustee has delivered related Notices of Appointment for
Examination (the "Notices").12
15.
The Notices do not set out the scope of the proposed examination. They do
however require that the Verhoeffs and
Lea
bring "all
books, documents,
correspondence or papers" in their possession or power relating to payments by SHS
Inc and SHS LP to a related company, Installation Services Org. Ltd ("ISO"), and to the
trusts controlled by the Verhoeffs and Lea. An appended Schedule "A" lists 16 areas of
documents the Trustee requires that the Verhoeffs and Lea produced.13 That Schedule
"A" includes:
(a)
all correspondence related to the payment of dividends by SHS in the
course of its operations;
(b)
all correspondence related to the repayment terms of the equity and debt
financing of SHS under an agreement with Sears, entered into December
20, 2012;
Driscoll Examination, RMR Tab 1, p. 5-6, Ins 26-27, 1-2.
11 Inspectors' Resolution, Exhibit 1 to the Driscoll Examination, RMR Tab 1-1.
12 Revised Notices of Appointment for Examination for Paul Verhoeff and Stephen Verhoeff, MR, Tab 2D.
13 Revised Notices of Appointment for Examination, MR, Tab 2D.
10
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(c)
all correspondence related to payments made in March of 2013 pursuant
to the contribution agreement with Alaris, dated March 1, 2013;
(d)
all documentation evidencing the amount of initial funding received by
SHS in March of 2013 from all sources, including the use of such funds;
(e)
all correspondence and documentation related to payments made to
shareholders of SHS or ISO;
(f)
any evidence or analysis made in respect of the nature and purpose of the
dividend payments by SHS in March 2013, including but not limited to the
use of these funds for purposes of ISO;
(g)
all correspondence discussing potential Director or Officer liability; and
(h)
all
documentation
evidencing
the $15M
minimum
threshold
for
investments made by Alaris Royalty Corp.14
D.
The Trustee's Action
16.
On February 27, 2015, the Trustee caused a claim to be issued in the Ontario
Superior Court of Justice naming the Verhoeffs and Lea as defendants (the "Action").15
17.
The Action makes a number of allegations with respect to the payment of
dividends in March, 2013, the repayment of a $5 million loan to Sears, and the payment
14
Ibid.
Statement of Claim, MR Tab 2E. The Action also names Michael Clements, the trusts and corporation
controlled by the individual defendants, and a related company, Installation Services Org. Ltd as
defendants.
15
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of certain amounts to employees in December 2013. In particular, the Action alleges
that:
(a)
the dividends were fraudulent conveyances under the Fraudulent
Conveyance Act (Ontario), and in the alternative were preferential
payments under the Fraudulent Preferences Act (Alberta) and the Statute
of Elizabeth;
(b)
the declaration of the dividends was:
(i)
oppressive, unfairly prejudicial to and disregarded the interests of
creditors of SHS; and
(ii)
in breach of fiduciary duties which the Verhoeffs owed in
performing their duties on behalf of SHS; and
(iii)
(c)
in breach the duty of care owed to SHS.
the authorization of the repayment of the Sears loan was in breach of the
duty of care owed to SHS; and,
(d)
SHS' directors made preferential payments to employees and trade
creditors in the week preceding the interim receivership order so as to
avoid personal liability to employees and trade creditors following
insolvency.
18.
The pleading is 16 pages long and particularized.
6
19.
Driscoll, one of the Inspectors who authorized the examination, and Alaris' Chief
Financial Officer, has a fulsome knowledge of the factual matrix relating to the dividend
payments in particular, inasmuch as Alaris agreed to, financed and authorized those
payments.16
20.
The depth of Driscoll's knowledge is demonstrated by an examination of Driscoll
in connection with this motion. Among other things, he confirmed the following:
(a)
Alaris financed SHS Inc.'s acquisition of Sears' home services business
from Sears.17
(b)
In or around August, 2012, the Verhoeffs entered into discussions with
Alaris to secure financing to operate the SHS business.18 Alaris initially
proposed a $20,000,000 investment,19 which was ultimately reduced to
$15,000,000.20
(c)
Alaris understood and agreed from the outset that its investment in the
business would be allocated as between "general corporate working
capital associated with the newly acquired business" and "shareholder
liquidity".21
See generally Driscoll Examination, RMR Tab 1.
17 Driscoll Examination, RMR Tab 1, p. 11, lines 22-24.
18 Email dated August 2, 2012, Steve King to Paul Verheoff, Exhibit C to the Driscoll Examination, RMR
Tab 1C.
19 Draft term sheet, August 2, 2012, Exhibit "C" to the Driscoll Examination, RMR Tab 1C, p. 96.
20 Direction, Exhibit C to the Driscoll Examination, RMR Tab 1D.
21 Draft term sheet, August 2, 2012, Exhibit "C" to the Driscoll Examination, RMR Tab 1C, p. 96;
Draft term sheet, October 12, 2012, Exhibit "D" to the Driscoll Examination, RMR Tab 1D, p. 100;
Draft term sheet, October 29, 2012, Exhibit "E" to the Driscoll Examination, RMR Tab 1E p. 104;
Executed Term sheet, February 7, 2013, Exhibit "F" to the Driscoll Examination, RMR Tab 1F, p. 110.
16
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(d)
The concept of the transaction was that part of the funds ($7,000,000)
would be paid out into the company, part would be paid to shareholders in
a dividend ($3,000,000), and part would be held in the form of shares of
Alaris and would be available to provide for liquidity if necessary
($5,000,000).22
(e)
Prior to making its investment, Alaris engaged Ernst & Young ("E&Y") to
conduct due diligence of Sears and its operation.23 Though E & Y had
some reservations about the transaction, Alaris ultimately decided to
proceed.24
(f)
As part of its due diligence, several Alaris representatives reviewed a
business plan prepared by SHS and presented to the Sears Board of
Directors (the "Business Plan"). Alaris agreed that the Business Plan
appeared sound.25
(g)
The Sears Business Plan reflected that $7,000,000 would be contributed
to SHS as equity financing.26
Driscoll Examination, RMR Tab 1, p. 21, lines 4-16;
Driscoll Examination, RMR Tab 1, p. 32, lines 8-16.
23 Driscoll Examination, RMR Tab 1, p. 27, lines 21-24;
Driscoll Examination, RMR Tab 1, p. 33, lines 18-24.
24 Driscoll Examination, RMR Tab 1, p. 35, lines 22-27 — p. 36, lines 1-2.
25 SHS Services Management Business Plan ("Business Plan"), Exhibit "G" to the Driscoll Examination,
RMR Tab 1G;
Driscoll Examination, RMR Tab 1, p. 36, lines 16-26.
26 Business Plan, Exhibit G to the Driscoll Examination, RMR Tab 1G, p. 184;
Driscoll Examination, RMR Tab 1, p. 31, lines 6-18.
22
8
(h)
On March 1, 2013, Alaris and SHS LP entered into a contribution
agreement, pursuant to which Alaris contributed $15,000,000 to SHS LP.27
(i)
In accordance with its agreement with SHS, Alaris executed a direction
that dividends be paid out to SHS Inc.'s shareholders.28
(j)
Alaris was at all times aware that its funding was being used to finance the
payment of dividends to the shareholders.29
(k)
By August, 2013, SHS was completely offside the revenues projected in
the Business Plan.3° The initial financial reporting as "nothing close to
what anybody was expecting"31, it was "horrendous"32.
(I)
The amount of Alaris' financing being held in Alaris shares for liquidity was
sold and those amounts went to pay down a debt owed to Sears, which
held general security agreements for amounts due to it.33
(m)
In or around September, 2013, the finances and operations of SHS were
restructured.
As part of the restructuring, SHS obtained additional
Direction, Exhibit B to the Driscoll Examination, RMR Tab 1B.
28 Direction, Exhibit B to the Driscoll Examination, RMR Tab 1B.
29 Driscoll Examination, RMR Tab 1, p. 17, lines 15-18.
3° Email dated September 3, 2013, from Theresa Lea to Darren Driscoll and attached financial
information, Exhibit "A' to the Driscoll Examination, RMR Tab 1A.
31 Driscoll Examination, RMR Tab 1, p. 39, lines 20-21.
32 Driscoll Examination, RMR Tab 1, p. 39, line 16.
33 Driscoll Examination, RMR Tab 1, p. 43, lines 9-19;
Westreich Affidavit, RMR Tab 3, para. 11.
27
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financing from Sears and Alaris.34 At that time, Sears and Alaris each
invested an additional $2,000,000 into SHS.35
21.
Alaris has and had full knowledge of the facts surrounding the payment of the
dividends, including:
(a)
when the dividends were paid;36
(b)
to whom the dividends were paid;37 and
(c)
the total amount to be paid.38
22.
The Verhoeffs resigned as directors of SHS in October 2013.39
23.
In December, 2013, the time when the trustee alleges improper payments were
made to employees and trade creditors, it appears that:
(a)
the business continued to operate at a loss;4°
(b)
Sears and Alaris would not advance SHS any further funds to resolve the
crisis but would also not take steps to enforce their security;41 and
(c)
SHS' legal counsel recommended payment of certain amounts due to
employees.42
Driscoll Examination, RMR Tab 1, p. 46, lines 19-26.
Clements Affidavit, RMR Tab 2, p. 245, para. 24.
36 Driscoll Examination, RMR Tab 1, p. 11, line 27-p. 12, line 1.
37 Driscoll Examination, RMR Tab 1, p. 12, lines 5-7.
38 Driscoll Examination, RMR Tab 1, p. 12, lines 13-15.
39 Clements Affidavit, RMR Tab 2, p. 242, para. 6.
4° Clements Affidavit, RMR Tab 2, p. 248, para. 40.
41 Clements Affidavit, RMR Tab 2, p. 248, paras. 41-42.
34
35
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PART III. ISSUES
24.
The Trustee's motion raises a single issue: are there exceptional circumstances
in this case which justify requiring the Verhoeffs and Lea to submit to examinations
under oath though the Trustee has commenced an action against them, and though it
has sufficient information concerning the finances and operations of SHS to fulfill its
responsibilities under the BIA?
25.
The Verhoeffs and Lea submit that there are no exceptional circumstances which
justify the order sought. The Trustee will already have access to the information it seeks
through documentary and oral discovery pursuant to the Rules of Procedure in the
Action and should not be afforded an opportunity for a "dress rehearsal" for the Action.
PART IV. LAW AND ARGUMENT
A.
The Commencement of an Action Precludes the Section 163 Examinations
26
Section 163 of the BIA confers upon a trustee broad powers to examine
individuals. The purpose of these powers is to allow a trustee to collect information to
assist it in carrying out its duties to administer the bankrupt estate.43
27.
The court however must be "vigilant that [these] powers are not abused."44
Section 163 is not meant to facilitate or promote litigiousness by the trustee.45
28.
One such abuse occurs where the trustee attempts to examine an individual
under oath after commencing proceedings against the proposed deponent. There is a
Examination of Adam Bernard, MR Tab 3, p. 139, Q. 401.
Rieger Printing Ink Company (Re), 2009 CanLII 7766(ON SC), at para. 10, per Pepall J.
44 L.W. Houlden and Geoffrey B. Morawetz, Bankruptcy and Insolvency Analysis, H§9
45 Lloyd W. Houlden, Geoffrey B. Morawetz, and Janis P. Sarra, The 2014-2015 Annotated Bankruptcy
and Insolvency Act(Toronto: Carswell, 2013) at H§9 ["Houlden"].
42
43
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longstanding common law rule precluding examinations in circumstances such as the
present ones. In Re Franks; Ex parte Gittins46, the trustee of Franks' estate sought to
examine Campbell, who was the beneficiary of an insurance policy (the bankrupt was
deceased). There was ongoing litigation between the parties as to whether the
insurance proceeds should go to Campbell or the estate. The court held that the
examination should be "postponed," because the trustee should not have a "dress
rehearsal" of the cross-examination in the action.47
29.
The Trustee argues that there are exceptional circumstances which justify a
departure from the general rule. These "exceptional circumstances" are that the Trustee
was "forced" to commence the Action due to an impending limitation period. The
Trustee relies on Re Aarons48, where the trustee sought an interim injunction against an
individual with respect to a bank account controlled by the bankrupt. The purpose of the
interim injunction was to prevent the dissipation of assets. The trustee then sought to
examine the individual controlling the bank account pursuant to equivalent provisions of
the English Bankruptcy Act in order to adduce evidence in support of the injunction.
Horridge J. noted that he was prepared to adopt the general rule enunciated in Re
Franks, but the circumstances of that case were "exceptional", and permitted the
examination to proceed.
30.
The circumstances in this case do not justify allowing the Trustee to examine the
Verhoeffs and Lea. Instead, this case illustrates why examinations are generally
Re Franks; Ex parte Gittins, [1892] 1 QB 646.
47 Re Franks; Ex parte Gittins, [1892] 1 QB 646. See also: See Nadon Paving Ltd., Re., 1967
CarswellAlta 1 at para 12.
48 Re Aarons (1914), 111 L.T. 411 (K.B.)
46
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prohibited in such circumstances. The Action relates to the same issues about which
the Trustee would examine the Verhoeffs and Lea: the conduct of SHS, the payment of
dividends, and the repayment of the loans.
31.
The Trustee has the right to documentary and oral discovery pursuant to the
Rules of Procedure in the Action. It should not be afforded an opportunity for a "dress
rehearsal" for the Action by examining the Verhoeffs and Lea, and requiring them to
produce the same documents they would be required to produce in the Action.
32.
Further, the Trustee already has sufficient information to administer the SHS
estate. Through the Inspector and others, the Trustee has more than adequate
knowledge of the factual matrix pertaining to the matters raised in the Action.
33.
The Supreme Court has affirmed that proportionality underlies rules of court that
involve the exercise of discretion.49 In light of the information already in the Trustee's
possession, and the information it will obtain through the Action, ordering an
examination of the Verhoeffs and Lea would be disproportionate.
34.
The estate and the defendants to the Action will already bear the costs of
litigating the Action. They should not also finance superfluous examinations.
B.
The Requested Document Production is Also Too Broad
35.
The Trustee's document production request is also disproportionate and overly
broad. For example, it includes requests for:
49
Hryniak v. Mauldin, 2014 SCC 7(CanLll) at paras 30-31 [references omitted].
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(a)
all correspondence discussing potential Director or Officer liability, though
this request is not particularized to refer to a period, purpose, transaction
or event;
(b)
all documentation evidencing the amount of initial funding received by
SHS in March of 2013 from all sources, including the use of such funds,
though the initial funding included the initial investments in the business,
which were no doubt used for complicated corporate purposes, and could
require production of all the books and records of SHS;
(c)
all correspondence and documentation related to payments made to
shareholders of SHS or ISO and any evidence or analysis made in respect
of the nature and purpose of the dividend payments by SHS in March
2013, including but not limited to the use of these funds for purposes of
ISO, though this request does not refer to whose analysis, and if the
payments relate to any entity other than SHS, the request is too broad and
falls outside the scope of s. 163.
36.
It would be disproportionate and superfluous to require the Verhoeffs and Lea to
produce these documents.
PART V. ORDER SOUGHT
37.
The Verhoeffs and Lea seek an order dismissing the motion in its entirety, or, in
the alternative, allowing the examination to proceed only with respect to matters that are
not raised in the Action, and limiting the scope of the document production request.
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ALL OF WHICH IS RESPECTFULLY SUBMITTED THIS 16TH DAY OF APRIL, 2015
riMassimo Starnino
Paliare Roland Rosenberg Rothstein LLP
Lawyers for Paul Verhoeff, Stephen Verhoeff
and Theresa Lea
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Schedule "A" — List of Authorities
1. Rieger Printing Ink Company(Re), 2009 CanLII 7766(ON SC)
2. L.W. Houlden and Geoffrey B. Morawetz, Bankruptcy and Insolvency Analysis
3. Lloyd W. Houlden, Geoffrey B. Morawetz, and Janis P. Sarra, The 2014-2015
Annotated Bankruptcy and Insolvency Act(Toronto: Carswell, 2013)
4. Re Franks; Ex parte Gittins, [1892] 1 QB 646
5. Nadon Paving Ltd., Re., 1967 CarswellAlta 1 (Appellate Division)
6. Re Aarons (1914), 111 L.T. 411 (K.B.)
7. Hryniak v. Mauldin, 2014 SCC 7(CanLll)
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Schedule "B" — Text of Statutes, Regulations, and By-Laws
Bankruptcy and Insolvency Act, RSC 1985, c B-3
Examination of bankrupt and others by trustee
163. (1) The trustee, on ordinary resolution passed by the creditors or on the written
request or resolution of a majority of the inspectors, may, without an order, examine
under oath before the registrar of the court or other authorized person, the bankrupt, any
person reasonably thought to have knowledge of the affairs of the bankrupt or any person
who is or has been an agent or a mandatary, or a clerk, a servant, an officer, a director or
an employee of the bankrupt, respecting the bankrupt or the bankrupts dealings or
property and may order any person liable to be so examined to produce any books,
documents, correspondence or papers in that person's possession or power relating in all
or in part to the bankrupt or the bankrupts dealings or property.
Examination of bankrupt, trustee and others by a creditor
(2) On the application to the court by the Superintendent, any creditor or other interested
person and on sufficient cause being shown, an order may be made for the examination
under oath, before the registrar or other authorized person, of the trustee, the bankrupt,
an inspector or a creditor, or any other person named in the order, for the purpose of
investigating the administration of the estate of any bankrupt, and the court may further
order any person liable to be so examined to produce any books, documents,
correspondence or papers in the person's possession or power relating in all or in part to
the bankrupt, the trustee or any creditor, the costs of the examination and investigation to
be in the discretion of the court.
Examination to be filed
(3) The evidence of any person examined under this section shall, if transcribed, be filed
in the court and may be read in any proceedings before the court under this Act to which
the person examined is a party.
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IN THE MATTER OF THE BANKRUPTCY OF SHS SERVICES
MANAGEMENT INCJGESTION DES SERVICES SHS INC. and SHS
SERVICES LIMITED PARTNERSHIP of the City of Toronto, in the Province of
Ontario
Court File No. 31-208039-T
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
PROCEEDING COMMENCED AT
TORONTO
FACTUM OF PAUL VERHOEFF, STEPHEN
VERHOEFF AND THERSEA LEA
Paliare Roland Rosenberg Rothstein LLP
155 Wellington Street West
35th Floor
Toronto, ON M5V 3H1
Gordon Capern (LSUC No. 32169H)
Tel: 416.646.4311
Fax: 416.646.4301
Email: [email protected]
Massimo Starnino(LSUC No. 41048G)
Tel: 416.646.7431
Fax: 416.646.4301
Email: [email protected]
Doc 1418415 v1
Lawyers for Paul Verhoeff, Stephen Verhoeff and
Thersea Lea