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Scragg v. Lotzkar Between
Mitch Patrick Scragg, plaintiff, and
Rodney Lotzkar, Mark Lotzkar and D'arcy Harry
Hipwell, defendants
[2004] B.C.J. No. 2335
2004 BCSC 1447
Victoria Registry No. 02/5196
British Columbia Supreme Court
Victoria, British Columbia
Bouck J. BOUCK J.:—
INTRODUCTION
¶1
The plaintiff claims he was a partner with the defendants in a bottle return
business. It commenced trading in early July 2002 at Victoria, B.C., under the name of
614494 B.C. Ltd. (the Management Company). He now seeks a declaration that he
owns one-third of the 300 shares held by the defendants in the Management Company.
¶2
The defendants contend there was no partnership agreement, only an
agreement to enter into one. Alternatively, they say that if there was such an agreement,
the plaintiff resigned from the partnership on or about 23 February 2001.
FACTS
¶3
Mr. Scragg is 44 years old. He is a labourer by trade with a specialty in the scrap
and recycling business. The defendants Rodney Lotzkar and Mark Lotzkar are brothers
and business partners. Apparently, they are the shareholders, directors and officers of a
scrap and recycling business using the name Regional Recycling Ltd. (Regional). At all material times, it carried on business at Abbotsford and Richmond, B.C. The defendant
D'arcy Hipwell is a friend of the plaintiff and the Lotzkar brothers.
¶4
In 1999 Mr. Scragg began working for Regional at its Abbotsford, B.C., plant. He
lived in Chilliwack, B.C., in a comfortable condominium. At that time, the Abbotsford
operation was not financially successful. Mr. Scragg worked hard to turn this around.
Regional paid him an annual salary of $50,000. He had the personal use of a one-ton
truck and received bonuses from time to time.
¶5
During this period, Mr. Mark Lotzkar spoke to Mr. Scragg about a proposal to
start a recycling plant in the Grand Cayman Islands. He offered Mr. Scragg a one-third
interest if Mr. Scragg ran the plant for two years. On 5 September 2000, Mr. Rod
Lotzkar wrote his Grand Cayman Islands contact stating neither he nor his brother could
visit the Islands but they would send their Operations Manager, Mr, Scragg. Mr. Scragg
traveled to the Grand Caymans to investigate the proposal.
¶6
On 15 October 2000, Mr. Mark Lotzkar emailed Mr. Beau Pyatt of Brewers
Distributors Ltd. (BDL), Victoria, about the possibility of starting a recycling plant in this
city with BDL acting as the product supplier. On 9 November 2000, Mr. Rod Lotzkar
wrote BDL enclosing a proposal for a full refund bottle depot. Mr. Lotzkar wrote the
covering letter on the letterhead of "Government Street Bottle Depot". It used Regional's
address. Part of the letter said: The Government St. Bottle Depot (the "GBD") will be incorporated to
operate this project. The principles (sic) of GBD are Mitch Scragg, Darcy
Hipwell, and Mark & Rod Lotzkar. All the parties have extensive
experience working with BDL over the last 20 years. GBD will be operated
and managed by Mitchell Scragg. ¶7
On 12 November 2000, "Lotzkar Recycling Partnership" of Delta, B.C., sent a
proposal to the Grand Cayman's titled "Cayman's Recycling Concept". It described the
principals behind the partnership as Mark Lotzkar, Rod Lotzkar and Mitch Scragg.
¶8
On 11 December 2000, Mr. Rod Lotzkar wrote BDL about the project using the
same Government Street Bottle Depot letterhead. He anticipated that BDL would accept
its proposal of 9 November 2000. He informed BDL that Mr. Scragg would be vacating
his home at the end of the month and that he had found a new home in Victoria.
¶9
On 18 December 2000, Mr. Scragg signed a letter as President of Government
Street Bottle Depot, Delta, B.C., addressed to BDL, with the advice that the organization
was prepared to open on 15 January 2001 when it could handle deliveries from BDL.
Mr. Rod Lotzkar sent it to BDL. ¶ 10
The evidence is not entirely clear on this point but it seems that sometime
before 2 January 2001, Mr. Hipwell or the Lotzkars, controlled the Management
Company. The Register of Directors shows Ms. Judith P. King as the sole director,
President and Secretary from 21 September 2001 to 8 January 2001. On 8 January
2001, the defendants asked Mr. Scragg to become the sole director, President and
Secretary of the company in place of Ms. King. He accepted. Apparently, the parties
intended that the Management Company would become the owner/operator of the new
Victoria venture. This eventually happened.
¶ 11
Before January 2001, the Lotzkars suggested that Mr. Scragg hire a person to
replace him at Regional's Abbotsford facility because Mr. Scragg would be moving to
Victoria once BDL signed the supply contract. Mr. Scragg did so. He left his
condominium in Chilliwack and in December 2000, he moved into a motel in Ladner,
B.C. As he waited for the BDL contract to materialize, he helped train his replacement at
Abbotsford. He also assisted the Lotzkars in the operation of Regional's Richmond
plant.
¶ 12
On 2 January 2001, Mr. Rod Lotzkar sent a written proposal to Mr. Scragg, Mr.
D'arcy Hipwell and Mr. Mark Lotzkar outlining his ideas for the new business in Victoria,
B.C., with the possible name of GS Bottle Depot Ltd. It too was written on Government
Street Bottle Depot letterhead, an unincorporated organization. Amongst other things,
Mr. Rod Lotzkar proposed a three-way partnership consisting of Mr. Scragg, Mr. Hipwell
and the Lotzkar brothers. That was to be the share arrangement once the business got
up and running. Mr. Hipwell and the Lotzkars were to provide the initial financing and
Mr. Scragg was to be the Manager with an annual salary of $60,000.
¶ 13
On 2 January 2001, Mr. Scragg sent a memo to BDL on Government Street
Bottle Depot letterhead enclosing a revised proposal and saying inter alia, "We have
been in contact with the property owner and feel we should be able to get going
promptly."
¶ 14
Besides getting BDL's signature as a supplier of product to the Victoria project,
the partners needed to acquire suitable premises. The Lotzkar brothers asked Mr.
Hipwell to assume a lease of a building for that purpose but Mr. Hipwell was not
prepared to do so until BDL signed the supply agreement.
¶ 15
Mr. Scragg made it clear to the defendants that he was looking forward to
moving back to Victoria where he had friends and relatives. During the time he lived in
Ladner he came to Victoria several times, either to visit the BDL offices or to inquire
about some preliminary matters that were necessary to get the project up and running.
At one time, one or more of the defendants advised Mr. Scragg that he would be moving
to Victoria on 8 January 2001 since the business would be opening on 15 January
2001. That never happened.
¶ 16
Soon after, Mr. Rod Lotzkar told Mr. Scragg that the BDL contract negotiations
had stalled and it might take one or two years to finalize. In late February 2001, Mr. Scragg informed Mr. Hipwell that he wanted "to be laid off" from Regional because he
was not needed at the Richmond or Abbotsford facilities and he did not want to continue
living in a motel room. Mr. Hipwell agreed.
¶ 17
At first, Mr. Rod Lotzkar suggested that rather than leaving Regional, Mr.
Scragg should fire his successor and resume control of the Abbotsford operation. Mr.
Scragg declined the proposal. He felt it would be unfair to the new manager. During this
meeting, they discussed the Cayman Islands and Victoria projects. Mr. Scragg said he
was still interested in the Victoria project. On 23 February 2001, Mr. Rod Lotzkar
released Mr. Scragg as an employee of Regional at Mr. Scragg's request.
¶ 18
The next day, Mr. Scragg traveled to Edmonton and started looking for a job.
Eventually, he got employment as a night shift foreman at $23.00 per hour. In May
2001, he called Mr. Rod Lotzkar who told him that nothing was happening with the
Cayman Islands and Victoria projects. Whenever Mr. Scragg talked to Mr. Rod Lotzkar
about BDL, Mr. Lotzkar would reply "you never know, something might happen". Mr.
Scragg told the defendants he was "ready to go at any time". He said he spoke to Mr.
Hipwell about BDL six or seven times and to Mr. Rod Lotzkar two or three times.
¶ 19
In June 2001, Mr. Scragg went to Victoria and discussed the BDL venture with
Mr. Hipwell. In October 2001, Mr. Hipwell called Mr. Scragg and asked him to sign over
his position in the Management Company. Mr. Scragg said no.
¶ 20
In May 2002, Mr. Scragg flew to Victoria where again he discussed the BDL
proposal with Mr. Hipwell, who said it was not going to happen. Four days later Mr.
Scragg transferred his interests in the Management Company to Mr. Hipwell. A few
weeks after that, Mr. Scragg found out that the BDL project was completed. He called
Mr. Rod Lotzkar to complain. Mr. Lotzkar said they had decided to go ahead fifty-fifty
with Mr. Hipwell.
¶ 21
Mr. Scragg then called Mr. Hipwell. He asked Mr. Hipwell why they had left him
out of the project? Mr. Hipwell replied, "we're here and you're there, that's the way it is".
¶ 22
On or about 6 June 2002, the BDL contract came through. It is described as an
agreement between "Victoria Depot and Brewers Distributor Ltd. (BDL)" and
"Government Street Bottle Depot". Mr. Mark Lotzkar signed on behalf of that entity. On
the same day Mr. Hipwell entered into negotiations to lease premises where the new
venture would carry on business.
¶ 23
Shortly after, the defendants commenced business using the Management
Company as the corporate vehicle. It issued 300 shares to the defendants. Apparently,
each defendant received 100 of these shares. Instead of hiring Mr. Scragg as manager,
the company hired a Mr. Michael Cox who was a friend of Mr. Hipwell.
¶ 24
Around mid-July 2002, Mr. Mike Morino, a mutual friend of Mr. Scragg and Mr.
Hipwell, spoke to Mr. Hipwell and told him that Mr. Scragg was upset about being kept out of the BDL project. Mr. Hipwell replied, "that's life in the fast lane, business is
business". Mr. Morino argued, "it was a bad thing to cut Mr. Scragg out of the deal". Mr.
Hipwell replied, "Rod cut him out of the deal, maybe I should have said something."
Eventually, Mr. Hipwell agreed with Mr. Morino that Mr. Scragg "really got the short end
of the deal".
¶ 25 Mr. Scragg left Edmonton for Victoria in March 2003 to pursue other interests. ISSUES
¶ 26
Did the parties enter into a partnership agreement for the development of a
bottle recycling business in Victoria?
¶ 27
When Mr. Scragg left Regional and went to Edmonton in February 2001 did he
resign from the partnership?
ANALYSIS
¶ 28
Under s. 2 of the Partnership Act, R.S.B.C. 1996, c. 348, "a partnership is the
relation which subsists between persons carrying on business in common with a view to
profit". A business is defined in Black's Law Dictionary, 7th Ed. p. 192, as: A commercial enterprise carried on for profit; a particular occupation or
employment habitually engaged in for livelihood or gain. ¶ 29
The defendants do not deny the existence of a business arrangement between
themselves and Mr. Scragg up to the time that Regional laid off Mr. Scragg in February
2001. They refuse to call it a partnership. If it was one, they say that Mr. Scragg's move
to Edmonton ended the partnership.
¶ 30
The question arises, did the parties by their written and oral words enter into a
partnership? Khan v. Miah, [2001] 1 All E.R. 20 (H.L.) is helpful on this point. It involved
an agreement by the parties to establish a restaurant. The trial judge said the
agreement amounted to a partnership. At p. 23(j) the House of Lords said that the Court
of Appeal reversed the decision of the trial judge: ... because they considered there was a rule of law that the parties to a
joint venture do not become partners until actual trading commences. ¶ 31 The House of Lords did not agree with the Court of Appeal. At p. 24(e), it said: There is no rule of law that parties to a joint venture do not become
partners until trading commences. The rule is that persons who agree to
carry on a business activity as a joint venture do not become partners
until they actually embark on the activity in question. It is necessary to
identify the venture in order to decide whether the parties have actually
embarked upon it, but it is not necessary to attach any particular name to
it. Any commercial activity which is capable of being carried on by an
individual is capable of being carried on in partnership. ¶ 32
When considering the preliminary work done in preparation for setting up a
restaurant, at p. 24(h), the House of Lords said: The work of finding, acquiring and fitting out a shop or restaurant begins
long before the premises are open for business and the first customers
walk through the door. Such work is undertaken with a view to profit, and
may be undertaken as well by partners as by a sole trader. At p. 25(e), the House of Lords said: The question is not whether the restaurant had commenced trading, but
whether the parties had done enough to be found to have commenced
the joint enterprise in which they had agreed to engage. ¶ 33
Applying that law to the facts in this case, it seems clear that the venture the
parties agreed to engage in was to acquire the BDL contract, the premises at 2111
Government Street, Victoria, and ultimately, the equal division of shares in the
Management Company. They did so with a view to profit. Therefore, they were in
partnership. At one time or another, Mr. Scragg assisted the partnership in getting the
BDL contract and acquiring the premises. Mr. Scragg's partners failed to meet their
commitment to hire him as a manager and allot him his proportion of the shares.
¶ 34 Section 28 of the Act says that: A majority of the partners can not expel any partner unless a power to do
so has been conferred by express agreement between the partners .... Section 29(1) of the Act says: If no term has been agreed on for the duration of the partnership, any
partner may end the partnership at any time on giving notice to all the
other partners of his or her intention to do so. ¶ 35
There was no express agreement between the partners allowing the defendants
to expel Mr. Scragg from the partnership under s. 28. At no time before or after the
Management Company issued the shares excluding Mr. Scragg did any defendant give
notice to Mr. Scragg under s. 29 ending the partnership.
¶ 36
The parties never set a specific term for the duration of the partnership.
Implicitly, they intended the partnership to end once they started operations under the
name of the Management Company and received their agreed allotment of shares. This
is because corporate law and not partnership law would then govern their relationship.
For these reasons, I see little merit in the argument that the partnership did not
commence until the Management Company issued the shares. It remains to be
determined whether any other terms in the partnership agreement of 2 January 2001
survived the share allotment.
¶ 37
Apparently, the unincorporated Government Street Bottle Depot still owns the
BDL contractual agreement. Whether it assigned its rights to the Management
Company, I do not know.
¶ 38
The mere fact that Mr. Scragg left Regional and went to Edmonton in February
2001 did not automatically end the partnership. Mr. Scragg stopped working for
Regional, but it was not one of the partners. Mr. Hipwell and the Lotzkar brothers
personally were the partners, along with Mr. Scragg.
¶ 39
Suppose for example that Mr. Hipwell moved from Victoria to Prince George,
B.C., and the Lotzkar brothers sold their interests in Regional and moved to Toronto.
Then suppose Mr. Scragg moved to Victoria and successfully persuaded BDL to give
him the contract that the partnership originally sought. In these circumstances, the law
would give relief to Mr. Hipwell and the Lotzkar brothers as it will now give relief to Mr.
Scragg.
¶ 40
The defendant partners did not meet their duty of "utmost good faith" under s.
22 of the Act because they failed to allot Mr. Scragg one-third of the issued shares in the
Management Company and failed to appoint him its Manager.
¶ 41
Mr. Scragg did not plead a loss of opportunity to earn income from the
Management Company as its Manager once it got up and running in early July 2002.
During argument, he applied to amend his statement of claim to allege this loss. Since
the defendants would then have had the right to plead and prove mitigation, I dismissed Mr. Scragg's motion because he applied too late in the game. Thus, he cannot recover
any loss he may have suffered for not receiving an annual salary of $60,000 from the
Management Company starting in July 2002.
¶ 42
Nor did Mr. Scragg plead a claim for breach of trust similar to the plea made by
the plaintiff in Alers-Hankey v. Teixeira, [2000] B.C.J. No. 602, 2000 BCCA 196, para.
39, where the court awarded the plaintiff equitable damages. During argument, Mr.
Scragg abandoned his claim for an accounting. Instead, he chose the remedy of a
declaration: Rule 5(22) of the Supreme Court Rules. It reads:
(22)
No proceeding shall be open to objection on the ground that only a
declaration order is sought, and the court may make binding
declarations of right whether or not consequential relief is or could
be claimed. IN SUMMARY:
¶ 43
1.
On or about 15 October 2000, the parties entered into a partnership
agreement for the development of a bottle recycling business in Victoria.
2.
On or before May 2002, the defendants unlawfully
expelled Mr. Scragg from the partnership.
3.
Mr. Scragg is entitled to the following remedy his counsel
asked for during argument. JUDGMENT
¶ 44
As of 1 July 2002, the defendants hold in trust for Mr. Scragg one-third of the
issued shares of 614494 B.C. Ltd.
¶ 45 Mr. Scragg will recover his costs from the defendants. BOUCK J.
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