COURT OF APPEAL FOR BRITISH COLUMBIA

Citation:

Shannon v. Shannon,

 

2011 BCCA 397

Date: 20111014

Docket: CA038529

Between:

Eve Lorraine Shannon

Appellant

(Plaintiff)

And

Stanley Malcolm Shannon

Respondent

(Defendant)

 

Before:

The Honourable Madam Justice D. Smith

The Honourable Madam Justice Neilson

The Honourable Madam Justice Bennett

On appeal from: Supreme Court of British Columbia, September 30, 2011
(Shannon v. Shannon, 2010 BCSC 1372, Chilliwack Docket No. E7803)

Counsel for the Appellant:

L. Kahn, Q.C.

Counsel for the Respondent:

A. Briscoe

Place and Date of Hearing:

Vancouver, British Columbia

September 21, 2011

Place and Date of Judgment:

Vancouver, British Columbia

October 14, 2011

 

Written Reasons by:

The Honourable Madam Justice D. Smith

Concurred in by:

The Honourable Madam Justice Neilson

The Honourable Madam Justice Bennett


 

Reasons for Judgment of the Honourable Madam Justice D. Smith:

A.       Overview

[1]             Ms. Shannon appeals the valuation of the parties’ sawmill, which formed the basis, in part, for an order under Part 5 of the Family Relations Act, R.S.B.C. 1996, c. 128 (“FRA”) for the equal division of the family assets (the ”FRA order”). The FRA order was made following the breakdown of the parties’ 28-year marriage and the granting of a declaration on May 4, 2009, that there is no reasonable prospect of reconciliation by the parties pursuant to s. 57 of the FRA.

[2]             The appellant concedes there was an evidentiary basis for the valuation of the business but contends that the trial judge erred in law by failing to provide adequate or sufficient reasons for his valuation of that asset. She submits that the lack of reasons for how he arrived at this valuation precludes her from assessing whether he erred in his finding and that an error in the valuation of the sawmill could affect the amount of the compensation awarded to her pursuant to s. 66 of the FRA to equalize the division of assets. The appellant does not allege any other error of law or principle or misapprehension of the evidence.

[3]             For the reasons that follow I would dismiss the appeal.

B.       The duty to give reasons

[4]             A trial judge has a duty to give adequate or sufficient reasons for his or her decision. This principle has been applied to reasons for judgment in the criminal context (see R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869; R. v. Braich, 2002 SCC 27, [2002] 1 S.C.R. 903; and R. v. R.E.M., 2008 SCC 51, [2008] 3 S.C.R. 3) and in the civil context (see Willick v. Willick, [1994] 3 S.C.R. 670; and F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41). Failure to give adequate or sufficient reasons for judgment is an error of law.

[5]             The function of reasons for judgment is to explain what the trial judge has decided and why he or she reached that decision: R. v. Morrissey (1995), 22 O.R. (3d) 514 (C.A.) at p. 525; and R.E.M. at para. 17. Reasons for judgment should demonstrate “a logical connection between the ‘what’ – the verdict [the decision] – and the ‘why’ – the basis for the verdict [the decision]”, when they are read as a whole in the context of the evidence and the live issues at trial, and the submissions of counsel: R.E.M. at paras. 16 and 17. Reasons for judgment do not require a judge to show how his or her decision was reached by “expound[ing] on evidence which is uncontroversial, or detail[ing] his or her finding on each piece of evidence or controverted fact, so long as the findings linking the evidence to the verdict can be logically discerned” (R.E.M. at para. 20).

[6]             In the civil context, the duty to give reasons was summarized by Mr. Justice Rothstein, for the Court, in McDougall:

[98]      The meaning of adequacy of reasons is explained in R. v. Sheppard, [2002] 1 S.C.R. 869, 2002 SCC 26. In R. v. Walker, [2008] 2 S.C.R. 245, 2008 SCC 34, Binnie J. summarized the duty to give adequate reasons:

(1)        To justify and explain the result;

(2)        To tell the losing party why he or she lost;

(3)        To provide for informed consideration of the grounds of appeal; and

(4)        To satisfy the public that justice has been done.

[7]             Justice Rothstein then explained what the duty to give reasons did not include:

[99]      However, an appeal court cannot intervene merely because it believes the trial judge did a poor job of expressing herself. Nor, is a failure to give adequate reasons a free standing basis for appeal. At para. 20 of Walker, Binnie J. states:

Equally, however, Sheppard holds that “[t]he appellate court is not given the power to intervene simply because it thinks the trial court did a poor job of expressing itself” (para. 26). Reasons are sufficient if they are responsive to the case’s live issues and the parties’ key arguments. Their sufficiency should be measured not in the abstract, but as they respond to the substance of what was in issue. ... The duty to give reasons “should be given a functional and purposeful interpretation” and the failure to live up to the duty does not provide “a free-standing right of appeal” or “in itself confe[r] entitlement to appellate intervention” (para. 53).

[100]    ... Nor are reasons inadequate because in hindsight, it may be possible to say that the reasons were not as clear and comprehensive as they might have been.

[8]             This test for the adequacy of reasons was confirmed by Mr. Justice Donald, for the Court in K. (K.L.) v. K. (E. J.), 2011 BCCA 276, 19 B.C.L.R. (5th) 320, quoting from Marois v. Pelech, 2009 BCCA 286, 95 B.C.L.R.(4th) 243 at para. 46:

[31]      ... It was not, in my view, necessary for “intelligibility” to have a full recital of the evidence. A trial judge is not required to exhaustively survey every piece of evidence offered at trial. As this Court stated in Marois v. Pelech [citation omitted] at para. 46: 

The failure of the trial judge to discuss the evidence in detail is not sufficient reason for this Court to re-examine it unless it gives rise to a “reasoned belief that the trial judge must have forgotten, ignored, or misconceived the evidence in a way that affected his conclusion”: Van de Perre v. Edwards, 2001 SCC 60, [2001] 2 S.C.R. 1014 at para. 15, aff’d Housen v. Nikolaisen [2002 SCC 33, [2002] 2 S.C.R. 235] at paras. 39, 72.

[9]             It is now settled law that there is no free-standing right of appeal on the adequacy or sufficiency of a judge’s reasons. Moreover, even where the logical connection between the evidence and the decision cannot be discerned (i.e., the reasons are objectively inadequate), appellate intervention will not be justified if the record itself permits meaningful appellate review. This is evident from the comments of Mr. Justice Bastarache and Madam Justice Abella, for the majority of a five-judge panel in R. v. Gagnon, 2006 SCC 17, [2006] 1 S.C.R. 621:

[13]      ...Finding an error of law due to insufficient reasons requires two stages of analysis:  (1) are the reasons inadequate; (2) if so, do they prevent appellate review? In other words, the Court [in Sheppard] concluded that even if the reasons are objectively inadequate, they sometimes do not prevent appellate review because the basis for the verdict is obvious on the face of the record. But if the reasons are both inadequate and inscrutable, a new trial is required.

[10]         In this case, the issue raised by the appellant requires the Court to examine whether the “why” for the valuation of the mill can be discerned from the trial judge’s reasons when viewed in conjunction with the record.

C.              Evidentiary background

[11]         This small, hardwood sawmill is a family operated business that provides employment to Mr. Shannon and three of the children from the marriage. It is owned by Shannon Lumber Ltd. (the “Company”). The Company is the registered owner of the real property on which the mill is situated. It also owns the mill’s equipment, most of which was purchased used, repaired and assembled by Mr. Shannon. Appraisals of the real property and its equipment were tendered at trial. A valuation of the shares of the Company and a critique of that valuation were also provided.

[12]         At trial, the parties agreed on the value of the other family assets (the family home, a vehicle, an excavator, an RRSP and the Company’s shareholder’s loan). The principle issue on the division of assets was the value of the mill.

[13]         At the time the appraisals were commissioned, the forest industry was experiencing difficult times and there was little interest in the acquisition of sawmills. The depressed state of the industry was reflected in the Company’s financial statements from the previous five years, two of which reflected operational losses and one of which showed only bare gains. However, the trial judge found that Mr. Shannon “has created a niche in the hardwood market and has been able to sustain it through a difficult period” (para. 25).

[14]         On behalf of Mr. Shannon, Mr. Blair, a chartered business valuator with Blair, Mackay, Mynett Valuations, provided an “Estimate Valuation Report” of the en bloc fair market value of the Company’s shares as at December 31, 2009. He valued the shares at $390,000 (the “Blair report”). This was the only valuation report before the Court. Mr. Blair adopted the voluntary liquidation approach in his valuation, which assumes the sale of the assets and wind-up of the business in a controlled manner by the owners of the business and the realization of a residual value by the owners. He adopted this approach over the going concern approach because, in his view, the business was not earning a reasonable rate of return on the net assets employed in the business.

[15]         On behalf of Ms. Shannon, Greg Williamson, a chartered business valuator with Grant Thornton, provided a limited critique of the Blair report (the “Williamson critique”). Mr. Williamson did not conduct an independent valuation of the shares but instead challenged the approach adopted by Mr. Blair and a number of his assumptions about the business.

[16]         The trial judge assigned a value to the Company’s shares of $500,000, a figure $110,000 higher than Mr. Blair’s valuation, but less than the value that Ms. Shannon sought to ascribe to the asset.

1. The Real Property Appraisals

[17]         There were two appraisals of the real property. Mr. Houlden of Fortin Appraisals appraised the land on which the mill was situated at $706,000; Mr. Henrey of Colliers International appraised it at $840,000. For the purposes of the action, the parties agreed on a value at the midpoint of these two figures: $773,000.

2. The Equipment Appraisals

[18]         There were two equipment appraisals tendered. Each used a different methodology. Mr. Mose of Maynards Appraisals relied on a forced liquidation (auction) approach and appraised the equipment at $154,000. Mr. Lotz of Alza Appraisals used a going concern approach and appraised the equipment at $505,075. The parties were unable to agree on the value of the equipment.

3. The Company Valuations

(a)      The Blair Report

[19]         Mr. Blair relied on the agreed market value of the land ($773,000) and the mid-point between the two equipment appraisals ($330,000) as the basis for his opinion. He employed the voluntary liquidation approach in determining the fair market value of the shares after concluding that a higher value could be realized by liquidating the assets of the Company rather than by treating it as a going concern which would have valued the shares based on cash flow capitalization.

[20]         Using this approach, Mr. Blair calculated the market value of the shares at $741,000. He then deducted from that figure the income tax and disposition costs associated with liquidation, and arrived at a share valuation between $370,000 and $410,000, settling on the midpoint of $390,000.

(b)      The Williamson Critique

(i) Valuation Based on a Going Concern Approach

[21]         Mr. Williamson’s principle issue with the Blair report was its adoption of the voluntary liquidation approach. In Mr. Williamson’s view, there was no clear evidence that the financial performance of the Company would not improve in the future. He viewed recent capital investments in the Company as an indication that the Company should not or would not be liquidated in the foreseeable future. Using Mr. Blair’s market value of $741,000 and the going concern asset-based approach, Mr. Williamson calculated the value of the shares at $687,000 after deducting disposition costs and latent taxes.

[22]         Mr. Williamson was of the view this figure could be increased if the higher land and equipment appraisals were used in the going concern approach for the share valuation. In his opinion, the Alza appraisal, which valued the equipment based on a going concern approach, provided a more appropriate figure for the value of the equipment if the shares were valued using the going concern approach. Using the Alza equipment appraisal of $505,075, he calculated the fair market value of the shares on a going concern approach at $862,000.

(ii) Valuation Based on a Voluntary Liquidation Approach

[23]         Mr. Williamson also provided a detailed critique of the Blair report and questioned the validity of some of its assumptions concerning disposition costs. He suggested several ways in which the fair market value of the shares calculated under the voluntary liquidation approach could be higher. He noted:

(a)      If the inventory of the Company was sold in the normal course of business (rather than at book value) and the Company could realize a gross profit margin of 30%, an additional $116,000 of profit could be realized during liquidation.

(b)      In the course of liquidation the land could be retained and could provide annual rental incomes. This would result in an income tax savings of $97,103.

[24]         Based on both of these assumptions, Mr. Williamson was of the view that the fair market value of the shares under the voluntary liquidation approach would increase to a range between $583,000 and $623,000. Table 1 below provides a comparison of the potential valuations using the voluntary liquidation approach valuations from the Blair report and Mr. Williamson’s assumptions in para. 23 above:

Table 2:  Fair market value using liquidation approach, comparing Blair report and Williamson critiques figures

Liquidation Approach (Fair Market Value)

Blair report

Assuming profit from inventory and retention/rental of land (per Williamson Critique)

Mid-point between Blair and Williamson figures

low

370,000

583,000

476,500

mid

390,000

603,000

496,000

high

410,000

623,000

516,500

D.       The trial judge’s reasons for judgment

[25]         The trial judge noted Mr. Williamson’s principal criticisms of the voluntary liquidation approach and the assumptions contained in the Blair report (at para. 24):

1.       the assumption that the Company would continue to provide an inadequate return on its assets did not allow for an improvement in the Company’s prospects;

2.       a potential purchaser would be looking forward rather than back;

3.       2009 had an increased profit margin;

4.       Mr. Shannon’s investments in the Company in 2007 of $200,000 and 2008 of $167,000 showed his intention to maintain the Company as a going concern and his belief the industry downturn was temporary;

5.       on such an ongoing basis, an estimated market value of the equipment [sic] was $687,000 [Note: the trial judge clearly intended to refer to the value of the shares at $687,000 but inadvertently referred to “equipment”.];

6.       alternatively, if the equipment was sold but the land retained for market rent there could be a liquidation value of approximately $500,000.

[26]         In making the following findings, the trial judge appeared to accept, at least in part, a number of Mr. Williamson’s criticisms. The judge concluded:

[25]      The comments [of Mr. Williamson] reflect the present reality that Shannon Lumber Limited has maintained its position in hard times, due to the acumen of its [principal], his investments and the support of a family’s combined talents and hard work. The company is a family business. Seasonally, they may hire up to 30 employees. Mr. Shannon and his three children run the operation. Mr. Shannon has wisely invested in the future. I am satisfied he has created a niche in the hardwood market and has been able to sustain it through a difficult period. His daughter said the company is currently busy, as it was in 2009.

[26]      The company will not be sold or liquidated. Its value is as an ongoing operation. But that value is limited to the Shannon family and it is hard to truly value it in the marketplace. That situation may change dramatically should the world marketplace improve. However, for the purposes of this lawsuit I must do so as best I can on the evidence and therefore I put the share value at $500,000 and the shareholder loan at $565,000.

[Emphasis added.]

E.       Discussion

[27]         It is evident the trial judge was faced with a wide range of potential share values, calculated under two different valuation approaches, and ranging from $390,000 to $862,000. He understandably recognized his decision as to the value of the shares must be arbitrary to some degree, given the uncertainty associated with the Company’s future. In choosing a fair market value of $500,000, it may be inferred that he began his analysis with the Blair report’s valuation of the shares as it was the only opinion before the court on that issue. However, he also appears to have preferred Mr. Williamson’s more optimistic portrayal of the Company’s potential. This is evident in his finding that the Company would not be sold and had value as an ongoing concern. On the other hand, it is also apparent that he accepted that the unique features of this business and the uncertainties in the hardwood market limited its marketability and therefore its value as a going concern. In my view, the valuation of $500,000 takes into account these competing considerations. Thus while the “why” for the trial judge’s valuation of the shares could have been expressed more clearly, in my view it is adequately explained when examined in the context of the evidentiary record.

[28]         The reasons for judgment in this case are to be distinguished from those considered by the Court in Crepnjak v. Crepnjak, 2011 BCCA 177, a decision relied upon by the appellant in support of her position. In Crepnjak, the necessary findings to support the chambers judge’s conclusions could not be discerned from his reasons or the evidentiary record and, accordingly, the appeal was allowed and a new hearing ordered.

[29]         Having found no error of law in the adequacy of the trial judge’s reasons, I would dismiss the appeal.

“The Honourable Madam Justice D. Smith”

I AGREE:

“The Honourable Madam Justice Neilson”

I AGREE:

“The Honourable Madam Justice Bennett”