Peoples Department Stores Inc' v' Wise

1
Peoples Department Stores Inc. v. Wise

• By
• Lauren AdamsJeremy ArchibaldAndrew
  BulliedJennifer Farrell Dave Reid

2
Schedule

• Introduction
• Summary
• Background
• Trial Court
• Appeals Court
• Supreme Court
• Affects on Business Today
• Conclusions
• Questions

3
Introduction

• Fiduciary Duty - Employees' or directors' legal
  and moral duty to exercise the powers of their
  office for the benefit of the employer or the
  firm. Directors owe the duty of utmost good faith
  and must not put themselves in a position where
  their personal interests and their fiduciary
  duties may conflict. Also called fiduciary
  obligation.
• Petitioned by Caron Belanger Ernst Young Inc.
• Against Wise Stores Inc. and their majority
  shareholders the Wise Brothers.

4
Introduction

• Section 122(1) of the CBCA states that
• Every director and officer of a corporation in
  exercising their powers and discharging their
  duties shall(a) act honestly and in good faith
  with a view to the best interests of the
  corporation and(b) exercise the care, diligence
  and skill that a reasonably prudent person would
  exercise in comparable circumstance (Canada, 63).

5
Summary

• The Quebec Trial Court found Wise liable for
  breaching their fiduciary duties under section
  122(1) of the CBCA and ordered over four million
  dollars in compensation to Caron Belanger Ernst
  Young Inc.
• Decision was appealed to the Quebec Court of
  Appeal.
• Appeal court overturned the trial judges ruling.
• Case proceeded to the Supreme Court of Canada
  after an appeal was made by the trustee on the
  appeal courts ruling.
• Decision upheld by the Supreme Court of Canada.

6
Background

• Wise was a public company operating 50 department
  stores throughout Quebec.
• Three majority share holders Lionel, Ralph and
  Harold Wise (Wise Brothers). Controlled 75 of
  the firm.
• Peoples was incorporated in 1991 and had 81
  stores located from Ontario to Newfoundland.
• Peoples was owned by Marks Spencer, the company
  was struggling financially when it was purchased
  by Wise Inc. in July of 1992 for 27 million, 22
  million of which was to be paid over the next 8
  years.

7
Background

• Consolidation of the two parties lead to the
  eventual bankruptcy of both.
• The additional administrative work for Wise was
  overwhelming.
• Inventory management problems arose.
• Joint inventory system was established, dividing
  purchasing responsibilities.
• TD Bank decided to stop dealing with both Peoples
  and Wise do to the weak financial condition of
  the relationship.
• The Wise brothers made personal guarantees to the
  bank to maintain the relationship, but failed to
  honor the financial guarantees.

8
Background

• December 1994 MS began bankruptcy proceedings
  against Wise and Peoples.
• Both companies declared bankruptcy.
• Assets of both companies were sold.
• Mainly trade creditors that were still owed
  unpaid debts.

9
Trial Court

• Petition filed by a trustee of Peoples claiming
  the Wise brothers had put the interests of Wise
  above the interests of Peoples to the detriment
  of Peoples creditors.
• The trustee also said that the Wise brothers
  violated section 100 of the Bankruptcy and
  Insolvency Act because they had been transferring
  property for a year at less than fair market
  value.

10
Trial Court

• Section 100 of the Bankruptcy and Insolvency Act
  deals with the situation where the secured
  creditor has failed to value his security, he
  shall, if the trustee so demands, value the
  security. If he does this, he is entitled to
  share in the bankruptcy on to the extent that his
  claim exceeds the stated value of the security.
  The trustee, for his part, may accept the
  creditors valuation. In either of these events,
  the trustee may require that the security be put
  up for sale.

11
Trial Court

• Trial judge found the Wise brothers and Chubb
  Insurance both liable and ordered them to pay
  4.44 million each.
• It was found that the Wise brothers had
  implemented a corporate policy that failed when
  they knew that the companies were going to go
  bankrupt which was detrimental to the creditors
  of Peoples.
• It was also found that the wise brothers enjoyed
  indirect benefits because they were the
  controlling shareholders

12
Quebec Court of Appeal

• Court not comfortable comparing the interests of
  the corporation with the interests of the
  creditors when Peoples was so close to bankruptcy
  
• Peoples assets were transferred at 94 which was
  said to be close enough to fair market value
• Quebec Court of Appeal overturned the decision.
• Why is this important?

13
Supreme Court of Canada

• Judges ruled that since directors are elected by
  the shareholders and are therefore responsible
  for acting in the shareholders best interest.
• Creditors are included into part (b) of section
  122(1), but not (a), as directors are obliged to
  act in the best interest of the corp. without
  favoring any particular stakeholder.
• Justices decided it was clear the Wise Brothers
  acted reasonably given the circumstances and did
  not breach their duty of care. QCA decision held.
  
• Why was this important?

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How does this affect Business?

• Set the precedent that the process of making a
  business decision will influence the result.
• Supreme Court decided that directors of a
  corporation owe no duty of care to creditors
  under 122(1)(a), as duty is owed to the
  corporation itself.
• If SCC as to extend duty to creditors under
  122(1)(b) then there is a potential to extend
  duty to shareholders. This would make the
  Canadian courts more like American Courts.
• Maintained distinction between Canadian and
  American Courts while still adopting Delaware
  style considerations to the process of the
  business decision.

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Conclusion

• We agree with the decision of the QCA and the SCC
  to overturn and hold that the Wise brothers owed
  no fiduciary duty to the trustee of Peoples.
• The business decisions of the Wise Brothers were
  not made in attempt at a credit scheme, but
  rather to save two companies that were very close
  to insolvency.
• The decisions were also well informed and made
  reasonably given the circumstances.

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Questions?