Responsibilities and Rights Pursuant to Pledge Agreements


Is a business owner free from any personal responsibility to proactively consider whether to exercise their rights under a pledge agreement and entitled to rely on the depositary to advise them instead? According to the recent Manitoba Queen’s Bench decision in Loeppky et al. v. Taylor McCaffrey LLP et al., (1) the answer may be “no”.

In this case, Loeppky sold 50% of the shares he owned in Niverville Swine Breeders Limited (“NSB”), a hog company in Niverville, to The Puratone Corporation (“Puratone”) in 2006. (2) In the Purchase Agreement, Puratone promised to pay for the shares in two installments of $1,100,000. (3) The parties also entered into a separate Pledge Agreement that required the shares in NSB to be held by a depositary (Taylor McCaffrey or “TM”) and entitled Loeppky to take back the NSB shares in the ‘event of default’. (4) Such events included not only non-payment of monies as they were owed, but also any change to the financial position of NSB that would result in the debt-to-equity ratio of NSB becoming greater than 2.5:1. (5)

Before proceeding with the transaction, Loeppky had wanted to be “fully secured”. (6) Duboff, Loeppky’s lawyer – TM had previously acted for Loeppky on an unrelated matter, and referred Loeppky to Duboff for independent advice (7) – warned Loeppky that the NSB assets could be charged or sold, but that further security would “kill the deal”; Loeppky decided to proceed nonetheless. (8) Later, Puratone faced financial difficulties due to the downturn in the hog market in 2008. To help it weather these difficulties, Puratone took out a loan from the Manitoba Agricultural Services Corporation (“MASC”) that Puratone had NSB guarantee (the “Guarantee Action”). Loeppky was not consulted before the Guarantee Action, despite the fact that the Guarantee Action arguably caused NSB’s debt to equity ratio to exceed 2.5:1, (9) or at the very least significantly undermined the security provided by Puratone under the Pledge Agreement. (10) Loeppky alleged that had he been informed about the Guarantee Action he would have taken back his shares in NSB pursuant to the Pledge Agreement and continued NSB’s operations himself. Unfortunately, what transpired instead was that Puratone retained control of NSB and subsequently went on to seek protection from its creditors under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c.36, without having made the two $1,100,000 installment payments owing for the purchase price under the Purchase Agreement.

Loeppky subsequently brought suit against TM and others for losses he alleged he had sustained as a consequence of breaches of various duties owed to him in these circumstances.

Loeppky pursued TM in particular for breaching fiduciary duties TM (as a depositary) allegedly owed to Loeppky, as well as for allegedly breaching contractual duties and a duty of care in tort that TM owed to him, by failing to advise him of the MASC loan and Guarantee Action. (11) The Court for its part dismissed Loeppky’s claim against TM and effectively found that any damage suffered was caused by Loeppky’s own failure to make use of the financial information he had been provided with and to trigger a Notice of Default under the Pledge Agreement when he had the chance. (12) In reaching this conclusion the Court had particular regard for the terms of the Pledge Agreement itself, and found that TM was neither a fiduciary pursuant to this agreement nor responsible for monitoring the financial health of NSB or Puratone. (13) Under the terms of the Pledge Agreement, that responsibility fell to Loeppky himself. (14)

Overall, this case is a reminder that the responsibilities of professional advisers and intermediaries have limits. And that business owners should clarify the level of security provided by a pledge agreement, as well as their responsibilities in enforcing the pledge agreement and those of other participants, such as the depositary. If a business owner fails to do this they may end up being the author of their own misfortune and responsible for any loss that they go on to suffer.

1. Loeppky et al. v. Taylor McCaffrey LLP et al., 2021 MBQB 208

2 Ibid at paras. 54 – 60

3 Ibid.

4 Ibid at paras 59 – 60.

5 Ibid.

6 Ibid at para. 61

7 Ibid at para. 45

8 Ibid at para. 91

9 Ibid at para. 71.

10 Ibid.

11 Ibid at para. 255

12 Ibid at paras. 270, 295, 306.

13 Ibid at paras. 296 – 306

14 Ibid at para. 306.

By Xiyuan Feng – Supervised by Professor MacPherson

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