Crocus asks court to sell off Canad Inns assets
Accuses Leo Ledohowski of diverting funds to own company
The receiver for the failed Crocus Fund is asking a court to dissolve and liquidate the parent company of Canad Inns so it can recover a 15-year-old investment.
It is also accusing company president Leo Ledohowski of not acting honestly and in good faith and alleges that Canad Corporation assets are wrongfully being diverted for Ledohowski’s benefit.
“Leo has exercised unfettered, autocratic control over the business and affairs of Canad without regard to the Applicant’s interests as a shareholder of Canad,” Crocus says.
In an application filed in June, Crocus says it is is seeking to recover the “fair value” of its 16 per cent stake in Canad Corporation Ltd. so that it can reimburse 34,000 Crocus Fund investors.
The fund was forced into receivership a decade ago, and its receiver has been trying to recover funds ever since.
Crocus Fund paid $5 million for the stake 1999. Canad Inns has grown significantly since that initial investment.
Province's largest food, beverage operator
Canad Inns owns about a dozen hotel complexes in Manitoba and North Dakota, as well as Tavern United, Garbonzo’s Pizza Pub and the Metropolitan Entertainment Centre. It is the province's largest food and beverage operator, with more than 37,000 seats in its restaurants and clubs.
Canad Corporation’s income before shareholder management fees and amortization went from $3.8 million in 2000 to $6.5 million in 2013, according to court filings.
According to court documents filed by the receiver, Canad Corporation Ltd.has not paid Crocus anything since 2003.
On top of the liquidation order, Crocus seeks detailed financial information from Canad and Ledohowski, including audited financial statements, monthly reports and a breakdown of Ledohowski’s expenses.
This information has never been revealed publicly, since Canad is a privately held company.
Steven Peleck, senior vice-president of Deloitte Restructuring, stated in an affidavit that Canad has “systematically refused” to pay out bonus, dividends and other payments since 2003.
He added that the profitability of the company was similar and in excess to the years when Crocus received dividends and bonuses.
“Canad has elected to wrongfully divert funds to the direct or indirect benefit of Leo [Ledohowski],” Peleck stated in his affidavit.
Peleck also pointed to multiple loans between Canad and Ledohowski’s holding company as being outside “normal commercial terms” for arm’s-length parties.
Similar legal action rare in Manitoba
John Pozios, director of the Centre for Private Enterprise and the Law at the University of Manitoba, said this kind of legal action is unusual, especially in this province.
"There has to be a significant breakdown in shareholder relations," he said. "It is a rare occurrence in Manitoba, probably every two or three years."
Pozios said courts aren't interested in punishing parties who allegedly don't live up to an agreement, but they do have a lot of power.
"The court is just looking to fix the problem," he said. "And will go as far as it has to go to remedy the situation. But in some cases, the court has the jurisdiction to order an extreme remedy like the liquidation or dissolution of the corporation."
$6.3M loaned to company
Canad loaned $6.3 million interest-free to Ledohowski’s holding company while Canad owed that same holding company $800,000 bearing interest at eight per cent, according to the affidavit.
The interest on the loan was waived or deferred over the years.
Crocus also argued that Ledohowski is not entitled to more than half a million dollars in fees he was paid in 2012 and 2013.
Crocus also requested that Canad stop making any further payments to Ledohowski “in excess of the amounts to which Leo [Ledohowski] was and is properly entitled” based on the shareholder agreement signed between Crocus and Canad in 1999.
Ledohowski’s lawyer, Beth Eva, declined an interview because this matter is before the court. She said the application by Crocus will be defended.
His lawyers asked for large portions of the Peleck affidavit to be expunged because they contain “argument, legal interpretations and conclusions” which are based on “hearsay, double hearsay and speculation.”
Canad Corporation is the last investment the Crocus Fund hopes to recover on behalf of shareholders.
Crocus recently completed its third interim payment to shareholders.
The fund says it does not know when or if any more money will be provided to shareholders.