Sid

ney

Greenwood and Nancy Fitzgerald had worke

d for National Business Systems, an

international computer repair service,

for ten years. It th

erefore came as a surprise when they

both received lay

-

off notices on a Friday

afternoon late in December 2010

. Both were given

severance packages that matched t

heir seniority so they decided that this might be the catalyst

to launch t

heir own business rep

airing computers and related equipment for business

es

in their

community. Both were single, so no one else would be affected if the business failed.

Sidney

had

graduated from a community college with a diploma in computer technology

while Nancy

had left

high school after grade twelve, having taken several business courses prior to

graduating.

They decided to establish a partnership and to call their firm Compa

ct Business Systems,

closely mimicking a large successful firm in another

city called Compaq Bu

siness Systems.

Since they had no plans to expand their business beyond their own community, they did not

believe that the similarity in names would pose a probl

em. In fact,

Sidney

and Nancy so

admired the colours used in the Compaq B

usiness Systems' logo

that they used similar gradient

tones of red on all their signage and advertisements.

Sidney

and Nancy

also

named their

prem

ium same day service: "Presidio

Ser

vice" (a name

similar to

, but not exactly the same as,

one

already tradema

rked by Compaq Busine

ss Systems) and this became their most popular

standard of service outselling their three day "

Invest S

ervice" by a margin of two to one.

Sidney

and Nancy gave

no thought to the non

-

competition clause they had signed with National

whe

n they were hired. A

ll employees of National were required to sign a non

-

competition

covenant stipulating that they would not work for a competitor or start up a competitive busines

s

within three years after leaving National Business Systems. There was n

o geographic

restrict

ion contained in the non

-

competition clause, as National Business Systems had

customers all over the world.

In con

sid

ering their start up costs, the pair determ

ined that they would need a small shop to

conduct their business from, som

e testing and repair

-

equipment, a modest inventory of

electronic components and a delivery van to pick

-

up and return equipment they would repair.

They would also need to do some adv

ertising in the local newspaper to get their name in front of

the public.

Pooling their resour

ces they found they had a shortfall in start

-

up capital of some

$50,000.

Because neither

Sidney

nor Nancy owned a home or had any appreciable assets, the bank

would not lend them the money without a guarantor. Nancy's uncle Fred wa

s fairly well

establi

shed and agreed to sign a continuing guarantee for the necessary funds, insisting that

"this was as much as he was prepared to 'be on the hook for', so they bett

er make do." This

2

limitation however, was not written into the agreement w

ith the bank, nor was

the bank made

aware of it.

Compact Business Systems opened for business on March 1, 20

11

. In the first couple of

months after start

-

up the business was goin

g extremely well. On April 15, 20

11

, one of

Compact's customers

-

Lucky A

ccounting

-

delivered

one of its (Lucky's) desktop HQ

computers to Compact. Compact was asked to upgrade the computer and install a new

operating system known as Vulnerable. When L

ucky's employee returned to Compact on April

21

st

to pick up the HQ comput

er, Compact informed

the Lucky employee that he was out of luck

because the HQ computer had been stolen in a break

-

in the night before. Neither Compact nor

Lucky had any insurance c

overage on the HQ computer.

Compact had installed surveillance

cameras in

the store and there

was a sign on the door identifying an alarm company. In order

to save money, however, Compact had stopped paying for the alarm monitoring and the

surveillance

cameras were just dummies.

Compact's desk clerk calmly explained to the L

ucky

employee that th

e loss was not Compact's fault. The Lucky employee became very angry but

she was not able to obtain any satisfaction from Compact.

When Compact upgraded comput

ers, this often involved not only changing the hardware but

also adding ad

ditional software. S

hawna, a mature looking17 year old high school student,

brought her computer into Compact's. Shawna's computer had not being working well lately

and she had abs

olutely no idea why that was the case. Compact's desk clerk advised Shawn

that the only way to

improve the computer would be for her to purchase Compact's Deluxe

Upgrade Package for $750.00. Shawna

,

under the urging of the desk clerk

,

agreed and signed

t

he work order. Shawna picked up her computer a few days later. Once she

had her computer

at h

ome it worked perfectly.

When her parents returned home and found out how much she

had spent to repair the computer her mother called a friend in the computer r

epair field who

advised her that the repairs should have cost no more than

$200.

About a week

after Shawna had visited the store, Nancy, who happened to be working at the

counter, spotted a customer behaving strangely. Upon closer observation she saw him

slip

some small computer components into his pocket and move towards the

exit. Nancy got

anot

her clerk who was in the back working on some computers and, after the customer had left

the store, Nancy and the clerk approached him and demanded that he empty

his pockets. The

customer refused and Nancy demanded that he come back i

nto the store while s

he called the

police. Intimidated by the other clerk (whose nickname was "Moose") and believing that he had

no choice but to comply he accompanied them into the

store. He was placed in the break room

and the door was closed. He wait

ed until the police a

rrived and was subsequently arrested and

charged with theft.

Later that day a long term customer, known to his friends as "Shady

,

" brought his computer to

Compa

ct. Shady had heard that Compact would install software

(named FreeFromIT

unes)

,

created by a c

ompany called S

ketchysoft,

which would allow Shady to download music and

movies from itunes

.com

without payment. Compact installed this software and Shady paid

the

$400.00 fee. Whe

n

Shady got his comp

uter home he realized that FreeFr

omITunes did not

work

at all and

,

in fact

,

resulted in Shady being charged double for each download.

Sidney and Nancy

called on several of National Business Systems customers and pe

rsuaded

several to switch their business with offers of reduced service ch

arges and faster turn

-

around.

Sidney

and Nancy were particularly proud that they were able to persuade the regional office of

3

International Tire

Inc.

to bring all their computer rep

air work to Compact. International Tire

Inc.

,

who was National Business S

ystems largest custom

er, was in the 3

rd

year of a 5 year service

contract with National Business. Nancy was also quick to point out to those she called on that

she had long suspecte

d National Business Systems of overcharging its bigger customers and

using

off

-

shore components

of inferior quality in their repairs. Needless to say, many of

National's customers were eager to switch their business in favour of the lower prices offered by

Compact.

On June 1, 20

11

,

Compact Business Systems signed a three year a

greement with Interna

tional

Tire Inc. Terms of the contract included the requirement that Compact would repair all of

International Tire's computers

in a timely manner

and that Inte

rnational would send all of its

computer repairs to Compact during the 3 y

ear period. The cont

ract was signed by the

President of International Tire (on behalf

of

International Tire Inc.) and by Sidney Greenwood.

Another term of the contract required Com

pact to pick up, repair and return the computers

within an

"

average time o

f approximately 4 bus

iness days.

"

Sid and Nancy were fortunate to get a large contract from another tire manufacture

-

American

Tire Corporation

-

based in Nova Scotia. This contra

ct was fixed price contract. Sid and Nancy

negotiate a deal that would pa

y

$100,000 per year f

or 4 years for keeping ATC's computers

working in tip top shape. The contract contained Sid and Nancy's cost exposure because

ATC's ability to util

iz

e their ser

vices was limited to having Sid and Nancy repair or upgrade a

maximum of 1

300 computers a year.

A contract covering this work was executed by both

parties. A few days after the contract was signed, Nancy notice that the

contract stated that the

annual pa

yment would be

$10,000 per year.

Around Thanksgiving 20

11

,

things started

to go wrong. Nancy,

who had agreed to take care of

the administrative end of the business, had fallen behind in paying the firm's bills and several

suppliers were becoming impatien

t. At the same time, payments were not coming in from their

customers and

Nancy was too busy t

o spend time chasing the delinquent accounts. Mainly as

a result of this, cash flow was tight.

By this time

,

Sidney

and Nancy's business had paid $15,000 o

f the initial loan. The pair

approached the manager of the bank for an add

itional $40,000 in or

der to pay off the remainder

of the initial loan and have an additional $5,000 to get them through their 'tight spot'. The bank

manager agreed and provided the

needed funds with all of Compact's business assets to be

secured against t

he additional funds.

One night a couple of weeks later,

Sidney

was delivering a computer to a customer on his way

home from work and had an accident. A young woman in the other ca

r, Freda Schmidt, was

seriously injured, suffering serious neck and back i

njuries. It was deter

mined that

Sidney

had

made an improper lane change and he was subsequently charged with dangerous operation of

a motor vehicle. As it turned out, Freda was a hig

hly paid administrative assistant and when her

boss learned she could be o

ff work for at least

three months, was going to sue for the loss of

her services and the cost of replacing her on a temporary basis.

By early November, the average

time Compact to

ok to repair a computer

had slipped from 4

business days to 7 or 8 busines

s days. After severa

l complaint

s

from International to Compact,

International advised Compact that it was cancelling the contract because Compact had

4

breach

ed

a condition of the con

tract.

International Tire Inc. stopped sending its computers to

Compact f

or repair.

In additi

on, d

uring the last two months of the

ir first

year

,

the economy went from bad to worse.

Orders dropped off, suppliers were screaming for payment in full on their

overdue accounts, and

the bank was threatening to seize the collateral po

sted as security for

their loan.

Sidney

and

Nancy decided that they had had enough and decided to declare bankruptcy. Believing that

uncle Fred was in the clear, it seemed like the

y had nothing to lose. The bank could 'go pound

salt'.

In the week be

fore the pair were to

visit their lawyer to discuss the bankruptcy process, Sid and

Nancy wrote cheques to three of their suppliers whom they felt had treated them well and who

they

did not want to leave holding the bag. They also arranged to sell off som

e unused

inventory to

a discount warehouse for 30% of its original value. They pocketed the cash they

received from the sale, believing that they were entitled to it as compensation

for all of their hard

work.

In early January

20

12

,

they met with their l

awyer to start bankru

ptcy proceedings. They

disclosed their financial situation, including the most recent loan arrangement they had with the

bank. Although the lawyer only gave th

e initial loan agreement with the bank a cursory look, he

assured them the

inventory was the on

ly security the bank was entitled to. The delivery van,

which was leased, could be returned to the leasing company without any additional costs and

they would s

imply abandon the lease for the building they were using as a workshop.

Meanwhile, the leasin

g company, having heard about Compact's troubles, decided to try and

recover their van, fearing that bankruptcy proceedings could see it tied up for weeks once t

he

trustee in bankruptcy put a lock on the firm's premises. They ordered

their agents to break

into

Sidney

& Nancy's shop late one night to recover the van. In doing so, the agents broke the

padlock on the door and, while moving through the dimly lit pre

mises, one of the agents tripped

over an electric heater which ignited a p

uddle of solvent Nanc

y had spilled and failed to clean

up.

The solvent ignited immediately causing a fire that quickly spread through the shop.

Serious damage was done to the sho

p and one of the agents sustained serious burns while

putting the fire out

. He was out of work

for three months recovering from the injuries

Is the restrictive covenant (non

-

competition clause) that

Sidney

and Nanc

y signed with

National one that would be enforced by the court

s

? Explain your answer thoroughly.

5.

Explai

n how

tres

pass

is an issue in this case from

Compact's

perspective? Who is the

trespasser? If an action for trespass is commenced, who would be the plaintiff and who

would be the defendant?

What

would be the most probable outcome (remedy) and why.

6.

Do the trespasser(s) that you identified in question 5 above have any action against

Compact

? Who would be the plaintiff(s) and on what basis? Who would be the

defendan

t(s)?

Pleas

e explain your answer

thoroughly

.

7.

Descr

ibe the st

eps taken by Sid and Nancy immediately prior to the bankruptcy that may

be offences under the Bankruptcy and Insolvency Act

. What is the legal term used to

describe each of these s

teps

(events)?

8.

Does Lucky Accounting have a potent

ial cause

of action against Compact? If so, what

type of action (give its legal name) would Lucky pursue? Explain the cause of action

and whether or not they might be successful.

If Lucky was su

ccessful, what would be

the most probable outcome (remedy)

and why.