Whalley Trial Part VI: The McKeil Deal

Editor’s Note: John Whalley, the former Economic Development Manager of the Cape Breton Regional Municipality (CBRM) is suing the CBRM for constructive dismissal. The case finally came to trial from 20-24 August 2018 and the Spectator was there. We’re presenting our coverage in a series of articles because the trial touched on so many issues of interest to CBRM residents. This is Part VI (Read Part I, Part II, Part III, Part IV and Part V)

On 19 January 2015, John Whalley, then economic development manager for the CBRM, received an email from Michael Merritt, then CAO for the CBRM, asking if Whalley could prepare a “port update” for an in camera council meeting coming up on 26 January 2015.

In terms of his constructive dismissal case and questions of his actual responsibilities, Whalley’s lawyer would point to this as proof that officially at least, Whalley was still the municipality’s lead on the port.

But Whalley testified that he responded to this request by telling Merritt that if the update was to include information on “current commercial initiatives,” he would need more information. That’s because, once again there was a land deal going down in connection with the port and the CBRM’s economic development manager had nothing to do with it.

Whalley said the deal — a plan to purchase land in the Sydport Marine Industrial Park for lease to a private company — was being negotiated by The Breton Law Group’s Jim Gogan and consultant Mike Moore. (Moore, as we learned in Part IV, was engaged by Business Cape Breton as a port consultant in 2013, reported to the Mayor’s Office and had just negotiated the sale of Archibald’s Wharf to Canadian Maritime Engineering or CME. Merritt, in his testimony, would also name Moore as the lead negotiator on the McKeil deal.)

(For the record, Albert Barbusci of what was then still Harbor Port Development Partners was also involved in the McKeil deal. In June 2015, Blair McKeil would tell the Post that “a Montreal-based friend suggested he speak with Albert Barbusci…who was working on port development in Sydney.” But the McKeil deal was finalized in May 2015 and the CBRM didn’t sign its formal agreement with HPDP until June.)

When Whalley did receive further information, however, he became concerned the deal would violate the Municipal Government Act (MGA) as it was, in his opinion, “a very clear subsidy to a private business.”

And that wasn’t his only concern.

 

Sydport sale

The plan was as follows:

The CBRM would buy a number of adjacent lots, totaling 24 acres, in the Sydport Marine Industrial Park from two private companies — East Coast Metal Fabrication (ECMF) and Sydport Operations Inc. (SOI) — both headed by local businessman Jim Kehoe. (The location of the properties would be described wonderfully by Michael Merritt when it came his turn to testify as “in the Sydport area across the harbor from City Hall, just down somewhat.”)

The purchase price was to be $1.2 million.

In the Issue Paper that Port of Sydney CEO Marlene Usher presented to council on 12 June 2015 (after Whalley had resigned), the valuation of that property was explained this way:

The appraised value of the property in its current condition is approximately $667,000.00 not including the wharf which was appraised in 2011 at $356,000.00 by an independent appraiser.

Once the CBRM had purchased the land, it would then turn around and lease it to a third private company, Point Edward Marine (PEM), a subsidiary of McKeil Marine:

PEM will sign a 10 year lease with an option to renew for 10 years however they may buy the lease out during that period and the monthly lease payments would be deducted from the $1.2 million…This inducement to PEM is in consideration for the considerable economic benefits that will accrue to the CBRM from this project.

Whalley testified that because of his work on the purchase of the so-called Greenfield Site (a portion of Sydport identified as the likely location for a container terminal and purchased by the CBRM from Laurentian Energy Corporation — headed by Jim Kehoe — for $6 million in 2012), he knew that there were two conflicting appraisals of the Sydport property, both commissioned in 2011 as a result of a dispute between Laurentian shareholders.

Whalley felt the valuation being touted by Gogan and Moore relied heavily on the appraisal by Mackey Appraisals Ltd and wondered why there was no mention of the second valuation, done by the Altus Group.

I have seen both appraisals and although I do not have copies of the documents, I had the opportunity to take notes from them, so rather than simply relying on what was said in court, I propose to tell you what I read with my own eyes.

 

Altus

The Altus Group’s appraisal, dated 24 January 2011, valued the Sydport Marine Industrial Park as follows:

Market Value Sydport (buildings, lots, associated lands) — $0

Greenfield Site and Wharves — $7,650,000

Altus said the value of the park was best determined by estimating what a single purchaser would be willing to pay for the complete assets of Laurentian Energy Corp. In that spirit, it calculated the value of all Sydport assets (other than the Greenfield Site and the wharves) as $1,616,400. But then it subtracted costs for repairs and remediation, citing a 2005 ADI report that said the cost of bringing Sydport roads up to municipal standards would be $1.99 million while the cost of dealing with contaminated soil caused by a creosote timber culvert which would have to be removed and disposed of would be $461,737. The total was negative $379,723 or $0.

As for the value of the wharves, Altus used an income approach to valuation as “they are producing revenue.” But it also noted that the 2005 ADI report had put the cost of upgrading the wharves at $1,350,000.

Altus determined that the value of the wharf for long-term use was $0 while the value of the wharf for short-term use (assuming berthage revenue for five years) was $250,000. (The McKeil deal would see Point Edward Marine leasing the land for 10 years.)

I made special note of the descriptions of two properties: PID 15114523 and PID 15169436. These are described as the “finger pier” and both were to be purchased by the CBRM from SOI. Altus described them as wharves requiring “substantial renovations” with weight and lay down restrictions in place. (Elsewhere the appraiser noted that the “weakness” of the wharves prevented lay down with 30 feet of the docks.)

In short, Altus said the Sydport land the CBRM proposed to buy from two private companies for $1.2 million was worth $0.

 

Mackey

Mackey, in direct contrast to Altus, determined market values for individual Sydport lots and said those values reflected “the expected range of value if each property were marketed over a normal period of time.”

(Altus said the lots had been for sale for 12 years but few had sold and liquidity was poor. But where Altus looked at other sales of land in Sydport, Mackey looked at sales of land in other industrial parks.)

Mackey stated the sites would have “minor” contamination but that any discussion of contamination was beyond the scope of the appraiser’s expertise.

My notes from the Mackey appraisal are maddeningly incomplete, so I’m not sure what the total value placed on the properties involved with the sale was. (In his testimony, Michael Merritt said he thought both appraisals had been used in valuing the property.)

But when Whalley was asked (once again, although he’d had nothing to do with negotiating the deal) to present an Issue Paper on it to council, he balked, insisting that he couldn’t advise council to pay $1.2 million for a parcel of land knowing there was a second appraisal out there that valued it at $0.

Whalley testified he would have had to withhold documents to make a positive recommendation to council.

 

CFO, DMA

Whalley said he expressed his concerns about the McKeil deal very clearly to Merritt and that soon afterward  — on 8 April 2015, in fact —  CFO Marie Walsh expressed similar concerns to Merritt. (Walsh, in her testimony, agreed she had done so. Her 8 April 2015 email was introduced in court.)

Walsh testified to three main concerns about the deal:

First, she was bothered that the CBRM proposed leasing to McKeil with the municipality “covering property tax.” Walsh said even if the CBRM owned the property, it still had to charge property tax, “which we were not going to be doing.”

Her second concern was that, under the MGA, the municipality could sell or lease land below market value to a non-profit group only. Walsh testified that the CBRM was using debt servicing, not market value, to calculate the lease cost and was not including insurance or improvement costs.

And finally, Walsh was concerned the CBRM had not written anything into the deal about “not being liable if there were pre-existing environmental problems with the property.”

Walsh was so concerned that she wrote to Emily Pond, an adviser with the NS Department of Municipal Affairs, removing identifying details about the companies but presenting the basic elements of the deal and asking for Pond’s advice.

Pond (in an email I saw because reporters are allowed to look at the Joint Exhibit Book, a wonderful fact I learned from a fellow reporter) responded that:

• nothing in the MGA allows a municipality to provide a capital lease for a property.
• the CBRM can acquire property and lease it at market value [emphasis mine]
• buying land with the intention (essentially) of selling it would disqualify the land as a TCA [tangible capital asset] and the CBRM would not be able to borrow for it.
• the CBRM could provide no tax concession or other direct form of financial assistance to a business or industry.

Walsh forwarded Pond’s email to Merritt, Whalley and CBRM Solicitor Demetri Kachafanas.

Whalley said  that in responding to Walsh, Merritt and Kachafanas he brought up a further concern he had about the deal.

 

Conflict of interest?

Whalley said he was concerned Jim Gogan, the lawyer assisting with the McKeil negotiations, was in a conflict of interest. One look at the Sydport sales contract will show you why:

 

Gogan was representing everyone in this deal, for reasons I have never heard explained. (Kachafanas, the regional solicitor, is the contact person for the municipality on the Archibald’s Wharf contract, why did he not represent the CBRM in the McKeil deal?)

The CBRM’s lawyer, Tony Mozvik (who happens to share a law firm with Gogan), made light of this fact, wondering why Whalley would go to the trouble of researching the Canadian Bar Association’s definition of a conflict of interest (which Whalley had said he did) or checking the Nova Scotia Joint Stocks Registry to find out who was the recognized agent for SOI and ECMF (which Whalley also said he did — discovering that in both cases it was Gogan).

But Whalley argued that when he presented an Issue Paper to council he had to be prepared for any question and such research was simply preparation.

 

Honoring the MGA

I mentioned right from the beginning that this case played out on two completely different levels — on the surface, a constructive dismissal case but just underneath that, a peek into the workings of the CBRM under Mayor Cecil Clarke.

This is the point where the two levels separate abruptly: Whalley resigns in May 2015 but port development, obviously, continues. I’m going to follow both threads but in keeping with my stated chief interest — the workings of the CBRM — I’m going to start by explaining what happened with the McKeil deal.

Whalley refused to present the Issue Paper on the McKeil deal and soon after was, by his own account, removed from the port file by Merritt. Whalley resigned on 25 May 2015 but the McKeil deal continued. We’ll now turn to Michael Merritt’s testimony for “the rest of the story.”

Merritt testified that in response to Walsh and Whalley’s concerns, Mayor Clarke decided they needed an opinion on the deal from the Department of Municipal Affairs, so the day after Whalley resigned, on 26 May 2015 (fun fact: the exact same day Harbor Port Development Partners was registered as a company), Merritt and Gogan met with Department of Municipal Affairs (DMA) executive director Mark Peck and municipal adviser Emily Pond in Halifax.

Merritt was rather peevish on the stand about having to attend the meeting on short notice, as it interfered with a party he was throwing “for [his] daughter’s graduation” but luckily he was “able to have a different dinner party for [his] daughter’s graduation.”

Merritt testified that he and Gogan had discussions with Peck and Pond, drew “certain conclusions” and returned to the CBRM. Whalley’s lawyer, Blair Mitchell, had Merritt admit that Peck had committed his opinion to writing in the form of an email. Merritt testified that the email said the McKeil deal “met the requirements of the MGA,” specifically “Mr. Whalley’s concerns” and “congratulated” the CBRM for taking the “initiative on economic development in the province.”

But Mitchell insisted the email from Peck said no such thing. Mitchell said the email said, essentially, “CBRM, you have to make the decision, the matter has been drawn to your attention. You should rely on your own counsel and you should be informed by your fiduciary responsibilities.”

Merritt didn’t agree, stating that the email said the deal met the requirements of the MGA.

I don’t know what was actually in Peck’s email (I stand to be corrected, but I don’t believe it was actually introduced during the trial) so I can’t say what it said. But I’m not the only one who didn’t see a copy of it — Marie Walsh, the CFO who had expressed concerns about the McKeil deal, testified that she was never given a copy of Peck’s email. She was simply told the DMA had approved the deal. (Merritt couldn’t recall if he’d provided a copy to Walsh, but said, “I may have.”)

In any event, the McKeil deal was a go, and the terms were presented to council by Port of Sydney CEO Marlene Usher (who happens to be Marie Walsh’s sister, a fact that never ceases to amaze me).

Her Issue Paper made no mention of the Altus Group appraisal of Sydport:

McKeil_Docs_16.06.2015

But wait, there’s more…

 

The smoking contract?

From the opening of the trial there had been discussions between the lawyers about two exhibits, the introduction of which was apparently a matter of contention.

After a great deal of back and forth, Justice Patrick Murray allowed Mitchell to introduce one of these documents during his cross examination of Merritt.

The document was a copy of the McKeil lease agreement. It was dated 7 April 2015 (i.e. the day before Walsh had shared her concerns with Merritt) and it was signed by CBRM Mayor Cecil Clarke.

This contract, for obvious reasons, received a lot of attention in the press — it was the closest thing to a bombshell to drop during the trial (I would argue it was a bombshell). As a practitioner of “slow journalism” I get the benefit of the Mayor’s own response to this bombshell, as provided to the CBC:

During an interview Friday, Clarke said the document needed to be signed so the negotiating process could move forward. It outlined what the company was looking for and then allowed staff to determine if it would work, he said.

“That is very clearly in the document,” Clarke said in Halifax, where he was attending the Conservative Party of Canada convention. Clarke is also running to lead the Nova Scotia Progressive Conservatives.

“It was accepting that this is what staff would follow up on and do the due diligence that was in place. So that is a normal course of business and a responsible thing to do.”

Except that Marie Walsh, the CFO who had already raised concerns about the deal and who might have been expected to be among the “staff” who would “determine if it would work” testified that she had never seen this document before it was presented to her in court by Blair Mitchell.

Even Merritt, asked by Mitchell if he were aware an offer to lease had been signed, equivocated:

I can’t recall that specifically.

And both District 6 Councilor Ray Paruch and Deputy Mayor Eldon MacDonald told the CBC they had no idea the mayor had signed such a document.

So if it were really the “normal course of business” for parties to sign unenforceable versions of contracts before signing actual contracts (and does anyone other than the mayor actually believe that to be true?) why would Clarke not inform council and the CFO and the CAO that he had done so?

Both Walsh and Merritt made the point that the document Clarke signed was not enforceable — Walsh explained that the contract would need two signatures on behalf of the CBRM and Merritt pointed out that it would have to be approved by council.

To me, Clarke signing sent a signal to McKeil that the mayor was on board and would do what he could to ensure the deal was approved. (Maybe even “direct or focus” council on a “personal agenda and attempt to influence voting,” which the MGA says Nova Scotian mayors must not do?)

The revelation of the contract has already had repercussions: during a meeting of the CBRM Council’s General Committee yesterday (September 4), District 8 Councilor Amanda McDougall moved that council receive a “thorough and detailed review” of the “roles, responsibilities, expectations and limitations of “all members of the CBRM Council” By way of background information, she attached the CBC story with Mayor Clarke’s defense of his actions in signing the lease agreement.

But the controversy also knocked loose another little nugget of information related to the McKeil deal.

In downplaying the notion that Jim Gogan was in a conflict of interest by representing the buyer and the sellers in the McKeil deal, Tony Mozvik at one point asked Whalley, “Are people working over there?” Meaning, as I understood it, are people working at Sydport as a result of the McKeil deal?

Although I was puzzled by a lawyer seeming to suggest that a conflict of interest doesn’t matter if it creates jobs, I was also curious as to just how many people were working “over there” as a result of the McKeil deal. (I mean, besides Mike Moore, who is now, as was mentioned in Part III, regional manager of commercial interests for Heddle Marine Service’s East Division in Sydney, of which McKeil CEO Blair McKeil is a director.)

In her 2015 Issue Paper, Marlene Usher promised “Job creation estimated at over 100+ [sic] jobs, direct and indirect, over five years from PEM.” (Over 100+?)

Of course, Usher also promised the deal would result in tug services in the harbor which would add millions to the local economy via the cruise industry alone only to admit to council in September 2017, that there were no “readily available tug services” in Sydney harbor because they didn’t have enough business to be able to afford to hire McKeil.

So what about the jobs? Are we anywhere near “over 100+”? Apparently not, according to Mayor Clarke, who told the CBC the deal had resulted in “dozens of people working that weren’t working before.”

And that’s where we’ll adjourn for the day.

Next up: the defense calls its first witness.

 

 

 

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