r v. Hobart, 2017 ONSC 8181

Poole et al. v. Phillips et al. [Indexed as: Poole v. Phillips] Ontario Reports Ontario Superior Court of Justice, Tausendfreund J. January 31, 2017 166 O.R. (3d) 319 | 2016 ONSC 8181 Case

Summary Corporations — Directors — Plaintiffs bringing action for damages for lost investments — Moving defendants being directors ofcorporations which were general partners of limited partnerships which issued units in which plaintiffs invested — Defendantsmoving for

summary judgment dismissing claims against them — Motion granted in part — Defendants aware of seriousfinancial concerns since 2005 — Triable issue existing as to what might reasonably be expected of defendants concerningfinancial stewardship of corporations as it affected plaintiffs — Claim for oppression remedy dismissed as plaintiffs did not pleadfacts to support that claim — Claim based on defendants' appointment of receiver being dismissed as decision to appoint receiverwas business judgment decision which deserved deference.

The moving defendants were directors of corporations which were general partners of limited partnerships which issued units in whichthe plaintiffs invested. The plaintiffs brought two actions for damages for their lost investments, claiming that the defendants werenegligent, that they breached their statutory and fiduciary obligations to the plaintiffs, and that their actions were oppressive. Thedefendants brought motions for

summary judgment dismissing the claims against them. Held, the motions should be granted in part. The defendants had been aware since 2005 of the existence of serious financial concerns. There was no evidence that any of thoseconcerns were addressed. The question of what might reasonably be expected of the defendants concerning the financial stewardship ofthe corporations, as it affected the plaintiffs, was a triable issue.

The defendants' decision to have a receiver appointed, which the plaintiffs claimed had a negative impact on their investments, wasentirely a business judgment decision and was entitled to deference. The claim based on the appointment of the receiver should bedismissed. The claim for statutory oppression remedies should also be dismissed as the plaintiffs had failed to plead facts that would justify suchorders. There was no evidence on the motions that any defendant had personally benefited from his or her conduct as a director. Cases referred to Allen v. Platinum Rouge Valley Inc., [1998] O.J.

No. 2834, 70 O.T.C. 281, 43 B.L.R. (2d) 62, 80 A.C.W.S. (3d) 1096 (Gen. Div.); Alvi v.Misir (2004), 73 O.R. (3d) 566, [2004] O.J. No. 5088, [2004] O.T.C. 1102, 135 A.C.W.S. (3d) 825 (S.C.J.); BCE Inc. v. 1976Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, 52 B.L.R. (4th) 1, EYB 2008-151755, J.E. 2009-43, 301D.L.R. (4th) 80, 71 C.P.R. (4th) 303, 383 N.R. 119, 172 A.C.W.S. (3d) 915; Bell v. Source Data Control Ltd. (1988), (ON CA), 66 O.R. (2d) 78, [1988] O.J. No. 1424, 53 D.L.R. (4th) 580, 29 O.A.C. 134, 40 B.L.R. 10, 12 A.C.W.S. (3d) 19 (C.A.);Coleman v.

Myers, [1977] 2 N.Z.L.R. 225; [page320] Cooper v. Hobart, [2001] 3 S.C.R. 537, [2001] S.C.J. No. 76, 2001 SCC 79, 206D.L.R. (4th) 193, 277 N.R. 113, [2002] 1 W.W.R. 221, J.E. 2001-2153, 160 B.C.A.C. 268, 96 B.C.L.R. (3d) 36, 8 C.C.L.T. (3d) 26,REJB 2001-26862, 110 A.C.W.S. (3d) 943; Hill v. Hamilton-Wentworth Regional Police Services Board (2005), (ON CA), 76 O.R. (3d) 481, [2005] O.J. No. 4045, 259 D.L.R. (4th) 676, 202 O.A.C. 310, 36 C.C.L.T. (3d) 105, 33 C.R. (6th) 269, 142A.C.W.S. (3d) 518 (C.A.); Hryniak v. Mauldin, [2014] 1 S.C.R. 87, [2014] S.C.J.

No. 7, 2014 SCC 7, 314 O.A.C. 1, 453 N.R. 51,2014EXP-319, J.E. 2014-162, EYB 2014-231951, 95 E.T.R. (3d) 1, 12 C.C.E.L. (4th) 1, 27 C.L.R. (4th) 1, 21 B.L.R. (5th) 248, 46

C.P.C. (7th) 217, 37 R.P.R. (5th) 1, 366 D.L.R. (4th) 641, 2014EXP-319, J.E. 2014-162; Normart Management Ltd. v. West HillRedevelopment Co. (1998), (ON CA), 37 O.R. (3d) 97, [1998] O.J. No. 391, 155 D.L.R. (4th) 627, 113 O.A.C. 375,41 C.C.L.T. (2d) 282, 17 C.P.C. (4th) 170, 77 A.C.W.S. (3d) 518 (C.A.); Pelling v. Pelling, [1981] B.C.J. No. 1945, 130 D.L.R. (3d)761, [1982] 2 W.W.R. 185, 16 B.L.R. 150, , 12 A.C.W.S. (2d) 22 (S.C.); Peoples Department Stores Inc. (Trustee of) v.Wise, [2004] 3 S.C.R. 461, [2004] S.C.J.

No. 64, 2004 SCC 68, 244 D.L.R. (4th) 564, 326 N.R. 267, J.E. 2004-2016, 49 B.L.R. (3d) 165,4 C.B.R. (5th) 215, REJB 2004-72160, 134 A.C.W.S. (3d) 548; Percival v. Wright, [1902] 2 Ch. 421; ScotiaMcLeod Inc. v. PeoplesJewellers Ltd. (1995), (ON CA), 26 O.R. (3d) 481, [1995] O.J. No. 3556, 129 D.L.R. (4th) 711, 87 O.A.C. 129, 23B.L.R. (2d) 165, 9 C.C.L.S. 97, 59 A.C.W.S. (3d) 213 (C.A.); Standard Trustco Ltd. (Re), 1992 LNONOSC 270, 15 OSCB 4322, 6B.L.R. (2d) 241, 1992 CarswellOnt 140; UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., (ON SC), [2002]O.J.

No. 2412, 214 D.L.R. (4th) 496, 27 B.L.R. (3d) 53, 19 C.C.E.L. (3d) 203, 32 C.C.P.B. 120, 115 A.C.W.S. (3d) 981, 2002CarswellOnt 2096 (S.C.J.) Statutes referred to Business Corporations Act, R.S.O. 1990, c. B.16 [as am.], ss. 134(1), 135(4)(c), 248 [as am.]

Canada Business Corporations Act, R.S.C. 1985, c. C-44, ss. 122 [as am.] (1)(b), 241 [as am.] Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 [as am.] Securities Act, R.S.O. 1990, c. S.5 [as am.] Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 20.04(2) (a), (2.1),

(2.2) MOTION for

summary judgment dismissing the actions as against the moving defendants. Michael S. Hebert and Cheryl G. Mcluckie, for all plaintiffs. John Fabello and Irfan Kara, for defendants Douglas Hyatt, Leo De Bever, Robert Gauld and John Cook. David S. Steinberg, for defendants Marina Ushycky, Steven Brockhouse and Terence Fisk. Bruce O'Toole, for defendant Margaret Davis. Pathik Baxi, for defendant Robin Pullen. TAUSENDFREUND J.: — [page321] Overview [1] The plaintiffs seek damages for their lost investments. Nine of the 16 defendants in these two actions have brought

summaryjudgment motions to have these actions dismissed as against them. The plaintiffs' claims are based on a similar set of factual allegations.Although there has yet to be a request to consolidate, the parties agree that for purposes of this motion, these two actions may be treatedas one. [2] The plaintiffs were investors in limited partnerships ("LPs"), trusts and preferred shares. They lost a substantial amount of theirinvestments when in February 2012 an application was made for court protection under the Companies' Creditors Arrangement Act,R.S.C. 1985, c. C-36 ("CCAA").

This included the LPs in which the plaintiffs had invested. [3] The defendants were directors of corporations which acted as general partners for the LPs. The plaintiffs assert that these defendantsas directors owed them a duty of care. They state that these defendants were negligent, breached their fiduciary and statutory obligationsto them and that their actions were oppressive. [4] These defendants seek to have these actions dismissed on the basis that they as directors of general partnerships do no owe a duty ofcare to the plaintiffs as investors in LPs.

Facts [ 5 ] The business generally known as the "First Leaside Group" ("FL Group") was started by the non-moving defendant David C. Phillips ("Phillips") in or about 1988. He controlled and was the directing mind of that business until December 2011, when the FL Group appointed a restructuring officer and turned the operational authority over to a committee of board members which included some of the moving defendants. [ 6 ] First Leaside Wealth Management Inc. ("FLWM") was the de facto parent company of the FL Group with Phillips as its principal directing mind.

By August 2011, the FL Group had grown into a complex structure of 161 different but interrelated LPs and funds. [ 7 ] As noted in the Grant Thornton report of August 19, 2011, which will be further referred to below, the FL Group offered a variety of investments including -- full brokerage and financial planning services; -- higher risk securities with debt and equity offerings invested directly or indirectly within the FL Group; [page322] -- four types of products, namely: -- LP units; -- trust units; -- mortgages; and -- corporate preferred shares. [ 8 ] The Grant Thornton report further noted that the LPs and other instruments within the FL Group collectively allowed investors to place their capital, directly or indirectly, in the following types of assets: -- multi-unit residential properties in Canada and the United States; -- retirement homes in the Provinces of Ontario and British Columbia; -- raw land with development potential throughout Southern Ontario; -- four small, independent accounting firms in Western Canada; -- a cidery and brewery in Southern Ontario, as well as a liquor consulting business; and -- high-tech companies in their infancy stage which were eligible to receive government grants. [ 9 ] FLWM had seven operating entities, including First Leaside Securities Inc. ("FLSI"), a dealer of securities registered under the Securities Act , R.S.O. 1990, c.

S.5 and a member of the Investment Industry Regulatory Organization of Canada ("IIROC"). It was through FLSI that investment units were sold. [ 10 ] Under Phillips' direction, FLSI advisors promoted and sold units of the various FL Group LPs, funds and preferred shares. At its peak, the FL Group had about 1,000 participating investors.

[ 11 ] These moving defendants were all directors of one or more companies, including FLWM, First Leaside Realty II Inc. ("Realty II") and 965010 Ontario Inc. ("965"), all incorporated under the Business Corporations Act , R.S.O. 1990, c. B.16 of Ontario (" OBCA "). Each of these corporations acted as a general partner for a series of LPs in which these plaintiffs and others [page323] had invested. These defendants, like the plaintiffs, were also investors in FL Group LPs and funds. They served as directors at the request of Phillips and did so on a volunteer basis.

They played no role in the sale or marketing of any FL Group investment products. They had no contact with nor made any representations to any of the plaintiffs in advance of or after the plaintiffs had made their investments in the FL Group entities. [ 12 ] The first signs of possible financial concerns for the FL Group came in the form of the KPMG audit report to the audit committee of Wimberly Apartments Limited Partnership ("WALP"). It was for the year ended December 31, 2004 and released September 20, 2005. 965 was WALP's general partner ("GP").

The KPMG report included these observations: -- the partnership has been experiencing operating losses for a number of years; -- at December 31, 2004, the partnership had 2.3 million in debt payable to related parties.

In addition, $893,000 of contractual commitments were outstanding on that date; -- related parties have continued to fund operating deficits and distributions during 2005; -- support from related parties has been critical to the assessment of the partnership as a going concern; -- management has not implemented a formal policy for the approval of related party transactions, including the issuance of partnership units in settlement of outstanding balances; -- clear guidance must be provided on the process for the approval of all related party transactions; -- written agreements should govern all related party balances; -- there are a growing number of short-term loans occurring between the partnership and a number of related entities; -- for internal management and assessment as well as audit purposes, management must continue to improve on its depth of analysis of its operations; -- management must also increase the level of detail in its support for accounting issues and transactions. [page324] [ 13 ] Although the KPMG report might be viewed as a "call to action" for the directors of 965 and perhaps directors of other FL group board of directors, there is no evidence of what action, if any, the board of directors of 965 took to address these issues and concerns KPMG had raised in this report. [ 14 ] In November 2009, the Ontario Securities Commission ("OSC") commenced an investigation into the FL Group.

Phillips was made aware of that investigation in March 2010. [ 15 ] In March 2011, the OSC requested that a viability study be carried out on the FL Group. To that end, Grant Thornton was engaged for the purpose of reviewing, reporting and making recommendations on the business, assets, affairs and operations of the FL Group and to assess its financial viability.

On March 18, 2011, at the request of the OSC, Phillips signed the following undertaking: As agreed with Staff of the Ontario Securities Commission ("Staff"), Grant Thornton LLP ("Grant Thornton") has been retained to conduct a viability review (the "Review"). During the Review, and for a one week period after the delivery to Staff of the final report prepared by Grant Thornton as a result of the Review, David C. Phillips undertakes that no sales will be made to any investors of any debt or equity in Wimberly Apartments Limited Partnership ("WALP") nor any of its subsidiaries.

This undertaking includes an agreement not to sell any units of WALP, Wimberly Fund and First Leaside Fund during the relevant time. [ 16 ] Grant Thornton completed its review and provided its report on August 19, 2011. Phillips' undertaking thus expired on August 26, 2016. No further restrictions by the OSC were then in place on Phillips or the FL Group. [ 17 ] A joint directors' meeting of FLWM and 965 was held on September 5, 2011 to consider the Grant Thornton report. [ 18 ] The executive

summary of the Grant Thornton report included the following comments:

-- There are significant interrelationships between the entities in the FL Group which results in a complex corporate structure. Within the FL Group, there are several LPs that own units in other LPs. FLWM is the de facto parent entity within the FL Group. It earns a significant amount of its revenue by charging fees on new capital raises and administration fees within the FL Group. Certain LPs, particularly WALP, have been a drain on the resources of the FL Group, as a result of recurring operating losses and property rehabilitation costs. Significant funds have been loaned between entities in the FL Group.

This allowed the FL Group to perpetually operate as a going concern, as generally it had access to capital to meet cash flow shortfalls, albeit using new investor money in some cases; -- There is a significant equity deficit based on asset valuation; -- The future viability of the FL Group is contingent on its ability to raise new capital.

If the FL Group was restricted from raising new [page325] capital, it would likely be unable to continue its operations in the ordinary course, as it would have insufficient revenue to support its infrastructure, staffing costs, distributions and its funding requirements for existing projects; -- The FL Group has had challenges in the area of financial reporting; -- The FL Group is in the early stages of implementing enhanced corporate governance. There is little apparent allocation of responsibilities at the executive level.

David Phillips has had active hands on management of all facets of the FL Group; -- We recommend as follows: -- Management should take steps to improve its accounting capacity and financial systems, so that it can better accommodate its financial reporting requirements; -- The FL Group should ensure that there are financial statements available for each entity which holds investors' money.

It should ensure that better reporting and disclosure be made to investors; -- The Board should improve its governance policies and procedures. [ 19 ] On September 2, 2011, Phillips made a loan of $500,000 to the FL Group which then paid Phillips $80,000 on September 8, 2011 and repaid the sum of $500,000 to Phillips on November 3, 2011. [ 20 ] The Grant Thornton report was not released to investors until November 7, 2011. In that intervening period from August 26 to November 7, 2011, the FL Group continued to market its products.

The defendants Phillips and Wilson acknowledged to the OSC that approximately $18.76 million of securities of the FL Group entities were sold to investors during the period August 26 to October 28, 2011. Included among that group of investors were the plaintiffs Keith and Linda Carter to the extent of $200,000 and Paul McGrail to the extent of $200,000. [ 21 ] On November 7, 2011, the FL Group under the signatures of the defendants Phillips, Hyatt and De Bever sent a letter to all investors of the FL Group.

Excerpts of that letter are as these: -- Grant Thornton was retained to conduct a review of assets, affairs and operations of the FL Group and produced a report on August 19, 2011;

-- Grant Thornton concluded, among other things, that the future viability of the FL Group is contingent on their ability to raise new capital. OSC staff advised that it is not appropriate to use money raised from new investors to fund the operating losses, rehabilitation costs and distributions of existing LPs. Accordingly, at the request of OSC staff, the FL Group has agreed to voluntarily stop trading units in all LPs and funds; [page326] -- WALP has been a significant drain on the resources of the FL Group. WALP needs cash to fund operations, distributions and to rehabilitate its properties.

It has required significant capital through direct investment by FL Group funds to meet these cash flow requirements. WALP auditors have expressed concern over its continued viability; -- Grant Thornton concluded, among other things, that: -- The future viability of the FL Group is contingent on their ability to raise new capital . . . if the FL Group was restricted from raising new capital, it would likely be unable to continue its operations in the ordinary course. [ 22 ] The financial statements of WALP for the years ended December 31, 2009 and 2010 were first available on September 16, 2011.

These statements indicate that certain funds were advanced to WALP by other FL Group entities as follows: -- $4.34 million by FLWM as of 2010; -- $3.581 million by First Leaside Mortgage Fund on the strength of promissory notes; -- $1.24 million by First Leaside Realty. [ 23 ] At the October 27, 2010 board of directors' meeting of 965, one of its directors, the defendant De Bever, noted that WALP was "technically worth zero".

However, WALP continued to pay regular monthly dividends to its investors, most if not all with money injected into the FL Group by new investors. [ 24 ] In October 2011, the OSC sought a "cease trade order" against all securities of the FL Group which then agreed that all FL Group entities would refrain from issuing or selling securities as of October 28, 2011. [ 25 ] Late November 2011, the directors of FLWM, FLR-II and 965 signed resolutions to discontinue distributions for LPs for which these companies were the general partner. [ 26 ] On December 9, 2011, Grant Thornton released a second report which traced funds received by the FL Group between August 19 and November 1, 2011.

The report disclosed that approximately $20 million was raised from investors during that period. [ 27 ] In December 2011, the management and affairs of the FL Group were transferred into the control of an independent committee of directors. That committee ultimately determined that a managed liquidation and wind-up was in the best interest of the FL Group. It authorized the application in February 2012 for court protection under the CCAA . [page327] [ 28 ] By order of December 7, 2012, Grant Thornton was appointed Receiver over all assets of the FL Group.

Analysis [ 29 ] The plaintiffs in their pleadings advance several causes of action based on: (

a) Negligence; (

b) Breach of fiduciary obligations; (

c) Breach of statutory duties; and

(

d) Oppressive conduct alleged by holders of preferred shares in FLWM. [ 30 ] The moving defendants have brought four motions, one by the defendants Hyatt, De Bever, Gauld and Cook, a second by the defendants Ushycky, Brockhouse and Fisk, a third by the defendant Pullen, and a fourth by the defendant Margaret Davis. Each of these motions seeks

summary judgment relief for the question of whether a trial is required to determine if the moving defendants could be found liable for the claims made against them. [ 31 ] These defendants assert that the claims against them as directors must fail for these reasons: (

a) as directors, they owe no duty to the plaintiffs; (

b) they made no representations to the plaintiffs; (

c) the claims for breach of trust, oppression and breach of statutory duty are untenable. [ 32 ] They urge that there is no genuine issue requiring a trial and that the actions against them should be dismissed. [ 33 ] The Rules of Civil Procedure, R.R.O. 1990, Reg. 194 provide: -- Rule 20.04(2)(a): The court shall grant

summary judgment if the court is satisfied that there is no genuine issue requiring a trial. -- Rule 20.04(2.1): In determining whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and may (

a) weigh the evidence; [page328] (

b) evaluate the credibility of a deponent; and (

c) draw any reasonable inference from the evidence. 1 [ 34 ] The evidence submitted on these

summary judgment motions is by way of documents, affidavits and transcripts of cross- examinations on these affidavits. [ 35 ] As is now well settled, the approach a court is to take on a motion for

summary judgment must be guided by the comments of the Supreme Court of Canada in Hryniak v. Mauldin , [2014] 1 S.C.R. 87 , [2014] S.C.J. No. 7 , 2014 SCC 7 . The

summary judgment rule should be interpreted broadly, favouring proportionality and fair access to affordable, timely and just adjudication of claims. 2 [ 36 ] The court must determine whether there is a genuine issue requiring a trial based only on the evidence presented. If there is no genuine issue, then the motion shall be granted. Where there is a genuine issue, the motion judge should consider whether the need for a trial can be avoided by ordering the presentation of oral evidence under rule 20.04(2.2) or relying on the fact-finding powers in rule 20.04(2.1) , namely,

(1) Weighing the evidence.

(2) Evaluating the credibility of a deponent.

(3) Drawing any reasonable inference from the evidence. [ 37 ] These powers can only be exercised where doing so would not be against the interest of justice. In Hryniak , the Supreme Court clarified, at para. 66, that "[t]heir use will not be against the interest of justice if they will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole". Claims of Negligence Did the Directors owe a duty of care to the plaintiff investors? [ 38 ] To establish a claim in negligence, the plaintiffs must prove (

a) the existence of a duty of care; (

b) failure to meet the standard of care; [page329] (

c) proximate cause; and

(

d) resulting loss.3 [39] These moving defendants are directors of FLWM, FLR-II and 965, all Ontario corporations, to which the OBCA applies. Section134(1) of the OBCA provides: 134(1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporationshall, (

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 circumstances.4 [40] This obligation of a director to the corporation is mirrored in the

Canada Business Corporations Act ("CBCA"): 122(1) 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 circumstances.5 [41] Referring to s. 122 of the CBCA, the Supreme Court stated: The first duty has been referred to . . . as the "fiduciary duty". It is better described as the duty of loyalty . . . This duty requires thedirectors and officers to act honestly and in good faith with a view to the best interests of the corporation. The second duty is commonlyreferred to as the "duty of care".

Generally speaking, it imposes a legal obligation upon directors and officers to be diligent in supervising and managing the corporation's affairs.6 [42] As noted [in] Alvi v. Misir (2004), (ON SC), 73 O.R. (3d) 566, [2004] O.J. No. 5088 (S.C.J.), at para. 57: In view of the fact that "the statutory duties of good faith, loyalty and care are owed to the corporation, the directors cannot have separateduties of the same nature owing to the shareholders.

Such parallel duties would create untenable and unrealistic conflicts". [page330] [43] These moving defendants were directors of corporations which were general partners of LPs which issued units in which theseplaintiffs invested. These defendant directors owe their duty not to the LPs but to the corporate general partner. It falls to the general partner to "consider the interest of the limited partnership as a whole, not the individual situation of one or more limited partners".7 [44] There may be instances where a director's duty of care is owed to someone other than the corporation.

These cases are limited to (

a) where the director has actively participated in tortious conduct beyond the role of a director of the corporation.8 Finlayson J.A.speaking for the court stated: (b) "It is well established that the directing minds of corporations cannot be held civilly liable for the actions of the corporations theycontrol and direct unless there is some conduct on the part of those directing minds that is either tortious in itself or exhibits a separate identity or interest from that of the corporation such as to make the acts or conduct complained of those of the directing minds . . ."9; and (

c) where there is evidence of fraud, dishonesty, want of authority or other conduct specifically pleaded which justifies piercing thecorporate veil, where the corporate veil is a sham or where the conduct exhibits a separate identity of interest from the bona fide interests of the corporation.10 [45] In the actions giving rise to these

summary judgment motions, it is uncontested that none of these moving defendants made -- any representations to any of the plaintiffs; [page331] -- neither met nor spoke to any of the plaintiffs; -- did not create any marketing or offering material. [46] There is no evidence that any of these moving directors acted in a manner that had "a separate identity or interest from that of thecorporation so as to make the act or conduct complained of their own".

I also note that the plaintiffs did not plead fraud, dishonesty, wantof authority or conduct by these defendants in the nature of a separate identity or interest of these corporations. In the absence of suchevidence and pleadings, the only duty these defendants owe would appear to be to the general partnership corporation of which they were

directors. This would militate for a dismissal of the action as against these defendants, but for the question of their stewardship of thefinances of the corporations for which they had been appointed as directors. I will now turn to that topic. [47] In Bell v. Source Data Control Ltd.,11 Cory J., in dissent, considered the question whether the directors owed a fiduciary duty otherthan to the corporation, such as to individual shareholders. He found that at common law that was not so, as directors owed their fiduciary duty only to the corporation. Referring to Pelling v.

Pelling,12 he noted that at common law there was no general fiduciary obligation owed by a director to shareholders. He then considered the New Zealand Court of Appeal decision of Coleman v. Myers,13 which departed from that common law rule originally set out in Percival v. Wright.14 The New Zealand Court of Appeal set out a test fordetermining whether or not a fiduciary duty by directors existed for shareholders as well as the corporation.

It provided that the standardof conduct required from a director in dealing with a shareholder would differ depending upon the surrounding circumstances and thenature of the responsibility that the director had assumed towards the shareholder.

The New Zealand Court of Appeal expressed thatduty, at pp. 325-5, as follows: [page332] . . . it is my opinion that the standard of conduct required from a director in relation to dealings with a shareholder will differ dependingupon all the surrounding circumstances and the nature of the responsibility which in a real and practical sense the director has assumedtowards a shareholder . . . it is an area of the law where courts can and should find some practical means of giving effect to sensible andfair principles of commercial morality in the cases that come before them. [48] Cory J. in Bell v.

Source Data Control Ltd., supra, referring to Coleman v. Myers, supra, stated at [at paras. 31 and 32] p. 9 (QL): A similar test can be derived from some Ontario decisions. In Laskin v. Bach & Co. Inc., (ON CA), [1972] 1 O.R. 465, 23 D.L.R. (3d) 385 (C.A.), Arnup J.A. observed that thecategory of fiduciary duties and obligations which may arise from the circumstances of the case and the relationship of the parties wasno more closed than the categories of negligence at common law. [49] Lax J. in UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc.15 dealt with an oppression remedy.

This required the trial judgeto examine the conduct of a director who sought the benefit of a self-interested contract with the corporation he served. In her reasons,the now late Justice Lax spoke of the duty of care expected from a board of directors [at paras. 125, 126 and 129]: It is settled law that the duty of due care requires that where directors make decisions likely to affect shareholder welfare, their decisionmust be made on an informed and reasoned basis. In CW Shareholdings Inc. [v. WIC Western International Communications Ltd.,(1998), (ON SC), 39 O.R. (3d) 755], Mr.

Justice Blair expressed it in this way: In the end, they must make a decision and exercise their judgment in an informed and independent fashion, after a reasonable analysis ofthe situation and acting on a rational basis with reasonable grounds for believing that their actions will promote and maximizeshareholder value[.] A Board is entitled, indeed encouraged, to retain advisors, but this does not relieve directors of the obligation to exercise reasonablediligence. In Hanson Trust PLC v. ML SCM Acquisition Inc.[, 781 F.2D 264 U.S. Second Cir.

N.Y. (1986) at 274-276], the United StatesCourt of Appeals for the Second Circuit was asked to determine if directors' approval to grant a lock-up option of substantial corporateassets in a take-over struggle was protected by the business judgment rule. As Pierce, J. stated, "in duty of care analysis, the presumptionof propriety inures to the benefit of directors, who enjoy wide latitude under the business judgment rule in devising strategies".

However,as he noted: [page333] The proper exercise of due care by a director in informing himself of material information and overseeing the outside advice on which hemight appropriately rely is, of necessity, a pre-condition to performing his ultimate duty of acting in good faith to protect the bestinterests of the corporation. . . . . .

In Hanson, Pierce, J. held that a prima facie case was made out that the directors breached their fiduciary duties in making their decisionafter a three-hour, late-night meeting relying on their financial advisor's "conclusory opinion" and without asking enough questions oftheir advisors prior to making a decision.

The Board failed to read or review carefully the various offers and agreements and insteadrelied on advisors' descriptions. [Emphasis added] [50] Standard Trustco Ltd. (Re)16 is a decision of the OSC in which it considered actions and responsibilities of the directors of StandardTrust Company ("Standard Trust and Standard Trustco Ltd"). The OSC was to determine whether the conduct of the directors wascontrary to the public interest.

The OSC had the following comments on this question: P 28 As against the Respondent directors it was alleged that they acted contrary to the public interest on July 24, 1990 by voting toapprove Standard Trust unaudited interims and the issuance of Standard Trustco unaudited interims without making appropriate inquiriesin relation to the concerns of the OFSI [Office of the Superintendent of Financial Institutions] and its requirement for an audit. . . . . .

We are of the opinion that, in relying on management to the extent they did and only taking the steps they did, the Respondent directorsfailed to exercise the kind of prudence and due diligence that they ought to have exercised, given the information they had about the

financial condition of Standard Trust and Standard Trustco on July 24, 1990, and the seriousness of the concerns expressed by OSFI[.] . . . . . Directors should not rely on management unquestioningly where they have reason to be concerned about the integrity or ability of management or where they have notice of a particular problem relating to management's activities.

As of July 24, 1990, there was reason for the Respondent directors to question management. . . . . . [page334] . . . the Respondent directors were in possession of information on July 24, 1990, which . . . should have caused them not to rely on management to the extent they did and to make further inquiries[.] . . . . .

P 29 In our view . . . it was incumbent upon all of the Respondent directors to make a number of inquiries directly of various people to obtain the necessary information and advice in order to satisfy themselves about the integrity of the interim financial statements before they made the decision to approve and issue the financial statements . . .

At the very least, the directors ought to have given management specific direction on the inquires that were to be made of the outside lawyer and the auditor and insisted that management report back to the Boards with the results of the inquiries so that the Boards could then consider the advice and exercise their judgment on whether to issue the financial statements or make additional disclosure or make further inquiries. . . . . .

P 30 . . . it would be prudent for directors who had concerns about their company's financial statements to make the necessary inquires to satisfy their concerns before voting to approve the statements or releasing them. . . . . .

P 31 We are therefore of the view that by approving the financial statements without making the appropriate inquiries, they should bear some of the responsibility for the subsequent release of the misleading information to the public, which provided the nexus to the capital market[.] As a result, we have found that the respondent directors failed to exercise the care, diligence and skill that reasonably prudent persons would have exercised in comparable circumstances and that they acted contrary to the public interest on July 24, 1990, by voting to approve the Standard Trust and the Standard Trustco unaudited interim financial statements without making appropriate inquiries in relation to the concerns of OSFI.

While s. 135(4)(

c) of the OBCA permits a reasonable diligence defence for directors who in good faith rely on the advice of an officer or employee of the corporation, the statute requires the circumstances for relying on such advice to be reasonable. [ 51 ] In BCE Inc. v. 1976 Debentureholders , 17 the Supreme Court of Canada confirmed that the duty of directors is owed to the corporation. However, the court also allowed that there may be times when, it may be appropriate, although not mandatory, to consider the impact of corporate decisions on shareholders or particular groups of shareholders.

Referring to its 1993 decision [page335] of People's Department Stores Ltd. 18 the S.C.C. noted as follows [at paras. 39 and 40]: . . . as stated by Major and Deschamps JJ., at para. 42: We accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia , the interests of shareholders, employees, suppliers, creditors, consumers, government and the environment. . . .

In considering what is in the best interests of the corporation, directors may look to the interests of, inter alia , shareholders, employees, creditors, consumers, governments and the environment to inform their decisions. Courts should give appropriate deference to the business judgment of directors who take into account these ancillary interests, as reflected by the business judgment rule.

The "business judgment rule" accords deference to a business decision, so long as it lies within a range of reasonable alternatives[.] [ 52 ] These defendant directors and particularly those who were directors of 965 were or should have been aware as of September 20, 2005 that there were financial concerns with WALP. KPMG released its audit findings report on that date. The report included these concerns -- the partnership has been experiencing operating losses for a number of years;

-- related parties have continued to fund operating deficits and distributions during 2005; -- support from related parties has been critical to the assessment of the partnership as a going concern; -- management has not implemented a formal policy for the approval of related party transactions by including theissuance of partnership units and settlement of outstanding balances; -- clear guidance must be provided on the process for the approval of all related party transactions; -- written agreements should govern all related party balances; -- there are a growing number of short-term loans occurring between the partnership and a number of related entities;[page336] -- management must increase the level of detail in its support for accounting issues and transactions. [53] Although this should have been a "wake up call" to the directors of at least 965, there is no evidence that any of these concerns wereaddressed or indeed, that any action was taken to rectify apparent shortcomings in the financial management by 965 of its LPs. [54] At the directors' meeting of 965 on October 27, 2010, the defendant director De Bever noted that WALP units appear to beworthless.

Yet it continued to declare and pay out dividends on a monthly basis to at least September 2011. How these dividends werefunded remains on the facts of these motions an unanswered question. However, it appears likely that these dividends were funded bynew investors. [55] In March 2011, the OSC mandated that a viability study be undertaken of the FL Group.

Grant Thornton was retained to that end.The defendant David Phillips gave an undertaking to the OSC on March 18, 2011, that until one week after the delivery to the OSC ofthe expected Grant Thornton report that no sales would be made to any investor of any debt or equity in "WALP" nor any of itssubsidiaries. [56] The Grant Thornton report was released on August 19, 2011. It reached several conclusions: (

a) If the FL Group was restricted from raising new capital, it would likely be unable to continue its operations in the ordinary course,as it would have insufficient revenue to support its infrastructure, staffing costs, distributions, and to meet their funding requirements forexisting projects. (

b) There is a significant equity deficit based on the "asset valuation". (

c) The FL Group would have a cash flow deficiency of approximately $15.9 million over the three-year period of 2011 to 2013. The report was not disclosed to then current or potential investors until November 7, 2011, when the FL Group released its letter of thatdate. [57] In the intervening period, the FL Group continued to market its investments.

The second Grant Thornton report dated December 9,2011 indicated that between August 19 and November 1, 2011, the FL Group raised approximately $20 million from investors with $3.7million paid out in dividends. [page337] [58] On November 3, 2011, the defendant Phillips was repaid by the FL Group the apparently unsecured loan of $500,000. Whether thispayment was a preference remains an unanswered question. [59] Referring to s. 122(1)(

b) of the CBCA, the S.C.C. in BCE Inc.19 stated: This duty, unlike the s. 122(1)(

a) fiduciary duty, is not owed solely to the corporation, and thus may be the basis for liability to otherstakeholders in accordance with principles governing the law of tort and extra contractual liability . . . Section 122(1)(

b) does not providean independent foundation for claims. However, applying the principles of Saskatchewan Wheat Pool v. Canada, (SCC), [1983] 1 S.C.R. 205, courts may take this statutory provision into account as to the standard of behaviour that should reasonablybe expected. [60] These defendants, as directors, had been on notice as of 2005 that "their boat was taking on water". The material before me isincomplete on what action, if any, these defendants took to address the problem. It appears, however, that over the next six years, fewmanagement changes, if any, were made. The first of the two Grant Thornton reports did not mince words when it noted:

If the FL Group was restricted from raising new capital, it would likely be unable to continue its operations in the ordinary course. To continue the maritime metaphor, "[i]f the boat is going down, one should stop selling tickets". But "tickets" continued to be sold -- tothe extent of $20 million from new investors between August 19 and November 2011. [61] The question of whether the law of negligence should be extended to address the situation raised in these two actions requires a Cooper v. Hobart20 approach.

The record on these motions is insufficient for that purpose. [62] I find that the question of what might reasonably be expected of these directors concerning the financial stewardship of thesecorporations, as it affects the plaintiffs, is a triable issue. [63] The plaintiffs plead that the decision of the directors to have a receiver appointed for the FL Group had a negative impact on theplaintiffs' investments. They state that the defendants with that decision failed to maximize the value of the plaintiffs' investments in theFL Group.

Each of these defendant [page338] directors were, like the plaintiffs, investors in the FL Group. Their decision to appoint areceiver, I find, was entirely a business judgment decision which in these circumstances deserves deference. Accordingly, I find that thispart of the plaintiffs' claim will be dismissed. [64] The plaintiffs further advance a claim of oppression under s. 248 of the OBCA and s. 241 of the CBCA. They plead that thesedefendants exercised their powers as directors in a manner that was oppressive or unfairly prejudicial to the plaintiffs and unfairlydisregarded their interests.

The oppression remedy is a statutory right available to shareholders to move against the corporation, if theminority shareholders have been prejudicially affected by the majority.

Here, the plaintiffs do not claim against the corporation, butagainst the individual directors. [65] While the oppression remedy permits claims against directors, the plaintiffs must plead facts that would justify an order of this kind.The oppression remedy would be available to rectify conduct by directors that "amounts to self-dealing at the expense of the corporation or other shareholders": see UPM-Kymmene Corp.21 There is no evidence on this motion that any director personally benefited from hisor her conduct as a director.

As I noted above, each of these directors suffered investment losses similar to those alleged by the plaintiffs.The plaintiffs' claim of oppression against these defendants is dismissed. [66] Two of the defendants, Robin Pullen and Margaret Davis, state that this action should be dismissed against them, as they took nopart in any of the meetings of directors.

I was not provided with any authority to support the proposition that absenteeism from boardmeetings short of a written resignation absolves a director from responsibilities owed to the corporation or to others by virtue of havingbeen appointed to that position. For that reason, I am not inclined to dismiss the action against either of these defendants for the reasonthey advance. The defendant Pullen further states that he did not know that he had been elected or appointed as a director. He alleges thathe believed that his only role with WALP was that of chair of the audit committee. That may be so.

Yet I find that this is a triable issue,as there are insufficient facts before me on this motion. It will be left to the trial judge. [page339] [67] I may be spoken to within 30 days on the question of costs, if required. Motions granted in part. Notes 1 Rules, R.R.O. 1990, Reg. 194. 2 Hryniak, at para. 49. 3 Hill v. Hamilton-Wentworth Police Services Board (2005), (ON CA), 76 O.R. (3d) 481, [2005] O.J. No. 4045(C.A.), at para 84. 4 OBCA, R.S.O. 1990, c. B.16. 5 CBCA, R.S.C. 1985, c. C-44. 6 Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, [2004] S.C.J.

No. 64, 2004 SCC 68, at para. 32. 7 Allen v. Platinum Rouge Valley Inc., [1998] O.J. No. 2834, 70 O.T.C. 281 (Gen. Div.), at para. 35. 8 Normart Management Ltd. v. West Hill Redevelopment Co. (1998), (ON CA), 37 O.R. (3d) 97, [1998] O.J. No.391 (C.A.). 9 Ibid., at p. 102 O.R. 10 ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), (ON CA), 26 O.R. (3d) 481, [1995] O.J. No. 3556 (C.A.), atpara. 25.

11 Bell (1988), (ON CA), 66 O.R. (2d) 78, [1988] O.J. No. 1424 (C.A.). 12 Pelling, [1981] B.C.J. No. 1945, 130 D.L.R. (3d) 761, (S.C.). 13 [1977] 2 N.Z.L.R. 225. 14 [1902] 2 Ch. 421. 15 UPM-Kymmene Corp., (ON SC), [2002] O.J. No. 2412, 214 D.L.R. (4th) 496, 2002 CarswellOnt 2096 (S.C.J.). 16 Standard Trustco, 1992 LNONOSC 270, 15 O.S.C.B. 4322, 1992 CarswellOnt 140. 17 [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, at paras. 39-40. 18 Supra, note 6. 19 Supra, at para. 44. 20 2001 SCC 79 , [2001] 3 S.C.R. 537, [2001] S.C.J. No. 76. 21 Supra, note 15, at para. 201. End of Document