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Good afternoon.

Following are this week’s summaries of the Court of Appeal for Ontario for the week of November 29 to December 3, 2021.

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On December 1, 2021, the Court released what is sure to be one of this year’s top appeals, not only because of the myriad of corporate legal issues considered, but because of its high-stakes, high-profile nature. In Extreme Venture Partners Fund I LP v. Varma, the Court considered claims of conspiracy, breach of contract, breach of fiduciary duty, and knowing assistance in breach of fiduciary duty arising from the underhanded business dealings of two of the directors of the corporate general partner of a limited partnership carrying on business in the tech sector. The limited partnership invested in start-up tech companies, including in the company that initially developed and launched the well-known dating App, Tinder. The directors who were operating the target business conspired with a prominent Silicon Valley tech billionaire, who was an original founding executive of Facebook, to sell him the business at a grossly suppressed price. In the process, they hid the limited partnership’s ownership interest in the company that owned Tinder, rid themselves of their original partners, with whom they were not getting along, and increased their stake in the business. In an expansion of the categories of fiduciary relationships, the Court held that directors of a corporate general partner of a limited partnership owe a fiduciary duty not just to the corporate general partner, but also to the underlying limited partnership. The Court also allowed the cross-appeal, resulting in a prophylactic disgorgement award in the amount of $29.5 million (U.S.), representing the entirety of the profits reaped by the faithless fiduciaries, and more than doubling the disgorgement award made by the trial judge. The tech billionaire who knowingly assisted in the breach of fiduciary duty and was the primary beneficiary of that breach, was found jointly and severally liable for the full disgorgement award. Apologies in advance for the length of the summary, but I wanted to make sure that I gave our readers a full flavour of most, if not all, of the interesting and complicated factual and legal issues canvassed in this 55-page decision.

In Kumarasamy v. Western Life Assurance Company, the Court held that the respondent’s long-term disability claim was statute-barred. The Court held that a clear and unequivocal denial of the respondent’s long-term disability claim was not required to start the limitations clock. Having a disability claim and not receiving payment from the insurer on that claim was enough to start the running of the limitation period.

In Bianco v. Deem Management Services Limited, the Court held that the motion judge made no error in determining that the construction lien claimants in the matter had priority over the appellant’s registered mortgage, the advances under which had been made years prior the mortgage was registered.

For our readers who are not yet aware of it, I would like to introduce them to a new online publication, Civil Procedure & Practice in Ontario (CPPO). The CPPO is a new free online resource jointly published by the University of Windsor and CanLII. CanLII is a not-for-profit organization operated by the Federation of Law Societies of Canada and is dedicated to assisting with access to justice through the free and open dissemination of the laws of Canada to all members of the public. The CPPO was written by a team of 135 leading litigators and experts in Ontario civil procedure, led by Professor Noel Semple of Windsor Law School. I had the privileged of co-writing two chapters to CPPO dealing with Rules 54 and 55 (Directing a Reference and Procedure on a Reference).

CPPO will serve as a guide to Ontario’s Rules of Civil Procedure, Courts of Justice Act, and Limitations Act, and will be accessible not only to practitioners, but to members of the public. It contains not only the text of all these rules and statutory provisions, but also commentary and annotations to all the relevant case law applying and interpreting each rule and section. To access Civil Procedure & Practice in Ontario, please click here, and make sure to bookmark the site for easy access.

I would encourage all of our readers to consult CPPO in their daily practice, to spread the word among colleagues, and to provide any feedback they may have.

Wishing everyone an enjoyable weekend.

John Polyzogopoulos
Blaney McMurtry LLP
416.593.2953 Email

Table of Contents

Civil Decisions

Kumarasamy v. Western Life Assurance Company, 2021 ONCA 851

Keywords: Contracts, Insurance, MVA, Long-Term Disability, Civil Procedure, Limitations Periods, Discoverability, Limitations Act, 2002, S.O. 2002, c. 24, Sched. B, Clarke v. Sun Life Assurance Company of Canada, 2020 ONCA 11, Longo v. MacLaren Art Centre Inc., 2014 ONCA 526, Thompson v. Sun Life Assurance Company of Canada, 2015 ONCA 162, Markel Insurance Company of Canada v. ING Insurance Company of Canada, 2012 ONCA 218, 407 ETR Concession Co. v. Day, 2016 ONCA 709, leave to appeal refused, [2016] S.C.C.A. No. 509, Nasr Hospitality Services Inc. v. Intact Insurance, 2018 ONCA 725, Presidential MSH Corp. v. Marr, Foster & Co. LLP, 2017 ONCA 325

Csizmazia v. Csizmazia, 2021 ONCA 865

Keywords: Family Law, Equalization of Net Family Property, Bankruptcy and Insolvency, Property of the Bankrupt, Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, ss 21, 69.3, 71, Family Law Rules, Rules 1(8.4) and 25(19)

Bianco v. Deem Management Services Limited, 2021 ONCA 859

Keywords: Real Property, Construction law, Construction liens, Contracts, Mortgages, Priority, Bankruptcy and Insolvency, Construction Act, R.S.O. 1990, c. C.30, ss. 71(1), 78, Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.3, ss. 193, 249, The Mechanics’ Lien Act, R.S.O. 1970, c. 267, ss. 14(1), Boehmers v. 794561 Ontario Inc. (1993), 14 O.R. (3d) 781 (Gen. Div.), aff’d. (1995), 21 O.R. (3d) 771 (C.A.), Dorbern Investments Ltd. v. Provincial Bank of Canada, [1981] 1 S.C.R. 459, Jade-Kennedy Development Corp. (Re), 2016 ONSC 7125, XDG Ltd. v. 1099606 Ontario Ltd. (2014), 186 O.A.C. 33 (Div. Ct.)

Extreme Venture Partners Fund I LP v. Varma, 2021 ONCA 853

Keywords: Torts, Conspiracy, Inducing Breach of Contract, Breach of Contract, Limited Partnerships, Corporations, Piercing Corporate Veil, Group Enterprise Theory of Liability, Breach of Fiduciary Duty, Knowing Assistance of Breach of Fiduciary Duty, Damages, Joint and Several Liability, Disgorgement, Punitive Damages, Prejudgment Interest, Foreign Currency Exchange Rate, Civil Procedure, Trials, Amending Pleadings, Evidence, Credibility, Courts of Justice Act, R.S.O. 1990, c. C.43, s. 121(1), Business Corporations Act, R.S.O. 1990, c. B. 16, s 135(4), Partnership Act, R.S.O. 1990, c. P.5, Rules of Civil Procedure, Rule 26.06, Penvidic v. International Nickel, [1976] 1 S.C.R. 267, Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744, 1758704 Ontario Inc. v. Priest, 2021 ONCA 588, Southwind v. Canada, 2021 SCC 28, Hodgkinson v. Simms, [1994] 3 S.C.R. 377, Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, Ultraframe (UK) Ltd. v. Fielding, [2005] EWHC 1638 (Ch.), Vyse v. Foster (1872) LR 8 Ch App 309, Enbridge Gas Distribution Inc. v. Marinaccio, 2012 ONCA 650, Imperial Parking Canada Corporation v. Anderson, 2015 BCSC 2221, McGrail v. Phillips, 2018 ONSC 3571, ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 26 O.R. (3d) 481, Frame v. Smith, [1987] 2 S.C.R. 99, Guerin v. R., [1984] 2 S.C.R. 335, Galambos v. Perez, 2009 SCC 48, In re Harwood, 637 F (3d) 615 at 622 (5th Cir 2011), In re USACafes, L.P. Litig., 600 A (2d) 43 (Del Ch 1991), Olson v. Gullo, (1994), 17 O.R. (3d) 790, Rochwerg v. Truster (2002), 58 O.R. (3d) 687, Strother v. 3464920 Canada Inc., 2007 SCC 24, Warman International Ltd v. Dwyer, [1995] HCA 18

Short Civil Decisions

Grand River Conservation Authority v. Geil, 2021 ONCA 861

Keywords: Civil Procedure, Contempt, Consent Orders, Evidence, Hearsay


Hamza v. Law Society of Ontario, 2021 ONCA 852

Keywords: Civil Procedure, Vexatious Litigants, Scaduto v. The Law Society of Upper Canada, 2015 ONCA 733

National Bank of Canada v. Guibord, 2021 ONCA 864

Keywords: Civil Procedure, Stay Pending Appeal, Writs of Possession, Summary Judgment, Rules of Civil Procedure, Rules 15.01(3) & 63.01(1), RJR-MacDonald Inc. v. Canada (Attorney General),[1994] 1 S.C.R. 311

CIVIL DECISIONS

Kumarasamy v. Western Life Assurance Company, 2021 ONCA 851

[MacPherson, Simmons and Nordheimer JJ.A.]

Counsel:

E. Bennet-Martin and H.M. Gastle, for the appellant
A.B. Kuciej, for the respondent

Keywords: Contracts, Insurance, MVA, Long-Term Disability, Civil Procedure, Limitations Periods, Discoverability, Limitations Act, 2002, S.O. 2002, c. 24, Sched. B, Clarke v. Sun Life Assurance Company of Canada, 2020 ONCA 11, Longo v. MacLaren Art Centre Inc., 2014 ONCA 526, Thompson v. Sun Life Assurance Company of Canada, 2015 ONCA 162, Markel Insurance Company of Canada v. ING Insurance Company of Canada, 2012 ONCA 218, 407 ETR Concession Co. v. Day, 2016 ONCA 709, leave to appeal refused, [2016] S.C.C.A. No. 509, Nasr Hospitality Services Inc. v. Intact Insurance, 2018 ONCA 725, Presidential MSH Corp. v. Marr, Foster & Co. LLP, 2017 ONCA 325

facts:

The respondent was injured in a car accident on August 25, 2014. At the time of the accident, the respondent was employed by Morris National Inc. (“Morris”), and was covered under Morris’ group long-term disability (“LTD”) policy with the appellant (the “Policy”). Under the terms of the Policy, the deadline for the respondent to provide a Notice of Claim to the appellant, and the first day that LTD benefits would become payable to the respondent, was February 26, 2015. The Policy also provided that a claimant waived their right to claim benefits if they did not provide notice within the prescribed time.

On August 26, 2014, the respondent retained litigation counsel to represent him with respect to his tort and accident benefits claim, but not with respect to any potential LTD claim.

On December 15, 2014, the respondent’s sister emailed Morris for a Notice of LTD Claim form. Morris emailed the Notice of Claim form to the respondent’s sister. On March 9, 2015, the respondent’s sister faxed the completed form back to the appellant.

On March 11, 2015, the appellant said it sent an acknowledgement letter directly to the respondent requesting that he complete an LTD application form. The appellant sent three follow-up letters to the respondent, including a letter dated June 2, 2015, that advised the respondent that it had closed the respondent’s file because he had not forwarded the completed LTD application forms. The motion judge found that, while the respondent did not receive the other letters, he did receive the June 2, 2015 letter.

On October 13, 2016, the respondent’s lawyers wrote to the appellant requesting the respondent’s LTD claim file. On November 8, 2016, the appellant responded to the lawyers to advise that the file had been closed on June 2, 2015, as the respondent had not sent the required LTD forms.

On February 10, 2017, the respondent signed a retainer letter with his lawyers to also represent him on his LTD claim and on June 14, 2017, the lawyers sent an email to the respondent to explain the delay in making the LTD claim. On June 28, 2017, the appellant wrote to the respondent advising that his claim was denied as the information provided did not support reasonable cause for the delay.

The respondent issued a statement of claim against the appellant and Morris on June 8, 2019. The appellant brought a summary judgment motion on the basis that the respondent’s claim was statute-barred under the Limitations Act, 2002.

The appellant argued that a reasonable person in the respondent’s circumstances ought to have discovered a claim on June 7, 2015 (the date by which he would have received the appellant’s letter closing the file). The respondent argued that he could not have become aware of the loss until June 28, 2017 (the date of the denial letter). The motion judge found that the claim was discoverable on June 28, 2017 (when the LTD claim was denied by the appellant) and, therefore, was not statute-barred.

issues:

Did the motion judge err in finding that the action was not statute-barred?

holding:

Appeal allowed.

reasoning:

The Court found that the central errors made by the motion judge were her conclusions regarding when the respondent ought to have known that a loss occurred and her conclusion that the required element of discoverability was only satisfied when the appellant clearly and unequivocally denied the respondent’s claim.

First, the Court found that the motion judge did not cite any authority for her conclusion, and it was at odds with other authorities, most notably, the Court’s decision in Thompson v. Sun Life Assurance Company of Canada, 2015 ONCA 162. In Thompson, the Court found that the injured party’s claim was barred because (1) the injured party had failed to meet the qualifying conditions of the policy and (2) the two-year limitation period had expired because the injured party knew of her disability in August 2008 but did not commence her action until September 17, 2010. Applying the Thompson approach, the limitation period would have commenced February 26, 2015, which was the first day benefits would have been payable had the respondent submitted a timely application and met the Policy’s definition of Total Disability. By that time, the respondent knew that he was injured, he believed that he was entitled to long-term disability payments, and he knew that the appellant was not making those payments.

The Court further found that there was no authority for the proposition that a clear and unequivocal denial of the respondent’s claim was required. It may be that there will be some cases where an insurer may, by its conduct, lead an insured person to believe that their claim has not been denied (and thus litigation is not required). Those cases will likely be rare, and, in any event, this case was not one of them. Additionally, to adopt such an approach would inject an unacceptable element of uncertainty into the law as the court would be required to assess the tone and tenor of communications in search of a clear denial, and would only serve to encourage insurers to make such denials at their earliest opportunity to ensure that the “limitations clock” started to run.

Finally, the Court found that the motion judge’s conclusion was contrary to Nasr Hospitality Services Inc. v. Intact Insurance, 2018 ONCA 725, which noted certain circumstances where conduct of an insurer may toll the limitation period: (i) where the plaintiff relied on the superior knowledge and expertise of the defendant, especially where the defendant undertook efforts to ameliorate the loss, and (ii) if an alternative dispute resolution process offered an adequate alternative remedy and that process had not fully run its course. The Court found that neither of those circumstances arose in this case.

Thus, the Court held that there were three potential start dates for the limitation period: February 26, 2015 (when the limitation period required by the Policy expired), June 7, 2015 (when the respondent would have received the appellant’s notification that his claim file had been closed), and November 8, 2016 (when the lawyers received copies of the same correspondence). The Court declined to decide which of these three dates was the actual start date for the running of the limitation period because the regardless of which date was chosen, the two-year limitation period had expired before the proceeding was commenced.


Csizmazia v. Csizmazia, 2021 ONCA 865

[van Rensburg and Roberts JJ.A. and Tzimas J. (ad hoc)]

Counsel:

E. Karp, for the appellant
T. Johnson as agent for S. Heeley, for the respondent

Keywords: Family Law, Equalization of Net Family Property, Bankruptcy and Insolvency, Property of the Bankrupt, Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, ss 21, 69.3, 71, Family Law Rules, Rules 1(8.4) and 25(19)

facts:

The parties have been engaged in family law proceedings that were commenced in October 2017. In January 2020, as a result of the appellant’s non compliance with various court orders, including the requirement to pay an interim equalization payment and various costs awards, her pleadings were struck in relation to all issues in the proceedings except for custody and access. Eventually, the court ordered that the uncontested trial be adjourned to the sittings commencing November 16, 2020. Recognizing that under r. 1(8.4) of the Family Law Rules, the court has the discretion to permit a party whose pleadings are struck to participate in a more limited manner, the court required the respondent to serve a copy of the court’s endorsement on the appellant.

The uncontested trial proceeded on December 1, 2020. A final order was made dealing with the issues of equalization, child support, s. 7 expenses and costs. In particular, with respect to equalization, the court ordered that $37,100 be payable to the respondent by the appellant’s pension provider in full satisfaction of his one-half claim to the appellant’s pension during the course of the marriage, and that the appellant pay the respondent the sum of $79,348.59 by way of equalization. The appellant did not attend the uncontested trial.

The appellant brought a motion under r. 25(19) of the Family Law Rules seeking to change the final order “on the ground of misrepresentation and concealment of facts by the appellant, and on the ground that the order [would] cause significant miscarriage of Justice”. The respondent brought a cross-motion for an order that the appellant be prohibited from filing further motions.

The appellant appeals the order of the review judge refusing to set aside the final order that was made after an uncontested trial.

issues:

Were the reasons of the review judge inadequate to permit appellate review?

holding:

Appeal dismissed.

reasoning:

The Court found that the reasons of the review judge were sufficient and clear. Contrary to the appellant’s argument, the review judge did not overlook her assertions about the respondent’s changes to his NFP statement, which she had characterized as fraud in her written argument. Rather, he observed that the financial issues were moot, because of the appellant’s bankruptcy.

The appellant filed for bankruptcy on March 18, 2020. The effect of the bankruptcy was that the appellant’s property, including her equalization claims in the family law proceedings, vested in her trustee, and she had “cease[d] to have any capacity to dispose of or otherwise deal with” such property: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), ss. 21 and 71. By order dated September 15, 2020, the stay of proceedings was lifted pursuant to s. 69.3 of the BIA to permit the respondent to establish the value of his claim against the appellant, and prohibited the enforcement of the claim without further order, except in relation to the division of the appellant’s pension for the purposes of equalization. This order was in the appeal record, and was before the review judge.

It was unnecessary for the review judge to address the appellant’s specific allegations about the changes to the respondent’s NFP before the uncontested trial when her property, including her property claims in the litigation, had vested in the trustee upon her bankruptcy, and she had no further rights with respect to equalization – whether by asserting or defending an equalization claim.


Bianco v. Deem Management Services Limited, 2021 ONCA 859

[Gillese, Trotter and Nordheimer JJ.A.]

Counsel:

David T. Ullmann and Brendan Jones, for the appellant

E. O. Gionet, for the respondent, Maxion Management Services Inc.

R. B. Bissell and J. Turgeon, for the receiver, Crowe Soberman Inc.

J. A. Armel, for EXP Services Inc.

H. T. Rosenberg, for Deep Foundations Contractors Inc.

E. L. D’Agostino, for Kieswetter Excavating Inc.1

Keywords: Real Property, Construction law, Construction liens, Contracts, Mortgages, Priority, Bankruptcy and Insolvency, Construction Act, R.S.O. 1990, c. C.30, ss. 71(1), 78, Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.3, ss. 193, 249, The Mechanics’ Lien Act, R.S.O. 1970, c. 267, ss. 14(1), Boehmers v. 794561 Ontario Inc. (1993), 14 O.R. (3d) 781 (Gen. Div.), aff’d. (1995), 21 O.R. (3d) 771 (C.A.), Dorbern Investments Ltd. v. Provincial Bank of Canada, [1981] 1 S.C.R. 459, Jade-Kennedy Development Corp. (Re), 2016 ONSC 7125, XDG Ltd. v. 1099606 Ontario Ltd. (2014), 186 O.A.C. 33 (Div. Ct.)

facts:

In 2018, pursuant to an order of the Superior Court of Justice, Crowe Soberman Inc. was appointed as Receiver of several properties. The receivership arose out of a project that contemplated the redevelopment of one of the properties as a seniors’ retirement residence called the Uptown Residences (the “Uptown Project”). The respondent, Maxion Management Services Inc. (“Maxion”), was the general contractor on the Uptown Project. At some point in 2018, Maxion was advised to cease construction. Shortly after construction ceased, various service providers registered construction liens against title to the property.

The Uptown Project was sold by the Receiver in the summer of 2018. After making certain distributions, including payment of the first and second mortgages, the Receiver still holds in trust the sum of $5,477,224.57 from the proceeds of sale. As a result of competing priority claims between the lien claimants and a third mortgage held by the appellant, the Receiver was not able to distribute these remaining funds.

The appellant appealed from the order of the motion judge, who determined that the lien claimants in this matter, including the respondent, Maxion, had priority over the appellant’s registered mortgage.

issues:

(1) Did the motion judge err in ruling that subsection 78(6) of the Construction Act did not apply to the third mortgage?

(2) Did the motion judge err in ruling that the exception under subsection 78(2) of the Construction Act did not apply to the secured party?

(3) Did the motion judge err in failing to address the submissions of the Receiver?

(4) Did the motion judge err in the manner in which she expressed the public policy point in her reasons?

holding:

Appeal dismissed.

reasoning:

(1) No.

Subsection 78(6) of the Construction Act refers to “any advance made in respect of” the mortgage. In this case, the advances were made well before the third mortgage was granted and registered. Indeed, the third mortgage was granted and registered more than three years after the last advance and almost six years after the first advance. The Court did not see how, in those circumstances, it could be said that the advances were “made in respect of” the third mortgage.

The Court furthered noted that the appellant’s criticism of the motion judge for failing to refer to this legislative history was misplaced. While the motion judge may not have referred to the legislative history, her decision was consistent with the intent of s. 78, to the degree that that intent is revealed by the legislative history. Of more importance is the fact that the motion judge’s conclusion was consistent with the wording of s. 78(6).

The decision in Dorbern Investments Ltd. v. Provincial Bank of Canada, and its impetus for changes to the provisions of the Construction Act, had limited relevance to the issues raised by this case. Here, the mortgage was not a collateral mortgage but a direct mortgage. Further, the legislative change Dorbern caused, namely the addition of s. 78(5), was of no direct relevance to the issues the Court was called upon to determine.

(2) No.

The appellant could not bring itself within that exception for the same reason that undercuts the appellant’s reliance on s. 78(6), and that is that the wording of s. 78(2) of the Construction Act suggests that the intention to secure the financing operates prospectively. In other words, to fit within s. 78(2), the mortgagee must take the mortgage with the intention to secure financing of an improvement, which financing is then made. It does not operate retrospectively, that is, with respect to an intention to secure financing of an improvement that has already been made.

That conclusion with respect to the intention of s. 78(2) is consistent with the intention of s. 78 generally, which is to give priority to lien claimants. If a secured party wishes to propel its claim past the general priority given to lien claimants, then it bears the onus of bringing itself clearly within one of the exceptions set out in s. 78. In this case, the appellant failed to discharge that onus, both with respect to s. 78(6) and s. 78(2).

(3) No.

The motion judge was not required to specifically address any party’s submissions. What the motion judge was required to do was address the substance of all of the submissions made and reach a conclusion in light of all of those submissions, which was what the motion judge did in this case.

(4) No.

The Court did not consider it necessary to comment on the manner in which the motion judge expressed the point. The Construction Act sets out the general principle of providing lien claimants with priority. The basic concern that the motion judge identified regarding any conclusion that would undermine that legislative intent remained a valid one.

Extreme Venture Partners Fund I LP v. Varma, 2021 ONCA 853

[Hourigan, Huscroft and Coroza JJ.A.]

Counsel:

J. Lisus, C. Smith, N. Campion, V. Calina and J. C. Mastrangelo, for the appellants A.V., S. M., Varma Holdco Inc. and Madra Holdco Inc.
A. Brodkin, D. E. Lederman and D. Cappe, for the appellants C. P. and El Investco 1 Inc.
W. J. Kim, M. B. McPhee, A. Gyamfi and R. Sider, for the respondents

Keywords: Torts, Conspiracy, Inducing Breach of Contract, Breach of Contract, Limited Partnerships, Corporations, Piercing Corporate Veil, Group Enterprise Theory of Liability, Breach of Fiduciary Duty, Knowing Assistance of Breach of Fiduciary Duty, Damages, Joint and Several Liability, Disgorgement, Punitive Damages, Prejudgment Interest, Foreign Currency Exchange Rate, Civil Procedure, Trials, Amending Pleadings, Evidence, Credibility, Courts of Justice Act, R.S.O. 1990, c. C.43, s. 121(1), Business Corporations Act, R.S.O. 1990, c. B. 16, s 135(4), Partnership Act, R.S.O. 1990, c. P.5, Rules of Civil Procedure, Rule 26.06, Penvidic v. International Nickel, [1976] 1 S.C.R. 267, Whitefish Lake Band of Indians v. Canada (Attorney General), 2007 ONCA 744, 1758704 Ontario Inc. v. Priest, 2021 ONCA 588, Southwind v. Canada, 2021 SCC 28, Hodgkinson v. Simms, [1994] 3 S.C.R. 377, Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, Ultraframe (UK) Ltd. v. Fielding, [2005] EWHC 1638 (Ch.), Vyse v. Foster (1872) LR 8 Ch App 309, Enbridge Gas Distribution Inc. v. Marinaccio, 2012 ONCA 650, Imperial Parking Canada Corporation v. Anderson, 2015 BCSC 2221, McGrail v. Phillips, 2018 ONSC 3571, ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 26 O.R. (3d) 481, Frame v. Smith, [1987] 2 S.C.R. 99, Guerin v. R., [1984] 2 S.C.R. 335, Galambos v. Perez, 2009 SCC 48, In re Harwood, 637 F (3d) 615 at 622 (5th Cir 2011), In re USACafes, L.P. Litig., 600 A (2d) 43 (Del Ch 1991), Olson v. Gullo, (1994), 17 O.R. (3d) 790, Rochwerg v. Truster (2002), 58 O.R. (3d) 687, Strother v. 3464920 Canada Inc., 2007 SCC 24, Warman International Ltd v. Dwyer, [1995] HCA 18

facts:

A.V. and S. M., along with their respective holding companies, V. Holdco Inc. (“V. Holdco”) and M. Holdco Inc. (“M. Holdco”), are the “V./M. Appellants.” C. P. is a well known silicon valley tech billionaire who was an original founding executive of Facebook, and his holding company, El Investco 1 Inc. (“Investco”), are the “P. Appellants”. They are collectively referred to as the “Appellants”. Extreme Venture Partners Fund I LP, EVP GP Inc., R. K. S., I. B. and K. T. are the “Respondents”.

Extreme Venture Partners Fund I LP (“Fund I”) is a venture capital fund that operated as a limited partnership and provided seed capital to start-up technology companies. It was established in November 2007 by the Respondents and the V./M. Appellants. Fund I’s general partner was EVP GP Inc., a corporation of which the shares were owned personally by the respondents S., B., and T., as well as the appellants V. Holdco and M. Holdco. EVP GP Inc. managed the business of Fund I, and the board of directors consisted of S., B., T., and the appellants V., and M. Fund I grew rapidly, but by late 2010, tensions had started to develop in the relationship between the Respondents and the V./M. Appellants.

In December 2011, the V./M. Appellants established a second fund named the Annex Fund with Northleaf Capital Partners (“Northleaf”). The V./M. Appellants did not tell the Respondents about the establishment of the Annex Fund. Instead, the V./M. Appellants surreptitiously obtained $5 million in financing from Northleaf. After the Annex Fund was established, the V./M. Appellants provided Northleaf with confidential information about Fund I’s portfolio and investment strategy. As a result, the Annex Fund invested in six of Fund I’s most successful portfolio companies and operated for two years until it closed in 2013.

One of Fund I’s investments was Xtreme Labs, a mobile software development lab business co-founded by V. and M., who were also the managing directors and co-CEOs of Xtreme Labs. By 2011, the parties had started to explore options to sell Xtreme Labs. V. and M. presented projections to the board that estimated Xtreme Labs’ growth would slow, despite the prior years’ rapid growth. Notwithstanding that they were officers and directors of the vendor, in 2012, they conspired with the P. Appellants to assist them in acquiring Xtreme Labs for $18 million, whereby the V./M. Appellants increased their interest in Xtreme Labs in the process.

In October 2013, the P. Appellants negotiated the sale of shares of Xtreme Labs to Pivotal for $60 million (U.S.). Prior to the sale, the Appellants carved certain assets out of Xtreme Labs and transferred them to a holding company of which they were the sole shareholders, 2390184 Ontario Inc. (“239 Ontario”). One of those assets was a 13% equity interest in Hatch Labs, which had developed the mobile dating app Tinder. In March 2014, 239 Ontario sold its stake in Hatch Labs to a large American corporation, InterActive Corp. (“IAC”), for $30 million (U.S.). In summary, then, the V./M. Appellants, who were operating the target business (Xtreme Labs), assisted the P. Appellants to purchase the assets of that business for $18 million, which assets were then flipped within two years for a combined $90 million.

At trial, the Respondents asserted two central claims: (1) the “Annex Fund Claim”, in which they alleged that the V./M. Appellants were liable for breach of fiduciary duty and breach of contract regarding the establishment of a competing business/fund, and (2) the “Xtreme Labs Claim”, in which they alleged that the V./M. Appellants were liable for breach of fiduciary duty, breach of contract, and conspiracy and that the P. Appellants were liable in tort for knowing assistance in breach of fiduciary duty, inducing breach of contract, and conspiracy, all concerning the sale of Xtreme Labs Inc. (“Xtreme Labs”).

The trial judge found in favour of the Respondents and ordered that: (1) on the Annex Fund Claim, V. and M. were liable for $250,000 in punitive damages, notwithstanding that no damages were proved, and (2) on the Xtreme Labs Claim, the P. Appellants and the V./M. Appellants were jointly and severally liable for $3.36 million (U.S.) in damages and $12.33 million (U.S.) in disgorgement of profits.

On this appeal, the V./M. Appellants alleged two legal errors pertaining to the trial judge’s calculation of damages and disgorgement order. The P. Appellants adopted the legal arguments advanced by the V./M. Appellants, and also advanced two other grounds of appeal. The P. Appellants alleged the trial judge erred in imposing joint and several liability for her disgorgement order, and further, that she erred in finding the appellant P. had knowingly assisted in the breaches of fiduciary duty.

Additionally, the Respondents brought a cross-appeal seeking to increase the amount of profits to be disgorged to them.

issues:

Appeal of V./M. Appellants
(1) Did the trial judge err in her calculation of damages on the sale of Xtreme Labs?
(2) Did the trial judge err in finding the amendment to the statement of claim to seek disgorgement regarding the sale of Hatch Labs Inc. (“Hatch Labs”) was valid, and ultimately ordering disgorgement?

Appeal of P. Appellants
(1) Did the trial judge err in imposing joint and several liability for her disgorgement order?
(2) Did the trial judge err in finding that the P. knowingly assisted in the breaches of fiduciary duty?
(a) Did the trial judge make a series of palpable and overriding errors of fact?
(b) Did the trial judge err in her findings of misconduct against the P. Appellants by basing them on her own “idiosyncratic moral values”?

Respondents’ Cross-appeal
(1) Should the disgorgement order be increased to achieve the purpose of deterrence?

holding:

Appeal of the V./M. Appellants dismissed.

Appeal of the P. Appellants dismissed.

Cross-appeal allowed.

reasoning:

Appeal of V./M. Appellants

(1) No.

The Appellants made three submissions regarding the award of damages on the sale of Xtreme Labs.

First, they submitted the damages award lacked an evidentiary foundation as the trial judge failed to accept both parties’ expert evidence that there were no damages. The Court held the trial judge was not obliged to accept the evidence of the expert witnesses on damages, and that she reasonably calculated damages based on the actual revenues for fiscal year 2012 and the fact that the Respondents were amenable to selling at a 1.5 multiplier.

Second, the Appellants submitted that the trial judge erred in ignoring the lack of evidence of a buyer at a higher price. The Court held that this submission ignored the critical fact that the misconduct of the Appellants prevented the company from being properly marketed, as the correct underlying revenue and other information was concealed by the Appellants and thus could not be presented to potential buyers.

Third, the Appellants argued the Respondents were awarded loss of chance damages that were not claimed or argued at trial. The Court disagreed, holding that while the Respondents changed the methodology of their damages calculation during the trial, they consistently sought damages on the sale of Xtreme Labs.

In sum, the Court held the trial judge made a sensible damages calculation grounded in the evidence. Accordingly, there was no basis for interference with the trial judge’s damage calculation.

(2) No.

Amendment of the Claim

The Court held that the trial judge reasonably exercised her discretion in permitting the amendment of the claim to seek disgorgement, and making the disgorgement order. Specifically, the Court held the trial judge was correct in finding that there was no prejudice to the Appellants. The Court noted that the Appellants had not articulated what substantial new evidence they might call at a new trial for disgorgement, which in the Court’s view, was because there was no new evidence. Further, the Court noted the Appellants were given an opportunity to either lead further evidence or seek an adjournment, but they declined both options. Accordingly, the Appellants had to live with the consequences of their choice.

Further, the fact that the pleading was not formally amended was of no consequence. Rule 26.06 of the Rules provides that “where a pleading is amended at the trial, and the amendment is made on the face of the record, an order need not be taken out and the pleading as amended need not be filed or served unless the court orders otherwise”.

The Disgorgement Order

Regarding the disgorgement order itself, it related to the finding that the V./M. Appellants had hid Xtreme Labs’ ownership interest in Hatch Labs, which was developing the Tinder App, prior to the sale of Xtreme Labs, thereby artificially suppressing the value of Xtreme Labs and eliminating the Respondents’ opportunity to decide to keep their interest in Hatch Labs.

The Appellants submitted the trial judge made four errors in making her order for disgorgement.

First, they submitted the trial judge erred in not requiring a causal relationship between the wrongdoing and the profits to be disgorged. Specifically, they submitted the Hatch Labs equity was only worth at most $500,000 (U.S.) when the Xtreme Labs sale closed, and the increase in value thereafter resulted from external independent events unrelated to the Appellants’ conduct. Accordingly, the Appellants’ submitted the trial judge allowed the Respondents to take the benefit of the significant increase in value unrelated to the wrongful conduct.

In rejecting the Appellants’ argument, the Court stressed that what the fiduciaries (the V.M. Appellants) had done was hide the investment in Hatch Labs/Tinder. As a consequence, Fund I lost the opportunity to participate in the upside of said investment. Accordingly, it was no defence to say that no one knew the investment in Hatch Labs would be profitable. The Court noted a fiduciary has a duty of utmost good faith and an obligation to disclose so that the beneficiary has an opportunity to make an informed decision about the best course of action. By breaching that duty, the Appellants denied the respondents the opportunity to make that decision.

Second, the Appellants submitted that the trial judge erred in ordering disgorgement from 239 Ontario, V. and M. when there was no evidence they had personally profited from Hatch Labs’ sale. Thus, they allege the trial judge pierced the corporate veil of 239 Ontario, a non-party.

The Court rejected this argument, noting the trial judge found that the Appellants or their holding companies “wholly owned” 239 Ontario, and that a sizable portion of the profits “were distributed” to the Appellants. The Court held this was an available inference on the facts because one of the purposes of the conspiracy was to conceal Hatch Labs from the selling shareholders for the benefit of the co-conspirators. Further, there was no order that 239 Ontario itself make any disgorgement, and therefore no veil piercing occurred.

Third, the Appellants submitted that the trial judge’s disgorgement award did not account for deductions/expenses in completing the sale. Essentially, they submitted the order was made in an evidentiary vacuum. The Court rejected this argument, as the Appellants were the ones that held the evidence relating to the sale, yet elected not to tender that evidence.

Fourth, the Appellants argued the trial judge’s damages calculation included an element of double counting. Specifically, they argued that the trial judge’s calculation was based on an enterprise value which included the price of Hatch Labs equity, therefore, ordering both damages and disgorgement was an error.

The Court rejected this argument, stating that the trial judge’s assessment of damages was based on the extent the actual fiscal year 2012 figures for the revenues of Xtreme Labs exceeded the depressed figures put forth by V. and M. The Court noted the Hatch Labs equity interest did not contribute to the Xtreme Labs revenue stream during that fiscal year, and was therefore not included in the damages calculation. Therefore, there was no double counting.

Appeal of P. Appellants

(1) No.

In submitting the trial judge erred in law by holding them jointly and severally liable with the V./M. Appellants, the P. Appellants cited the English case of Ultraframe (UK) Ltd. v. Fielding which provided that a knowing assistant should not face the same liability as a faithless fiduciary.

The Court noted there was Canadian jurisprudence where Canadian courts have found a knowing assistant to be jointly and severally liable. Further, the Court cited academic commentary that supported a finding of joint and several liability for the knowing assistant. Ultimately, the Court concluded there was little reason to hew closely to Ultraframe, as in the Court’s view, the reasoning in that case was inconsistent with the policy goals underlying equitable remedies.

Although the Court agreed that a knowing assistant should not be penalized, it noted that a judgment against a faithless fiduciary is often uncollectable. Accordingly, the Court concluded that, as between the wronged beneficiary and the knowing assistant, in most circumstances the loss more equitably falls on the shoulders of the knowing assistant who has deliberately taken steps to procure a breach of fiduciary duty.

Although the Court held that there might be circumstances where a knowing assistant should have their liability limited, it concluded this was not such a case. Specifically, the Court found the P. Appellants were active participants in the core wrongful conduct as well as its primary beneficiaries. Accordingly, there was no equitable reason why their liability should be limited.

(2) No.

Citing the Supreme Court of Canada case of Air Canada v. M & L Travel Ltd., the Court set out the constituent elements of the tort of knowing assistance in the breach of a fiduciary duty: (i) there must be a fiduciary duty; (ii) the fiduciary must have breached that duty fraudulently and dishonestly; (iii) the stranger to the fiduciary relationship must have had actual knowledge of both the fiduciary relationship and the fiduciary’s fraudulent and dishonest conduct; and (iv) the stranger must have participated in or assisted the fiduciary’s fraudulent and dishonest conduct.

The P. Appellants submitted the trial judge erred in her application of the knowing assistance test because there was no intentional wrongful act. Further, they argued the trial judge erred in reaching her factual conclusions, specifically alleging P.’s conduct was legal and consistent with Canadian business conduct standards. In order to address these submissions, the court considered whether: (a) the trial judge made palpable and overriding errors of fact; and (b) whether the trial judge erred in imposing her idiosyncratic moral code upon what was otherwise standard business conduct.

(a) No.

The Court noted the V./M. Appellants accepted the factual findings of the trial judge, whereas the P. Appellants did not. The Court went on to list some of the significant findings of fact made by the trial judge regarding the misconduct, including: P., V., and M. were incredible witnesses; P., V., and M. worked together and coordinated their efforts to present P.’s offer to buy Xtreme Labs to the board of directors; V. and M. downplayed Xtreme Labs’ financial prospects to facilitate P.’s acquisition of the company at a discounted price; P., V., and M. all knew the Pivotal multiple was higher than the 0.75x number contained in P.s offer, yet V. and M. nonetheless conveyed the offer to the board even though they knew the number was understated; and P’s testimony wherein he denied knowing anything about Hatch Labs at the time of the sale transaction was false.

The Court noted the P. Appellants challenged those factual findings, but failed to specify how the trial judge went wrong in her factual analysis. The P. Appellants submitted that the initial offer to purchase Xtreme Labs was rejected and therefore had no impact, but the Court noted that submission ignored the trial judge’s finding that the offer was only one instance of the illegal activity employed as part of the ongoing conspiracy.

Further, the P. Appellants submitted the board could have discovered the actual revenue numbers if they had undertaken more due diligence. The Court rejected this argument, as it was “not the way corporate law work[ed]”. Citing s. 135(4) of the Ontario Business Corporations Act, the Court held a board of directors has a right to believe what its officers and directors are telling it, and where that information is deliberately falsified (as in this case) it was no defence to say that the board should have known better.

Finally, the P. Appellants submitted the trial judge ought to have accepted P.’s evidence over the testimony of the Respondents. The Court held the problem with this argument was that it was dependant upon the Appellant’s credibility. The Court held the trial judge correctly found the Appellants to be incredible witnesses, as their sworn testimony routinely contradicted the written record. Further, the Court noted P. had an unusual habit in his public and private communications of bragging about specific aspects of his alleged misbehaviour, but then inexplicably denying any misconduct when testifying.

The Court was satisfied the trial judge made no factual errors in finding that P. was not only an active participant in the core wrongful activity, but also its primary beneficiary.

(b) No.

The P. Appellants asserted P.’s conduct was in keeping with how business is conducted in Canada, and that the trial judge inappropriately applied her idiosyncratic moral values and thereby found wrongdoing where there was none.

The Court categorized this as a straw man argument. The Court held that what was in issue was whether the Appellants had breached their duties and/or engaged in tortious conduct by organizing the sale of Xtreme Labs. The Court held the trial judge correctly rejected the Appellants’ submission by finding that this was not a case of tough business tactics, and was rather a case of a purchaser conspiring with fiduciaries to acquire a business and doing so based on breaches of fiduciary and contractual duties.

Specifically, the Court held the trial judge’s conclusions were not grounded in her idiosyncratic moral values, nor did she require P. to compromise his legitimate business interests. Rather, the trial judge applied well-established tort and corporate law principles to P.’s conduct and made findings of illegality supported by the record.

Other Grounds of Appeal

The Court also dealt summarily with several grounds of appeal found in the Appellants’ factums but not addressed in oral argument. Specifically, the Court held:

  • the trial judge did not err in awarding punitive damages on the Annex Fund Claim;
  • the trial judge did not err in exercising her discretion not to deviate from the default rules for prejudgment interest and the exchange rate;
  • the trial judge did not use the group enterprise theory to affix liability for any breach of fiduciary duty;

Further, the Appellants argued in their factums that they could not be held liable for any breach because the party to whom they owed the duty, EVP GP, was different than the party that suffered the loss, Fund I. The Court rejected this argument, but for different reasons than the trial judge.

First, the Court noted the position taken by the Appellants that no duty was owed directly to the Limited Partnership (because they were officers and directors of the corporate general partner of the Limited Partnership and therefore only owed duties to the corporate general partner) was inconsistent with the text of the Limited Partnership Agreement (“LPA”). Specifically, article 6.5 of the LPA stated the General Partner and its “officers, directors, shareholders or agents” can be liable to the Limited Partnership or a Limited Partner for acts or omissions “performed or omitted fraudulently or in bad faith” or that “constituted willful misfeasance or negligence in the performance of their obligations or as a result of the reckless disregard of such obligations”.

Second, the Court held it would be an anomalous result if the law offered no remedy for the breach of a director’s fiduciary duty in circumstances where the limited partnership suffered the resulting loss. The Court set out that the question in this case was whether V. and M.’s fiduciary duty should expand to include a duty to the Limited Partnership. The Court concluded that it should, as V. and M. conducted themselves in a manner that clearly breached their duties to EVP GP (the corporate general partner). Specifically, the Court noted they acted solely in their self-interest and contrary to the interests of both the general partner and the Limited Partnership.

In such a situation, the Court concluded the concept of a director’s fiduciary duty should be flexible enough to include duties to both the general partner and the limited partnership. Further, the Court noted that in a limited partnership, the raison d’être of the general partner was to manage the business operations of the limited partnership and shield the limited partners from the unlimited liability they would face in a partnership. In turn, the use of the corporate form by the general partner is designed to limit its liability to exposure. Accordingly, the Court held it would be inequitable if the corporate form could be used to insulate directors who are in breach of their duties to the general partner and who have caused damages to the limited partnership.

The Court concluded that, given the unique structure of limited partnerships, the common law should impose a fiduciary duty on corporate directors of the general partner towards the limited partnership. The Court cited Frame v. Smith, indicating it was well established that the “categories of fiduciary relationship are never closed”. Specifically, the Court cited Galambos v. Perez indicating courts can find an ad hoc fiduciary duty where (1) the fiduciary has the discretionary power to affect the vulnerable party’s legal or practical interests; and (2) the fiduciary has made an express or implied undertaking that it will exercise the discretionary power in the vulnerable party’s best interests.

The Court concluded V. and M. owed the limited partnership an ad hoc fiduciary duty. First, both the limited partners and the limited partnership constituted a class of vulnerable and defined beneficiaries whose interests could be, and in fact were, adversely affected by V. and M.’s exercise of discretion. Second, V. and M.’s undertaking arose from the LPA, as well as the nature of the business relationship itself: a general partner operates on behalf of the limited partnership.

In further support of their conclusion, the Court referenced the fact that certain jurisdictions in the United States had similarly determined the liability owed by a general partner to the limited partnership should be expanded. The Court made specific reference to comments made by Chancellor Allen in the Delaware case of In re USACafes, L.P. Litig. setting out that the theory underlying fiduciary duties is consistent with the recognition that a director of a corporate general partner bears such a duty towards the limited partnership.

The Court agreed and adopted Chancellor Allen’s analysis. Accordingly, the Court held both V. and M. were liable to Fund I (the Limited Partnership) for their fiduciary breaches as directors of EVP GP (the general partner of the Limited Partnership).

Respondents’ Cross-appeal

(1) Yes.

The trial judge awarded disgorgement of profits earned on the sale by the Appellants of Hatch Labs (which held an interest in Tinder) based on the Respondents’ ownership interest in Hatch Labs (about 42%) when they sold it to the Appellants. The Appellants were therefore permitted to retain approximately 58% of the profits earned. The Respondents submitted that the trial judge committed an error in principle because prophylactic disgorgement is aimed not at what the beneficiaries lost but rather at what the wrongdoers gained. They submitted that the apportioned disgorgement award issued by the trial judge represented an outcome where the wrongdoers were no worse off than if they had never breached their fiduciary duties in the first place, meaning no deterrence had been achieved.

The Court cited Strother v. 3464920 Canada Inc., the leading case on disgorgement of profits, which sets out that the remedy of disgorgement can be directed to either or both of two equitable purposes: (1) a prophylactic purpose, whereby any benefit or gain obtained by the fiduciary is appropriated for the benefit of the person to whom the fiduciary duty was owed, the objective of which is to preclude the fiduciary from being swayed by considerations of personal interest; and (2) a restitutionary purpose, the objective of which is to restore the beneficiary profit which properly belonged to the beneficiary.

Under the prophylactic purpose, “equity requires disgorgement of any profits received even where the beneficiary has suffered no loss because of the need to deter fiduciary faithlessness and preserve the integrity of the fiduciary relationship”.

The Court held it was evident that the disgorgement order was imposed to serve a prophylactic purpose, as the trial judge explicitly stated that a “disgorgement order is required to serve a deterrent purpose in this case.”

Therefore, the Court agreed with the Respondents that the disgorgement order actually made was erroneous because it did not achieve its purpose of deterrence. The Court next turned to whether it was required to order disgorgement of all of the ill-gotten gains, or whether it could make an order that achieved its deterrent purpose, but that did not require full disgorgement. The Court concluded that there may well be circumstances where it would be inequitable to order a faithless fiduciary to disgorge all profits earned as a result of a breach of fiduciary duty. However, the Court held that this was not such a case, and that, in this case, an order for disgorgement of all profits in the amount of $29.5 million (U.S.) was appropriate.


SHORT CIVIL DECISIONS

Grand River Conservation Authority v. Geil, 2021 ONCA 861

[Benotto, Huscroft and Miller JJ.A.]

Counsel:

S. Biesbroek, for the appellants
S. J. O’Melia, for the respondent

Keywords: Civil Procedure, Contempt, Consent Orders, Evidence, Hearsay

Hamza v. Law Society of Ontario,, Hamza v. Law Society of Ontario, 2021 ONCA 852

[van Rensburg and Roberts JJ.A. and Tzimas J. (ad hoc)]

Counsel:

O. Hamza, acting in person
K. Hensel, for the respondent, Law Society of Ontario
D. Mayer, for the Ministry of the Attorney General

Keywords: Civil Procedure, Vexatious Litigants, Scaduto v. The Law Society of Upper Canada, 2015 ONCA 733

National Bank of Canada v. Guibord, 2021 ONCA 861

[Nordheimer J.A. (Motions Judge)]

Counsel:

Grand Chief, acting in person
M. Myers, for the responding party

Keywords: Civil Procedure, Stay Pending Appeal, Writs of Possession, Summary Judgment, Rules of Civil Procedure, Rules 15.01(3) & 63.01(1), RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311


The information contained in our summaries of the decisions is not intended to provide legal advice and does not necessarily cover every matter raised in a decision. For complete information or for specific advice, please read the decision or contact us.

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Photo of John Polyzogopoulos John Polyzogopoulos

John has been the editor of Blaneys Appeals since the inception of the blog in the Summer of 2014. He is a partner at the firm with almost two decades of experience handling a wide variety of litigation matters. John assists clients with…

John has been the editor of Blaneys Appeals since the inception of the blog in the Summer of 2014. He is a partner at the firm with almost two decades of experience handling a wide variety of litigation matters. John assists clients with matters ranging from appeals, to injunctions, to corporate, breach of contract, construction, environmental contamination, product liability, debtor-creditor, insolvency and other business litigation. He also handles professional discipline and professional negligence matters, as well as complex estates and matrimonial litigation. In addition, John represents amateur sports organizations in contentious matters, and advises them in matters of internal governance. John can be reached at 416-593-2953 or jpolyzogopoulos@blaney.com.