DATE: 20010209

DOCKET: C33746

COURT OF APPEAL FOR ONTARIO

MCMURTRY C.J.O., CATZMAN and FELDMAN JJ.A.

BETWEEN:

JOHN ANGER, BONNIE ANGER, PETER ANTON, VICTORIA ANTON, DAVID BAUGHMAN, ROSEMARY BAUGHMAN, THEODORA C. BOURIS, WILLIAM G. BOURIS, FRANCA BRITTON, RUSSELL BRITTON, DAVID BLACKWELL, WENDY BLACKWELL, CATHERINE CONNORS-LAMOS, WILLIAM L. DAVID, MURRAY DEMAINE, JUNE DEMAINE, SUSAN T. DIXON, FRED EEDY, KATHERINE EEDY, PAUL HARRIS, DEBBIE HARRIS, ROY HUNTER, WENDY HUNTER, THOMAS LAMOS, PAUL LEPINE, RODNEY H. LOVELL, MONA V. LOVELL, ANTONIO MICHIENZI, MARIA MICHIENZI, DON NUTCHEY, BAHADAR S. PUREWAL, RESHAM K. PUREWAL, ROBERT SCHULTZ, KAREN SCHULTZ, MURRAY J. SHAIN, MICHAEL L. SMITH, TERRI J. SMITH, DOUGLAS SPRAGUE, BARBARA SPRAGUE, ROY STEPHENS, LARRY SULLIVAN, and MARGARET SULLIVAN

Plaintiffs/Appellants

Anne Marie Frauts and Adrien P. Cameron for the appellants

• and -

BERKSHIRE INVESTMENT GROUP INC., BERKSHIRE SECURITIES INC., DINO DeLELLIS, ANNA PACIFICO, KRIS ASTAPHAN, MICHAEL LEE-CHIN, FRANK DAKOS, JOHNATHAN P. WELLUM, NATIONAL TRUST COMPANY, JAMIE HODGINS, EGERTON ASSOCIATES LTD., LANSINK, BEST & MCIVER LIMITED, ANTHONY BEST, KNIGHTSBRIDGE LONDON LIMITED PARTNERSHIP 1993, LYNWOOD PLACE LIMITED PARTNERSHIP, SHERWOOD GATE LIMITED PARTNERSHIP, SOVEREIGN LIMITED PARTNERSHIP, SOVEREIGN 1994 LIMITED PARTNERSHIP, SOVEREIGN SECOND 1994 LIMITED PARTNERSHIP, PROMITTERE CAPITAL GROUP, PROMITTERE SECURITIES LIMITED, EQUION SECURITIES CANADA LIMITED, ROBERT J. THIESSEN, NEAL PALLETT AND TOWNSEND

Frank J.C. Newbould Q.C., and Aaron A. Blumenfeld for the respondents

Defendants/Respondents

HEARD: November 27, 2000

On appeal from the order of Justice William A. Jenkins dated January 25, 2000.

FELDMAN J.A.:

[1]

Introduction

The appellants are plaintiffs in an action brought against the defendants for their respective roles in persuading the plaintiffs to make improvident investments in certain limited partnerships. The appellants dealt with individual salespeople of the defendant Berkshire Investment Group Inc. (formerly known as AIC Investment Planning Limited). The respondents were in some cases directors and officers and in other cases compliance officers of Berkshire. The respondents moved successfully to have the actions struck out against them as disclosing no reasonable cause of action. It is acknowledged that the appellants' causes of action against the respondents are novel. The issue on appeal is whether it is clear at this stage that those causes of action cannot succeed in law, no matter what the evidence discloses, or whether the action should proceed to trial (or possibly summary judgment motion) where the issues of law can be decided on a full record.

The Statement of Claim

[2]

The Statement of Claim

Each of the appellants made tax-driven investments in limited partnership condominium projects, based on advice from Berkshire given by the defendant salespeople, DeLellis, Pacifico and Dakos. The action against these defendants is based on negligence, fraud, breach of contract and breach of fiduciary duty and is proceeding.

3In paragraph 78 of the Statement of Claim, the appellants also plead that the respondents, Lee-Chin, Astaphan and Dakos, were compliance officers for Berkshire and in that capacity, Lee-Chin and Dakos were responsible for ensuring that Berkshire’s sales force complied with applicable securities law, and Astaphan and Dakos were responsible for ensuring that Berkshire’s products complied with applicable securities law. In paragraph 79 of the Statement of Claim, the appellants plead that as compliance officers, Lee-Chin, Astaphan and Dakos owed an independent duty of care to them and that they negligently breached that duty in the following ways:

a. they failed to supervise and restrain DeLellis, Pacifico and Dakos from selling the aforesaid partnership units in a manner contrary to Ontario Securities Law, particulars of such conduct being as follows:

i. they failed to deliver a prospectus or offering memorandum within the time period prescribed by ss. 71(1), 72(1)(d) and 72(1)(p) of the Securities Act.

ii. they solicited sales in the Sovereign Limited Partnership, and the Lynwood Place Limited Partnership which were all prospectus offerings contrary to the registration requirements as set out in s. 25(1) of the Securities Act.

iii. they failed to disclose a commission of $100.00 paid by Hodgins on behalf of National Trust which disqualified the Limited Partnerships from the prospectus exemption available under s. 72(1)(p) of the Securities Act.

iv. they guaranteed rates of return on investments as alleged in paragraphs 27 to 57 herein, contrary to s. 38(2) of the Securities Act.

v. they made representations about the resale, refund or repurchase of the partnerships units as alleged in paragraphs 27 to 57 herein contrary to the provisions of s. 38(1)(a) and (b) of the Securities Act.

vi. they failed to ensure that the Limited Partners had the requisite net worth and investment experience to purchase the Limited Partnerships as is required pursuant to s. 72(1)(d) and (p) of the Securities Act.

b. Lee-Chin failed [sic] ensure that DeLellis, Pacifico and Dakos disclosed to the Berkshire Plaintiffs his conflict of interest as owner and vendor of the Lynwood Place Limited Partnership pursuant to the provisions of s. 40 of the Securities Act;

c. Astaphan promised Michael L. Smith and Terri J. Smith that he would ensure that DeLellis sold their investment in Knightsbridge and on or about April 10, 1995 Astaphan represented to them that the sale was complete and that they were relieved of all financial obligation when in fact the investment was never sold by DeLellis, causing the Smiths damages in the form of legal fees, interest and penalties.

4The appellants also plead that the respondents, Wellum, Lee-Chin, Dakos and Astaphan, were directors and officers of Berkshire and in that capacity owed them an independent duty of care, which they breached. These directors and officers allegedly had knowledge of the actions of DeLellis, Pacifico and Dakos including: selling units without a prospectus; committing numerous other breaches of the Securities Act, R.S.O. 1990. c. S-5; and making misrepresentations to effect the impugned sales. In the face of that knowledge, they allegedly condoned the conduct of the salespeople “and participated in selling practices which are prohibited under the Ontario Securities Act.” (para. 80 of the Statement of Claim). It is pleaded that the condonation and participation exhibited by Wellum and Lee-Chin (for example, by their pro forma execution of sale documents) “encouraged [the salespersons] to perpetrate the same practices on the Berkshire Plaintiffs.” (para. 81)

The Issue

[5]

The Issue

The respondents say that in their capacities as compliance officers and as directors and officers of the corporation who did not have direct contact with the appellants (in those capacities), they owed no duty of care to the appellants.

6The issue on appeal is a procedural one: is the legal issue raised by the respondents so clear that it should be decided at this stage of the litigation by striking out the claims from the Statement of Claim?

Analysis

[7]

Analysis

The motions judge disposed of the matter on the basis that in their capacity as directors and officers of Berkshire, the respondents owed no duty of care to the appellants, but only to the corporation, based on Budd v. Gentra (1998), 111 O.A.C. 288 (C.A.). Second, in connection with the claims against the respondents as compliance officers, the appellants did not allege reliance, which the motions judge viewed as a necessary ingredient for the finding of a duty of care, based on the Supreme Court of Canada decision in Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165. Furthermore, he held that as a breach of the Securities Act does not create a cause of action in tort, failing to ensure compliance with the Act also cannot create a cause of action.

8Since the decision of the Supreme Court of Canada in Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959, the test to be applied on a motion to strike out a claim at the pleadings stage is whether it is plain and obvious that the action cannot succeed assuming that everything pleaded by the plaintiff is proved. If a claim is a novel one, it is not to be struck out at the pleadings stage, but allowed to proceed so that the viability of the cause of action can be considered based on a full record.

9Applying that standard to this case, can it be said unequivocally that the directors, officers and compliance officers of the respondent Berkshire did not and could not owe a duty of care to the appellants as investors if they were negligent in their supervision of the sales force, or if they knowingly allowed their employees to engage in sales practices which constituted breaches of the Securities Act, thereby depriving those investors of the protections which the Act provides for them?

10Budd v. Gentra was an oppression remedy case where the plaintiffs' claims were against the corporation and its directors and officers under s. 241 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44. The court found that the Statement of Claim failed to identify any acts or omissions of specific defendant directors and officers which could link them to the alleged oppressive conduct of the corporation. The claims were struck against them for that failure and not because there could not have been a cause of action at law for oppression.

11In this case the claims against the individual respondents sound in tort, not oppression. The respondents assert that there cannot be a claim against them in tort because as directors, officers and compliance officers of Berkshire, they owed no duty of care to the appellants. Recent case law has made it clear that directors, officers and employees of corporations can be liable for torts they commit personally even if they are acting in the course of their duties or in accordance with “the best interests of the corporation”: ADGA Systems International Ltd. v. Valcom Ltd. (1999), 43 O.R. (3d) 101 (C.A.), application for leave to appeal dismissed by Supreme Court of Canada, [1999] S.C.C.A. No. 124; ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 26 O.R. (3d) 481 (C.A.), application for leave to appeal dismissed by Supreme Court of Canada, [1996] S.C.C.A. No. 40; Meditrust Healthcare Inc. v. Shoppers Drug Mart, a division of Imasco Retail Inc. (1999), 124 O.A.C. 137 (C.A.), application for leave to appeal dismissed by Supreme Court of Canada, [1999] S.C.C.A. No. 530; NBD Bank, Canada v. Dofasco Inc (1999), 46 O.R. (3d) 514 (C.A.), application for leave to appeal dismissed by Supreme Court of Canada, [2000] S.C.C.A. No. 96; 460635 Ontario Ltd. v. 1002953 Ontario Inc. (1999), 127 O.A.C. 48 (C.A); Immocreek Corp. v. Pretiosa Enterprises Ltd. (2000), 131 O.A.C. 358 (C.A.).

12In order to determine whether a person owes a duty of care to another person, the court must apply the two part Anns/Kamloops test (Anns v. Merton London Borough Council, [1978] A.C. 728; Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2): (1) whether the parties are in a relationship of sufficient proximity that a prima facie duty of care is owed; (2) if so, whether the duty is limited or negated by policy considerations. The analysis of the duty of care issue is new legal territory in the context of personal liability of directors and officers of corporations. Certainly, the policy issues raised by the respondent will be very important as part of the application of the two part Anns/Kamloops test in the context of this analysis.

13In Hercules Managements Ltd., the Supreme Court considered in detail the application of the two-part test to a claim for negligent misrepresentation against auditors. The court emphasized the importance of the “specific factual matrix” (p. 197) of each case in applying the test. Both the proximity factors and the policy factors are fact-driven. I note that Hercules Managements Ltd. reached the Supreme Court on appeal from a summary judgment motion, not a pleadings motion.

14This case is not pleaded as a negligent misrepresentation case on the part of the respondents as in Hercules Managements Ltd., but is related to negligent misrepresentation because the breach of duty alleged against the respondents is in effect, allowing or condoning misrepresentations made by employees to investors. Reliance by the investors is not pleaded. Whether reliance is a necessary element of the cause of action, and if so, how it will fit into the analysis and application of the two-part test as set out in Hercules Managements Ltd. are open issues. The particular policy concern flagged by the respondents in this case is the potential for indeterminate liability of directors and officers in their personal capacities if this action is allowed to proceed. It was the same issue of indeterminate liability of auditors to investors which concerned the Supreme Court in Hercules Managements Ltd., and for which the court required a consideration of the specific facts of each case.

15To attempt to apply policy considerations in a vacuum, and without the benefit of a record, would be contrary to the principles upon which our case law has long been understood to develop. That is why Hunt v. Carey Canada Inc. provides that a court should strike a claim only if it is clear that in law the case cannot succeed, based on decided principles directly applicable to the case as set out in the pleadings. The court does not develop the law, including policy considerations, in order to strike a claim. That should only be done after a trial.

Conclusion

[16]

Conclusion

This is not a case where the law is clear in favour of the defendants. Whether the respondents owed a duty of care to the appellants will depend on an application of the Anns/Kamloops test to the facts of this case based on the evidence. The order to strike is set aside.

17The respondents also complain about lack of particularity in paras. 79-82 of the Statement of Claim. If the parties wish to pursue that part of the motion, they may do so before a judge or master as appropriate.

18Costs of the motion and of the appeal to the appellants.