CITATION: Keeton v. The Bank of Nova Scotia, 2009 ONCA 662
Date: 20090921
Docket: C47587
COURT OF APPEAL FOR ONTARIO
Goudge, Simmons and Juriansz JJ.A.
BETWEEN
Linda Keeton and Dynamic Medical Concepts Inc.
Plaintiffs (Appellants/ Respondents by way of cross-appeal)
And
The Bank of Nova Scotia
Defendant (Respondent/ Appellant by way of cross-appeal)
AND BETWEEN
Dynamic Medical Concepts Inc.
Plaintiff (Appellant/ Respondent by way of cross-appeal)
And
Rocco DiBenedetto, Rose Ting, Hartford International Corporation, Elliott Shiry, York-Med Systems Inc. and PrimeMed Technologies Inc.
Defendants (Respondents)
And
Mark Sandell, Sandi Gentleman and The Bank of Nova Scotia
Defendants (Respondents/ Appellants by way of cross-appeal)
Graydon Sheppard and Marc Munro, for the appellants
Martin Sclisizzi and Margot Finley, for the respondents The Bank of Nova Scotia, Gentleman and Sandell
Mauro Marchioni, for the respondents DiBenedetto, Ting and Hartford International Corp.
Michael L. Shell and Patrick Greco, for the respondent York-Med Systems Inc.
Elliott Shiry, acting in person
No one appearing, for the respondent PrimeMed Technologies Inc.
Heard: March 11, 2009
On appeal from the judgment of Justice Thomas R. Lofchik of the Superior Court of Justice dated May 1, 2008, with reasons reported at 2007 ONSC 26605.
Simmons J.A.:
[1] The issues on this appeal concern the trial judge’s findings about a fraudulent kick-back scheme perpetrated by two officers of Dynamic Medical Concepts Inc. and by at least one of Dynamic’s suppliers.
[2] Dynamic appeals from the trial judge's assessment of damages against the parties the trial judge found liable for the scheme, namely, Rocco DiBenedetto, Rose Ting, Hartford International Corporation and York-Med Systems Inc. Dynamic also appeals from the dismissal of its claims against The Bank of Nova Scotia, Sandi Gentleman, Mark Sandell, Elliott Shiry and PrimeMed Technologies Inc., and from the judgment awarded to Mr. Shiry on his counterclaim.
[3] Linda Keeton appeals from the dismissal of her claims against the Bank, Sandi Gentleman and Mark Sandell.[^1]
[4] The Bank, Ms. Gentleman and Mr. Sandell request leave to cross-appeal the trial judge's costs award.
[5] For the reasons that follow, I would allow Dynamic's appeal in part as against Mr. DiBenedetto, Ms. Ting, Hartford and Mr. Shiry; I would dismiss the balance of the appeal; and I would refuse the Bank's request for leave to cross-appeal.
Background
[6] The appellant, Linda Keeton, is a medical doctor. In 2001, she had a dream of setting up a medical clinic that would focus on women’s issues and also provide cosmetic medical services.
[7] Dr. Keeton's plans were relatively modest. By April 2002, she had purchased a small house zoned for medical offices in Hamilton, Ontario using $20,000 of a $50,000 small business start-up loan from the Hong Kong Bank of Canada (“HSBC”) as a down payment and by placing a $127,000 collateral mortgage on her home. Her business plan called for start-up expenditures of just over $50,000, including $6,450 for leasehold improvements; $23,000 for capital equipment (including $5,000 for computer software and $4,500 for office equipment) and $24,000 for annual cosmetic medical laser equipment rentals.
[8] Unfortunately for Dr. Keeton, in April 2002, she discussed her dream with Rocco DiBenedetto, a patient at the Oakville medical centre she was leaving. Mr. DiBenedetto had connections with an Italian Canadian Credit Union and claimed he could get her a better mortgage.
[9] In addition to the mortgage, Mr. DiBenedetto spoke to Dr. Keeton about plans to obtain investors, franchise her clinic operation, and conduct training sessions for franchisees in the basement of her clinic. The appellant, Dynamic Medical Concepts Inc., was incorporated to operate the first clinic and to serve as a model for future clinics.
Dynamic Medical Concepts Inc.
[10] Dr. Keeton became the president and sole shareholder of Dynamic; Mr. DiBenedetto and his business partner, Rose Ting, became officers and directors. The plan was for Dr. Keeton to focus on her medical practice, and for Mr. DiBenedetto and Ms. Ting to attend to the financial and business affairs of Dynamic.
[11] On the trial judge’s findings, it was the intention of all parties that the first clinic would belong to Dr. Keeton alone. Mr. DiBenedetto and Ms. Ting were not to be shareholders, nor were they to be paid for any work they did in setting up the financial and business affairs of Dynamic. Rather, Mr. DiBenedetto and Ms. Ting stood to profit in the future, by setting up further clinics through a larger company using the first clinic as a model. However, it was the understanding of all parties that if Mr. DiBenedetto or Ms. Ting advanced any money to Dynamic, they were to be repaid.
Dynamic’s Account at The Bank of Nova Scotia
[12] On May 13, 2002, Dr. Keeton, Mr. DiBenedetto and Ms. Ting went to a branch of The Bank of Nova Scotia in Oakville to open a business account for Dynamic. Dr. Keeton signed various banking documents for Dynamic on that date, including a Scotiabank Financial Services Agreement Signature Form, a Banking Resolution, and a Certificate-Officers, Directors & Signing Authorities form.
[13] Mr. DiBenedetto recommended obtaining a line of credit for Dynamic by means of a government sponsored small business improvement loan. In July 2002, the Bank approved a $250,000 credit facility. The loan was to be repaid over a term of 60 months with interest at the Bank’s prime lending rate plus 2.5% per year. Commencing on September 22, 2002, Dynamic was to make monthly payments of principal in the amount of $4,166.67, together with interest. Dr. Keeton signed a personal guarantee for 25 per cent of the loan and provided a mortgage on the clinic as security for the guarantee.
[14] Under the terms of the loan, the Bank would advance approximately 90 per cent of the amount of an eligible invoice into Dynamic’s account and Dynamic was responsible for paying the balance from working capital. The loan approval crystallized after Mr. DiBenedetto provided $32,900.00 to Dr. Keeton for deposit into Dynamic’s account as working capital.[^2]
Dynamic’s Financial Trouble
[15] In the fall of 2002, Dr. Keeton began receiving notices that certain bills had not been paid and she eventually requested an accounting from Mr. DiBenedetto and Ms. Ting. Shortly thereafter, on November 20, 2002, Mr. DiBenedetto and Ms. Ting resigned from Dynamic.
[16] By the time of their resignations, Dynamic had spent $310,562.24, including $275,258.59 on leasehold improvements and equipment, and approximately $12,000 on account of payments on the small business loan.
[17] Dynamic’s expenditures for leasehold improvements and equipment consisted primarily of the following payments:
i) $69,550 to Elliott Shiry for landscaping and renovations;
ii) $45,922.58 to York-Med Systems Inc. for computer equipment; and
iii) $155,177.75 to PrimeMed Technologies Inc. for cosmetic laser equipment.
[18] In order to fund the purchase of the leasehold improvements and equipment, the Bank advanced a total of $231,775.26 on the small business loan, including $57,750 for payments to Mr. Shiry, $38,814.39 for payments to York-Med and $131,158.93 for payments PrimeMed.
[19] However, despite these expenditures, at the time Mr. DiBenedetto and Ms. Ting resigned, there were no investors, franchise operations had not begun, and Dynamic did not have money to make the $4,166.67 per month principal payments on the loan.
Unauthorized Payments Taken by the Bank
[20] In early December 2002, Dr. Keeton made arrangements with the Bank to re-amortize the loan. The new payment schedule called for monthly payments of interest only, with principal payments of $3,149.15 plus interest to commence on April 30, 2003.
[21] Dr. Keeton provided the Bank with a void cheque to facilitate pre-authorized payments from her personal account at HSBC along with a note which stated "debit interest payments for loan monthly." Contrary to this instruction, the Bank took five principal payments in the amount of $3,149.15 each for a total of $15,745.75 from Dr. Keeton's HSBC account without authorization.
Evidence of Secret Commissions
[22] Over time, evidence emerged that Mr. Shiry, York-Med and PrimeMed paid secret commissions totalling $73,641.45 to Hartford International Corporation, a company operated by Mr. DiBenedetto and Ms. Ting. They did so essentially by submitting invoices to Dynamic that reflected charges for services performed by Hartford that were not in fact performed.
The Appellants’ Claims
[23] In June 2003, Dynamic commenced an action against Mr. DiBenedetto and Ms. Ting, claiming $1,000,000 for breach of fiduciary duty, conspiracy and fraud, together with punitive damages and other ancillary relief. Dynamic claimed similar relief against Hartford for conspiracy and fraud, and also named Mr. Shiry, York-Med and PrimeMed as defendants.
[24] Dynamic claimed rescission against York-Med and PrimeMed, as well as damages for conspiracy and knowing assistance in Mr. DiBenedetto's and Ms. Ting’s breaches of fiduciary duty. As against Mr. Shiry, Dynamic claimed damages for conspiracy and fraud, or, in the alternative, for knowing assistance in Mr. DiBenedetto's and Ms. Ting's breaches of fiduciary duty and in Mr. DiBenedetto’s, Ms. Ting’s and Hartford’s fraud. Dynamic also claimed damages for breach of contract, negligence and overpayments with respect to construction work against Mr. Shiry. Finally, Dynamic claimed punitive damages against all defendants.
[25] In November 2003, Dr. Keeton and Dynamic commenced an action against the Bank of Nova Scotia claiming an injunction restraining the Bank from enforcing its security against them. The Bank counterclaimed for the amount owing on the small business loan.
[26] In April 2004, Dynamic amended its statement of claim by adding the Bank, Mark Sandell and Sandi Gentleman as defendants. Mr. Sandell and Ms. Gentleman were employees of the Bank at the time of the relevant transactions. Although Dynamic initially advanced a variety of claims against these defendants, ultimately it pursued claims for improper disbursement of loan proceeds contrary to the banking authority Dynamic had provided, for unauthorized alteration of banking documents to cover up unauthorized transactions, and for covering up unauthorized transactions.
[27] Further, it appears that Dr. Keeton advanced a claim for the unauthorized removal of funds from her personal HSBC bank account, apparently in response to the Bank’s claims against her.[^3]
The Decision at Trial
[28] Following a 39-day trial of the combined actions and various counterclaims asserted by the defendants, Lofchik J. granted judgment to Dynamic as follows:
i) $18,941.45 as against Mr. DiBenedetto, Ms. Ting and Hartford; and
ii) $13,092.75 as against York-Med on terms that Mr. DiBenedetto, Ms. Ting and Hartford are jointly and severally liable to Dynamic for such payment to the extent of $12,313.05.
[29] The trial judge dismissed the appellants' claims against the Bank, Mr. Sandell and Ms. Gentleman, and awarded judgment to the Bank on its counterclaim in the amount of $240,256.57 as against Dynamic and in the amount of $55,784.42 as against Dr. Keeton.
[30] In addition, the trial judge dismissed Dynamic’s claims against PrimeMed and Mr. Shiry and awarded judgment to Mr. Shiry on his counterclaim against Dynamic in the amount of $5000. The trial judge made a number of ancillary orders and awarded costs.
The Appeal and Cross-appeal
[31] Dr. Keeton and Dynamic raise seven main issues on appeal; the Bank of Nova Scotia requests leave to cross-appeal the scale of the costs award in its favour. I will deal with these issues in turn.
Analysis
1. Did the trial judge err in failing to find that The Bank of Nova Scotia committed a fraud in the nature of a false pretence?
[32] Dr. Keeton submits that the trial judge erred in failing to find that the Bank committed a fraud in the nature of a false pretence by obtaining payments on account of principal from her personal account at HSBC, when it had instructions permitting it to obtain interest payments only. We did not call on the Bank to respond to this submission.
[33] The evidence at trial indicated that Dr. Keeton met with Mr. Sandell on December 17, 2002 for the purpose of sorting out arrangements concerning the small business loan. Mr. Sandell agreed to re-amortize the loan and to postpone the commencement of principal repayments until April 30, 2003. Dr. Keeton advised Mr. Sandell that she could not afford to make principal payments and provided him with a “void” HSBC cheque to facilitate the preauthorized debit of interest payments only from her HSBC account. She also gave Mr. Sandell a note which stated “debit interest payments for loan monthly.”
[34] Mr. Sandell forwarded the void cheque to an internal Bank office with the following note:
We attach a ‘void’ cheque and authorization from the customer to debit H.S.B.C. with the necessary amount to bring interest up to date prior to closing the loan. This will be the source of repayment of the loan until further advised.”
[35] The Bank debited interest payments from Dr. Keeton's HSBC account in January, February and March 2003. On April 30 and May 30, 2003, the Bank withdrew principal and interest payments from the account. Dr. Keeton called Mr. Sandell in May 2003 to find out why the Bank was deducting principal payments. Mr. Sandell apologized, claimed it was a clerical error and said he would ensure that such withdrawals would stop. In June 2003, the Bank debited interest only. However, in July, September and October 2003, the Bank again withdrew principal and interest payments.
[36] In January 2004, Dr. Keeton's lawyer demanded that the principal payments be reimbursed. The Bank's lawyers responded that the Bank would reimburse the funds when Dynamic made a corresponding payment on its loan.
[37] The Bank refused to refund any money to Dr. Keeton. The trial judge found that the principal payments had been “wrongfully” debited from Dr. Keeton’s account, and reduced her personal liability for the loan accordingly.
[38] The trial judge concluded that it was “more likely that these payments [were] the result of clerical error or a communications mix-up at the Bank of Nova Scotia” as opposed to fraud. Although he indicated that the deductions may have been the result of negligence he said, “I am not prepared to impute fraudulent intent to the Bank or its employees with regard to the taking of the principal payments.”
[39] Dr. Keeton submits that there was no evidence at trial capable of supporting the trial judge's conclusion that the principal and interest payments were deducted as a result of clerical error. Rather, she contends that the evidence indicating that the principal and interest payments were for varying amounts demonstrates that the payment amounts had to be calculated and that the deductions were therefore deliberate.
[40] We do not accept these submissions. In his conversation with Dr. Keeton, Mr. Sandell asserted that the initial improper withdrawals were the result of clerical error. Although this statement was not admissible to prove the truth of how the initial withdrawals came about, Mr. Sandell's assertion to Dr. Keeton that the payments were withdrawn through oversight and the subsequent correction of the amounts withdrawn provided an evidentiary basis for the trial judge to infer that all improper withdrawals were made through oversight.
[41] After all, the payments owing were for both principal and interest. Given that fact, it is understandable that a clerical error could be made if the employee requesting payment from HSBC overlooked the instructions to withdraw interest only. Particularly in light of the promise to correct the initial incorrect withdrawals and the subsequent correct withdrawals, it was not unreasonable to infer that the later incorrect withdrawals were also made as a result of clerical error rather than through deliberate conduct.
[42] The fact that the quantum of the payments had to be calculated does not undermine the inference that principal was withdrawn as a result of clerical error. Moreover, any positions taken subsequently by counsel add nothing to the resolution of this issue. Given all of these factors, we did not give effect to this ground of appeal.
2. Did the trial judge err in failing to find that the Bank and its employees committed fraud by altering Dynamic’s banking documents to indicate that Ms. Ting had signing authority and borrowing authority for Dynamic?
[43] The evidence at trial indicated that Dr. Keeton’s copies of the banking documents differed from the Bank’s copies in several important ways. First, although Dr. Keeton’s copy of the Scotiabank Financial Services Agreement Signature Form is silent concerning the persons authorized to give instructions for the account, the Bank’s copy indicates that either the President/Chief Medical Officer or Secretary/Co-chair may give instructions.
[44] Second, although Dr. Keeton's copy of the Banking Resolution indicates that signing and borrowing authority rests with her as President, the Bank's copy indicates that either the President/Chief Medical Officer or the Secretary/Co-chair have such authority.
[45] Third, although Dr. Keeton's copy of the Certificate-Officers, Directors & Signing Authorities describes her as president and Ms. Ting as secretary and seems to suggest that both are required to give instructions, the Bank’s copy describes Dr. Keeton both as Chief Medical Officer and as President and Ms. Ting both as Co-Chair and as Secretary.
[46] At trial, Dr. Keeton claimed that the banking documents she signed on May 13, 2002 were altered after-the-fact without her consent to indicate that Ms. Ting had signing authority and borrowing authority for Dynamic in order to cover up the Banks role in permitting the borrowing to take place. The trial judge rejected this assertion. He stated that the only evidence capable of supporting that allegation was Dr. Keeton's testimony and the fact that she did not have photocopies of the documents in the form relied on by the Bank in her possession.
[47] After citing various examples, the trial judge found as a fact that Dr. Keeton’s long-term memory and short-term memory are both extremely frail. In addition, the trial judge accepted the evidence of the Bank's witnesses that the banking documents were amended in Dr. Keeton's presence and that she initialled the changes. She did not have copies of the amended documents because the blank forms came in multi-copy sets and had already been taken apart when the amendments were made. The trial judge also noted that Dr. Keeton signed the documents relating to the $250,000 small business improvement credit facility and that she does not dispute Ms. Ting's authority to sign cheques drawn on Dynamic's account.
[48] Concerning Dr. Keeton's claim that she made an agreement in Mr. Sandell's presence that Ms. Ting required her approval to sign cheques, the trial judge found that Mr. Sandell was not present on any of the dates when such an agreement could have been made. The trial judge accordingly concluded that Dr. Keeton did not inform the Bank that she had to approve advances under the credit facility before they were made.
[49] On appeal, the appellants do not challenge the trial judge's finding that Dr. Keating's memory is frail. However, they claim that the trial judge's findings are unreasonable in that they fail to take account of all of the evidence that undermined the Bank’s position. Dr. Keeton testified at trial that she did not want to give sole signing authority for Dynamic to Mr. DiBenedetto and Ms. Ting; according to her, other aspects of the banking documents she had in her possession support that position.
[50] According to the appellants, the trial judge failed to take account of a discrepancy between exhibit 6C and exhibit 6D, both of which were copies of the Scotia Bank Financial Services Agreement Signature Form and neither of which included any reference to Ms. Ting having authority to give instructions concerning Dynamic's account. Exhibit 6C contains a blank bank stamp whereas exhibit 6D does not. Exhibit 7C, which is a copy of the same document produced by the Bank, provides authority for either Dr. Keeton or Ms. Ting to give instructions concerning Dynamic’s account and contains the bank stamp in completed form.
[51] Similarly, the trial judge failed to refer in his reasons to exhibit 4, which is a copy of the Banking Resolution Ms. Ting appended to a Dynamic corporate document. Like Dr. Keeton's copy of this document, exhibit 4 does not include any reference to Ms. Ting having signing authority or borrowing authority for Dynamic.
[52] Further, the appellant contends that the trial judge failed to take account of evidence that Dr. Keeton and Ms. Ting attended at the Bank in July to sign documents permitting Ms. Ting to access the accounts on line and the fact that this attendance would have been unnecessary had the banking documents already existed in the form relied on by the Bank.
[53] We did not call on the Bank to respond to these submissions. The trial judge accepted the testimony of the Bank’s witnesses that the changes were made after the multi-copy sets of the documents were taken apart. He was entitled to do so. The fact that there may have been multiple copies of the banking documents in the same form as those in Dr. Keeton's possession, the fact that a blank bank stamp appears on one copy of one of those documents, and the July attendance, do not fundamentally undermine the testimony of the Bank's witnesses to the effect that the banking documents were amended after the multi-copy sets were taken apart. It was open to the trial judge to reject Dr. Keeton's testimony given her admittedly poor memory of events and to accept the testimony of the Bank's witnesses. We see no basis on which to interfere with his findings.
3. Did the trial judge err in assessing damages against Mr. DiBenedetto, Ms. Ting and Hartford?
i) Background
[54] The trial judge found that Mr. DiBenedetto and Ms. Ting arranged for $73,641.45 in secret commissions to be paid to Hartford, a company operated by them, through three of Dynamic’s suppliers, namely, Mr. Shiry, York-Med and PrimeMed, in the following fashion.
[55] Mr. DiBenedetto and Ms. Ting entered into an agreement with Mr. Shiry to have invoices submitted to Dynamic on his behalf that included a fee payable to Hartford for consulting services even though no such services were provided. Ms. Ting prepared invoices relating to Mr. Shiry’s work under Mr. DiBenedetto’s direction totalling $69,550, and forwarded them to the Bank for payment. Mr. Shiry, in turn, paid $41,940 to Hartford from the amounts he was paid on account of the inflated invoices.
[56] The trial judge found that Mr. Shiry understood that Hartford was owned by Dr. Keeton and that he was told that these arrangements were made “with the approval of Dynamic for the purposes of funnelling money through to Dr. Keeton from the bank, in order to reimburse Dr. Keeton for work that had previously been done at the clinic.”
[57] As for York-Med, the trial judge found that it inflated the amount it was otherwise going to charge Dynamic for the supply of computer equipment by adding an implementation fee of $7,653.25 (including G.S.T.), yielding a total invoice of $45,922.38. York-Med, in turn, paid Hartford $7,653.25 on account of a system implementation fee. In addition, York-Med paid Hartford a net total of $4,659.80 on account of computer equipment that was to be supplied by someone else and that was either not supplied or was unusable. York-Med therefore paid Hartford a total kickback of $12,313.05.
[58] As for PrimeMed, the trial judge accepted its evidence that it did not artificially inflate the amount of its invoice to Dynamic but rather agreed, at Mr. DiBenedetto’s request, to funnel a portion of its profits back to Dynamic as a means of cultivating future business with Dynamic. In order to do so, PrimeMed accepted and paid an invoice from Hartford in the amount of $19,388.40 for consulting services in relation to the sale of a vascular laser to Dynamic for $100,787.50 U.S. ($155,177.75 Cdn.). The trial judge also made an express finding that “the payment... was never intended to be a payment to DiBenedetto, Ting or Hartford, but was in fact intended to be a payment to Dynamic.”
[59] The trial judge found as a fact that Dr. Keeton was not aware of any of the foregoing payments to Hartford by the suppliers. The payments were therefore secret commissions and the actions of Mr. DiBenedetto and Ms. Ting in arranging them amounted to a breach of their fiduciary duty as officers and directors of Dynamic for which they were accountable to Dynamic.
[60] Further, to the extent that Mr. Shiry and the principal of PrimeMed testified that it was their understanding that the monies going to Hartford were intended for Dynamic and were paid as a means of funnelling money to Dynamic, the trial judge found that Hartford, Mr. DiBenedetto and Ms. Ting were liable to account to Dynamic for these monies because they constituted trust funds. Finally, to the extent that Hartford, Mr. DiBenedetto and Ms. Ting participated in creating false invoices to cause funds from the Bank to be directed to Hartford, their actions amounted to fraud.
[61] However, the trial judge also found that at least some of the monies that went to Hartford from the suppliers “were utilized for the purpose of repaying advances made by Ms. Ting and/or DiBenedetto.” He said, “To the extent that they can show that the monies went into Dynamic, their actions cannot be considered to be a fraud on Dynamic.” In addition, he stated, “To the extent of the money advanced from Hartford ($54,700.00) Dynamic suffered no loss due to the actions of DiBenedetto and Ting.”
[62] Accordingly, although the trial judge concluded that funds totalling $73,641.45 were paid improperly to Hartford, in calculating Dynamic’s damages, he deducted from that figure the sum of $54,700[^4] that was advanced to Dynamic by companies controlled by Mr. DiBenedetto and Ms. Ting, including Hartford, and awarded damages to Dynamic payable by Mr. DiBenedetto, Ms. Ting and Hartford for the amount of the difference ($18,941.45).
[63] In deciding to allow the $54,700 deduction, the trial judge accepted Mr. DiBenedetto’s evidence that the funds advanced to Dynamic were intended to be loans to assist with operating expenses so that Dr. Keeton would not have to put her own money into Dynamic even though Mr. DiBenedetto represented to the Bank that the initial investment of $32,900 was shareholders’ equity and not borrowed funds. Further, although the trial judge found that Dr. Keeton was not aware of any of the arrangements for “kickbacks”, he accepted Mr. DiBenedetto’s evidence that Dr. Keeton was aware that the advances for operating expenses were to be repaid by having suppliers put money into the company. In addition, the trial judge observed that there was some merit in the argument that had Dr. Keeton “lived up to her end of the concept” and “generated income into Dynamic, Dynamic would be alive and flourishing.”
[64] Ultimately, the trial judge concluded:
DiBenedetto and Ting were left in charge of running the financial affairs of Dynamic and in the course of doing so, money from DiBenedetto was injected into the company. To the extent that the money taken out of the company through invoices rendered by Hartford was in repayment of these advances, I find that there was no breach of trust involved and that DiBenedetto and Ting did not profit from their actions. Their actions were of some benefit to Dr. Keeton, who was in fact the company, in that she was not required to inject further funds of her own into the companies to keep it going. In the result, I find that Dynamic's claim against DiBenedetto and Ting is limited to the difference between the amount of money which they put in, namely, $54,700.00, and the amount of money paid out to Hartford, namely $73,641.45, resulting in a loss to Dynamic of $18,941.45. [Emphasis added.]
ii) Analysis
[65] Dynamic argues that the trial judge made a palpable and overriding error in concluding that the $54,700 paid to Dynamic through various sources were loans as opposed to investments.[^5] I do not accept this submission. As noted above, Mr. DiBenedetto testified that the sums paid to Dynamic were advances. Considering the record as a whole, it was open to the trial judge to accept that evidence.
[66] Nonetheless, I agree that the trial judge erred in deducting $54,700 from the damages he awarded. In doing so, in my view, the trial judge misunderstood the nature and scope of Mr. DiBenedetto’s and Ms. Ting’s breach of duty in two important respects.
[67] First, under the scheme they created, they caused Dynamic to borrow money from the Bank to both repay and partially replace the working capital of $32,900 that Mr. DiBenedetto had originally provided and also to pay themselves the $18,941.45 for which the trial judge held them responsible. Neither of these steps was permitted under the terms of the small business loan; nor had Dr. Keeton authorized such borrowing.
[68] Although Dr. Keeton had agreed on behalf of Dynamic that any monies advanced by Mr. DiBenedetto and Ms. Ting should be repaid, she had been told that the funds for repayment would come from suppliers. She had not agreed to borrow money from the Bank to both repay and replace working capital or to pay Mr. DiBenedetto and Ms. Ting, and, in particular, she had not agreed to participate in a fraudulent scheme in order to do so.
[69] Mr. DiBenedetto and Ms. Ting did not have the authority to borrow money from the Bank to repay themselves or to provide working capital; they did not have authority to borrow money based on fraudulent invoices; and, finally, having set up this fraudulent scheme, they did not have authority to use monies received from suppliers for Dynamic’s benefit to repay themselves for advances in priority to repaying money that Dynamic owed to the Bank.[^6]
[70] Second, under the Ting/DiBenedetto scheme, Dynamic was borrowing money from the Bank under the terms of a small business loan at Bank prime plus 2.5 per cent interest in order to pay approximately 90 per cent of the amount of the suppliers’ invoices. Accordingly, to the extent that Mr. DiBenedetto and Ms. Ting arranged for inflated invoices to be submitted to the Bank, they caused Dynamic to borrow money unnecessarily and they did so based on fraudulent invoices. This conduct not only caused Dynamic to borrow money unnecessarily on the security of property and incur Bank interest charges unnecessarily, it also placed Dynamic in the position of having committed a fraud on the Bank.[^7]
[71] Mr. DiBenedetto and Ms. Ting had no authority to divert funds in the fashion that they did. Moreover, they abused their positions with Dynamic to the detriment of Dynamic by wrongfully increasing the amount of its secured borrowings without authority and by incurring unauthorized interest charges to the Bank. In these circumstances, the trial judge was not entitled to effectively set-off any claims that Mr. DiBenedetto, Ms. Ting and Hartford had against Dynamic. Mr. DiBenedetto, Ms. Ting and Hartford were not entitled to be repaid the monies they advanced unless and until Dynamic was able to repay the Bank the monies that were borrowed improperly together with the interest thereon.
[72] Based on the foregoing reasons, I would vary the trial judge's award against Mr. DiBenedetto, Ms. Ting and Hartford to provide that they repay to Dynamic the sum of $73,641.45 received by them on account of secret commissions. Moreover, to at least partially account for the fact that Dynamic is required to repay the funds borrowed to pay the inflated invoices at the rate stipulated in the small business loan, I would order that interest accrue on $45,000 of that amount at the rate of Bank prime plus 2.5 per cent from September 1, 2002 to the date of judgment.
4. Did the trial judge err in failing to find Mr. Shiry liable for damages for fraud, conspiracy and knowing assistance in a breach of fiduciary duty?
[73] The trial judge found that Mr. Shiry agreed to have Ms. Ting create and submit inflated invoices to Dynamic on his behalf and agreed to pay the excess funds he received to Hartford. Moreover, the trial judge made an explicit finding that, “Shiry's invoices to Dynamic were false and Shiry knew that they were false.”
[74] However, the trial judge accepted Mr. Shiry’s evidence that he was told that the arrangement was being made with the approval of Dynamic so that Dr. Keeton could be reimbursed for work that had been done previously at the clinic. The trial judge also found that Mr. Shiry did not intend to pay any money to Mr. DiBenedetto or Ms. Ting, and that it was Mr. Shiry’s understanding that Hartford was owned by Dr. Keeton, “so that payment to Hartford caused him no concern.”
[75] In the end, the trial judge concluded “there was no conspiracy entered into by Elliot Shiry nor any agreement to pay secret commissions on his part, nor any intention to defraud Dynamic.” After noting that Mr. DiBenedetto and Ms. Ting “were clothed with ostensible authority to deal on behalf of Dynamic” to the knowledge of Dr. Keeton, that all of the invoices and cheques were transparent and that there was no attempt to hide the arrangements, the trial judge found that “Shiry entered into the arrangements as a result of being misled by DiBenedetto” and “[I]f anything, he was taken in as much as Dynamic by DiBenedetto and Ting.”
[76] Dynamic submits that Mr. Shiry's conduct in participating in submitting invoices containing charges for services that he knew were not delivered demonstrates a general intention to defraud and that the trial judge erred in failing to find Mr. Shiry liable for fraud, conspiracy or knowing assistance in a breach of fiduciary duty.[^8]
[77] I would not accept these submissions. The trial judge made an express finding that Mr. Shiry did not intend to defraud Dynamic. This finding would defeat any claim in deceit (common law fraud): see G.H.L. Fridman, The Law of Torts in Canada, 2nd ed. (Toronto: Carswell, 2002) at p. 747. Further, Dynamic has not provided us with any authorities that demonstrate that a party can be liable for equitable fraud where the party has no intention to injure the claimant and receives no benefit from the scheme.
[78] Concerning conspiracy and knowing assistance, in my view, the trial judge’s findings concerning Mr. Shiry’s state of mind negate liability to Dynamic for these torts.
[79] Writing for the unanimous Supreme Court in Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd. 1983 SCC 23, [1983] 1 S.C.R. 452, at pp. 471-72, Estey J. set out the elements of both branches of the tort of conspiracy in the following terms:
Although the law concerning the scope of the tort of conspiracy is far from clear, I am of the opinion that whereas the law of tort does not permit an action against an individual defendant who has caused injury to the plaintiff, the law of torts does recognize a claim against them in combination as the tort of conspiracy if:
(1) whether the means used by the defendants are lawful or unlawful, the predominant purpose of the defendants' conduct is to cause injury to the plaintiff; or,
(2) where the conduct of the defendants is unlawful, the conduct is directed towards the plaintiff (alone or together with others), and the defendants should know in the circumstances that injury to the plaintiff is likely to and does result.
In situation (2) it is not necessary that the predominant purpose of the defendants' conduct be to cause injury to the plaintiff but, in the prevailing circumstances, it must be a constructive intent derived from the fact that the defendants should have known that injury to the plaintiff would ensue. In both situations, however, there must be actual damage suffered by the plaintiff.
[80] The trial judge concluded that Mr. Shiry believed that the purpose of submitting the inflated invoices was to funnel money to Dr. Keeton to reimburse her for monies she had already spent renovating the upstairs of the clinic and that Dynamic approved of the scheme. Although it is true that Mr. Shiry agreed to commit unlawful acts by submitting the inflated invoices, the trial judge’s findings negate the existence of either an intent to injure or a constructive intent to injure.
[81] On the trial judge’s findings, Mr. Shiry believed, in effect, that Dynamic owed the amount of the inflated invoices to Dr. Keeton and that by paying Hartford he was paying Dr. Keeton. These findings reveal an intent to assist Dynamic rather an intent to injure it. Moreover, they refute any suggestion that Mr. Shiry should have known injury to Dynamic was likely. Based on what Mr. Shiry had been told by a director of Dynamic, he thought Dynamic owed Dr. Keeton the money reflected in the inflated invoices and he thought Dr. Keeton owned Hartford.
[82] With respect to knowing assistance in a breach of fiduciary duty, to found liability, the stranger to the trust must have actual (as opposed to constructive) knowledge of the misconduct, or be wilfully blind to the breach or reckless in his failure to realize that there was a breach: see Air-Canada v. M & L Travel Ltd., 1993 SCC 33, [1993] 3 S.C.R. 787 at pp. 811-12.
[83] Although it might have been appropriate to conclude that a reasonable man in Mr. Shiry’s shoes would have made further inquiries before participating in a scheme that involved creating false invoices, such a conclusion would support a finding of constructive knowledge only; it does not support a finding of wilful blindness or recklessness.
[84] The trial judge’s findings to the effect that Mr. Shiry believed that Dynamic owed Dr. Keeton the money paid on account of the inflated invoices, that Dr. Keeton owned Hartford, and that the money was being funnelled to Dr. Keeton through Hartford with Dynamic’s approval negate both wilful blindness and recklessness.
[85] Accordingly, I would not give effect to this ground of appeal.
5. Did the trial judge err in awarding Mr. Shiry judgment on his counterclaim?
[86] In January 2003, Mr. Shiry called Dr. Keeton with respect to $7,712.35[^9] owing for the balance of the renovations he had completed at the clinic. In support of his claim, he provided copies of all the invoices related to the project, including the Hartford invoices, which is how Dr. Keeton became aware of the DiBenedetto/Ting “kick-back” scheme.
[87] Mr. Shiry’s arrangement with Mr. DiBenedetto was that he would be paid for the costs of the renovations he performed plus 20 per cent. According to both Mr. Shiry and Mr. DiBenedetto, this was less than a contractor’s usual mark up, because Mr. Shiry hoped to obtain work at future clinics. Mr. Shiry’s claim at trial for was for work performed that was not included in the original invoices totalling $69,550.
[88] The trial judge concluded that some deduction was necessary for unsatisfactory work and awarded Mr. Shiry $5,000 plus costs. Dynamic claims that the trial judge erred in doing so because Mr. Shiry has already been fully paid for his work.
[89] I agree. The total cost of the work performed by Mr. Shiry was approximately $30,000. Even when 20% is added, Dynamic paid him an amount well in excess of the value of the work he performed. Although Mr. Shiry may have been as much a victim of the Ting/DiBenedetto scheme as Dynamic, it is Mr. Shiry who must bear the loss of his choice to pay Hartford, not Dynamic.
[90] Accordingly, I would allow this aspect of Dynamic’s appeal, set aside the judgment in favour of Mr. Shiry, and dismiss Mr. Shiry's counterclaim. I would also set aside the award of costs in favour of Mr. Shiry and substitute an order of no order as to costs with respect to the dismissal of Dynamic’s claim against him and the dismissal of his counterclaim against Dynamic.
6. Did the trial judge err in failing to find PrimeMed liable for damages for conspiracy and knowing assistance in a breach of fiduciary duty?
[91] As already noted, the trial judge accepted PrimeMed’s evidence that it did not artificially inflate the amount of its invoice to Dynamic but rather chose to repay Dynamic part of its profit on the sale of the laser “to cultivate future business from Dynamic.”
[92] The trial judge found that PrimeMed agreed that the payment would go through Hartford for two reasons: first, so that Hartford could provide an invoice for consulting services that PrimeMed could use as a deduction for income tax purposes; and second, so that PrimeMed could maintain its position with other customers that it did not provide discounts.
[93] However, the trial judge stated, “the payment made by PrimeMed was never intended to be a payment to DiBenedetto, Ting or Hartford, but was in fact intended to be a payment to Dynamic.” The trial judge therefore concluded that PrimeMed was not a party to any conspiracy nor liable on the basis of knowing assistance in a breach of fiduciary duty.
[94] Dynamic claims that the trial judge erred in failing to find PrimeMed liable for fraud, conspiracy, knowing receipt, and knowing assistance in a breach of fiduciary duty. However, Dynamic did not plead fraud or knowing receipt as against PrimeMed. In any event, the trial judge's findings that PrimeMed did not artificially inflate its invoices and that it intended the payment it made to Hartford to be a payment to Dynamic negate its liability for wrongdoing.
[95] I would not give effect to this ground of appeal.
7. Did the trial judge err in failing to award punitive damages?
[96] Apart from noting the appellants’ claims for punitive damages, the trial judge made only one reference to their availability, and he did so while addressing Dynamic's claims against York-Med. After finding that the principal of York-Med knew that monies were going to Mr. DiBenedetto and Ms. Ting at the expense of Dynamic and that the payment amounted to a secret commission and equitable fraud, the trial judge said:
This is, in my view, not the nefarious type of fraud that warrants an award of punitive damages.
[97] Dynamic submits that the trial judge erred in failing to award punitive damages against all of the defendants against whom it recovered. Dynamic characterizes the remedy awarded by the trial judge as disgorgement and asserts that it is not an adequate remedy to achieve the important goal of deterring the type of self-interested and purposely exploitive conduct on the part of fiduciaries that occurred in this case. Dynamic claims that substantial punitive damages are necessary to achieve that purpose.
[98] As against Mr. DiBenedetto, Ms. Ting and Hartford, Dynamic claims punitive damages equivalent to Dynamic’s exposure under the loan to the Bank. As against York-Med, Dynamic claims a significant award.
[99] I would not give effect to these submissions for three reasons.
[100] First, as I read his reasons, the trial judge did not share Dynamic’s view that Mr. DiBenedetto’s and Ms. Ting’s conduct was purposely exploitive. On the trial judge’s findings, Mr. DiBenedetto and Ms. Ting’s fraudulent scheme was directed primarily at recovering money they advanced to Dynamic and perhaps also at compensating them, albeit without authority, for the time and effort they expended in trying to advance Dynamic’s interests. Further, in the trial judge’s view, Dr. Keeton was at least partially to blame for Dynamic’s failure. Accordingly, although I consider that the trial judge’s findings are consistent with an inference of self-interested conduct, in my opinion, they do not support an inference of deliberate exploitation.
[101] In the circumstances, even though he may not have fully reviewed Dynamic’s claim for punitive damages as against Mr. DiBenedetto, Ms. Ting and Hartford, I see no basis for interfering with the trial judge’s general conclusion that this is not the type of nefarious fraud that warrants an award of punitive damages.
[102] Punitive damages are awarded only in extreme cases to address misconduct that represents a marked departure from ordinary standards of decent behaviour. They are awarded to address the need for retribution, deterrence and denunciation and not for the purpose of compensating the plaintiff, and, are to be awarded only rarely and with restraint. In addressing a claim for punitive damages, the court should relate the facts of the particular case to the underlying purposes of punitive damages and ask itself how, in particular, an award would further one or other of the objectives of the law: Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at paras. 36, 43, 68, 69 and 71; see also McIntyre v. Grigg (2006), 2006 ONCA 37326, 83 O.R. (3d) 161 (C.A.).
[103] On the trial judge’s characterization of Mr. DiBenedetto’s and Ms. Ting’s misconduct, I am not persuaded that he erred in failing to award punitive damages against them. Although the trial judge failed to take account of the full nature and scope of their misconduct in awarding damages, that error has been corrected and, in any event, does not undermine the trial judge’s perception of the nature of the misconduct that took place.
[104] Second, although Dynamic acknowledged in its submissions that punitive damages are awarded to address the need for retribution, deterrence and denunciation in a particular case and not as compensation, Dynamic’s submission concerning the quantum of any award suggests that it is seeking compensation. As I have said, punitive damages are not to be awarded as compensation.
[105] Third, Dynamic has not demonstrated any basis for interfering with the trial judge’s decision not to award punitive damages against York-Med.
[106] I would not give effect to this ground of appeal.
8. Did the trial judge err in his costs award to the Bank?
[107] The respondent Bank seeks leave to appeal the trial judge’s costs award. If leave is granted, the Bank appeals the decision of the trial judge to significantly reduce the quantum of the substantial indemnity costs awarded from the date of discoveries[^10] and his holding that Dr. Keeton is personally liable for only 50 per cent of the costs awarded.
[108] I would not grant leave to appeal. It is well established that a costs award is a discretionary order, and that the decision of a trial judge with respect to costs is entitled to significant deference. This court will only set aside a costs award if the trial judge has made an error in principle, or if the costs award is plainly wrong: see Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, at para. 27.
[109] Although the trial judge awarded substantial indemnity costs to the Bank, the Bank is not, as a result, entitled to receive full indemnification for any and all legal expenses incurred. The trial judge exercised his discretion to make an award for an amount he considered proper. I see no basis on which to grant leave to appeal this aspect of the award.
[110] Nor am I persuaded that there is any basis on which to grant leave to appeal with respect to the costs award against Dr. Keeton. The trial judge was in the best position to determine the amount of trial time attributable to the issues involving Dr. Keeton and the Bank and its employees.
[111] Accordingly, I would refuse leave to appeal costs.
9. Conclusion
[112] Based on the foregoing reasons, I would allow the appeal in part as follows:
i) by varying the quantum of damages awarded to Dynamic against Mr. DiBenedetto, Ms. Ting and Hartford from $18,941.45 to $73,641.45 with interest to run on the sum of $45,000 at Bank prime plus 2.5 per cent and on the balance at 2.5 per cent from September 1, 2002 to the date of judgment;
ii) by setting the judgment in favour of Mr. Shiry aside and dismissing his counterclaim with no order as to costs.
[113] I would dismiss the balance of the appeal and deny the Bank’s request for leave to appeal costs.
[114] Finally, I would award costs of the appeal as follows:
i) the sum of $18,000 inclusive of G.S.T. and disbursements to Dynamic against Mr. DiBenedetto, Ms. Ting and Hartford;
ii) the sum of $4,000 inclusive of G.S.T. and disbursements to York-Med against Dynamic;
iii) the sum of $10,000 inclusive of G.S.T. and disbursements to the Bank against Dynamic and Dr. Keeton;
iv) no order as to costs of the cross-appeal.
RELEASED: September 21, 2009 “STG”
“Janet Simmons J.A.”
“I agree S.T. Goudge J.A.”
“I agree R.G. Juriansz J.A.”
Appendix ‘A’
The $54,700 was advanced to Dynamic in the following circumstances. Mr. DiBenedetto made an initial advance of $32,900 to Dr. Keeton through Greenwood Environmental Inc. on July 10, 2002. The balance of the funds was advanced by Hartford as payments were received from the suppliers. A summary of the advances to Dynamic and the payments by suppliers to Hartford is set out below:
| Date | Source of Funds | Amount of Advance | Amount of Payment |
|---|---|---|---|
| July 10, 2002 | Greenwood | $32,900 | |
| July 15, 2002 | Primemed | $19,388.40 | |
| July 15, 2002 | Hartford | $5000 | |
| July 16, 2002 | Mr. Shiry | $18,400 | |
| July 19, 2002 | York-Med | $7653.25 | |
| July 22, 2002 | York-Med | $4659.80 (net) | |
| July 23, 2002 | Hartford | $8000 | |
| August 2, 2002 | Mr. Shiry | $4280 | |
| August 6, 2002 | Hartford | $3000 | |
| August 15, 2002 | Hartford | $3000 | |
| August 16, 2002 | Mr. Shiry | $16,050 | |
| August 28, 2002 | Mr. Shiry | $3210 | |
| August 30, 2002 | Hartford | $2800 | |
| Total | $54,700 | $73,641.45 |
[^1]: According to the pleadings, Linda Keeton advanced a claim against the Bank only. However at paragraph 6 of the judgment, the claims of “the plaintiffs” as against the defendants, the Bank, Mark Sandell and Sandi Gentleman are dismissed.
[^2]: The monies provided to Dr. Keeton were actually from Greenwood Environmental Inc., and, according to Mr. DiBenedetto, represented the proceeds of a loan repayment to him from Greenwood.
[^3]: This claim does not appear in the pleadings forming part of the appeal record. However, no issue was raised on appeal with respect to the absence of pleadings concerning this issue.
[^4]: The details of the $54,700 in advances to Dynamic by Mr. DiBenedetto, Ms. Ting and Hartford as well as the payments by suppliers to Mr. DiBenedetto, Ms. Ting and Hartford are set out in Appendix ‘A”. Essentially, the advances consisted of the $32,900 originally provided by Mr. DiBenedetto as working capital, plus $21,800 provided by Hartford to Dynamic as funds were received from the suppliers.
[^5]: In its factum, Dynamic also argued that the trial judge erred in his approach to assessing damages for breach of fiduciary duty. Dynamic claimed that the remedy of disgorgement awarded by the trial judge was insufficient and that the trial judge should have adopted a restitutionary approach and placed Dr. Keeton in as good a position as she would have been in had the breach not occurred. According to Dynamic, this meant finding Mr. DiBenedetto and Ms. Ting liable for an amount equivalent to the debt they incurred in the name of Dynamic pursuant to their fraudulent scheme.
Dynamic did not pursue this argument in its oral submissions. In any event, to the extent that the argument implies that the award of damages should have been equivalent to the total amount of Dynamic’s indebtedness to the Bank, it misconstrues the extent of the breach of fiduciary duty. Dr. Keeton authorized the Bank loan, the purchase of the laser equipment and the computer equipment, and the work that Mr. Shiry actually performed.
[^6]: The monies Hartford received consisted of $49,593.25 on account of money from inflated invoices ($41,940 from Mr. Shiry and $7,653.25 from York-Med) and $24,048.20 on account of “true” kickbacks ($19,388.40 from PrimeMed and $4,659.80 from York-Med) for a total of $73,641.45.
Even if Mr. DiBenedetto and Ms. Ting had authority to use the true kick-backs received from PrimeMed and York-Med to repay the $32,900 originally advanced by Mr. DiBenedetto, they did not have authority to do so in priority to discharging the obligations they incurred improperly on behalf of Dynamic to the Bank. These obligations were secured and bore interest at the rate of Bank prime plus 2 1/2%.
[^7]: Apart from the $18,941.45 that Mr. DiBenedetto, Ms. Ting and Hartford kept for themselves, Dynamic had to borrow approximately $44,633.93 at Bank prime plus 2 1/2% interest from the Bank to pay the inflated components of Mr. Shiry's and York-Med’s invoices (approximately 90% of $41,940 and $7,653.25 respectively).
[^8]: In its factum, Dynamic also refers to knowing receipt, however that doctrine was neither pleaded nor addressed by the trial judge.
[^9]: Although Mr. Shiry gave evidence at trial indicating that the amount owing was $7,712.35, the amount he claimed in his Statement of Defence and Counterclaim is $7,512.00.
[^10]: In oral submissions, the Bank confirmed that it was not challenging the trial judge’s decision to reduce the quantum of partial indemnity costs awarded to the completion of discoveries.