CITATION: Swinkels v. American Home Assurance Company, 2012 ONSC 4345
COURT FILE NO.: 1888-11
DATE: 20120724
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
hackland, R.S.J., pierce, r.s.J., matlow,j.
B E T W E E N :
NANCY SWINKELS
Plaintiff (Respondent)
- and -
AMERICAN HOME ASSURANCE COMPANY
Defendant
AND BETWEEN:
NANCY SWINKELS
Plaintiff (Respondent)
-and-
I.I.G. INTERNATIONAL INVESTMENT GROUP INC. and PCC FIRST CAPITAL CORPORATION and J. BRUCE BALDOCK and JOANNE E. WEILHARTER and STEPHEN J. HAWKINS and LARS SODERSTROM
Defendants
PCC FIRST CAPITAL CORPORATION and J. BRUCE BALDOCK
Defendants (Appellants)
DAVID J. KIRWIN, for the Plaintiff (Respondent)
No appearance
DAVID J. KIRWIN, for the Plaintiff (Respondent)
PHILIP G, GARBUT for the Defendants (Appellants)
HEARD AT LONDON: November 29,
2011
AMENDED REASONS FOR JUDGMENT
MATLOW J.:
The order in appeal
[1] This is an appeal by two of the defendants in the second of the above-titled actions from the order of Justice Campbell dated October 26, 2010, made in the first of the above-titled actions, granting leave to the plaintiff in both actions, (“Swinkels”), to amend her statement of claim in accordance with a draft amended statement of claim that is attached to the order. The order permits her, as she requested, to add, to her direct claims against American Home Insurance Company (“AHIC”), derivative claims on behalf of and in the name of PCC First Capital Corporation (“PCC”) and directs that the actions be tried “one immediately after the other”.
The disposition
[2] This appeal is allowed. The order in appeal is set aside and, in its place, an order is to issue dismissing the motion before the motion judge.
The background of this litigation
[3] In April, 2001, Swinkels made an investment of $450,000 U.S. with I.I.G. International Investment Group (“I.I.G.”) by way of a debenture. She now alleges that, because of certain subsequent actions taken by PCC, which was to act as escrow trustee, and its principal, J. Bruce Baldock (“Baldock”), her investment was not secured as required and she has been unable to recover any part of her investment and there is no prospect of repayment of her investment by I.I.G.
[4] In her efforts to obtain redress, Swinkels commenced two actions. The first action in time, Court File No. 50759 (“the I.I.G. action”), was commenced on June 19, 2006 against I.I.G., PCC, Baldock and others from whom Swinkels claims repayment of her investment and interest. The second action in time, Court File No. 58575 (“ the AHIC action”), was commenced on June 13, 2008 against American Home Assurance Company (“AHIC”) from which she claims indemnification pursuant to a fidelity bond which it issued insuring PCC against certain types of losses.
[5] Swinkels subsequently brought a motion in the AHIC action, but titled in both actions, seeking leave to amend her statement of claim in that action to add a derivative claim pursuant to section 246 (1) of the Business Corporations Act, R.S.O. 1990, c. B.16 (“the Act”) against AHIC in the name of PCC. By the order in appeal, she was granted that relief.
[6] The combined prayer for relief set out in the draft amended statement of claim includes claims for the following relief:
a) a declaration that the fidelity bond issued by AHI to PCC was in force at the relevant time;
b) a declaration that AHIC is bound to indemnify her for “any and all damages proven against” PCC;
c) a declaration that AHIC is bound to indemnify PCC “for all damages proven against PCC “ in Action 50759;
d) a money judgment against AHIC for $450,000 plus interest.
The issues
[7] The issues in this appeal can best be understood by referring to the definition of “complainant” set out in section 245 and section 246 of the Business Corporations Act, R.S.O. 1990, c. B.16 (“the Act”) the statutory provision pursuant to which the order in appeal was made, which read as follows:
Definitions
- In this Part,
“action” means an action under this Act; (“action”)
“complainant” means,
a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,
b) a director or an officer or a former director or officer of a corporation or of any of its affiliates,
c) any other person who, in the discretion of the court, is a proper person to make an application under this Part. (“plaignant”) R.S.O. 1990, c. B.16, s. 245.
Derivative actions
- (1) Subject to subsection (2), a complainant may apply to the court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate. R.S.O. 1990, c. B.16, s. 246 (1).
Idem
(2) No action may be brought and no intervention in an action may be made under subsection (1) unless the complainant has given fourteen days’ notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the court under subsection (1) and the court is satisfied that,
(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;
(b) the complainant is acting in good faith; and
(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued. R.S.O. 1990, c. B.16, s. 246 (2).
Notice not required
(2.1) A complainant is not required to give the notice referred to in subsection (2) if all of the directors of the corporation or its subsidiary are defendants in the action. 2006, c. 34, Sched. B, s. 38.
Application
(3) Where a complainant on an application made without notice can establish to the satisfaction of the court that it is not expedient to give notice as required under subsection (2), the court may make such interim order as it thinks fit pending the complainant giving notice as required. R.S.O. 1990, c. B.16, s. 246 (3).
Interim order
(4) Where a complainant on an application can establish to the satisfaction of the court that an interim order for relief should be made, the court may make such order as it thinks fit. R.S.O. 1990, c. B.16, s. 246 (4).
Appeal
- An appeal lies to the Divisional Court from any order made by the court under this Act. R.S.O. 1990, c. B.16, s. 255.
[8] Leave was granted to the appellants to appeal on two issues, described in the order granting leave as follows;
a) Whether the Plaintiff is entitled to bring the application for leave to commence a derivative action by way of a Motion to Amend her Statement of Claim; and,
b) Whether the Plaintiff is a proper complainant within the meaning of the Business Corporations Act (Ontario);
[9] I observe, however, that it was not necessary for the appellants to seek leave to appeal as section 255 of the Act provides an unrestricted right of appeal.
Analysis
[10] For the reasons that follow, I would prefer to confine my determination of this appeal to the issue referred to in paragraph 8(b) above. Although counsel for the appellants did not explicitly abandon his reliance on the prior issue, his submissions made it clear that he viewed the second as the major determining issue and we agreed.
[11] It is useful to begin the analysis of this appeal by recognizing once more that the order in appeal would permit Swinkels to prosecute derivative claims in the name and on behalf of a corporation which, in this case, is PCC. Accordingly, it is necessary to begin by separating the claims which she would assert on behalf of PCC, which does have privity with AHIC as the party insured by the fidelity bond, from her original personal claims against AHIC, with which she does not have privity.
[12] Paragraphs 19 to 25, inclusive, of the amended statement of claim contains Swinkels’ allegations against PCC and Baldock. They are as follows:
Dishonest and Fraudulent Act by Employees of PCC
As noted above, PCC, through Bruce Baldock, opened up bank accounts at two financial institutions, the Royal Bank of Canada and Wells Fargo Bank. Both accounts required a signature from Baldock on behalf of PCC and Stephen Hawkins of IIG.
The Plaintiff’s investment funds were deposited into one or both of these accounts.
PCC, as the escrow trustee, had an obligation to ensure that the Plaintiff’s monies were deposited into secured investments of Grade A quality or higher.
Contrary to this obligation, the Plaintiff’s investment funds were then transferred to an individual or individuals without the benefit of any security whatsoever as contemplated by the terms of the Subscription Agreement and Debenture.
PCC’s employee Baldock facilitated this transfer by providing Stephen Hawkins with executed, blank transfer forms permitting Stephen Hawkins to transfer whatever sum he wished to whatever entity he wished without the benefit of a review by the trustee PCC.
In so doing, the Plaintiffs (sic) state that the employee of PCC, Baldock breached his fiduciary obligations to PCC and was effectively dishonest and fraudulent through his complete abdication of his responsibilities as a co-signer and escrow trustee on the bank accounts into which the Plaintiff’s monies were deposited.
Accordingly, the Plaintiffs (sic) states that the Defendant has an obligation to indemnify PCC for the losses sustained by it as a result of its employee, Bruce Baldock’s, dishonesty and fraudulent conduct.
[13] Paragraphs 21 and 27 to 31, inclusive, of the motions judge’s endorsement, include his views on the issues in this appeal. They read as follows:
- For the reasons that will follow, I find that the plaintiff in this action is a complainant within the meaning of s. 245(c) of the Act. Further, the requirements of s. 246(2) have been met. Therefore, the plaintiff will be granted leave to amend the Statement of Claim as requested.
Similarly, I believe that the third requirement as (sic) has been met. As stated by the Court in Richardson Greenshields of Canada Ltd. v. Kalmacoff, 1995 1739 (ON CA), 18 B.L.R. (2d) 197, the requirement is only that the action appears to be in the best interests of the corporation. Further, I am satisfied there is a reasonable basis for the complaint and the action sought to be instituted is at least a legitimate arguable one. While I cannot be expected to try the case, I do not find the action is frivolous or vexatious or bound to be unsuccessful. (Marc-Jay Investments v Levy (1974), O.R. (2d) 235.
PCC and Baldock argue that this case is bound to fail for two reasons. First, the preconditions of the policy have not been met, and secondly, that the limitation period has passed. In my view, the issue of the limitation period and the discoverability of the action is a matter for a trial judge and therefore I cannot say the action is bound to fail for that reason.
With respect to the issue of the preconditions, I would comment as follows:
(i) The case as constituted establishes the loss was caused by employee (sic) of PCC, Baldock. Granted he now argues that he was acting in the capacity of I.I.G. but again a determination of that issue is for trial.
(ii) Secondly, I find that PCC may suffer a loss. That is, a judgment against it by the plaintiff would be a loss. It is not determinative that it does not have assets to cover such a loss.
(iii) Thirdly, the loss must result from a fraudulent or dishonest act on the part of an employee. The allegation is that Baldock’s actions were fraudulent or dishonest. On the basis of the admitted facts, his actions were at least extraordinarily careless. This coupled with the fact that Baldock was closely associated with I.I.G. may cause a court to find that his conduct falls within the requirements of the bond of indemnity.
(iv) Fourthly, the loss must have resulted from a dishonest act of an employee intending to gain some financial benefit. The debenture given to Baldock without consideration, whether it was for profit sharing or some potential tax benefit, it is clearly of benefit to him.
The defendant also argued that for policy reasons the court should not allow an action to reimburse an investor for loss. It is clear that is not the basis of this claim. If that were the basis of the claim, it would not be legitimate and it would have no chance of success.
I do not agree that the derivative action is premature. In my view, to wait for the determination of the factual issues before granting leave would be an unnecessarily duplicitous (sic) and present the possibility of inconsistent verdicts.
[14] The fidelity bond issued by AHIC to PCC contains provisions relevant to Swinkels’ proposed derivative claim. The only coverage conceivably responsive to such as claim is set out at page 1 of the bond under the headings, “INSURANCE AGREEMENT” and “FIDELITY”. Paragraph (A), describing the coverage, reads as follows:
Loss resulting directly from dishonest or fraudulent act committed by an Employee acting alone or in collusion with others.
Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:
(a) to cause the insured to sustain such loss, and
(b) to obtain financial benefit for the Employee and which, in fact, result in obtaining such benefit.
As used in this Insuring Agreement, financial benefit does not include any employee benefits earned in the normal course of employment, including salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions.
[15] It follows that, in order for Swinkels’ proposed derivative claim to fall within the scope of the coverage provided by the bond, she would have to prove that;
a) Baldock was an employee of PCC; and
b) Baldock, as an employee, committed a dishonest or fraudulent act; and
c) Baldock’s acts directly caused PCC to suffer a loss; and
d) when Baldock committed the acts, he had a clear or obvious intent to cause PCC to suffer the loss and to obtain a financial benefit for himself; and
e) Baldock received a financial benefit as a result of his acts.
[16] Throughout the amended statement of claim Swinkels identifies the conduct of Baldock with that of PCC and, in essence, alleges that both Baldock and PCC committed “dishonest and fraudulent acts” in relation to her, the alleged victim, but not in relation to PCC itself. Both the appellants and Swinkels agree that, at all material times, Baldock was the sole officer and director of PCC and Baldock’s evidence is that all of the shares of PCC were owned either by him or a family corporation. According to Baldock’s evidence, he did not act as an employee of PCC in relation to the subject transaction. Nor is there any evidence in the record before us that he was an employee of PCC at the relevant time.
[17] As well, Swinkels recognizes that Baldock was the controlling mind of PCC, that his actions were the actions of PCC and that his knowledge of what occurred was the knowledge of PCC. Indeed, on the record before us, PCC could not act or have any knowledge about anything except what Baldock did and what Baldock knew.
[18] It follows, both as a matter of logic and a matter of law, that, in the circumstances of this case, it would have been impossible for Baldock to act dishonestly or fraudulently in relation to PCC, his corporation and his alter ego, because it is fundamental that one cannot deceive or defraud oneself. This, alone, would bring the proposed derivative claim outside the scope of the coverage provided by the bond.
[19] If Swinkels’ proposed derivative action were allowed to proceed as proposed by her, it would follow that, having defrauded Swinkels, PCC would be allowed to seek to recover a sum of money from AHIC that PCC could hold to indemnify itself against any potential judgment that Swinkels might obtain against it. It would be tantamount to a situation in which a fraudster seeks to recover on a fidelity bond to provide protection for himself against the contingency that his own victim might one day obtain redress in a court. To view the situation in this light shows the absurdity of the result and demonstrates why no insurer would provide such coverage and why any such claim would be bound to fail.
[20] Although there can be no doubt that Swinkels did suffer a loss, PCC clearly has not. If anyone was deceived or defrauded by Baldock, it was Swinkels. Nor would a judgment against PCC in favour of Swinkels at some time in the future constitute a “loss” to PCC as required by the fidelity bond.
[21] Accordingly, with respect, I am persuaded that the motions judge could not have reasonably concluded, as he did, that Swinkels fell within the discretionary definition of complainant as a proper person set out in section 245 (c) of the Act. As shown above, Swinkels’ intended action was clearly bound to fail and it was unreasonable for the motions judge to reach the opposite conclusion and conclude that it appears to be in the best interests of the corporation.
[22] Although the order granting leave to appeal to this court expressly refused to grant leave to appeal on the issue of whether Swinkels “has satisfied the requirements established by s. 246(2) of …” the Act, it is open to us to observe that the discretion created by section 246(2)(c) is intertwined with the discretion created by section 245(c) and that it would create an absurdity to interpret the Act to hold that Swinkels, despite her intended action being bound to fail, could still be a proper person to bring the action and thereby qualify as a complainant. Indeed, section 246 prohibits the bringing of a derivative action unless the requirement of it appears to be in the best interests is satisfied.
The standard of review
[23] I turn, finally, to the standard of review that is applicable in this appeal. As can be seen from the motion judge’s reasons set out in paragraph 13, above, the order in appeal was based on two essential preliminary findings that the motion judge was required to make, namely, whether Swinkels qualified as a complainant pursuant to section 245 (c) which depended on whether the it appears to be in the best interests requirement in section 246 (2) (c) had been satisfied. Both findings made were in favour of Swinkels. Because both of these findings were left by the Act to be decided in the discretion of the motion judge, it follows, as a matter of logic, that the order in appeal should also be viewed as a discretionary order and for such orders the standard of review is that of reasonableness.
[24] Applying that standard to the order in appeal, I would conclude that it is unreasonable for the following reasons, all of which are discussed above:
The motions judge clearly misunderstood the coverage provided by the fidelity bond issued by AHIC and misapplied his interpretation of it which was unreasonable.
The application of that interpretation led the motions judge to make unreasonable preliminary findings in relation to sections 245 (c) and 246 (2) (c).
The application of the unreasonable preliminary findings led the motions judge to make the order in appeal which, in such circumstances, was inevitably unreasonable as well.
Costs
[25] Counsel may make written submissions to us with respect to costs, to be exchanged by them and delivered to the office of this court at London within 30 days of the release of these reasons.
Matlow J.
This endorsement is signed on behalf of the entire panel with the consents of the other members.
RELEASED: July 24, 2012
CITATION: Swinkels v. American Home Assurance Company, 2012 ONSC 4345
COURT FILE NO.: 1888-11
DATE: 20120724
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
hackland and pierce, r.s.J.J., matlow, j.
B E T W E E N:
NANCY SWINKELS
Plaintiff (Respondent)
- and -
AMERICAN HOME ASSURANCE COMPANY
Defendant
AND B E T W E E N :
NANCY SWINKLES
Plaintiff (Respondent)
- and -
I,I,G, INTERNATIONAL INVESTMENT GROUP INC. and PCC FIRST CAPITAL CORPORATION and J. BRUCE BALDOCK and JOANNE E. WEILHARTER and STEPHEN J. HAWKINS and LARS SODERSTROM
Defendants
PCC FIRST CAPITAL CORPORATION and J. BRUCE BALDOCK
Defendants (Appellants)
AMENDED REASONS FOR JUDGMENT
MATLOW J.
RELEASED: July 24, 2012