McGrail v. Phillips, 2018 ONSC 3571

minicounsel

CITATION: McGrail v. Phillips, 2018 ONSC 3571

DIVISIONAL COURT FILE NO.: 445/17

DATE: 20180612

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

SWINTON, BROAD AND MYERS JJ.

BETWEEN:

PAUL McGRAIL, DEBRA McGRAIL and PAUL COUTURE

Plaintiffs (Respondents in Appeal)

– and –

DAVID C. PHILLIPS, MARGARET DAVIS, DOUGLAS HYATT, LEO DE BEVER, JOHN WILSON, ROBERT GAULD, JOHN COOK, CHRISTINE CHANG, LEON EFRAIM, JOANNA HAMPTON, BRIAN SUTTON, ERMO OU, STEVEN BROCKHOUSE, MARINA USHYCKY, TERENCE FISK and ROBIN PULLEN

Defendants (Appellants in Appeal)

Bruce O’Toole, for the Appellant Margaret Davis

John Fabello and Irfan Kara, for the Appellants Douglas Hyatt, Leo de Bever and Robert Gauld

David S. Steinberg, for the Appellants Steven Brockhouse, Marina Ushycky and Terence Fisk

Pathik Baxi for the Appellant Robin Pullen

No one appearing for the Appellant John Cook

Michael S. Hebert and Cheryl Gerhardt McLuckie , for all of the Respondents

AND BETWEEN:

Plaintiffs (Respondents in Appeal)

– and –

DAVID C. PHILLIPS, MARGARET DAVIS, DOUGLAS HYATT, LEO DE BEVER, JOHN R. WILSON, ROBERT GAULD, JOHN COOK, CHRISTINE CHANG, LEON EFRAIM, JOANNA HAMPTON, BRIAN SUTTON, ERMO OU, STEVEN BROCKHOUSE and MARINA USHYCKY

Defendants (Appellants in Appeal)

HEARD at Toronto: April 25, 2018

D.A. Broad, J.

reasons for judgment

Background

1This is an appeal, with leave, from the order of Tausenfreund J. dated April 5, 2017, in which he granted partial summary judgment to the Appellants, but refused to dismiss all the claims against them. For the reasons that follow, I would allow their appeals and dismiss all the claims against them.

2The Appellants and the Respondents were all investors who purchased securities issued by corporations, limited partnerships and investment funds comprising an interconnected group of entities operating under the umbrella name “First Leaside.” They became investors in one or more of the First Leaside entities as clients of First Leaside Securities Inc. (“FLSI”).

3The Defendant David Phillips (“Phillips”), a registered investment advisor, was the founder, controlling shareholder and guiding mind of First Leaside Wealth Management (“FLWM”) which provided services to many of the First Leaside entities and was their de facto parent company. Phillips is not an appellant in these appeals.

4By August, 2011 the First Leaside group of entities had grown into a complex structure of 161 distinct but interrelated limited partnerships and funds.

5Participation in the First Leaside group allowed investors to invest their capital, directly or indirectly, in various types of assets including multi-unit residential properties in Canada and the United States, retirement homes, development property, independent accounting firms, manufacturing and processing companies, consulting firms and start-up high tech companies. For the most part investors made their investments in exclusive reliance on representations made to them by Phillips and other FLSI salespeople.

6The Appellants were all long-standing investors in First Leaside and, as a result of requests made by Phillips to them individually, became directors of certain corporations in the First Leaside group, of which three are potentially relevant to the investments of the Respondents. The names of the three pertinent corporations and the Appellants who were directors of each corporation are as follows:

FLWM – Hyatt, de Bever, Gauld, Cook, Davis;

First Leaside Realty II (“FLR II”) – Brockhouse, Ushycki, de Bever, Cook, Davis; and

965010 Ontario Inc. (“965”) – Fisk, Ushycky, de Bever, Cook, Gauld, Pullen.

7Certain financial concerns respecting one of the limited partnerships in the Leaside Group, Wimberley Apartments Limited Partnership (“WALP”), of which 965 was the general partner, were first expressed in an audit report released by KPMG on September 20, 2005.

8In November, 2009 the Ontario Securities Commission (“OSC”) commenced an investigation into the First Leaside group. The OSC requested that a viability study on the group be carried out. Grant Thornton LLP was engaged to carry out the study. Grant Thornton LLP completed its review report on August 19, 2011 and it was reviewed at a joint directors’ meeting of FLWM and 965 on September 5, 2011. However, the Grant Thornton LLP report was not released to investors until November 7, 2011.

9In December, 2011 responsibility for the management and affairs of First Leaside group was transferred to an independent committee of directors which determined that a managed liquidation and wind-up was in the group’s best interests. The committee authorized an application in February, 2012 for court protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”). An order was made in the CCAA proceeding on December 7, 2012 appointing Grant Thornton LLP as the receiver over all the assets of the First Leaside group.

10All investors in the First Leaside group, including the Appellants and the Respondents, suffered a significant loss in value of their investments as a result of the insolvency of the group which led to the CCAA proceeding.

11Michael R. Poole and others commenced an action against various defendants, including the Appellants, by Statement of Claim issued on November 27, 2013 in Court file 13-59444. Paul McGrail and others commenced an action against the Appellants and others by Statement of Claim issued February 24, 2014 in Court file 14-60166.

The Actions and Motions

(a) Statements of Claim

12Each Statement of Claim claims:

(a) damages against all defendants for negligence, negligent misrepresentation, fraudulent misrepresentation, breach of fiduciary obligations, breach of statutory obligations and oppression; and

(b) a declaration that the defendants have exercised their powers in a manner that is oppressive or unfairly prejudicial to the plaintiffs and that unfairly disregards the interests of the plaintiffs.

13Each of the Statements of Claim allege that the plaintiffs suffered significant losses by investing in First Leaside, for which losses the defendants, as directors of First Leaside, are liable. They allege that the defendants, as directors, owed the plaintiffs, as investors and shareholders in First Leaside, a duty of care and that they breached that duty of care and acted negligently (emphasis added).

14Each Statement of Claim also alleges that the defendants, as directors of First Leaside, owed fiduciary obligations to the plaintiffs, which the defendants breached, and that, had the defendants acted in accordance with their fiduciary obligations, the plaintiffs would have been able to avoid or minimize their investment losses (emphasis added).

15Each Statement of Claim also alleges that the defendants owed the plaintiffs duties pursuant to statutes, including a duty to act honestly and in good faith with a view to the best interests of the corporation and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The specific statutory provisions pleaded in the Statements of Claim are s. 134 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”) and s. 122 of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”), both of which describe the duties of directors and officers of corporations incorporated under those respective statutes.

16The Statements of Claim each seek a declaration, in reliance on the oppression remedy provisions of the OBCA and CBCA, that the named defendants exercised their powers as directors in a manner that was oppressive or unfairly prejudicial to the plaintiffs and that unfairly disregarded the interests of the plaintiffs.

17It is noted that the three corporations referred to above were all incorporated under the OBCA, and therefore the CBCA has no application to these appeals.

18Although the Statements of Claim allege that Phillips made negligent and fraudulent misstatements to the plaintiffs in his personal capacity, it is telling that all of the allegations made against the Appellants were “as directors” of First Leaside. No allegations are made against the Appellants for any breach or wrong, other than “as directors.”

(b) Motions for Summary Judgment

19Nine of the sixteen defendants named in the Statements of Claim brought summary judgment motions pursuant to rule 20 of the Rules of Civil Procedure to have the actions dismissed, as against them, on the basis that there is no genuine issue requiring a trial with respect to the claims made against them. In particular, they argue that, as directors of the named corporations, they owed no duty of care to the plaintiffs as shareholders or investors in the First Leaside group, they made no representations to the plaintiffs, and the claims for breach of trust, oppression and breach of statutory duty are untenable.

Facts

20There was extensive affidavit and documentary evidence before the motions judge, together with transcripts of lengthy cross examinations of the affiants of the affidavits. The motions judge set out the relevant facts in detail in his Reasons reported at 2016 ONSC 8181. No issue was taken by any party with the findings of fact made by the motions judge. It is sufficient for the purpose of the appeals to note the following findings of fact made by the motions judge:

(a) the Appellants served as directors at the request of Phillips and did so on a volunteer basis. They principally served as directors of corporations that were general partners of limited partnerships which issued units in which the Respondents invested;

(b) the Appellants had no contact with, nor made any representations to, any of the Respondents in advance of or after the Respondents made their investments in the First Leaside group of entities;

(c) the 2005 KPMG audit report in respect of WALP for the year ended December 31, 2004 included observations of serious financial concerns which might be viewed as a “call to action” for the directors of 965 and perhaps directors of the other First Leaside group board of directors. Notwithstanding this, there was no evidence of what action if any, the board of directors of 965 took to address these issues and concerns;

(d) the OSC commenced an investigation into the First Leaside group in November 2009 and in March, 2011 requested a viability study be carried out;

(e) at the request of the OSC, Phillips gave an undertaking on March 18, 2011 that, during the review by Grant Thornton LLP and for a one week period after delivery of its final report to OSC staff, no sales would be made to any investors of any debt or equity in WALP or any of its subsidiaries;

(f) Grant Thornton LLP provided its report on August 19, 2011 and Philips’ undertaking therefore expired on August 26, 2011;

(g) the Grant Thornton LLP report included the following comments and recommendations;

(i) certain limited partnerships, particularly WALP, have been a drain on the resources of the First Leaside group and significant funds have been loaned between entities in the group;

(ii) there is a significant equity deficit based on asset valuation;

(iii) the future viability of the First Leaside group was contingent on its ability to raise new capital and if it were restricted from doing so, it would likely be unable to continue its operations in the ordinary course;

(iv) the First Leaside group had challenges in the area of financial reporting;

(v) the First Leaside group was in the early stages of implementing enhanced corporate governance;

(vi) it was recommended that management of the group take steps to improve its accounting capacity and financial systems, the First Leaside group should ensure that there are financial statements available for each entity which holds investors’ money, that better reporting and disclosure be made to investors, and that the board should improve its governance policies and procedures.

(h) although a joint directors’ meeting of FLWM and 965 was held on September 5, 2011 to consider the Grant Thornton LLP report, it was not released to investors until November 7, 2011. In the intervening period First Leaside group continued to market its products, with $18.76 million of securities being sold to investors during the period August 26 to October 28, 2011;

(i) on September 2, 2011 Phillips made a loan of $500,000 to the First Leaside group which then paid Phillips $80,000 on September 8, 2011 and repaid the sum of $500,000 to Phillips on November 3, 2011;

(j) the financial statements of WALP for the years ended December 31, 2009 and 2010 were first available on September 16, 2011. The statement indicated that more than $8 million had been advanced to WALP by other First Leaside entities;

(k) WALP continued to pay regular monthly dividends to its investors; most, if not all, with money injected into the First Leaside group by new investors;

(l) in October 2011 the OSC sought a “cease trade order” against all securities of the First Leaside group which then agreed that all entities in the group would refrain from issuing or selling securities as of October 28, 2011;

(m) in late November, 2011 the directors of FLWM, FLR II and 965 signed resolutions to discontinue distributions from limited partnerships for which those corporations were the general partners;

(n) on December 9, 2011 Grant Thornton LLP released a second report which disclosed that approximately $20 million had been raised from investors between August 19 and November 1, 2011;

(o) none of the Appellants made any representations to any of the Respondents, nor did they ever meet or speak to any the Respondents;

(p) none of the Appellants created any marketing or offering material.

21Although there had been no order consolidating the two actions, the parties agreed that, for the purposes of the summary judgment motions, the two actions should be treated as one.

Disposition by the Motions Judge

22The motions judge granted summary judgment dismissing the claims in the action, “except the claim (sic) of negligence, fiduciary obligations and statutory duties, if any” finding that “the claims made in the within actions as against the Moving Parties for negligence, fiduciary obligations and statutory duties, if any, relating to their stewardship of the finances of the corporations for which they had been appointed directors, as it affects the plaintiffs, raise a triable issue”. In other words, the oppression claim has been dismissed, and that aspect of the order has not been appealed.

23In his reasons, the motions judge found that there was no evidence that any of the moving directors acted in a manner that had “a separate entity or interest from that of the Corporation so as to make the act or conduct complained of their own,” and noted that the plaintiffs did not plead fraud, dishonesty, want of authority or conduct by the moving defendants in the nature of a separate identity or interest from the subject corporations. He concluded that, in the absence of such evidence and pleadings, “the only duty these Defendants owe would appear to be to the general partnership corporation of which they were directors.” Notwithstanding this finding respecting the nature and scope of the moving defendants’ duty of care, the motions judge nevertheless found that “the question of what might reasonably be expected of these directors concerning the financial stewardship of these corporations, as it affects the Plaintiffs, is a triable issue.”

Appeals and Conclusion

24The Appellants have appealed the motions judge’s finding that there is a genuine issue requiring a trial (characterized by the motions judge as a “triable issue”) in respect of the claims in negligence, fiduciary obligations and statutory duties against them.

25For the reasons that follow, I would allow the appeal and dismiss the actions against the Appellants.

Grounds for the Appeals

26The Appellants appealed the order of the motions judge dismissing their motions for summary judgment with respect to the plaintiffs’ claims against them for “negligence, fiduciary obligations and statutory duties, if any,” on the grounds that he erred in law:

(a) in concluding that the appellants owed a duty to the plaintiffs;

(b) in conflating standard of care with duty of care;

(d) in concluding that the evidentiary record was not sufficient to grant full summary judgment, when it was more than sufficient.

Jurisdiction

27This Court has jurisdiction in respect of the appeals pursuant to s. 19(1)(b) of the Courts of Justice Act, R.S.O. 1990, c. C.43, as the order dismissing the motions for summary judgment in respect of the claims enumerated by the motions judge was interlocutory in nature. Leave to appeal was granted pursuant to rule 62.02 on September 29, 2017.

Analysis

28The motions judge reviewed sub-rule 20.04(2)(a), noting that the Court shall grant summary judgment if it is satisfied that there is no genuine issue requiring a trial and noting sub-rule 20.04(2.1) which provides that, in determining whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and may weigh the evidence, evaluate the credibility of a deponent and draw any reasonable inference from the evidence.

29The motions judge went on to observe that, on a motion for summary judgment, the court must be guided by the comments of the Supreme Court of Canada in Hryniak v. Maudlin, 2014 SCC 7 and, in particular, that the summary judgment rule should be interpreted broadly, favouring proportionality and fair access to affordable, timely and just adjudication of claims.

30The motions judge noted the direction from Hryniak that, if there is no genuine issue, then the motion shall be granted, and where there is a genuine issue, the motion judge should consider whether the need for a trial can be avoided by ordering the presentation of oral evidence under sub rule 20.04(2.2) or relying on the fact-finding powers in sub-rule 20.04(2.1).

31After reviewing the provisions of s. 134(1) of the OBCA and s. 122 of the CBCA and reviewing the case law the motions judge observed:

In view of the statutory duties of good faith, loyalty and care owed to the Corporation, directors cannot have separate duties of the same nature owing to the shareholders, as such parallel duties would create untenable and unrealistic conflicts;
the defendant directors owe their duty not to the limited partnerships in which the plaintiffs invested but to the corporate general partner;
the cases in which a director’s duty of care is owed to someone other than the corporation are limited to situations where the director has actively participated in tortious conduct beyond the role of the director of the corporation, or where there is evidence of fraud, dishonesty, want of authority or other conduct specifically pleaded which justifies piercing the corporate veil, where the corporate veil is a sham or where the conduct exhibits a separate identity of interest from the bona fide interests of the corporation;
the only duty that the defendants owe would appear to be to the general partnership corporation of which they were directors.

32Given these statements by the motions judge, the logical conclusion would have been a dismissal of the claims against the Appellants based on negligence, fiduciary obligation or statutory duty.

33The motions judge correctly, in my view, observed that the Appellant directors owe their duty, not to the investors in the limited partnerships, but to the corporations of which they were directors (see para. 43). Citing Montreal Trust Co. of Canada v. ScotiaMcLeod Inc. (1995), 26 O.R. (3d) 48 (C.A.), leave to appeal refused [1996] 3 S.C.R. viii (note), at para. 25, the motions judge correctly held that the circumstances where a director’s duty of care is owed to someone other than the corporation are limited to cases where :

(a) the director has actively participated in tortious conduct beyond the role of a director of the corporation; or

(b) where there is evidence of fraud, dishonesty, want of authority or other conduct specifically pleaded which justifies piercing the corporate veil, where the corporate veil is a sham or where the conduct exhibits a separate identity of interest from the bona fide interests of the Corporation.

34The motions judge made no finding that any of the circumstances enumerated in Montreal Trust Co. of Canada v. ScotiaMcLeod Inc., justifying the imposition of personal liability to directors in favour of persons other than the corporation, are present in the case at bar. Indeed, no such circumstances were pleaded in the Statements of Claim.

35The OBCA defines the duties of directors of corporation at s. 134(1) as follows:

134 (1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall,

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. R.S.O. 1990, c. B.16, s. 134 (1); 2006, c. 34, Sched. B, s. 24. (emphasis added)

36Para. (a) of s. 134(1) sets out the fiduciary duties owed by directors, while para. (b) sets out their duty of care. These duties are owed to the corporation.

37Notwithstanding these observations with respect to directors’ duties, the motions judge stated at paragraph 46 of his Reasons:

“this [i.e. the fact that the defendants’ only duty would appear to be to the corporation of which they were directors] would militate for a dismissal of the action as against these defendants, but for the question of their stewardship of the finances of the corporations for which they had been appointed as Directors.”

38The motions judge then undertook a review of certain case law respecting the nature and scope of directors’ duties to parties other than the Corporation, a further review of some of the factual findings set forth above and concluded that:

although the defendants, as Directors, had been on notice as of 2005 of financial difficulties (characterized by the motions judge as “taking on water”), the material before him was incomplete on what action, if any, the defendants took to address the problem;
the question of whether the law of negligence should be extended to address the situation raised in the actions requires a Cooper v. Hobart approach [being a reference to the Supreme Court of Canada decision reported at 2001 SCC 79, [2001] 3 S.C.R. 537] and the record on the motions is insufficient for that purpose;
the question of what might reasonably be expected of the defendants, as Directors, concerning the financial stewardship of the corporations, as it affects the plaintiffs, is a “triable issue.”

39In reaching this conclusion, the motions judge erred in two ways: he improperly conflated the issue of the standard of care with the duty of care, and he erred in finding that there was a “triable issue” with respect to the Appellants’ duty of care in negligence.

40In Cooper v. Hobart the Supreme Court of Canada reaffirmed the appropriateness of the approach laid down in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.) in determining whether the law of negligence should be extended to recognize a duty of care to reach a previously unrecognized situation. At p. 16 the Court noted that, at the first stage of the Anns test, two questions arise, namely:

(1) was the harm that occurred the reasonably foreseeable consequence of the defendant’s act, and

(2) are there reasons, notwithstanding the proximity between the parties established in the first part of this test, that tort liability should not be recognized here?

The Court stated that “the proximity analysis involved at the first stage of the Anns test focuses on factors arising from the relationship between the plaintiff and the defendant” (underlining in the original).

41At p. 17 of Cooper v. Hobart, the Court considered what is meant by proximity, noting firstly that “proximity” is generally used to characterize the type of relationship in which a duty of care may arise, and secondly, that sufficiently proximate relationships are identified through the use of categories, which provide certainty to the law of negligence, while still permitting it to evolve to meet the needs of new circumstances.

42The Statements of Claim in the present case rest their claims of liability against the Appellants exclusively on their positions as directors of one or more of the corporations. The motions judge found that the Appellants and the Respondents had no relationship with each other apart from the Appellants’ position as directors of corporations which were for the most part general partners for limited partnerships in which the Respondents were investors, as unit-holders or otherwise. Any duty of care of the Appellants to the Respondents could therefore arise solely by virtue of the Appellants’ status as directors, not on the basis of any interaction or relationship with the Respondents.

43The Respondents were unable to point to what additional material evidence would be necessary to carry out an Anns test analysis, presuming such an analysis is necessary, or if any such additional material evidence is necessary, that they had taken reasonable steps to obtain it for the motion for summary judgment. Counsel for the Respondents suggested in argument that evidence from Phillips would be material. However, he was unable to explain how his evidence would assist in an Anns analysis or why, in any event, Phillips was not cross-examined pursuant to rule 39.03(1).

44At para. 81 of Hryniak Karakatsanis J. stated that, absent an error of law, the exercise of powers under the new summary judgment rule attracts deference and when the motion judge exercises her or his new fact-finding powers and determines whether there is a genuine issue requiring a trial, this is a question of mixed fact and law, which is not to be overturned where there is no extractable error in principle, and in the absence of palpable and overriding error. At para. 82 Justice Karakatsanis went on to note that the question of whether it is in the interest of justice for the motion judge to exercise the new fact-finding powers depends on the relative evidence available at the summary judgment motion and at trial, the nature, size, complexity and cost of the dispute and other contextual factors and that such a decision is also a question of mixed fact and law which attracts deference.

45Since the motions judge in the case at bar did not ask the key question of how the record was insufficient to resolve the dispute summarily based upon the evidence before him, he was not equipped to go on to make the necessary determination of whether the need for a trial could be avoided by using the fact-finding powers under sub rules 20.04(2.1) and (2.2). The motions judge therefore never determined whether it was in the interest of justice to exercise the new fact-finding powers.

46In failing to ask these key questions, the motions judge applied the wrong legal test for determining whether there is a genuine issue requiring a trial. The motion judge’s finding that there is a “triable issue” does not therefore attract deference.

47In my view the record was sufficient to reach a fair and just determination on the merits respecting the question of “whether the law of negligence should be extended to address the situation raised in these two actions” posed by the motions judge. As discussed, the focus of the analysis of this question must be on the relationship between the parties rather than on the conduct of the Appellants. The summary judgment process allowed the motions judge to make the necessary findings of fact that he did, as summarized above, allowed him to apply the law to the facts, and was a proportionate, more expeditious and less expensive means to achieve a just result. Moreover, there was no need shown to use the fact-finding powers under sub rules 20.04(2.1) and (2.2).

48As indicated previously, the motions judge conducted a review of the law and concluded that the only duty that the appellants owed appeared to be to the general partnership corporation of which they were directors and that the dismissal of the actions against them should follow, “but for the question of their stewardship of the finances of the corporations.”

49The Miriam-Webster dictionary defines “stewardship” as “the conducting, supervising, or managing of something; especially: the careful and responsible management of something entrusted to one's care.”

50It is evident that “financial stewardship” of the corporation and its affairs is at the heart of a director’s duty of care in para. 134(1)(b) of the OBCA by its reference to “care, diligence and skill.” As observed by the motions judge in his initial conclusion, directors owe their duty of care to the corporation. It must follow from this that a director’s duty of care for “financial stewardship,” which lies at its heart, is owed to the corporation only, absent the existence of circumstances exemplified in Montreal Trust Co. of Canada v. Scotia McLeod Inc.

51 Subsection 115(1) of the OBCA states what a director must do in the discharge of her or his duty of care as follows:

Subject to any unanimous shareholder agreement, the directors shall manage or supervise the management of the business and affairs of a corporation.

52The motions judge, at para. 60 of his Reasons, described what, in his view, were the failings of the Appellants, as directors, in their management or supervision of the management of the business and affairs, or their “financial stewardship,” of the corporations. He stated that the Appellants had been on notice as of 2005 that “their boat was taking on water,” but did nothing about it. In addition, he noted that $20 million was received from new investors between August 19 and November, 2011.

53In my view, in focusing on what the Appellants did or did not do as directors at the relevant times, rather than on the relationship between the Appellants, as directors, and the Respondents, as shareholders or investors, the motions judge improperly conflated standard of care and duty of care.

54Moreover, a Cooper v. Hobart analysis was not, in my view, called for in the circumstances of this case. The fact that such an analysis may not be warranted in every case was recently confirmed by the Court of Appeal in 1688782 Ontario Inc. v. Maple Leaf Foods Inc., 2018 ONCA 407. Fairburn, J.A., writing for the Court, observed at para. 41:

“a full Anns/Cooper analysis is not required in every case. If a relationship falls within a previously established category, or is analogous to one, then the requisite close and direct relationship is shown. So long, then, as a risk of reasonably foreseeable injury can also be shown, or has already been shown through an analogous precedent, the first stage of the analysis will be complete and a duty of care exists”

55Although the observation of Fairburn, J.A. in 1688782 Ontario Inc. v. Maple Leaf Foods referenced a situation where the relationship between the plaintiff and the defendant fell within an established category in which a duty of care was found to exist, in my view, the converse must follow where the relationship falls within a category in which a duty of care has been previously found not to exist.

56It is well-established in the case-law that no duty of care exists in the relationship between directors of a corporation and shareholders or investors in the corporation, in the absence of the type of circumstances enumerated in Montreal Trust Co. of Canada v. Scotia McLeod Inc. In the case of Alvi v. Misir (2004), 2004 47790 (ON SC), 73 O.R. (3d) 566 (S.C.J.), referred to by the motions judge in his Reasons, Cameron, J. stated, at para. 57, that, in view of the fact that the directors’ statutory duties of good faith, loyalty and care are owed to the corporation, the directors cannot have separate duties of the same nature owing to the shareholders, as such parallel duties would create untenable and unrealistic conflicts.

57The cases cited by the Respondents do not assist them in casting doubt on the well-established principle that the duty of care of corporate directors in relation to the management of the business and affairs of a corporation is owed to the corporation and not to the shareholders.

58The Respondents place considerable reliance on the following passage of Cory, J.A., as he then was, dissenting in the result, in the case of Bell v. Source Data Control Ltd. (1988), 1988 4772 (ON CA), 66 O.R. (2d) 78 (C.A.) at para. 40:

It can then be seen that the original rule that individual shareholders are not owed a fiduciary duty by other directors or majority shareholders has been altered. It is now clear that the issue as to whether fiduciary obligations are owed will depend upon the facts of the particular case and will not be dependent solely upon the formal classification of the parties as majority and minority shareholders or director and shareholder.

59It is noted that Bell v. Source Data did not concern a claim by a shareholder against a director for deficiencies in her/his management or supervision of the management of the business and affairs of the corporation, but rather concerned matters external to the corporation, in particular, whether a majority shareholder owed a fiduciary duty to the minority shareholder in relation to the sale by the majority shareholder of his shares to a third party at a price that was not available to the minority shareholder.

60Similarly, the case of Haase v. Vladi Private Islands Limited, 1990 2418 (N.S.C.A.) did not involve the duty of care of the directors for the management or supervision of the affairs of the corporation, but rather related to alleged dealings by the majority shareholders to engineer a receivership of the corporation and to acquire the assets of the corporation from the receiver, through another corporation, in order to squeeze out the minority shareholders. Moreover, the case related to a motion by the defendants under the Nova Scotia Civil Procedure Rule, equivalent to rule 21 of the Ontario Rules of Civil Procedure, to strike out the Statement of Claim as disclosing no reasonable cause of action.

61Re Standard Trustco., 1992 LNONOSC 270 (OSC) was a decision of the Ontario Securities Commission which dealt with whether certain exemptions in the Act did not apply. It did not concern a claim for liability against directors of the corporation for breach of a duty of care.

62UPM-Kymmene Corp. v. UPM-Kymmene Miramichi Inc., 2002 49507 (Ont. S.C.J.) involved an application under the oppression remedy provisions of the Canada Business Corporations Act. The applicants sought to set aside an alleged self-interested contract entered into between the respondent director and the corporation. It did not involve a claim of liability for breach of a duty of care in reference to the management of the affairs of the corporation.

63The cases of Simson et al v. Deer Island Credit Union Limited et al, 2012 NBCA 92, Peracomo Inc. v. TELUS Communications Co., 2014 SCC 29, Holmes v. United Furniture Warehouse Limited Partnership, 2012 BCCA 226, Anger v. Berkshire Investments Group Inc., 2001 24141 (Ont. C.A.), and NBD Bank, Canada v. Dofasco Inc. (1999), 1999 3826 (ON CA), 46 O.R. (3d) 514 (C.A.) were all cited by the Respondents in support of the uncontroversial propositions that tortious conduct of directors is independently actionable and could result in personal liability, and that a finding of liability on this basis does not result from lifting the corporate veil, but as a result of direct liability.

64The Respondents have been unable to point to any case in which a director has been held personally liable to a shareholder or shareholders for breach of the duty of care in relation to management of the business and affairs, or the “financial stewardship,” of the corporation.

65The formal order signed by the motions judge granted summary judgment and dismissed the claims of the moving parties except the claims of “negligence, fiduciary obligations and statutory duties, if any”, notwithstanding that the motions judge’s Reasons found that there was a “triable issue” only with respect to “what might reasonably be expected of these directors concerning their financial stewardship of these corporations, as it affects the Plaintiffs.” It would appear that the range of surviving bases of liability (negligence, fiduciary obligations and breach of statutory duties) in the Order is broader than the “triable issue” found in the motions judge’s Reasons, which relates only to negligence. In any event, I find that the Respondents were unable to point to any basis by which personal liability to them could attach to the Appellants, whether in negligence, breach of fiduciary duty or breach of a statutory duty. The motions judge erred in finding that there was a triable issue with respect to the Appellants’ financial stewardship of the corporations.

66Given my conclusion on this issue, I need not address the alternative argument in which the Appellants allege that the Respondents should have proceeded by way of a derivative action.

Disposition

67For the foregoing reasons, the appeals are allowed, and the motions for summary judgment are granted. Action No. 13-59444 is dismissed as against the appellants Margaret Davis, Douglas Hyatt, Leo de Bever, Robert Gauld, Steven Brockhouse, and Marina Ushycky, and Action No. 13-59444 is dismissed as against the Appellants Margaret Davis, Douglas Hyatt, Leo de Bever, Robert Gauld, Steven Brockhouse, Marina Ushycky, Terence Fisk and Robin Pullen.

68The appeals of John Cook were not perfected and he did not participate in the hearing of the appeals. His appeals in both actions are therefore dismissed.

Costs

69In accordance with the agreement of the parties, the Respondents shall pay costs of the appeal, on a joint and several basis, fixed in the sum of $35,000, including the leave motion.

70The issue of costs of the Appellants of the actions, including the motions for summary judgment, shall be remitted back to the motions judge for determination.

Broad J.

I agree _______________________________

Swinton J.

I agree _______________________________

Myers J.

Released: June 12, 2018

CITATION: McGrail v. Phillips, 2018 ONSC 3571

DIVISIONAL COURT FILE NO.: 445/17

DATE: 20180612

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

SWINTON, BROAD AND MYERS JJ.

BETWEEN:

McGRAIL ET AL.

and -

PHILLIPS ET AL.

REASONS FOR JUDGMENT

Broad, J.

Released: June 12, 2018

McGrail v. Phillips, 2018 ONSC 3571

Case Summary

reasons for judgment

Background

The Actions and Motions

Facts

Disposition by the Motions Judge

Appeals and Conclusion

Grounds for the Appeals

Jurisdiction

Analysis

Disposition

Costs

McGrail v. Phillips, 2018 ONSC 3571

Case Summary

reasons for judgment

Background

The Actions and Motions

Facts

Disposition by the Motions Judge

Appeals and Conclusion

Grounds for the Appeals

Jurisdiction

Analysis

Disposition

Costs

Cited By (2 cases)

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

Extreme Venture Partners Fund I LP v. Varma, 2019 ONSC 2907

Cited By (2 cases)

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

Extreme Venture Partners Fund I LP v. Varma, 2019 ONSC 2907