Court of Appeal for Ontario

Date: 2001-01-25 Docket: C34980

Re: Conrad Black, H. Garfield Emerson, Martin Goldfarb, James Pattison, Joseph Rotman and A. Alfred Taubman (Plaintiffs/Defendants by Counterclaim/Respondents) v. American Home Assurance Company (Defendant/Plaintiff by Counterclaim/Appellant)

Before: Finlayson, Austin and Charron JJ.A.

Counsel: Roger J. Horst and Stephen R. Moore, for the appellant Glenn Smith and Monique Jilesen, for the respondents Black, Emerson, Goldfarb, Pattison and Rotman Michael J. Petrocco, for the respondent Taubman Elizabeth Pillon, for Livent Inc.

Heard: January 15, 2001 Released Orally: January 15, 2001

On appeal from the order of Justice John D. Ground dated August 14, 2000.

ENDORSEMENT

[1] The named respondents are outside directors of Livent Inc. They have brought an action against the appellant American Home Assurance Company to enforce a Directors and Officers Liability policy issued by American Home on the application of Livent.

[2] American Home defends the action, alleging that there is no coverage for any officers or directors of Livent. In its counterclaim, it asks for a declaration of its right to rescind the contract of insurance and for a declaration that it may keep the premiums paid by Livent because of the fraud committed by Livent against American Home.

[3] American Home seeks to add Livent to the action as a defendant by counterclaim along with a number of other directors of Livent. American Home also seeks an order lifting the stay of proceedings made under the Companies’ Creditors Arrangement Act (“C.C.A.A.”) R.S.C. 1985, c. C-25 presently in effect with respect to Livent. The individuals that American Home wishes to add as defendants are those directors and officers of Livent who have been named as defendants in a number of actions instituted in the State of New York and for whom notice under the policy of insurance has been given to American Home.

[4] The motions judge dismissed the motion to add parties and, consequently, held that the motion under the C.C.A.A. was moot.

[5] Prima facie, the parties sought to be added should have been added. The declarations sought by American Home in its counterclaim would not be effective unless the insured Livent and the beneficiaries under the policy are parties to the proceedings. See L. Sarna, The Law of Declaratory Judgments, 2nd ed. (1988), at p. 82:

No relief will issue unless all interested parties to the proceedings are represented or have been duly put in default. The applicant has the burden of demonstrating that those parties who have been served with proceedings are not only interested parties, but are the only interested parties to the application. This burden is ultimately for the sole benefit of the applicant: for the declaration to be of any practical importance any parties against whom the judgment is to be made must be represented in the litigation. In default of service to all those who have or may have an interest, the court would in effect be granting a decree in the air.

[6] Livent argues that the issue involving Livent is distinct from the issue involving the named plaintiff directors because the policy of insurance has two distinct coverages: coverage A for directors; and coverage B for Livent. It submits that the fraud, if any, committed by the officers of Livent does not vitiate the coverage for the innocent directors because they are beneficiaries under what amounts to a separate policy of insurance. Further, and to meet the legal requirement referenced in the above quotation, it states that it is prepared to undertake to be bound by any decision of the court relating to the validity of the policy in question.

[7] In our view, the argument as to the severability of the two coverages is not so conclusive as to be determinative of whether Livent should be added as a party. This is a matter that should be decided after a trial. In the meantime, American Home should not have to rely upon an undertaking. It is entitled to ask for and, in a proper case, receive a declaration between it and its policyholder, Livent, as to the validity of the policy.

[8] The adding of more individual directors involves a different problem. Those who are presently parties are plaintiffs who are outside directors who have taken a position that, as beneficiaries under coverage A, they are not affected by any fraud perpetrated by the management of Livent. Those sought to be added include not only new, outside directors, but also directors who were actively managing the company and are alleged to be perpetrators of the fraud.

[9] Adding the latter category introduces a new dimension to the lawsuit and one in which the present plaintiffs have no interest. It converts an action encompassing a manageable issue involving a discrete question of law as to the validity of their coverage to one involving what will undoubtedly be a disputed issue of the personal involvement of individual directors in the fraud. So far as the additional, outside directors are concerned, they have made no attempt to follow up on their claim for indemnity under the policy in this jurisdiction and there is serious doubt that they would now be able to do so. We agree that issue estoppel would probably be a bar in such an event.

[10] Under these circumstances we are not prepared to interfere with the order below refusing to add the new named directors as parties. Our refusal to do so in no way interferes with the appellant’s ability to pursue its counterclaim for a declaration that the policy of insurance is void and is void against those beneficiaries under coverage A who are innocent of the alleged fraud.

[11] Accordingly, the appeal is allowed to the extent of adding Livent as a party. Leave is given to amend the statement of defence and counterclaim accordingly. Additionally, we would grant leave under s.13 of the C.C.A.A. to appeal from the motions judge’s refusal to lift the stay of proceedings and lift the stay of proceedings to the extent necessary to give effect to this order. In all other respects, the appeal is dismissed.

[12] The named plaintiffs are entitled to their costs here and below. There will be no costs awarded to or against Livent.

Signed: “G.D. Finlayson J.A.” “Austin J.A.” “Louise Charron J.A.”