DATE: 20010629 DOCKET: C30552 C30573
COURT OF APPEAL FOR ONTARIO
GOUDGE, MacPHERSON AND SIMMONS JJ.A.
IN THE MATTER OF a Proceeding under the Class Proceedings Act, 1992
B E T W E E N:
PAUL PEPPIATT, GEORGE NICHOLS AND PETER WYSLOUZIL, AND ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED AND ON BEHALF OF THE MEMBERS OF EAGLE CREEK GOLF CLUB BY WAY OF DERIVATIVE ACTION, AND MARCEL LEMIEUX ON BEHALF OF ALL MEMBERS OF THE EAGLE CREEK GOLF CLUB (“CLUB MEMBERS”) WHO DID NOT RECEIVE A COPY OF THE MEMBERSHIP INFORMATION PACKAGE, GEORGE NICHOLS ON BEHALF OF ALL CLUB MEMBERS WHO RECEIVED THE FIRST VERSION OF THE MEMBERSHIP INFORMATION PACKAGE, ON BEHALF OF ALL CLUB MEMBERS WHO WERE PLAINTIFFS IN THE INJUNCTION PROCEEDING COMMENCED IN DECEMBER, 1990, ON BEHALF OF ALL CLUB MEMBERS WHO NEITHER WERE CUSTOMERS OF THE ROYAL BANK NOR RECEIVED INVESTMENT ADVICE FROM THE BANK, AND ON BEHALF OF ALL CLUB MEMBERS WHO ACQUIRED THEIR MEMBERSHIP IN THE CLUB FROM THE CLUB ITSELF, PETER WYSLOUZIL ON BEHALF OF ALL CLUB MEMBERS WHO RECEIVED THE SECOND VERSION OF THE MEMBERSHIP INFORMATION PACKAGE, AND ON BEHALF OF ALL CLUB MEMBERS WHOSE LETTERS OF CREDIT MADE NO REFERENCE TO “IN TRUST”, RICHARD LADAS ON BEHALF OF ALL CLUB MEMBERS WHO RECEIVED THE THIRD VERSION OF THE MEMBERSHIP INFORMATION PACKAGE, LOUIS RENAUD ON BEHALF OF ALL CLUB MEMBERS WHO RECEIVED THE FOURTH VERSION OF THE MEMBERSHIP INFORMATION PACKAGE, GREG BOYLE ON BEHALF OF ALL CLUB MEMBERS WHOSE LETTERS OF CREDIT IDENTIFIED AN ENTITY OTHER THAN THE BANK AS THE BENEFICIARY OF THE TRUST, GERRY STANTON ON BEHALF OF ALL CLUB MEMBERS WHOSE LETTERS OF CREDIT IDENTIFIED THE BANK AS A BENEFICIARY OF THE TRUST, ON BEHALF OF ALL CLUB MEMBERS WHO WERE CUSTOMERS OF THE BANK, ON BEHALF OF ALL CLUB MEMBERS WHO RECEIVED INVESTMENT ADVICE FROM THE BANK, AND ON BEHALF OF ALL CLUB MEMBERS WHO SAT ON THE BOARD OF GOVERNORS OF THE CLUB OR ANY COMMITTEE OF THE CLUB THAT APPROVED THE QUANTUM OF CONSTRUCTION COSTS, AND TIM BELL ON BEHALF OF ALL CLUB MEMBERS WHO ACQUIRED THEIR MEMBERSHIP IN THE CLUB BY WAY OF TRANSFER FROM ANOTHER MEMBER OF THE CLUB
William G. Horton And Allison A. Thornton For the Royal Bank
K. Scott McLean For Nicol Homes J. Arthur Cogan, Q.C.
And G. Todd Baney for the respondent Class-Plaintiffs
Alan R. O’Brien And Heather J. Williams For the Respondent Third Party
Plaintiffs (Respondents)
- and -
THE ROYAL BANK OF CANADA, R.J. NICOL, ROBERT JOHN NICOL IN TRUST, COOPERS & LYBRAND LIMITED Trustee of the Estate of R.J. NICOL HOMES LIMITED a Bankrupt, R.J. NICOL MANAGEMENT LIMITED, AND EAGLE CREEK GOLF CLUB
Defendants (Appellants)
- and -
SOLOWAY, WRIGHT, VICTOR
Third Party (Respondent)
Heard: January 15
And 16, 2001
On appeal from the Judgment of Justice James Chadwick dated August 21, 1998.
SIMMONS J.A.:
[1] Robert J. Nicol had a dream of building a world-class golf course in Ottawa. He realized his dream but some of the successful construction companies he operated in Ottawa went bankrupt in the process. Nicol’s longtime banker, the Royal Bank, lost a considerable amount of money because of the project.
[2] The private golf club envisaged by Nicol operated for two playing seasons. Club members abandoned their memberships at the point in time when the golf club was required to purchase the lands on which the course had been constructed from the Nicol companies. The purchase was not completed and the Nicol companies were petitioned into bankruptcy.
[3] One hundred and sixty-nine club-member investors started a class action against Nicol, his development companies, the golf club, and the Royal Bank. [^1] They claimed Nicol or his companies drew down on letters of credit delivered to R.J. Nicol Homes Limited to secure memberships before the conditions for draw down had crystallized.
[4] The trial judge determined the investors were entitled to the return of their initial investments based on breach of contract and breach of fiduciary duty. He awarded the investors $3,210,000 on account of their restitutionary claim against the estate in bankruptcy of R.J. Nicol Homes plus $2,754,198.45 on account of compound interest. [^2] He held the Royal Bank liable for the same sums as the knowing recipient of trust funds. He also awarded the investors punitive damages against the estate of R.J. Nicol Homes in the amount of $845,000.
[5] On appeal, both the Royal Bank and the trustee of the estate in bankruptcy of R.J. Nicol Homes argued that the breaches found by the trial judge were trivial if they existed at all. They also claimed the investors waived any breaches that may have occurred by lifting an injunction prohibiting draw down of the letters of credit and by playing at the club and participating in its governance during its two years of operation.
[6] The main issues on appeal are whether there was a breach of contract, whether a fiduciary duty existed and was breached, whether rescission was justified in the circumstances, whether the conduct of the investors amounted to waiver, and whether a remedy was available against the Royal Bank. The Royal Bank also appealed against the dismissal of its claim for indemnity against the law firm that acted for it during much of the transaction. Save in relation to costs, it conceded during the hearing of the appeal that that portion of its appeal could not succeed.
Facts
[7] Nicol envisaged an equity golf club having up to 400 members. At the time most of the plaintiffs purchased their memberships, the club was not yet incorporated and the course was not yet built. They purchased their memberships in the club on the basis of oral representations and written promotional material provided by R.J. Nicol Homes.
[8] Most of the plaintiffs were original subscribing members of the golf club. Most delivered payment for their memberships in the form of letters of credit payable to R.J. Nicol Homes, “in trust for Eagle Creek Golf Club”. Although the promotional material distributed to prospective members was changed over time, the trial judge found “two relevant conditions which were common to all brochures ”:
i) [I]f 260 non-resident Golf Memberships are not sold by December 31, 1990, the project will not be proceeded with and all amounts subscribed for membership and all accompanying documents will be returned to the applicants, and all letters of credit will be released; [^3] and
ii) [t]he Board of Governors of the club must certify that it was reasonably expected that the golf course would be ready for play within 6 months of the draw down of proceeds for membership. [^4]
[9] He also commented as follows:
…All the members felt secure that a safety net was provided. If the 260 membership level was not reached, they would receive the return of all their documentation including their letter of credit.
In the initial stages of soliciting memberships there was no reference to R.J. Nicol or his companies purchasing any of the memberships to make up a shortfall….
[10] It takes about three years to build a world-class golf course. Nicol purchased the land necessary for construction in 1986. Construction costs for the course itself were originally estimated at $6.5 million, the approximate equivalent of anticipated revenues from the sale of 260 memberships. Although some versions of the brochure indicated course construction would commence after 260 memberships were sold, layout began in the fall of 1987, and course construction was completed by December 1990. The course opened for play on May 15, 1991.
[11] Nicol approached the Bank for financing in August 1988. They negotiated a multiple-segment credit facility that Nicol accepted on March 23, 1989. Advances to R.J. Nicol Homes commenced in May 1989. Part of the security for the credit facility and indebtedness was an assignment to the Bank from R.J. Nicol Homes of the letters of credit it held from the subscribing members. As a precondition to financing, the Bank required that Nicol provide a legal opinion that in the event of any shortfall in the 260-membership threshold he could purchase any number of additional memberships to make up the deficiency. The credit facility included a covenant that Nicol would purchase any shortfall in memberships.
[12] A further condition of the credit facility was that all regulatory approvals, including zoning, be in place. Four holes of the golf course were located on lands known as “the wetlands”, the remaining fourteen holes were on lands known as “the uplands”. The municipality passed separate by-laws re-zoning each of the uplands and the wetlands to accommodate the golf course, however both by-laws were appealed to the Ontario Municipal Board. The proceedings were protracted and highly publicized. Membership sales stalled as a result.
[13] The O.M.B. released its decision on August 29, 1990 dismissing the appeal with respect to the uplands by-law but granting the appeal against the wetlands by-law. At about the same time as the release of the decision, Nicol obtained a legal opinion that the golf course would be a legal non-conforming use in the wetland area and that rezoning was not therefore required.
[14] As of December 1990, the municipality had not indicated one way or the other whether it would accept the opinion that the wetlands constituted a legal non-conforming use. Nevertheless, as the golf course was by then fully constructed and the legal opinion was in hand, the Board of Governors of Eagle Creek Golf Course determined the golf course would be ready for play six months from December 31, 1990, the deadline for draw down of the letters of credit.
[15] During December 1990, there was extensive communication between R.J. Nicol Homes, the Bank, and their respective lawyers concerning how many memberships would have to be purchased to satisfy the 260-membership threshold. The general manager of the golf club obtained legal advice to the effect that an accepted application for membership constituted a “sold” membership unless or until the member failed to make payment on or before December 31, 1990. Ultimately R.J. Nicol Homes purchased a total of 81 memberships in December 1990 based on a membership count that included 11 memberships for which applications, but no monies, promissory note, or letter of credit, had been received; and three memberships issued to persons based on services rendered to Nicol, Nicol companies, or the golf club.
[16] R.J. Nicol Homes verified that the eleven memberships remained unpaid by mid-January 1991. It made arrangements subsequently for the purchase of those memberships. A resolution of the Board of Governors of the golf course dated April 3, 1991 confirmed the eleven “members” whose memberships remained unpaid were “expelled from the Corporation and permanently suspended from the privileges of membership…” and that the transfer of memberships from the named persons to R.J. Nicol Homes was approved.
[17] Four separate groups representing 38 members instituted proceedings in December 1990 seeking an injunction to restrain Nicol Homes from drawing on the letters of credit. An interim injunction was issued on December 11, 1990. It was subsequently dissolved on December 14, 1990 based on minutes of settlement that provided for disclosure of a list of non-resident paid-up members as of December 30, 1990 by January 15, 1991, production of the legal non-conforming use opinion, and particulars of any pending or contemplated proceedings concerning two conditions of the draft subdivision plan approval relating to drainage.
[18] R.J. Nicol Homes drew on the letters of credit it held in December 1990. The proceeds of the letters of credit were applied against the Royal Bank construction loan for the Eagle Creek Golf Club.
[19] Eagle Creek Golf Club was incorporated as a not for profit corporation without share capital on August 10, 1990. The original Board of Governors consisted of Robert J. Nicol, his spouse and son. On September 26, 1991 the number of governors of the club was increased from three to six at which time members Connolly, Evans, and representative plaintiff Stanton were added to the original Board.
[20] Pursuant to an agreement between R.J. Nicol Homes and Eagle Creek, Eagle Creek was to lease the course for the first two years of operation and then purchase the land two years after the golf course opened for $2.8 million.
[21] The course officially opened for play on May 15, 1991. Most members continued to pay their annual dues and play in the first two years of operation. In 1991, 2,975 member rounds of golf were played. In 1992, 6,772 member and guest rounds were played.
[22] Net dues in default for 1991, 1992, and 1993 from non-Nicol members were $29,050, $60,875, and $169,000 respectively.
[23] For the period ending October 32, 1991 the club had playing revenues of $1,024,578, of which $688,700 was derived from membership dues. For the same period, the club incurred $1,100,803 in expenses and $311,696 in debt servicing costs, resulting in a loss of $387,921 that was made up by Nicol.
[24] For the year ending October 31, 1992, the club generated playing revenues of $1,265,138 of which $824,750 was derived from membership dues. For the same period, the club incurred $1,252,028 in expenses and $417,138 in debt servicing costs, for a loss of $417,138 that was made up by Nicol.
[25] Eagle Creek declined to purchase the land from R.J. Nicol Homes on May 15, 1993. The trustee sold the lands in bankruptcy to a private purchaser for the sum of $3,000,000. The trustee realized net proceeds of $2,197,000.
[26] The action was commenced in October 1994 under the Class Proceedings Act 1992, S.O. 1992 c.6. It was originally certified as a class action by order dated February 4, 1994 and had three representative plaintiffs. By order dated January 15, 1996, the certified class was subdivided into 15 subclasses. Representative plaintiffs for each subclass were appointed by order dated March 15, 1996.
Decision at Trial
[27] The trial judge found R.J. Nicol Homes was not entitled to draw on the letters of credit in December of 1990 as it had failed to meet the two conditions for draw down.
[28] First, the trial judge determined that membership sales were 14 short of the 260 membership threshold as of December 31, 1990. He found an application for membership could only be considered as accepted if the necessary monies, letter of credit, or promissory note accompanied the application. The eleven memberships that remained unpaid as of January 15, 1991 and the three memberships issued based on services rendered did not meet this criteria.
[29] Second, he found the Board of Governors was not in a position to certify that it reasonably expected the golf course would be ready for play within six months of December 31, 1990. He relied on the fact that concerns were being raised as to the validity of the legal opinion that use of the wetlands for purposes of a golf course would constitute a legal non-conforming use and the absence of evidence to establish that the contingency plan for building the remaining four holes on adjacent lands would also fulfill the requirement of a world class golf course.
[30] The trial judge also found R.J. Nicol Homes owed a fiduciary duty to the investors as it was holding the letters of credit in trust for the investors.
[31] As a result of these findings, the trial judge held R.J. Nicol Homes was in breach of its contractual obligations and its fiduciary duty to the investors when it drew down the letters of credit in December 1990. Because the conditions for draw down had not been met, the investors were entitled to a return of the monies they had paid or letters of credit they had deposited in accordance with the terms of the contract. As R.J. Nicol Homes held the letters of credit in trust for the investors and drew on them when it was not entitled to, it remained a trustee of the funds drawn, and the investors were entitled to an order for restitution against it.
[32] As for the Royal Bank, the trial judge found the plaintiffs were entitled to restitutionary relief against it based on the doctrine of knowing receipt. The Royal Bank knew the letters of credit were subject to the described conditions. When it received the funds and applied them against the golf club loan, its position was enhanced at the expense of the investors. The Royal Bank relied on statements from the golf club manager and R.J. Nicol as to the membership count knowing it should not have relied upon either of them. It also relied on the legal non-conforming use opinion knowing its own solicitors had concerns about the opinion and that the zoning issues were controversial, and chose not to inquire further. The trial judge found the Royal Bank did not act prudently as it did not want to receive any advice or legal opinion that “would impede the call down of the letters of credit and impede the eventual transfer of funds to the bank.”
[33] The trial judge declined to award punitive damages against R.J. Nicol Homes for breach of contract. He found it achieved its goal of creating a first class golf course and that its conduct had not amounted to a wanton and reckless disregard for the contractual rights of the investors. He did however find that in breaching its fiduciary duty the principals of the company showed contempt for the investors’ interests. The trial judge accordingly awarded damages for breach of fiduciary duty against R.J. Nicol Homes in the amount of $5,000.00 per investor. He dismissed a claim for punitive damages against the Royal Bank on the basis that although they made a business decision to assist R.J. Nicol Homes in the draw down of the letters of credit and thereby looked to their own interests and those of their customer, they did not do so for the purpose of harming the investors.
[34] The trial judge dismissed a claim for return of the profit the Royal Bank had made on the investors’ money since 1990 on the basis that while the bank may have earned considerable profits in the intervening years, it had also lost a considerable amount of money on this transaction. The trial judge did however award compound interest against R.J. Nicol Homes and the Royal Bank on the basis that where there has been a wrongful detention of money, it is reasonable to assume that the wrongdoer has made the most beneficial use of the money and should therefore compensate the persons whose money has been detained accordingly.
Grounds of Appeal
[35] The Royal Bank advances the following grounds of appeal:
▪ the trial judge erred in finding that R.J. Nicol Homes breached its contract relating to the sale of 260 memberships;
▪ the trial judge erred in finding the Board of Governors of the club was not in a position to certify that it reasonably expected the golf course would be ready for play within 6 months from December 31, 1990;
▪ if there was a breach of contract, the trial judge erred in holding that the breach was sufficiently serious to entitle the plaintiffs to rescission or that the plaintiffs suffered any damages as a result;
▪ the trial judge erred in finding R.J. Nicol Homes owed a fiduciary obligation to the plaintiffs, and further erred in finding a breach of any such obligation that may have existed;
▪ the trial judge erred by failing to find the plaintiffs waived any breaches which may have occurred, or, in the alternative, in failing to find the plaintiffs elected by their conduct to confine any remedy to damages;
▪ the trial judge erred in finding the circumstances gave rise to a duty to inquire on the part of the Royal Bank, or, if there was a duty to inquire, in finding the duty was not satisfied by the inquiries made of R.J. Nicol Homes;
▪ the trial judge erred in awarding compound interest against the Royal Bank;
▪ the trial judge erred by making inconsistent and unprincipled findings of fact; and
▪ the trial judge erred in his award of costs.
[36] The trustee of the estate in bankruptcy of R.J. Nicol Homes relies on the following grounds of appeal in addition to the grounds advanced by the Royal Bank:
▪ the trial judge erred in failing to consider the claims and defences of the individual subclasses;
▪ the trial judge erred in failing to account for the knowledge and conduct of the representative plaintiffs;
▪ the trial judge erred in finding the circumstances supported a claim for punitive damages; and
▪ the trial judge failed to deliberate on the counterclaim.
Analysis
Satisfaction of the Membership Threshold Condition
[37] The appellants rely on the By-laws of the golf club, its membership records and the evidence of the general manager of the golf club in support of their contention that the 260-membership threshold condition was satisfied as of December 31, 1990.
[38] By-law No. 1 defines “membership certificate” as “a certificate issued by the Club to each member, evidencing ownership of one Membership”. Sub-article 14.1 of By-law 1 provides:
“When a person has acquired a membership and has satisfied all of the requirements set forth in the Letters Patent of the Club and in these By-Laws entitling him or her to become a Member of the Club and has paid the fees, dues, and other sums that may then be required by the Board of Governors of the Club, a Membership Certificate in the form and substance adopted by the Board of Governors shall be issued in his or her name and shall be delivered to him or her by the Secretary of the Club.”
[39] Membership records filed at trial identified the eleven membership certificate numbers subsequently purchased by R.J. Nicol Homes due to default in payment of the original subscription price. All reflected an original application for membership by a specified person, a certificate number, the dates of powers of attorney and promissory notes filed with the application, and the date of acceptance by the Board of Governors and confirmation of recording in the Members’ Register. Minutes of the Board of Governors reflect that the original applications were approved on August 11, 1990 and that the named applicants were “enrolled as members of the Corporation”. Subsequent minutes dated April 11, 1991 reflect the expulsion of the eleven defaulters and approval of the transfer of memberships to R.J. Nicol Homes.
[40] The golf club manager testified in chief that applicants for membership who had not put up any money or note or letter of credit in support of an application remained a member until the club removed them and showed them to be in default. He said he asked for and received specific legal advice to that effect.
[41] The appellants also rely on the fact that R.J. Nicol Homes purchased memberships by way of offset of the monies owed to it by Eagle Creek Golf Club for construction of the club. As of December 31, 1990, more than $2.7 million remained owing to R.J. Nicol Homes after giving credit for the full proceeds of 260 memberships.
[42] The appellants assert there was accordingly no basis for the trial judge’s finding that the 260-membership threshold condition was not met.
[43] I disagree. The trial judge specifically relied on the provisions of the by-laws and brochures to conclude that in order to qualify as a “sold membership” within the meaning of the threshold condition, an application for membership had to be accompanied by payment of the membership price, either in cash or by way of promissory note supported by a letter of credit. He found that the golf club manager had acknowledged in cross-examination that “a membership sale was completed when they had the money in hand”. He determined that neither the eleven defaulted memberships nor the three memberships paid for in kind complied with the requirements for a “sold membership”. In my view, there was ample evidence to support his finding. I do not consider the membership records compiled at the behest of the Nicol-controlled Board of Governors to be determinative of this pivotal issue. The fact that R.J. Nicol Homes may have made an accounting entry to reflect an offset against monies owed to it by the golf club equivalent to the value of 260 memberships does not change the fact that eleven applications for membership were in default as of December 31, 1990 and three applications for membership were not accompanied by payment as required.
Satisfaction of the Readiness Condition
[44] The appellants rely on the fact that the original course, as designed by Ken Venturi, opened for play as a world-class facility on May 15, 1991, within six months of December 31, 1990. They say the readiness condition was met in fact. They say the trial judge erred in taking into account retrospectively what was no more than a hypothetical potential for breach. They say that there was no basis on which to conclude that the expectation of opening held by the Board was not reasonable.
[45] Again, I disagree. The trial judge found the attitude of the Board of Governors to be reflected in Nicol’s comments that he intended to call down on the letters of credit whether the conditions were met or not. He further found there were legitimate concerns about the validity of the non-conforming use opinion R.J. Nicol Homes had obtained concerning the four wetland holes as of December 31, 1990 and that those concerns jeopardized the viability of the project as a world class golf course. The trial judge was entitled to make those findings and he was correct to assess the issue from the perspective of the December date. The fact that the municipality ultimately accepted the validity of the non-conforming use opinion in the spring of 1991 does not make it a reasonable expectation as of December 31, 1990 that that would occur.
Availability of Rescission based on Breaches of Contract
[46] The appellants contend the breaches of contract found by the trial judge were no more than technical breaches that ultimately were remedied after the fact in any event. They assert the breaches of contract were not sufficiently serious to warrant the drastic remedy of rescission ordered by the trial judge.
[47] This submission ignores the provision of the contract that all money would be returned to the investors in the event a threshold condition was not met. The contract provided that it would be at an end if the threshold conditions were not satisfied. The trial judge found R.J. Nicol Homes breached its contractual obligation, not by failing to satisfy the conditions, but rather, by drawing on the funds paid to secure memberships in circumstances where the conditions for doing so had not been met and could no longer be met. R.J. Nicol Homes was obligated by the terms of the contract to return all money and letters of credit to the investors at that time. It committed a serious breach by failing to do so. It was not entitled to use the funds for its own benefit without having satisfied the conditions. Moreover, the remedy for this breach was effectively specified by the terms of the contract. I find no merit in this argument.
Existence and Breach of Fiduciary Obligation
[48] In determining whether the readiness condition had been met, the trial judge said the Nicols had a fiduciary responsibility to consider the interests of the investors and not just their own interest in obtaining a source of funds.
[49] The appellants submit the trial judge erred in finding that the fact that the plaintiffs paid their subscription proceeds ‘in trust’ for the golf club imposed a more onerous standard on R.J. Nicol Homes in determining whether the golf course readiness condition was met and as a basis for imposing liability for any breach of the draw down conditions. They say that that language was intended simply to ensure the monies were kept separate from other assets of R.J. Nicol Homes pending its entitlement to receive the proceeds on behalf of the golf club. Once R.J. Nicol Homes was contractually entitled to receive the proceeds, there could be no breach of this ‘trust’. Use of ‘trust’ language did not superimpose any additional obligations on R.J. Nicol Homes in terms of its legal obligations to the payors. As there was no breach of contract, there can be no breach of trust.
[50] This submission ignores the trial judge’s findings that the Nicols were not only effectively the holders of the letters of credit, but also in control of the Board of Governors of the golf course, the body charged with the obligation of determining whether the readiness condition had been met. In these capacities, their obligations to ensure the conditions for draw down were met prior to draw down and to determine whether the conditions had been met, became inextricably linked. Having chosen to wear two hats, the Nicols were obliged to fulfill the obligations imposed by both in carrying out their respective duties.
[51] This submission also begs the question of whether the conditions were satisfied. The trial judge found that they were not. He also found R.J. Nicol Homes became a trustee of the proceeds of the letters of credit following draw down because the conditions for draw down had not been met. I see no basis to interfere with his findings. R.J. Nicol Homes was disentitled from applying the proceeds to course construction costs unless and until both of the conditions had been met. In doing so, it breached a fiduciary obligation to the investors.
Whether Pre and Post ‘Breach’ Conduct by Investors Amounts to Waiver; Whether Trial Judge Erred in Failing to Differentiate Amongst the Classes
[52] The appellants rely on the conduct of the investors, or some of them, in agreeing to the dissolution of the injunction granted on December 11, 1990, in paying their dues and playing the course between May 1991 and May 1993, and in participating in the governance of the course, in support of their position that the investors waived any breach that may have occurred, or, alternately, that the investors are estopped from relying on conduct they were or could have been aware of in December 1990 as the basis for a claim for a return of their subscription payment now. R.J. Nicol Homes asserts that it continued to inject capital into the project and incur debt after December 31, 1990 and that it was encouraged by the conduct of the investors to continue. At a minimum, the appellants say a new trial should be ordered because the trial judge treated the action as if the order creating the various subclasses did not exist and failed to consider or determine either the claims of the individual representative plaintiffs or the defences applicable to each particular subclass.
[53] The appellants failed to demonstrate that any of the investors had been informed of the specific facts relied upon by the trial judge in determining the membership threshold condition was not met prior to the institution of these proceedings. There is accordingly no merit in the argument that the breach as found by the trial judge was waived or that the investors are estopped from relying on that breach. (Imperial Bank v. Begley, 1936 253 (UK JCPC), [1936] 3 D.L.R. 1 (J.C.P.C.)). The fact that many of the investors were aware that Nicol purchased a substantial number of memberships in an attempt to meet the 260 membership threshold condition does not equate to knowledge of the specific facts found by the trial judge in determining that condition was not met or to knowledge that the terms of the contract had been breached.
[54] In my view, the trial judge did not err in failing to differentiate amongst the classes or review potential defences in detail. No defence of waiver or estoppel has been demonstrated with respect to any class consisting of original subscribing investors. As for plaintiffs who acquired their memberships from other members, it is my view that they stepped into the shoes of the member from whom they purchased, and that they are entitled to the return of proceeds to which the original subscribing member would otherwise have been entitled.
Post Breach Conduct Constituted an Election to Limit any Remedy to Damages
[55] The appellants rely on the trial judge’s finding that the investors continued to pay their membership dues and play the course from May 1993 in support of their position that the investors’ post breach conduct amounted to an election to forego any claim for rescission. They say that a right of rescission must be exercised without delay and that the clear finding by the trial judge that the investors acted to protect their initial investments is a bar to the remedy of rescission. The appellants also say that in the event the investors are not entitled to rescission, they suffered no damages as a result of the breaches found by the trial judge.
[56] As already noted, the appellants failed to demonstrate that any of the investors had been informed of the specific facts relied upon by the trial judge in determining the membership threshold condition was not met prior to the institution of these proceedings. The appellants themselves were responsible for the lack of knowledge of class members at the material times, and cannot now claim the benefit of the resulting delay. (Imperial Bank v. Begley, supra.) The loss at issue flows from the act of the appellants in taking that which they had no right to take. Restitution is the appropriate remedy in the circumstances. This ground of appeal is without merit.
Award of Punitive Damages against R.J. Nicol Homes
[57] The trial judge made the following findings on this issue at pp. 77-78 of his Reasons:
In reviewing Nicol’s conduct relating to his breach of fiduciary duty to the investors it has to be established that he was motivated by his own self-interest and purposefully disregarded the interest of the investors.
MacLachlin J. in Norberg v. Wynrib, 1992 65 (SCC), [1992] 2 S.C.R. 226 considered the type of conduct required in a breach of fiduciary duty to attach punitive damages. At p. 299, she adopted a statement from Fiduciary Duties in Canada (Richard DeBoo 1988):
Where the actions of the fiduciary are purposefully repugnant to the beneficiary’s best interests, punitive damages are a logical award to be made by the Court. This award will be particularly applicable where the impugned activity is motivated by the fiduciary’s self-interest.
The fact all investors are members of a class action does not prohibit the awarding of punitive damages…. In this case, each individual member of the class had a contractual relationship to R.J. Nicol Homes Limited. The breach of fiduciary duty related to each individual investor.
In this case, Nicol totally disregarded the interest of the investors to whom he owed a duty. I have already referred to comments attributed to both R.J. Nicol and Pat Nicol which showed their contempt for the investors’ interest. [^5] In my view that conduct would attract an award of punitive damages.
[58] R.J. Nicol Homes says the Reasons of the trial judge are internally inconsistent. It relies on the fact that he made findings to the effect that there were intervening causes, such as environmental and zoning problems, over which the Nicols’ had no control, that led to the failure of the equity golf club. It also says the representative plaintiffs were aware of the fact that the Nicols’ conduct was dedicated to maintaining the viability of the project by ensuring that funding continued, and that the investors, through the representative plaintiffs, once apprised of such conduct, fully acquiesced to it, either expressly or by implication. Finally, R.J. Nicol Homes says the trial judge erred by assessing punitive damages in the amount of $5,000 to each of the plaintiffs, without differentiating among the subclasses.
[59] These submissions ignore the specific findings of the trial judge on this issue as set out above. I find them to be without merit.
Liability of the Royal Bank
[60] There is no real dispute concerning the basic legal principles applicable arising from the doctrine of knowing receipt:
relief will be granted where a stranger to a trust, having received trust property for his or her own benefit, and having knowledge of facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of trust property. [^6]
[61] The Royal Bank asserts however, that the trial judge erred in his assessment of liability against the Royal Bank on three grounds:
▪ he failed to consider the ‘unjust enrichment’ aspect of the doctrine of knowing receipt;
▪ he failed to consider whether the circumstances surrounding the two breaches gave rise to a duty to inquire on the part of the Royal Bank; and
▪ he committed a palpable and overriding error in stating that the Royal Bank made ‘no inquiries’ and failed to apply the correct legal test in assessing the sufficiency of the inquiries made.
[62] The Royal Bank relies on the following statement in Citadel General Insurance v. Lloyd’s Bank of Canada (1997), 1997 334 (SCC), 152 D.L.R. (4th) 411 at 436 (S.C.C.):
If the bank fails to make the appropriate inquiries, it will have constructive knowledge of the breach of trust. In these circumstances, the bank will be unjustly enriched and therefore, required to disgorge the benefit it received at the plaintiff’s expense [emphasis added].
[63] In Citadel, the trust monies were insurance premiums that were impressed with a statutory trust in favour of the insured. The bank applied those monies towards the insurer’s overdraft and therefore increased its own profits with no concomitant benefit to the insured. The Royal Bank says that the distinguishing feature between this case and Citadel, and most other knowing receipt cases, is that in Citadel the recipient of the trust proceeds had not provided a benefit to the beneficiary of the trust. The Royal Bank says it provided a direct benefit to the beneficiaries of the trust in this case by advancing the capital necessary to build the golf course. It had done so on the specific understanding that the proceeds of membership sales would be available to make loan payments and that R.J. Nicol Homes would make up any deficiency in membership sales so that the threshold membership condition would be met.
[64] The Royal Bank also submits that a third party receiving trust property must encounter ‘unusual circumstances’ to indicate that a breach may occur before a duty to inquire will arise. [^7] It says that in this case ‘the 260 was never in issue’. It had extracted a legal opinion and undertaking from R.J. Nicol Homes that it could and would purchase any deficiency. It concedes it had a duty to inquire with respect to the readiness condition, however it says the trial judge erred in holding the inquiries it made of its customer were insufficient to satisfy its obligations in respect of any duty to inquire that existed either with respect to the readiness condition, or the threshold membership condition.
[65] The critical findings of the trial judge on this issue are as follows:
▪ The second segment [^8] of the loan facility agreed upon between the Royal Bank and R.J. Nicol Homes was to be secured against assigned letters of credit provided to secure memberships;
▪ The Royal Bank was aware that both the threshold membership condition and the readiness condition had to be met before the letters of credit could be drawn down. The letters of credit clearly indicated that the proceeds were “in trust for Eagle Creek Golf Club”;
▪ The Royal Bank made the decision to commence advances on the second segment of the loan facility at a time when the conditions were not satisfied;
▪ Although the golf course manager requested funding to purchase memberships in addition to the 81 memberships required to meet the 260 threshold based on a broad definition of member, the Royal Bank declined to advance additional funds not wanting to expend any more money than was absolutely necessary in order to meet the 260 threshold;
▪ The Royal Bank failed to make additional inquiries relating to the satisfaction of the condition although it knew it should not rely on R.J. Nicol Homes for the membership count information and although it knew there were questions about the legal non-conforming use opinion. The Royal Bank did not want to receive information or advice that would impede the transfer of funds; and
▪ The Royal Bank acted in a manner that exhibited concern for its customer but not its customer’s customer. When it received the trust monies and applied it to the outstanding R.J. Nicol Homes loan, it enhanced its own position at the expense of the investors.
[66] Having regard to these findings, the fact that the Royal Bank may have provided a benefit to the investors by funding golf course construction is of minimal significance to the determination of whether it was unjustly enriched. The Royal Bank proceeded with advances based at least in part on the security of the letters of credit at a time when there was no doubt that the conditions for drawn down of the letters of credit had not been met. It subsequently restricted its advances in a way that impeded satisfaction of the threshold membership condition. The trial judge found that the conditions for draw down were never met, that the Royal Bank was therefore never entitled to receive the proceeds it applied, ultimately, to minimize its own losses, and that it failed to make adequate inquiries when it received the funds. He found, in effect, that the Royal Bank had been unjustly enriched.
[67] In dealing with the issue of inquiries, the trial judge couched his language in terms of the Royal Bank failing to make any inquiries. It is clear from his Reasons that he was aware the Royal Bank had information from its customer and that his finding was that it failed to make additional inquiries when it had been alerted they were necessary. Having regard to the Royal Bank’s knowledge of and participation in the transaction, the trial judge did not err in making this finding. I see no basis to interfere with the trial judge’s finding of liability based on the doctrine of knowing receipt.
Award of Compound Interest against the Royal Bank
[68] The trial judge relied on the decisions in Claiborne Industries v. The National Bank of Canada (1989), 1989 183 (ON CA), 59 D.L.R. (4th) 533 (Ont. C.A.) and Brock v. Cole (1983), 1983 1952 (ON CA), 40 O.R. (2d) 97 (C.A.) in reaching the conclusion that it would be appropriate to award compound interest pursuant to s. 127(1) of the Courts of Justice Act on the sum of $3.4 million [^9] he directed be repaid to the investors. He relied on the concept that “where there [has] been a wrongful detention of … money, it [is] reasonable to assume that the wrongdoer made the most beneficial use of the money and would be accountable for the profits.”
[69] The Royal Bank says the trial judge’s decision is plainly contrary to the recent decision of this court in Bank of America Canada v. Mutual Trust, 2000 1495 (ON CA), [2000] O.J. No. 704 in which it was stated that the court’s equitable jurisdiction to award compound interest:
…does not take in that case which is no more than a debt wrongfully withheld… Apart from cases of fraud, breach of fiduciary duty, knowing wrongful retention of another’s monies and the like, where equity can assist, the clear legislative policy [as expressed in section 128 of the Courts of Justice Act which states that ‘interest on interest’ shall not be ordered] is that interest not be compounded unless, of course, it can be proven as a matter of damages.
[70] It says the plaintiffs did not prove a claim for compound interest as a matter of damages in that they failed to prove the loss of any actual opportunity to earn compound interest. It also says the trial judge made no findings of fraud, breach of fiduciary duty, knowing wrongful retention of money or any other basis of liability involving intent or abuse of trust. The Royal Bank therefore claims that the trial judge exceeded his equitable jurisdiction by making an order for compound interest against it.
[71] I disagree. The award of compound interest as against the Royal Bank falls within the parameters established in both Claiborne and Bank of America Canada for the making of such awards. In holding the Royal Bank liable based on the doctrine of knowing receipt, the trial judge found in effect that the Royal Bank had wrongfully, and knowingly, received and retained the investors’ monies.
Claim by Royal Bank for Costs Against Solway, Wright
[72] Solway, Wright acted for both Nicol and the Royal Bank in connection with this project until July 1990. The Royal Bank retained alternate counsel at that time. The Royal Bank says the law firm was in a clear conflict of interest and failed to disclose a variety of matters to it that were potentially material to its decision to advance funds to R.J. Nicol Homes. It relies in particular on the failure to disclose varying representations set out in the different versions of the brochure, such as the representation that course construction would not commence until after 260 memberships had been sold. It relies on Stacey Heating & Plumbing Supplies v. Tamasi (1991), 1991 7204 (ON CA), 6 O.R. (3d) 341 (C.A.) to submit it ought to have received an indemnification for costs from the law firm. In Stacey Heating & Plumbing Supplies this court said:
Because the origin of this litigation lay in the conduct of the proceedings by the third party on behalf of the defendants, who were his clients, we think it fair and just in the circumstances that, as between them, the burden of bearing these costs should rest with the third party, and we direct that, to the extent that the defendants do not recover the costs from the plaintiff, they are entitled to be indemnified for such costs by the third party and to recover such costs against him.
[73] I find no merit in this submission. In Stacey Heating & Plumbing Supplies there was a direct causal link between the failure of counsel to obtain leave to discontinue foreclosure proceedings before causing his client [the defendant] to exercise power of sale proceedings, and the subject litigation. No such causal link has been established here.
[74] The Royal Bank also requested that the finding of the trial judge that there is “no evidence of negligence” by Solway, Wright be set aside on the basis that it is demonstrably wrong, overly broad, and potentially prejudicial to another action pending before the court. In my view, this court should not entertain this request. The appeal before us is from the judgment, not the reasons of the trial judge. No such finding appears in the judgment, nor is it integral to any of the grounds of appeal before us.
Internal Inconsistencies and Errors in Credibility Findings
[75] The Royal Bank claims that the Reasons for Judgment are replete with internal inconsistencies, that they rely on questionable and unprincipled findings of credibility, and that the underlying logic of the conclusions is not apparent. It says that in the event the findings of liability against it are not reversed based on the foregoing grounds of appeal, a new trial is required on the basis of these grounds.
[76] I find no merit in these submissions. The Royal Bank lists seven examples of what it says are internally inconsistent findings. Examined fairly, and in context, all of the impugned findings are reconcilable. [^10] As for the assessment of credibility, in my view the trial judge did no more than exercise his prerogative as the trier of fact to accept all, some, or none of the evidence of various witnesses. It is not surprising in a case of this magnitude that he did not address every piece of evidence in making his findings.
[77] In its last point under this heading the Royal Bank submits that the Reasons of the trial judge are not an adequate basis to uphold his conclusions as they fail to disclose the logic that informs them. It also relies on the fact that the trial judge made many observations sympathetic to the plaintiffs’ position from which he failed to draw legal conclusions and based on which he failed to consider the potential liability of the third party law firm to the Royal Bank.
[78] The ‘observations’ in question relate to several alternate theories of liability advanced at trial. For example, the trial judge made comments to the effect that R.J. Nicol Homes’ purchase of memberships was not in accordance with the plaintiffs’ understanding of the transaction; the alternate theory of liability being Nicol was not entitled to satisfy the membership threshold condition b purchasing the shortfall in memberships. Though obviously cognizant of the broader basis advanced for liability, the trial judge stopped short of accepting it. It is implicit, if not explicit, in the Reasons that he was not persuaded it was justified. He was not required to go further. I find no merits in these submissions.
Award of Costs in Favour of the Plaintiffs
[79] The Royal Bank says the trial judge erred in awarding costs against it in favour of the investors because the investors made, and failed to prove, an allegation that the Royal Bank had conspired with Nicol in a fraudulent scheme to harm them.
[80] The trial judge found that the allegation of a fraudulent conspiracy, though pleaded, was not pursued at trial. [^11] While it is apparent that he adverted to the issue in his Reasons, [^12] it is clear that he did not consider it an issue that consumed any time during the course of this lengthy trial. The trial judge made clear it would have been preferable that the allegation be withdrawn prior to the commencement of trial, but declined to deprive the respondents of their costs for that reason. I see no reason to interfere with the exercise of his discretion in this respect.
Failure to Deliberate on the Counterclaim
[81] In light of my findings concerning the other grounds of appeal, it is unnecessary that I deal with this ground which could only succeed had the appellants succeeded on appeal.
Conclusion
[82] Based on the foregoing reasons, I would dismiss the appeal with costs.
Released: June 29, 2001 “JCM”
“J. Simmons J.A.”
“I agree S.T. Goudge J.A.”
“I agree J.C. MacPherson J.A.”
[^1]: The action was ultimately discontinued against all defendants save the Royal Bank and the trustee of the estate in bankruptcy of R.J. Nicol Homes.
[^2]: The trial judge awarded the investors $3.4 million as restitution plus $2,917,219.41 on account of compound interest. These figures were amended in the formal Judgment.
[^3]: Versions 4 and 5 of the brochure filed at tab 291 of exhibit 65 and tab 5 of exhibit 2 respectively do not appear to contain this condition. This is not a matter that was raised on appeal and the specific finding that this condition was common to all brochures was not challenged. It may be noteworthy that it would appear that this was also a common oral representation. It may also be noteworthy that version 4 of the brochure, marked on its face as ‘edition #3’, recited the fact that the first and second series of memberships, selling for $20,000 and $25,000 respectively, were sold out and that the third, fourth, fifth, and sixth series of memberships would sell at $28,000, $29,000, $32,000, and $35,000 respectively. Version 5 of the brochure, marked on its face as ‘current version’, stipulated that the first, second, and third series of memberships had been sold out. Version 1 of the brochure indicated that memberships 1 to 125 would be sold for $20,000 each, memberships 126 to 200 would be sold for $25,000 each, memberships 201 to 250 would be sold for $27,500 each and that memberships 251 to 300 would be sold for $30,000 each. Subsequent versions of the brochure indicated that each series of memberships would consist of a number determined by the Board of Governors. It appears that R.J. Nicol Homes purchased memberships 181 to 261. It also appears that the bulk of memberships sold to persons other than R.J. Nicol Homes were sold for $20,000 or $25,000. However, according to exhibit 35, fourteen of such memberships were sold for $28,000. Finally, it may also be noteworthy that at p. 2 of its written submissions to the trial judge the Royal Bank apparently stated: “However, the only two provisions of the brochure which related specifically to the draw down of the LCs were identical in all versions of the brochure…” Condition i) was then quoted.
[^4]: The precise wording of this condition as set out in the Brochures is: “The note will be demanded and the letter of credit drawn upon not earlier than 6 months before the date the Board of Governors of the Club reasonably expects the golf course to open.” This wording is included in versions 1,2, 3, and 4 of the brochure.
[^5]: For example, at p. 32 of his Reasons the trial judge noted that the investors were never informed that R.J. Nicol had agreed with the Royal Bank to purchase the shortfall of any memberships required to reach the threshold of 260. Even though many of the investors, subsequently learned about the eventual purchase, they had not been informed it was Nicol’s intent from the outset. At p. 43, the trial judge referred to the fact that R.J. Nicol had informed a representative of the Royal Bank that he planned to draw down on the letters of credit whether the conditions were met or not.
[^6]: Citadel General Insurance v. Lloyd’s Bank of Canada (1997), 1997 334 (SCC), 152 D.L.R. (4th) 411 at 434 (S.C.C.)
[^7]: Arthur Andersen Inc. v. Toronto Dominion Bank (1994), 1994 729 (ON CA), 17 O.R. (3d) 363 at 380, 381-382 (C.A.)
[^8]: The second segment of the loan facility as originally agreed upon was in the amount of $6,550,000. It was subsequently increased to $8,875,000.
[^9]: As previously noted, this amount was varied in the formal judgment (see footnote 2).
[^10]: As an example, the Royal Bank relies on this submission: While finding that Nicol Homes was at fault for failing to properly satisfy the Readiness Condition (i.e. reasonable expectation that the Course would open within six months of draw down), [the trial judge] also finds that “the Board of Governors in their mind could meet the condition”. The latter statement is a narrative comment made by the trial judge at page 42 of his Reasons. He clearly intended it as the precursor to his analysis and not as representative of his ultimate view.
[^11]: Reasons on Costs at pp. 2-3
[^12]: At page 82 of his Reasons the trial judge said: “I do not find in making this business decision that they conspired with Nicol to harm the investors. Therefore, their conduct does not justify an award of exemplary or punitive damages.