DATE: 20050524
DOCKET: C41163
COURT OF APPEAL FOR ONTARIO
BORINS, BLAIR, AND LAFORME JJ.A
B E T W E E N :
A-C-H INTERNATIONAL INC.
Marg A. McKillop, for the appellant, William Donaldson Courtney (incorrectly named as William Donald Courtney)
Plaintiff
- and -
ROYAL BANK OF CANADA, AMBLER-COURTNEY LIMITED, AMBLER-COURTNEY PROPERTIES INC., BRIAN EDWARD AMBLER, WILLIAM DONALD COURTNEY and BRIGITTE HOFFMAN
H. David and W. Eric Kay, for the respondent, Royal Bank of Canada
Defendants
(William Donald Courtney – Appellant)
(Royal Bank of Canada – Respondent)
Heard: May 2, 2005
On appeal from the judgment of Justice Romaine Pitt of the Superior Court of Justice, dated December 1, 2003, cited at [2003] O.J. No. 5043 (Sup. Ct.).
R.A. BLAIR J.A.:
Facts
[1] The appellant, William Courtney, seeks to set aside the judgment of Justice Pitt dated December 1, 2003, granted against him in favour of the cross-claimant, Royal Bank of Canada. The judgment was founded on the tort of conversion coupled with the decision of the trial judge not to treat the appellant and two corporations of which he was a shareholder, officer and director, as separate legal personalities.
[2] The action has its genesis in the diversion of a series of cheques totalling approximately $1.7 million from the payee of those cheques, A-C-H International Inc. (“A-C-H”), to the defendant, Ambler-Courtney Properties Inc. (“ACPI”). Some of the funds were subsequently transferred to the defendant, Ambler-Courtney Limited (“ACL”). These various deposits were effected by means of unauthorized endorsements made on behalf of A-C-H by an unknown person and contrary to the account agreement between A-C-H and its banker, Royal Bank of Canada (“RBC”).
[3] The appellant and Brian Ambler were officers and directors and principal shareholders of ACPI and ACL. The defendant, Brigitte Hoffman, was the comptroller.
[4] A-C-H is a partnership or joint venture between ACL and Hub Equipment Ltd. (“Hub”), each as to a 50% interest. A-C-H leased and sold construction and plant-hire equipment and received almost all of its revenues from an agreement with Ontario Hydro for the supply of labour and equipment to Hydro’s Nanticoke Thermal Generating Station near Port Dover, Ontario. The cheques in question were proceeds from this contract.
[5] A-C-H commenced the main action in 1994, sometime after it became aware of the diversion of funds through the forged cheques. In September 1995 it obtained summary judgment against RBC and, subsequently, its claims against the other defendants were abandoned.
[6] RBC cross-claimed against the other defendants, however. It claimed against ACPI and ACL on the basis that they were obliged to indemnify the Bank pursuant to s. 49 of the Bills of Exchange Act. The trial judge granted judgment against ACPL on that basis and would have done so against ACL as well, had ACL not made an assignment in bankruptcy in the meantime. The cross-claim against Mr. Courtney, Mr. Ambler and Ms. Hoffman was pleaded on the basis that they had conspired to defraud A-C-H by misappropriating the proceeds of the cheques from A-C-H using ACPI for the ultimate benefit of ACL, and that they were therefore liable to indemnify RBC to the extent of any judgment against RBC in favour of A-C-H.
[7] There is no suggestion on the record that either Mr. Courtney or Mr. Ambler was the person who signed the unauthorized cheques effecting the transfers of funds or that they were otherwise personally involved in the transfers. It is conceded that there is no evidence of any direct benefit received by Mr. Courtney. “The most that can be said”, the trial judge found, “is that as a major shareholder in ACPI there was a presumptive benefit to the extent of the percentage of the shares in the corporation held [by the appellant]” (para. 23).
[8] The claim against Mr. Ambler was settled prior to trial, although the particulars of the settlement were not made known to the court.
[9] At the conclusion of the Bank’s case, counsel for Mr. Courtney advised the trial judge that Mr. Courtney would not be calling any evidence and that he was moving for a non-suit. After argument, the trial judge dismissed the action as against Ms. Hoffman. He found Mr. Courtney personally liable, however. But he did not do so on the basis of conspiracy. He dismissed the conspiracy claim. Instead, the trial judge found that “the gravamen of the offence [was] the conversion of the funds transferred by whomsoever, for the benefit of ACPI, or those who may have benefited subsequently” (para. 21). Later, he expressed the view that “the thrust of Royal Bank’s allegations [was] that Ambler-Courtney, its officers, directors and shareholders, themselves converted the funds.” (para. 29).
[10] The trial judge granted judgment against the appellant in favour of RBC for that proportion of the judgment obtained by A-C-H against RBC that the appellant’s shares in ACPI bore to those of Mr. Ambler, plus costs. In substance, he found that the appellant would benefit indirectly from having the funds of A-C-H deposited to the accounts of ACPI and ACL, since he was a shareholder of those companies, and that he had failed to answer an evidentiary onus cast upon him to explain why he would have a right to such an indirect benefit or why, having become aware of the diversion of the funds – even if he had not authorized their transfer – he was not personally obliged to cause the funds to be re-paid to A-C-H. However, the trial judge made no finding as to the nature of the indirect benefit obtained by the appellant.
[11] For the reasons that follow, I would allow the appeal.
Analysis
Issues
[12] Although Ms. McKillop put forward a lengthy list of arguments on behalf of the appellant, the points she raised may be grouped together conveniently in the following list of questions, for purposes of determining the appeal:
a) Did the trial judge err in granting judgment on a basis that was not pleaded, namely, conversion coupled with a decision to pierce the corporate veil?
b) Did the trial judge err in finding the appellant liable, as a shareholder, for the conversion of funds by ACPI and ACL, in the absence of any direct evidence of his participation in the conversion of the funds and on the basis of a “presumptive” indirect benefit to him as a shareholder?
c) Did the trial judge err in holding that the appellant had an evidentiary onus to account for funds which he knew were deposited into a corporate account over which he had control by virtue of being a major shareholder, officer and director of the corporation, and an obligation to explain why the corporation was entitled to the funds?
d) Did the trial judge err in piercing the corporate veil and finding the appellant personally liable as an officer and director of ACPI and ACL for the torts of those corporations?
Conversion not Pleaded
[13] The appellant submits that the trial judge err in granting judgment on a basis that was not pleaded in RBC’s cross-claim against him. I agree.
[14] The case against the individual cross-claim defendants was pleaded solely in conspiracy to defraud. That is clear from a reading of paragraphs 14 through 20 of RBC’s cross-claim. Although it is true, as Mr. David points out on behalf of the respondent, that para. 16 pleads “that such proceeds had been obtained by ACPI fraudulently and without colour of right” – he submits this is enough to bring the tort of conversion into play – that pleading relates strictly to “knowledge on the part of ACL” and to the case against it and ACPI. The cross-claim leaves no doubt that the case as pleaded against the appellant was based on conspiracy, and, indeed, the evidence is that examinations for discovery and the trial were conducted on that basis alone.
[15] The trial judge dismissed the conspiracy claim, and appears on his own initiative to have shifted the ground for liability to a new theory, not pleaded or argued at trial, namely, conversion supported by a decision to pierce the corporate veil. In this sense, the case is similar to Rodaro v. Royal Bank of Canada, (2002), 59 O.R. (3d) 74 (C.A.), a situation in which this Court reversed a trial judge for having founded liability on a new theory first raised in his reasons. Speaking for a unanimous court in Rodaro, Doherty J.A. affirmed that “it is fundamental to the litigation process that lawsuits be decided within the boundaries of the pleadings” (para. 60), and pointed out that this notion is based on concepts of fairness: a party has the right to know the case it has to meet, and to have the opportunity to meet it. He went on to add (at paras. 62-63):
[62] In addition to fairness concerns which standing alone would warrant appellate intervention, the introduction of a new theory of liability in the reasons for judgment also raises concerns about the reliability of that theory. We rely on the adversarial process to get at the truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties. A theory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process. We simply do not know how [the trial judge’s] lost opportunity theory would have held up had it been subject to the rigours of the adversarial process. We do know, however, that all arguments that were in fact advanced by Mr. Rodaro and were therefore subject to the adversarial process were found wanting by [the trial judge].
[63] [The trial judge] erred in finding liability on a theory never pleaded and with respect to which battle was never joined at trial. This error alone requires reversal.
[16] Similarly, we do not know how the trial judge’s conversion theory would have fared, had it been exposed to the rigours of the adversarial process. Believing that the case against him was based upon the tort of conspiracy to defraud, as pleaded, Mr. Courtney elected to call no defence and to move for a non-suit at the end of the cross-claimant’s evidence. Like the bank in the Rodaro case, he succeeded on the ground that had been litigated. But the trial judge shifted to a new theory that had not been pleaded.
[17] Had Mr. Courtney and his counsel known that they were required to meet a case based on the tort of conversion and the court’s equitable jurisdiction to pierce the corporate veil, they might well have conducted their preparations for the case, and their handling of the case at trial, differently. They might have conducted the cross-examination of RBC’s witnesses on a broader basis. They might have decided to call a defence, generally. In particular, they might well have decided to call Mr. Courtney in his own defence (perhaps to provide the explanation that the trial judge felt was necessary in the context of the conversion claim, but that was apparently not necessary in the context of the conspiracy claim).
[18] Because the appellant and his counsel did not know they were facing a case about conversion and personal liability based on corporate veil principles, they were not in an informed position to make the foregoing decisions. As a result, we do not know how these theories of liability would have survived, had the battle been joined, as Doherty J.A. said in Rodaro.
Motion to Amend
[19] RBC moved before us for leave to amend its cross-claim to plead conversion. I would dismiss the motion.
[20] This is not one of those cases where any harm to the opposite party can be compensated for in costs. Given the foregoing observations, at best we would have to order a new trial on the conversion issue, and the prejudice to the appellant would be extreme. The facts giving rise to these claims occurred over thirteen years ago. There was an attempt by RBC to amend its cross-claim just prior to trial – albeit with respect to different issues – that was ultimately not pursued, but the appellant’s counsel made clear to RBC during the correspondence surrounding the proposed amendment that the appellant had conducted his discoveries on the basis that conspiracy only was pleaded. Had RBC wished to pursue a claim in conversion it could have made it clear to the appellant at that time that it wished to do so. More significantly, in terms of prejudice, however, Mr. Ambler – the co-defendant by cross-claim who had settled with RBC before trial, and whose evidence was not necessary with respect to the conspiracy claim but might well have been on the conversion issue – died following the trial. His evidence is no longer available. This is not a case where an amendment to the pleading can be properly allowed at the appeal level.
[21] I would therefore allow the appeal on the pleading issue alone.
Other Issues
[22] Although the foregoing is sufficient to dispose of the appeal, I would not want to be taken to agree with some of the conclusions of the trial judge with respect to the conversion and piercing the corporate veil issues, assuming they had been properly pleaded.
[23] I turn first to the issue of the “presumptive” indirect benefit. The trial judge concluded – in the absence of any evidence of a direct benefit by the appellant – that the appellant had received a “presumptive” indirect benefit, as a result of the receipt of the unauthorized funds by ACPI and ACL, simply by reason of his position as a major shareholder of the two corporations, and that this was sufficient to ground personal liability on the part of the appellant for the corporations’ conversion of funds. Although it is not necessary to decide this issue for the purposes of this appeal, I have serious reservations about such a conclusion. No authority was cited by the trial judge for the proposition, nor was any provided to us by counsel.
[24] Secondly, I would hesitate to conclude, as the trial judge appears to have done, that the appellant’s roles as major shareholder and officer and director of ACPI and ACL were sufficient, in themselves, to cast an evidentiary burden on him to explain why he was entitled to the indirect benefit mentioned above or to explain why he was not personally obliged to cause ACPI and ACL to repay the converted funds to A-C-H once he became aware of the misappropriation of funds, even if he had not authorized the transfer. Again, no authority was cited for this view, and counsel provided us with none.
[25] In essence, in the absence of any evidence, the trial judge concluded that, as a signing officer, director and major shareholder of ACPI and ACL, the appellant should have known what was going on and that he should have done something to correct the problem. I would not say there can never be a case where a duty to explain or a duty to act in such a fashion might arise. I would be reluctant to conclude, however, that such a duty, or duties, could be founded solely upon the fact that an individual happens to be a shareholder (even a major shareholder) and/or an officer and director of a corporation.
[26] In spite of the trial judge’s view that Mr. Courtney and Mr. Ambler together controlled the funds that were improperly diverted, by virtue of their directorships and majority shareholdings, there is no evidence to establish that the appellant was in a position, on his own, to cause the corporations to do anything. The conspiracy allegations were dismissed, and the trial judge made no finding to contradict the appellant’s testimony on discovery that he first learned of the problem created by the diversion of cheques in February 1993. There is no evidence that either ACPI or ACL were in a position to reimburse the funds at any point in time after the appellant became aware of the diversion, even if he had been in a position to cause them to do so.
[27] Finally, I turn to the question of piercing the corporate veil. The trial judge determined that this was “not a proper case for recognizing the completely separate identity of [ACL] and ACPI from their shareholders and directors” (para. 36). Again, I note that this is not an issue that was pleaded. The trial judge said, however:
Whether or not they (Messrs. Courtney and Ambler) were personally responsible for the unauthorized transfers, they were the only ones who could explain what became of the money after the transfers. The record does not reveal any other directors, and as I said earlier, the evidence demonstrates on a balance of probability that they were the only shareholders, and accordingly the only persons presumptively benefiting from the unauthorized diversions. It is useful to remember that the separate corporate identity of corporations is not necessarily recognized when a corporation is used as a shield for fraudulent or improper conduct of its controlling mind or minds. See Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Company [1996] 28 O.R. (3d) page 423, affirmed by Ontario Court of Appeal [1997] O.J. No. 3754. One cannot escape liability for conversion by simply transferring the proceeds of conversion to a limited company. The beneficiaries of the unauthorized diversions were all unjustly enriched. [underlining in original]
[28] Mr. David argued that implicit in the foregoing passage is a finding of improper conduct on the part of the appellant, which justifies piercing the corporate veil on the law as it presently stands. If that is so, there is nothing in the reasons to indicate what that improper conduct consisted of, other than the appellant’s failure to explain why he had not caused ACL and ACPI to return the monies and his failure to cause the corporations to do so. More is required to pierce the corporate veil than merely a majority shareholding position, or even a controlling shareholder position, and a role as officer or director, however. As Sharpe J. (as he then was) noted, in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Company (1996), 28 O.R. (3d) 423 (Ont. Ct. Gen. Div.), affirmed [1997] O.J. No. 3754 (C.A.), at p. 433, the court is not “free to act as it pleases on some loosely defined ‘just and equitable’ standard.”
[29] The question of whether the appellant, as an officer and director of ACPI and ACL, could be found to be personally responsible for the tort committed by the corporations – had this question been raised on the pleadings – would require evidence to support a finding that the appellant exercised clear domination and control over the corporations in directing the wrongful things to be done, and that the conduct he engaged in was akin to fraud, deceit, dishonesty or want of authority and constituted a tort in itself: see Transamerica Life, supra; 801962 Ontario Inc. v. MacKenzie Trust Co., [1994] O.J. No. 2105 (Ont. Ct. Gen. Div.); ADGA Systems International Ltd. v. Valcom Ltd. (1999), 43 O.R. (3d) 101 (C.A.), leave to appeal dismissed, [1999] S.C.C.A. No. 124; Clarkson Co. Ltd. v. Zhelka (1967), 64 D.L.R. (2d) 457 (Ont. H.C.); Montreal Trust Co. of Canada v. ScotiaMcLeod Inc. (1995), 26 O.R. (3d) 481 (C.A.), (sub nom. ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.), at 490-491, leave to appeal dismissed, [1996] S.C.C.A. No. 40.. Here, it is conceded that the appellant did not benefit directly from the diversion of funds, and the trial judge appears to have accepted that he was not personally responsible for the unauthorized transfers. There is nothing on the record to suggest that the appellant engaged in any other conduct that would meet the foregoing criteria, and the trial judge made no such findings that would justify the exercise of the court’s equitable jurisdiction to pierce the corporate veil.
Disposition
[30] For all of the foregoing reasons, I would allow the appeal and dismiss RBC’s cross-claim against Mr. Courtney. The judgment of Pitt J. dated December 1, 2003 is varied by deleting paragraphs 2 and 5, and the reference to William Donald Courtney in paragraph 4.
[31] The appellant is entitled to his costs here (except for the motions) and below on a substantial indemnity scale. RBC persisted in its pursuit of the appellant individually on the basis of conspiracy to defraud, and was non-suited on that issue at trial. It escaped liability for costs at trial because it succeeded there against the appellant on a basis that has now been reversed. In this Court, RBC’s position was that the appellant engaged indirectly in the conversion or theft of monies from A-C-H for his own indirect benefit. These are fraud-like allegations, and there is ample authority for the proposition that parties who advance unfounded fraud-like allegations are liable to pay costs on a substantial indemnity scale.
[32] The costs at trial and in relation to the trial proceedings should be assessed. This Court is not in a position to determine and assess the various issues that may arise in connection with the determination of those costs.
[33] We have reviewed the draft bills of costs on appeal and with respect to the motion to amend on appeal (together with the two motions before Carnwath J. and Blair J.A. with respect to that motion, which were referred to the panel). The appellant claims $83,260.38, inclusive of the costs of the motion to amend. Various counsel spent a total of 147.3 hours in preparation for the appeal. In our view an appeal of this nature simply does not justify a costs order of that magnitude, reflecting that many hours of preparation, even on a substantial indemnity scale. The issues involved were primarily legal in nature. The bill of costs that RBC would have submitted for the appeal was for $13,607.00 on a partial indemnity scale, plus a further $8,142.00 in relation to the motion to amend. Even adjusting the RBC bill on the appeal for the substantial indemnity scale, there is an enormous discrepancy between the costs claimed by the appellant and the respondent.
[34] The costs of the appeal are fixed at $40,000.00 plus $5,000.00 for the motion to amend and the proceedings relating to it, for a total of $45,000.00. This sum is inclusive of fees, disbursements and GST.
“R.A. Blair J.A.”
“I agree S. Borins J.A.”
I agree H.S. LaForme J.A.”
RELEASED: May 24, 2005