Cytrynbaum et al. v. Look Communications Inc. Jolian Investments Limited et al. v. Look Communications Inc. Dolgonos et al. v. Look Communications Inc.

[Indexed as: Cytrynbaum v. Look Communications Inc.]

Ontario Reports

Court of Appeal for Ontario,

MacPherson, Sharpe and Lauwers JJ.A.

July 4, 2013

116 O.R. (3d) 241 | 2013 ONCA 455

Case Summary

Corporations — Directors and officers — Indemnification — Advance funding — Company suing former directors on basis that they had improperly conferred upon themselves substantial monetary benefits — Defendants asserting right to advance funding of their legal costs of defending action based on company's by-laws and indemnification agreements — Company successfully resisting claim for advance funding pursuant to s. 124(4) of Canada Business Corporations Act — Section 124(4) not restricted to derivative actions and applying to claims for advance funding in suits brought by corporations — Application judge not erring in applying "strong prima facie case" test and in refusing advance funding on basis that plaintiff had established strong prima facie case of bad faith on part of defendants — Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 124(4).

The plaintiff company's share appreciation rights plan ("SARs plan") allowed the plaintiff to award its directors and officers share appreciation rights based upon the market value of the plaintiff's shares. The share appreciation rights could be exercised if the plaintiff sold all or substantially all of its assets, and entitled the holder to be paid the difference between the market price of the shares on that date and the price on the date the SARs were granted. In 2008, the plaintiff's board of directors decided to sell its assets pursuant to a plan of arrangement under the Canada Business Corporations Act ("CBCA"). The board authorized payments to terminate the SARs and cancel all options on the basis of a share valuation of $0.40 per share, contrary to the terms of both the SARs and option plans that specified that market value was to be used. At the time, the market price of the shares was approximately $0.20. Following the closing, the plaintiff paid 32 per cent of the net sale proceeds to its officers, directors, employees and consultants by way of bonuses and equity cancellation payments. Once disclosed, the payments attracted strong shareholder criticism. Anticipating that they would be sued, the defendant directors authorized the company to pay $1,550,000 as retainers to three law firms acting for them personally and then immediately resigned. The plaintiff sued the defendants for breach of fiduciary duty, breach of statutory duty, negligence and unjust enrichment, and claimed repayment of the bonuses and equity cancellation payments. The defendants asserted the right to advance funding of their legal costs of defending the action based on the plaintiff's by-laws and various indemnification agreements. The plaintiff successfully resisted the claims for advance funding pursuant to s. 124(4) of the CBCA. The application judge refused advance funding on the basis that the plaintiff had established a strong prima facie case of bad faith on the part of the defendants. The defendants appealed.

Held, the appeal should be dismissed. [page242]

Section 124(4) of the CBCA is not restricted to derivative actions and also applies to actions brought by the corporation. The words "by or on behalf of the corporation" in s. 124(4) unambiguously cover both derivative actions, which are brought "on behalf of the corporation", and actions that are brought "by" the corporation, such as this one. While the marginal note of s. 124(4) is "Indemnification in derivative actions", marginal notes are primarily finders' aids and form no part of the enactment. The marginal note could not cut down or limit the meaning of the unambiguous wording of the text of s. 124(4). It is also difficult to see any principled rationale for applying one regime for advance costs in derivative actions and another for actions brought by the corporation itself.

The application judge did not err in refusing advance funding on the basis of the "strong prima facie case" standard instead of adopting the defendants' argument that court approval for advance funding should be denied only when the evidence rises to such a level that a court is able to make a final determination of mala fides. If the matter fell to be determined solely on the wording of the indemnity agreements, advance funding could only be denied on the basis of a final and conclusive judicial determination of mala fides. However, the issue had to be decided on the basis of the overriding language of s. 124(4), which contemplates that the right to advance funding is subject to court approval before trial and that a final determination of the issue of bad faith and indemnity must await trial.

The defendants were not denied the opportunity to respond to the plaintiff's allegations of bad faith. They responded to the plaintiff's defence to their claims for advancement primarily on the ground that the court was not entitled to consider the merits of the plaintiff's contention that they had acted in bad faith. Having made a tactical choice to limit their response, they had to bear the consequences.

The application judge did not err in finding that the plaintiff had made out a strong prima facie case of bad faith based on the facts that (1) the $0.40 share valuation to fix the equity cancellation payments bore no relation to the market value of the shares and resulted in substantial benefits being paid to the defendants at the expense of the company; and (2) the defendants had authorized, without proper legal advice, retainer payments of $1.55 million for their lawyers immediately before they resigned in the face of growing shareholder discontent.

The application judge did not err in finding that the corporate defendants (the individual defendants' management companies) did not qualify for indemnity as they were never an officer, director, consultant, employee or agent of the company as required by the indemnification agreement.

Jolian Investments Ltd. v. Unique Broadband Systems Inc., [2011] O.J. No. 2687, 2011 ONSC 3241, 90 B.L.R. (4th) 188, 207 A.C.W.S. (3d) 77 (S.C.J.), not folld

Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5, [1995] S.C.J. No. 29, 128 D.L.R. (4th) 73, 187 N.R. 241, 24 B.L.R. (2d) 161, 58 A.C.W.S. (3d) 230; Med-Chem Health Care Ltd. v. Misir (2010), 103 O.R. (3d) 769, [2010] O.J. No. 4535, [2010 ONCA 380], 72 B.L.R. (4th) 1, 265 O.A.C. 390; R. v. Bata Industries Ltd. (1995), [25 O.R. (3d) 321], [1995] O.J. No. 2691, 127 D.L.R. (4th) 438, 83 O.A.C. 343, 22 B.L.R. (2d) 135, 101 C.C.C. (3d) 86, 18 C.E.L.R. (N.S.) 11, 28 W.C.B. (2d) 295 (C.A.), consd

Other cases referred to

Bell ExpressVu Limited Partnership v. Rex, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, [2002 SCC 42], 212 D.L.R. (4th) 1, 287 N.R. 248, [2002] 5 W.W.R. 1, J.E. 2002-775, 166 B.C.A.C. 1, 100 B.C.L.R. (3d) 1, 18 C.P.R. (4th) 289, 93 C.R.R. (2d) 189, REJB 2002-30904, 113 A.C.W.S. (3d) 52; [page243] Bennett v. Bennett Environmental Inc. (2009), 94 O.R. (3d) 481, [2009] O.J. No. 853, [2009 ONCA 198], 264 O.A.C. 198, 53 B.L.R. (4th) 100, 308 D.L.R. (4th) 530; Catalyst Fund General Partner I Inc. v. Hollinger Inc., [2006] O.J. No. 615, 15 B.L.R. (4th) 48, 145 A.C.W.S. (3d) 1001 (S.C.J.); Imperial Oil Ltd. v. Canada, [2006] 2 S.C.R. 447, [2006] S.C.J. No. 46, [2006 SCC 46], 273 D.L.R. (4th) 450, 353 N.R. 201, J.E. 2006-2027, [2007] 1 C.T.C. 41, 2006 D.T.C. 6639, EYB 2006-110410, 151 A.C.W.S. (3d) 322; Law Society of Upper Canada v. Skapinker, [1984] 1 S.C.R. 357, [1984] S.C.J. No. 18, 9 D.L.R. (4th) 161, 53 N.R. 169, J.E. 84-428, 3 O.A.C. 321, 20 Admin. L.R. 1, 11 C.C.C. (3d) 481, 8 C.R.R. 193, 12 W.C.B. 118; R. v. Stevenson, [1980] O.J. No. 1621, 57 C.C.C. (2d) 526, 19 C.R. (3d) 74, 5 W.C.B. 330 (C.A.); Reddy v. Electronic Data Systems Corp., 820 A.2d 371 (Del. 2003), affg 2002 WL 1358761 (Del. Ch. 2002)

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, s. 136 [as am.], (4.1) [as am.]

Canada Business Corporations Act, R.S.C. 1985, c. C-44, ss. 124 [as am.], (3) [as am.], (4) [as am.], 192 [as am.], 239 [as am.], (1)

Interpretation Act, R.S.C. 1985, c. I-21, s. 14

Authorities referred to

Driedger, Elmer A., Driedger on the Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983)

Radin, Stephen A., "'Sinners Who Find Religion': Advancement of Litigation Expenses to Corporate Officials Accused of Wrongdoing" (2006), 25 Rev. Litig. 251

Sullivan, Ruth, Sullivan on the Construction of Statutes, 5th ed. (Markham, Ont.: LexisNexis, 2008)

APPEAL from the order of Pattillo J., [2012] O.J. No. 4532, [2012 ONSC 4578], 7 B.L.R. (5th) 286 (S.C.J.) dismissing an application for advance funding.

Peter H. Griffin, Matthew Sammon and Rory Gillis, for appellants Michael Cytrynbaum and First Fiscal Management Ltd.

Joseph Groia, for appellants Jolian Investments Limited and Gerald McGoey.

Edward Babin and Cynthia Spry, for appellant Stuart Smith.

Andrew Lewis, for appellant Jason Redman.

Peter Roy and Sean Grayson, for appellant DOL Technologies Inc.

Benjamin Zarnett, David Conklin and Peter Kolla, for respondent.

The judgment of the court was delivered by

[1] SHARPE J.A.: — This appeal principally concerns claims by former corporate directors and officers of Look Communications Inc. ("Look") for advance funding of their legal costs to defend an [page244] action brought against them by Look. Look alleges they improperly conferred upon themselves substantial monetary benefits. The appellants assert the right to advance funding based on Look's by-laws and various indemnification agreements. The claims for advance funding are resisted by Look, pursuant to s. 124(4) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 ("CBCA"), on the ground that advance funding should be refused if the appellants did not act honestly and in good faith. The application judge agreed with Look and found that as Look had established a strong prima facie case of bad faith, advance funding should be refused.

[2] The appellants submit that s. 124(4) applies only to derivative actions and that to allow Look to raise the issue of bad faith at this preliminary stage of the proceedings would effectively eviscerate the right to advance funding that is conferred by the by-laws and agreements. They further contend that advance funding cannot be denied on the basis of an interim and inconclusive finding of bad faith, a finding they say, in any event, is not supported by the evidence.

[3] For the reasons that follow, I would dismiss the appeal. In summary, I conclude that s. 124(4) does apply to claims for advancement in suits brought by the corporation. The statute imposes a judicial filter on advance funding and the strong prima facie test for determining whether advancement should be denied is apt. That test comports with the statutory requirement for court approval but also is sufficiently stringent to ensure that advance funding is ordinarily available to those claiming it unless there is strong evidence of bad faith. In my view, there was ample evidence to support the application judge's finding that Look's evidence overcame the presumption of good faith and that Look was likely to succeed at trial.

Facts

1. The parties

[4] Look is a CBCA company engaged in the wireless, Internet and cable services business.

[5] Michael Cytrynbaum was a director and executive chair of Look's board of directors. He was also a member of the board's compensation and human resources committee as well as its audit and governance committee.

[6] Gerald McGoey and Stuart Smith are also former directors of Look. McGoey was Look's chief executive officer, vice chairman of the board and a member of the compensation and human resources committee. Smith was a non-executive director and [page245] served as the chair of the board's compensation and human resources committee.

[7] Redman was Look's chief financial officer, but did not serve on the board.

[8] Alex Dolgonos provided technology-related services to Look but was neither a director nor officer of the corporation.

[9] First Fiscal Management Ltd. ("First Fiscal"), Jolian Investments Limited ("Jolian") and DOL Technologies Inc. ("DOL") are management service companies owned by Cytrynbaum, McGoey and Dolgonos respectively.

[10] Scott Colbran was also a non-executive director of Look and a member of the audit and corporate governance committee. He did not take part in the argument before the application judge and he is not an appellant before this court.

[11] Although he is not a party, I note here that Louis Mitrovich was also a non-executive director. He settled with Look prior to Look's action and filed an affidavit in this proceeding on behalf of Look.

2. Look's share appreciation rights and option plans

[12] Look adopted a share appreciation rights plan ("SARs plan") as an incentive to its directors, officers, employees and consultants. The SARs plan allowed Look to award its directors, officers and consultants share appreciation rights, based upon the market value of Look's shares. The SARs could be exercised, inter alia, if Look sold all or substantially all of its assets and entitled the holder to be paid the difference between the market price of the shares on that date and the price on the date the SARs were granted. Cytrynbaum, McGoey and Dolgonos were all granted SARs and they, in turn, assigned the SARs to their companies. Those parties and Smith were also granted options in Look shares.

3. The sale of Look's assets

[13] Look's business was in serious decline from 2005 to 2008. The board was unable to sell the company or to obtain the capital required to compete successfully. By late 2008, Look's board decided to attempt to sell Look's assets pursuant to a CBCA plan of arrangement under the supervision of a monitor. A sale was achieved in the period from January to May 2009, whereby Look sold its key assets for $80 million to a partnership formed by Rogers and Bell, Inukshuk Wireless Partnership, less $16 million to be paid to Bell to settle certain outstanding litigation. The sale was approved by shareholders and by the court. [page246]

[14] On June 16, 2009, Look's board accepted McGoey and Redman's recommendation to set aside $11 million for severance, retention and bonus payments. The board also accepted management's proposal to authorize payments to terminate the SARs and cancel all options on the basis of a share valuation of $0.40 per share, contrary to the terms of both the SARs and option plans that specified that market value was to be used. At the time, the market price of the shares was approximately $0.20.

[15] The sale to Inukshuk closed on September 11, 2009. Following the closing, Look paid $20,008,709, or 32 per cent of the net sale proceeds, to its officers, directors, employees and consultants by way of bonuses and equity cancellation payments. The payments to Cytrynbaum, McGoey and Dolgonos were made to First Fiscal, Jolian and DOL respectively.

[16] The payments are set out in chart form, at para. 25 of the application judge's reasons:

[17] Those payments were not disclosed to the shareholders until January 2010, when a management information circular was issued. Once disclosed, the payments immediately attracted strong shareholder criticism. The appellants anticipated that they would be sued and, at a board meeting in June 2010, decided to authorize Look to pay $1,550,000 as retainers to three law firms acting for them personally. Immediately after those retainers were paid, the individual appellants resigned as directors and officers of Look. [page247]

4. Look's claim

[18] Look's new management and board of directors commenced an action in July 2011, alleging breach of fiduciary duty, breach of statutory duty, negligence and unjust enrichment and claiming repayment of the bonuses and equity cancellation payments. A subsequent motion sought repayment of the bonuses and equity cancellation payments pursuant to s. 192 of the CBCA.

5. The appellants' claims

[19] The appellants commenced the applications that are the subject of these appeals when Look refused indemnity and advance funding for their legal costs. They seek declaratory and other relief to require Look to indemnify them for their legal costs in defending Look's claim and directing Look to advance to them all expenses incurred in defending the claim.

6. By-laws and indemnity agreements

[20] Look's by-laws provide for indemnity and advance funding in the following terms:

3.12 Indemnity of Directors and Officers. Subject to the provisions of the Act, the Corporation shall indemnify a director or officer of the Corporation, a former director or officer of the Corporation or another individual who acts or acted at the Corporation's request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Corporation or other entity; and the Corporation shall with the approval of a court, indemnify such individual or advance moneys under this section 3.12 in respect of an action by or on behalf of the Corporation or other entity to procure a judgment in its favour, to which such individual is made a party because of such individual's association with the Corporation or other entity as described above against all costs, charges and expenses reasonably incurred by such individual in connection with such action, if in each case such individual:

(a) acted honestly and in good faith with a view to the best interests of the Corporation, or, as the case may be, to the best interests of the other entity for which the individual acted as director or officer or in a similar capacity at the Corporation's request; and

(b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that his or her conduct was lawful.

The Corporation shall advance moneys to an individual referred to hereinabove for the costs, charges and expenses of a proceeding referred to hereinabove. Such individual shall repay the moneys if the individual does not fulfil the conditions set out in paragraphs (a) and (b) above. [page248]

[21] In addition to the by-laws, both the individual and corporate appellants (except DOL) rely on indemnification agreements they entered with Look which provide indemnity and advancement in broader and more generous terms. With respect to DOL, Look signed an indemnification agreement with AD Enterprise, which in turn assigned the agreement to DOL. The agreements provide for indemnification in proceedings brought by third parties or "[b]y or in the [r]ight of the Corporation" in cases in which the party claiming indemnity "acted honestly and in good faith and with a view to the best interests of the Corporation". The indemnification agreements also deal with advancement of expenses. Section 2(a) provides:

Advancement of Expenses. The Corporation shall advance all expenses incurred by Indemnitee in connection with the investigation, defence, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined by a court of competent jurisdiction from which no further right of appeal exists that Indemnitee is not entitled to be indemnified by the Corporation as authorized hereby. The advances to be made hereunder shall be paid by the Corporation to Indemnitee (or, if requested by the Indemnitee, shall pay the expenses directly) within 10 days following delivery of a written request therefor (accompanied by written evidence of the expense claimed) by Indemnitee to the Corporation.

Legislation

[22] The claims for advance funding are governed by s. 124 of the CBCA, the relevant portions of which are as follows:

Indemnification

124(1) A corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation or another individual who acts or acted at the corporation's request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation or other entity.

Advance of costs

(2) A corporation may advance moneys to a director, officer or other individual for the costs, charges and expenses of a proceeding referred to in subsection (1). The individual shall repay the moneys if the individual does not fulfil the conditions of subsection (3).

Limitation

(3) A corporation may not indemnify an individual under subsection (1) unless the individual [page249]

(a) acted honestly and in good faith with a view to the best interests of the corporation, or, as the case may be, to the best interests of the other entity for which the individual acted as director or officer or in a similar capacity at the corporation's request; and

(b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that the individual's conduct was lawful.

Indemnification in derivative actions

(4) A corporation may with the approval of a court, indemnify an individual referred to in subsection (1), or advance moneys under subsection (2), in respect of an action by or on behalf of the corporation or other entity to procure a judgment in its favour, to which the individual is made a party because of the individual's association with the corporation or other entity as described in subsection (1) against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfils the conditions set out in subsection (3).

Right to indemnity

(5) Despite subsection (1), an individual referred to in that subsection is entitled to indemnity from the corporation in respect of all costs, charges and expenses reasonably incurred by the individual in connection with the defence of any civil, criminal, administrative, investigative or other proceeding to which the individual is subject because of the individual's association with the corporation or other entity as described in subsection (1), if the individual seeking indemnity

(a) was not judged by the court or other competent authority to have committed any fault or omitted to do anything that the individual ought to have done; and

(b) fulfils the conditions set out in subsection (3).

Reasons of the Application Judge

[23] The application judge gave detailed and comprehensive reasons for dismissing the appellants' claims for advance funding.

[24] He considered and rejected the appellants' contention that s. 124(4) applies only to derivative actions. He found that the words "by or on behalf of the corporation" clearly and unambiguously include both actions brought by the corporation itself and actions brought on behalf of the corporation. He also found that interpreting s. 124(4) to embrace actions brought by the corporation was consistent with the overall scheme established by s. 124 as a whole and that the supervisory jurisdiction contemplated by s. 124(4) was properly invoked to balance and reconcile the competing interests that arise when a corporation sues former directors and officers for breach of fiduciary duty. As he put it, at para. 60: "Actions which have no merit should not delay advancement. On the other hand, directors or officers who have [page250] engaged in misconduct towards the corporation ought not to be allowed to use corporate funds to defend themselves."

[25] The application judge rejected the contention that the marginal note to s. 124(4) -- "Indemnification in derivative actions" -- was sufficient to restrict the unambiguous wording of the provision to derivative actions. He considered and declined to follow Jolian Investments Ltd. v. Unique Broadband Systems Inc., [2011] O.J. No. 2687, 2011 ONSC 3241, 90 B.L.R. (4th) 188 (S.C.J.), which held that the virtually identically worded s. 136(4.1) of Ontario's Business Corporations Act, R.S.O. 1990, c. B.16 ("OBCA") applied only to derivative actions because of a similar marginal note.

[26] The application judge noted that s. 124 is a complete code as to indemnity and advancement, citing to this court's decision in R. v. Bata Industries Ltd. (1995), [25 O.R. (3d) 321], [1995] O.J. No. 2691 (C.A.), in which the court held that s. 136 of the OBCA provides a comprehensive code in indemnification and advancement claims. He declined to follow Delaware authority to the effect that advancement can be provided without any pre-trial court approval or good faith inquiry as there is no statutory equivalent to s. 124(4) of the CBCA in Delaware law.

[27] The application judge held that the appellant officers and directors were entitled to the benefit of the presumption of good faith established in Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5, [1995] S.C.J. No. 29 and that it was for Look to lead evidence to rebut that presumption. He concluded, at para. 87, that the appropriate test was as follows: "Look must establish a strong prima facie case that the [a]pplicants acted mala fides towards the corporation. That is, [Look] must establish on the evidence that it is likely to succeed at trial."

[28] The application judge then carefully considered the evidence alleging bad faith. He focused on two incidents, namely, the approval of the equity cancellation payments in 2009 and the payment of the retainers in 2010.

[29] The application judge found that Look had made out a strong prima facie case that the appellants had acted in bad faith by using a share value of $0.40 to fix the equity cancellation payments because the market value of Look's shares in the period when the proposed sale of Look's assets was announced and approved ranged from $0.16 to $0.23. He found that the $0.40 value bore no relation to the market value and was contrary to the terms of the SARs and option plans, that it was determined without any consultation with a compensation or valuation expert, and that it resulted in conferring personal benefits of approximately $9 million largely on the appellants at the expense [page251] of the corporation. The application judge rejected the contention that the legal advice the board had received provided the appellants with a defence because the advice extended only to the board's general authority to make compensation awards and not to the decision to use the $0.40 per share valuation.

[30] The application judge further found that the retainer payments were made more or less contemporaneously with the appellants' resignation in the face of a mounting wave of shareholder complaints, and without the support of proper legal advice despite the caution sounded by a lawyer retained by the board who was then excluded from the meeting held to consider the payments.

[31] The application judge concluded that all the individual applicants, except Dolgonos, should be denied advance funding. He found that there was insufficient evidence to conclude that Dolgonos was an officer of Look at the relevant time or that he was involved with the impugned decisions. Dolgonos was therefore not subject to s. 124(4) and instead entitled to advance funding under the terms of his indemnity agreement.

[32] The claims for advance funding by First Fiscal, Jolian and DOL turned solely on the interpretation of the indemnification agreements as s. 124 applies only to directors and officers. The application judge held that these corporate claimants were effectively asking for a mandatory injunction and failed to meet that test for several reasons. First, the indemnification agreements apply when the claimant was a "director, officer, employee, consultant or agent". The application judge found that neither Jolian nor DOL fell within that class. Second, none of the corporate appellants led any evidence of irreparable harm. Finally, given the circumstances behind the payments made to the corporate appellants, the balance of convenience favoured Look. The findings made against Cytrynbaum and McGoey made advance funding in favour of the corporations they controlled, First Fiscal and Jolian, inappropriate.

Issues

[33] The issues raised by the appellants fall under five headings:

(1) Did the application judge err in refusing to restrict the application of s. 124(4) to derivative actions?

(2) Did the application judge err in refusing advance funding on the basis of the strong prima facie case standard?

(3) Were the appellants denied the opportunity to respond to Look's allegations of bad faith? [page252]

(4) Did the application judge err in finding that Look had made out a strong prima facie case of bad faith?

(5) Did the application judge err in refusing to approve advance funding for Smith, Redman, First Fiscal, Jolian and DOL?

Analysis

Issue 1. Did the application judge err in refusing to restrict the application of s. 124(4) to derivative actions?

[34] The appellants submit that s. 124(4) applies only to derivative actions and therefore does not apply to their claims. That argument, essentially based on the marginal note that appears beside s. 124(4) -- "Indemnification in derivative actions" -- was accepted in Jolian Investments Ltd. For the following reasons, I conclude that the application judge correctly rejected the argument and that he properly interpreted s. 124(4) to apply to actions brought by the corporation as well as derivative actions.

[35] The "preferred approach" to any exercise of statutory interpretation is that "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament": Bell ExpressVu Limited Partnership v. Rex, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, [2002 SCC 42], at para. 26, citing Elmer A. Driedger, Driedger on the Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983), at p. 87.

[36] In my view, the words "by or on behalf of the corporation", when read in the manner mandated by Bell ExpressVu, unambiguously cover both derivative actions, which are brought "on behalf of the corporation", and actions that are brought "by" the corporation, such as to one at issue on this appeal.

[37] I look first to the words of the CBCA in their grammatical and ordinary sense. On its face, s. 124(4) appears to apply to two types of actions: (1) actions brought "by" the corporation, that is, actions brought by the corporation itself; and (2) actions brought "on behalf of the corporation", that is, derivative actions. This interpretation is fortified by reference to the language used to deal with derivative actions in the CBCA. A derivative action is one brought "in the name and on behalf of a corporation" under s. 239(1) in circumstances in which the directors refuse to commence proceedings and the court determines that it is in the best interests of the corporation that an action be brought (emphasis added). The use of the disjunctive "or" in s. 124(4), distinguishing between actions brought by and [page253] actions brought on behalf of the corporation, may be contrasted with the conjunctive "and" in s. 239 dealing with derivative actions. By using the words "by or on behalf of the corporation" in s. 124(4), Parliament adopted language that includes both derivative actions brought on behalf of the corporation and actions brought by the corporation itself.

[38] The appellants argue that the application judge erred by refusing to follow Jolian Investments Ltd., a case involving some of the parties to this proceeding arising from circumstances related to those at issue here. Jolian Investments Inc. dealt with s. 136(4.1) of the OBCA. Marrocco J. held that s. 136(4.1) applied only to derivative actions and that, consequently, court approval was not required for advance funding for the legal costs of former officers and directors when the action was brought by the corporation itself. He reached that conclusion essentially for two reasons. First, he found that the heading accompanying s. 136(4.1) -- "Derivative actions" -- could be used as an interpretive aid. Second, he held that it made sense for the legislature to give the court supervisory jurisdiction over the payment of legal costs in derivative actions as the court already exercises a supervisory role in derivative actions. While Marrocco J. did decide the point, I note that in the circumstances before him it had little practical import. As he pointed out, at para. 138, even if s. 136(4.1) did apply to the individual director (Gerald McGoey, one of the appellants in the case at bar), it would not have had "any appreciable effect" on the corporation's exposure to pay advance costs as McGoey's costs would be the same as those of his company Jolian which was not subject to s. 136(4.1) in any event.

[39] I agree with the application judge that Jolian Investments Ltd. should not be followed for the following reasons.

[40] In my respectful view, Marrocco J. placed undue weight on the marginal note to narrow the meaning of the clear words of the enactment. Headings "are a valid indicator of legislative meaning and may be taken into account in interpretation": Ruth Sullivan, Sullivan on the Construction of Statutes, 5th ed. (Markham, Ont.: LexisNexis, 2008), at p. 394. But headings are not "of controlling importance" and they will not have a "confining" effect to a narrow class suggested by the heading when the unambiguous words of the section have a broader reach: see Law Society of Upper Canada v. Skapinker, [1984] 1 S.C.R. 357, [1984] S.C.J. No. 18, at p. 377; R. v. Stevenson, [1980] O.J. No. 1621, 57 C.C.C. (2d) 526 (C.A.), at pp. 529-30 C.C.C.

[41] Moreover, here, we are dealing not with a heading but with a marginal note that appears in the margin beside each [page254] subsection in the printed version and above in the electronic version. As Sullivan explains, at p. 397, marginal notes are "primarily finders' aids" designed to offer the reader a "quick overview" and to "permit users with particular questions to skim through [the statute] rapidly in search of relevant sections": Ruth Sullivan, Sullivan on the Construction of Statutes, 5th ed. (Markham, Ont.: LexisNexis, 2008). The Interpretation Act, R.S.C. 1985, c. I-21, s. 14 provides that marginal notes "form no part of the enactment, but are inserted for convenience of reference only". In Imperial Oil Ltd. v. Canada, [2006 SCC 46], [2006] 2 S.C.R. 447, [2006] S.C.J. No. 46, at para. 57, LeBel J. observed: "Although marginal notes are not entirely devoid of usefulness, their value is limited for a court that must address a serious problem of statutory interpretation." In my view, the marginal note "Indemnification in derivative actions" cannot cut down or limit the meaning of the unambiguous wording of the text of s. 124(4) which extends its reach to actions "by or on behalf of the corporation".

[42] I also find it difficult to see any principled rationale for applying one regime for advance costs in derivative actions and another for actions brought by the corporation itself. As the application judge pointed out, at para. 57: "the objective underlying the indemnity provisions for directors and officers is to maintain a balance between, on the one hand, encouraging responsible behaviour by directors and officers and, on the other hand, permitting enough leeway to attract strong candidates to foster entrepreneurism" (citing Blair, at para. 74; Bennett v. Bennett Environmental Inc. (2009), 94 O.R. (3d) 481, [2009] O.J. No. 853, [2009 ONCA 198], at paras. 23-25). The purpose of achieving an appropriate balance between encouraging responsible behaviour and attracting strong entrepreneurial candidates applies whether the directors and officers are faced with a derivative action or an action by the corporation itself. Both kinds of action flow from dissatisfaction with the conduct of the officers or directors; both expose the directors or officers to scrutiny for their conduct; and both reflect situations in which the officers and directors have lost control over litigation affecting or relating to the affairs of the corporation.

[43] I note as well that while the point does not appear to have been argued, in Med-Chem Health Care Ltd. v. Misir (2010), 103 O.R. (3d) 769, [2010] O.J. No. 4535, [2010 ONCA 380] and Catalyst Fund General Partner I Inc. v. Hollinger Inc., [2006] O.J. No. 615, 15 B.L.R. (4th) 48 (S.C.J.), this court and the Superior Court proceeded on the basis that court approval was required [page255] for a claim for advance funding in suits brought by the corporation governed by s. 124(4) of the CBCA or s. 136 or the OBCA.

[44] The appellants urge us to restrict the meaning of s. 124(4) to avoid imposing a merits-based threshold on advancement of legal costs that would undermine the right to indemnity conferred by the by-laws and reinforced by the indemnity agreements. In the present case, Look filed a substantial record, cross-examinations were conducted and a two-day contested hearing followed. The appellants complain that requiring them to litigate the issues underlying the action without funding effectively deprives them of their right to indemnity.

[45] The appellants place considerable reliance on the law of Delaware, where advance costs are awarded without any scrutiny of the conduct of the director or officer in part on the theory that the corporation should not be permitted to withdraw the promise of indemnity because of a subsequent harsh judgment of the director or officer's conduct: see, e.g., Reddy v. Electronic Data Systems Corp., 2002 WL 1358761 (Del. Ch. June 18, 2002), affd 820 A.2d 371 (Del. 2003); Stephen A. Radin, "'Sinners Who Find Religion': Advancement of Litigation Expenses to Corporate Officials Accused of Wrongdoing" (2006), 25 Rev. Litig. 251.

[46] In my view, apart from demonstrating that it is motivated by a very different underlying policy than that adopted by Parliament in s. 124(4), Delaware law does not assist us in resolving the issue on this appeal. Unlike the CBCA, the Delaware General Corporation Law does not require court approval of the advancement of legal expenses: Del. Code Ann. tit. 8, 145 (West 2011). By enacting s. 124(4), Parliament has determined that whatever corporate by-laws or agreements promise, by statute, advancement of legal costs requires court approval and court approval should be withheld if the officer or director has not acted in good faith and in the best interests of the corporation. That represents a fundamentally different policy choice than that prevailing in Delaware, a policy choice that this court must respect.

[47] The appellants also cite Med-Chem Health Care Ltd., at para. 20, in which this court observed that the legislature had "made advancement a part of the statutory indemnification scheme, recognizing the reality that requiring an individual to fund his or her legal costs of litigation until its conclusion before being provided with indemnification would seriously impair the objective of indemnification itself". But that statement describes only one side of the balance struck by the legislature, namely, allowing corporations to extend appropriate protections to corporate officers and directors. By imposing a pre-trial good conduct [page256] filter on the right to advancement, both Ontario and federal legislation also foster another purpose, namely, the discouragement of bad behaviour by corporate officers and directors. As the legislation we must interpret embraces both purposes, we cannot accept the appellants' contention that full weight be given to one purpose and the other ignored. Rather, the court's task is to achieve an appropriate balance or reconciliation between the two.

[48] This court held in Bata Industries Ltd., at p. 329 O.R., that s. 136 of the OBCA, the Ontario equivalent to s. 124 of the CBCA, is "a comprehensive code of general application by which the indemnification of officers and directors, and former officers and directors, is regulated". Like s. 136 of the OBCA, s. 124 [at p. 329 O.R.] "establishes the circumstances under which a corporation may, with and without court approval, indemnify an officer or director, and when a corporation must indemnify an officer or director" and, "[b]y implication . . . the circumstances under which a corporation cannot indemnify an officer or director". It follows that the by-laws and indemnity agreements cannot oust s. 124(4). Section 124(4), when read with the other subsections of s. 124, provides that court approval is required for advance funding and that approval can only be granted if the officer or director claiming advancement "acted honestly and in good faith with a view to the best interests of the corporation". The application judge correctly held that the provision applied in this case to the directors' and officers' claims for advance funding.

Issue 2. Did the application judge err in refusing advance funding on the basis of the strong prima facie case standard?

[49] The application judge held, at para. 87, that while the appellant directors and officers were entitled to the benefit of the presumption of good faith established in Blair, it was open to Look to lead evidence to rebut that presumption by establishing "a strong prima facie case that the [a] pplicants acted mala fides towards the corporation". In the application judge's view, if Look could demonstrate that it was likely to succeed at trial in proving mala fides, court approval for advance funding should be refused under s. 124(4). According to the application judge, Look had met this burden.

[50] In his very capable submission, Mr. Griffin argues that the application judge erred in adopting the "strong prima facie case test" and that court approval for advance funding should be denied only when the evidence rises to such a level that a court is able to make a final determination of mala fides. He based [page257] that submission on (1) the wording of the indemnity agreements; (2) the fact that the appellants proceeded by way of application rather than interlocutory motion; (3) the contention that to deny advance funding is to eviscerate the right to indemnity; and (4) the decision in Blair to the effect that corporate officers and directors are presumed to act in good faith.

[51] I turn first to the wording of the indemnity agreements. I agree with the appellants that if the matter fell to be determined solely on the wording of the indemnity agreements, advance funding could only be denied on the basis of a final and conclusive judicial determination of mala fides and that an interlocutory finding of a strong prima facie case would not be sufficient. However, the issue must be decided on the basis of the overriding language of s. 124(4). Court approval for advance funding may only be given when the claimant satisfies the conditions set out in subsection (3), namely, that he or she "acted honestly and in good faith with a view to the best interests of the corporation". I do not see how it is possible to avoid the conclusion that s. 124(4) contemplates that the right to advance funding is subject to court approval before trial and that a final determination of the issue of bad faith and indemnity must await trial.

[52] The second argument is procedural. The appellants' request for advance funding was advanced by way of an originating application rather than as a motion in Look's action. The appellants argue that as they proceeded by way of application which led to a final determination of their claims, the application judge erred by adopting a test applicable to interlocutory proceedings.

[53] I do not accept the submission that the procedural vehicle chosen by the appellants to advance their claims determines the test to be applied. The applications did lead to a final determination of the appellants' claims for advance funding, but that does not determine the test to be applied. By its very nature, a request for advance funding invites a preliminary assessment of the merits of the case but one that is not final and that does not bind the parties for the purposes of the Look action.

[54] It is widely accepted that this type of preliminary merits-based assessment is distinct from a final determination of the dispute. When preliminary or interlocutory orders require some assessment of the merits (including, for example, motions for interlocutory injunctions, motions for leave to proceed after the expiry of procedural time periods or motions for a stay pending appeal), the court is cautioned against attempting to make anything approaching a final determination of the issue. The court [page258] typically looks to see if the case is "arguable", "raises a serious issue to be tried" or is "not frivolous and vexatious". If a preliminary or interlocutory order will have drastic consequences (including, for example, an interlocutory mandatory injunction or a Mareva or Anton Piller order), the bar is raised to the level of "strong prima facie case".

[55] Third, I do not agree that the strong prima facie test eviscerates the right to advance funding. In my view, the application judge was correct in finding that s. 124(4) requires some assessment of the merits of the corporation's allegations of bad faith as a condition for advance funding. He correctly acknowledged that the appellants were entitled to the presumption of good faith as officers and directors, but also that the corporation could lead evidence to rebut that presumption. He recognized that the issues of indemnity and advance funding required a balance to be struck between providing adequate protections and incentives to attract strong candidates who foster entrepreneurialism and to encourage responsible behaviour.

[56] In my view, the strong prima facie case test strikes an appropriate balance between those competing considerations. It is a stringent test that gives significant weight to the protection of officers and directors. It ensures that they will ordinarily receive advance funding but leaves open the possibility that advancement will be denied when there is strong evidence of bad faith.

[57] Indeed, it seems to me that to accept the argument that advance funding should only be refused when the court is able to make a final determination of mala fides would be inconsistent with the very policy argument upon which the appellants rely, namely, that corporate officers and directors should not be forced to litigate the issue of mala fides without advance funding. The appellants cannot escape the fact that s. 124(4) legislatively imposes the requirement of court approval for advance funding. To set the standard for approval as the equivalent of a final determination would allow the corporation to force officers and directors to defend the entire case on a preliminary motion or application without advance funding.

[58] Finally, I do not agree that the application judge erred in his application of the presumption of good faith mandated by Blair. He gave the appellants the benefit of the presumption of good faith, as required by Blair, but held that Look had overcome that presumption by adducing evidence that made out a strong prima facie case of bad faith. Blair does not establish an irrebuttable presumption of good faith. Nor do I agree that by stating in Blair, at para. 35, that "persons are assumed to act in [page259] good faith unless proven otherwise", the Supreme Court should be taken to have precluded a court from making a finding of a strong prima facie case of bad faith when it would be inappropriate for the court to make a definitive finding.

[59] In my view, the application judge correctly refused to advance funding on the basis of the strong prima facie case standard.

Issue 3. Were the appellants denied the opportunity to respond to Look's allegations of bad faith?

[60] I do not accept the submission that the appellants were denied the opportunity to respond to the case advanced by Look. As applicants, they filed the evidence they thought they needed to support their claims. They were then faced with Look's record responding to their claims. They brought a motion to strike Look's evidence on the basis that the issue of bad faith was not properly before the court. That motion was dismissed by Newbould J., who expressed doubt as to the correctness of Jolian Investments Ltd., and held that the issue should be left for the application judge to decide. He stated: "It is up to the applicants to decide whether to respond to these affidavits" and that "it is for them to decide whether to file responding materials or not". The appellants appear to have made a tactical decision to respond to Look's defence to their claims for advancement primarily on the ground that the court was not entitled to consider the merits of Look's contention that they had acted in bad faith. Only Cytrynbaum's affidavit responded to Look's evidence of bad faith. To the extent the appellants limited their response, it is apparent that they did so as a tactical choice. Having made that choice, they must bear the consequences.

Issue 4. Did the application judge err in finding that Look had made out a strong prima facie case of bad faith?

[61] The application judge's conclusion that Look had established a strong prima facie case of bad faith rested on two findings. First, he found that the $0.40 share valuation to fix the equity cancellation payments bore no relation to the market value of the shares and that it resulted in substantial benefits being paid to the appellants at the expense of the corporation. Second, he found that the appellants had authorized without proper legal advice retainer payments of $1.55 million for their lawyers immediately before they resigned in the face of a growing shareholder discontent. Both findings relate to the sale of Look's assets through the CBCA plan of arrangement process that realized a value that disappointed Look's shareholders and [page260] from which the appellants paid themselves one-quarter of the proceeds in compensation awards.

[62] The appellants attack the first finding on the ground that the application judge erred by failing to give appropriate weight to their reliance on legal advice. In my view, this submission is without merit. The application judge recognized, at para. 106, that following legal advice can provide a defence to allegations of bad faith. He concluded, however, that the evidence of legal advice received by the board only addressed the general authority of the board to make special compensation awards and that there was "no evidence . . . that the decision to value Look's shares at $0.40 a share for the equity cancellation payments was based on legal advice".

[63] I see no basis for interference with that finding. The solicitor's opinion letter to the board is a carefully worded document that expresses no view as to the valuation of the shares. The solicitor, a partner of a major Toronto law firm, advised the board in very general terms of its duty to act honestly and in the best interests of the corporation. He referred to the business judgment rule which gives deference to the decisions of the directors provided those decisions fall within a range of reasonable alternatives. He indicated that on restructuring or winding down, it is common for a board of directors to authorize special incentive payments to retain key individuals provided that doing so is in the best interests of the corporation. There is nothing, however, in the letter as to the valuation of the Look shares. Indeed, it is not clear to me that the actual valuation, as distinct from the process the board had to follow, was a matter for legal opinion. There is conflicting evidence from the solicitor and Cytrynbaum as to whether the solicitor knew the valuation the board proposed to use. If he did know, he studiously avoided expressing any opinion on it and there is no indication that he was asked to do so. At best, the evidence indicates that the board's legal advisor advised that the valuation of the shares was a matter of business judgment to be exercised in the best interests of the corporation, and that he said nothing to dissuade the board from adopting the $0.40 valuation.

[64] In my view, the application judge made no palpable and overriding error of fact and no error of law in concluding that silence by a corporate solicitor on a matter that falls outside the realm of legal expertise and for which his advice was not sought by the board does not amount to a defence to an allegation of bad faith.

[65] Cytrynbaum's evidence was that the $0.40 per share valuation was based upon a proposed sale to Rogers. He described [page261] this as "a confidential offer in principle" from Rogers that was qualified by Rogers' desire for a "clean company" with no outstanding liabilities. Rogers did not proceed with the share purchase although, as we have seen, Rogers was ultimately involved in the asset sale. In my view, on this record, it was open to the application judge to conclude, at para. 100, that the board had received no oral or written offer for the shares and that Cytrynbaum's evidence regarding discussions of a possible sale to Rogers did not support the $0.40 per share valuation.

[66] The appellants rely on another letter written by the solicitor several months after the board decided to make the payments and in preparation for Look's general annual meeting. In that letter, the solicitor again reviews the business judgment rule and concludes that he "believe[s] that the decisions of the Board . . . have been made honestly and in the best interests of the Corporation" based on his understanding of the deliberations of the board, "the use of outside advisors when the Board deemed such assistance to be advisable and the application of the 'Business Judgment Rule'". I do not agree that this letter materially advances the case for the appellants. It expresses no opinion as to the $0.40 valuation. It is cast in general language as to the nature of the business judgment rule. Moreover, at the highest, the letter reflects the solicitor's ex post assessment of the decision the board had already made and does not reflect the advice the board received before the crucial board meeting.

[67] In my view, the application judge made no palpable and overriding error in finding that the board's valuation of Look's shares had no relationship to the actual market value and was not based on legal advice. This finding supported his conclusion that Look had made out a strong prima facie case of bad faith.

[68] The appellants also attack the second ground for the application judge's finding of bad faith, namely, the board's decision to authorize payments for legal retainers in excess of $1.5 million. They argue that the application judge's reasoning is circular as it assumes the very conclusion required to make the finding in the first place, that is, that the appellants were not entitled to authorize the retainers. The appellants also submit that the application judge misapprehended certain evidence as to the nature of the legal advice the board received.

[69] I disagree. I do not read the application judge's reasons as reflecting circular reasoning. In my view, his finding of bad faith with respect to these payments rested in large part on the timing and circumstances in which the payments were made. The appellants caused the board to authorize these payments literally as they went out the door. They knew that the shareholders [page262] were very dissatisfied with the equity cancellation payments and bonuses and the appellants' failure to disclose those payments in a timely manner. The appellants almost certainly knew they were about to be removed from office and sued. An independent solicitor had been retained to consider the advisability of an indemnity trust to fund the appellants' indemnity claims. Although the solicitor did not dismiss the possibility of a straightforward retainer agreement, he advised that the establishment of a trust could not be justified as being in the best interests of the corporation and indicated to Redman that he would advise the board accordingly at an upcoming meeting. On the morning of that meeting, Redman told the solicitor that the meeting was cancelled. However, the board meeting did take place as scheduled and the decision to advance the retainers was made without the benefit of the solicitor's legal advice. As the solicitor was prevented from advising the board, I fail to see how the fact that he did not rule out advance funding in any form can assist the appellants.

[70] In my view, it was open to the application judge to conclude that when all the circumstances are taken into account, the retainer payments were part of a pattern of self-interested behaviour that supported the finding of a strong prima facie case of bad faith.

Issue 5. Did the application judge err in refusing to approve advance funding for Smith, Redman, First Fiscal, Jolian and DOL?

[71] The foregoing discussion disposes of the claims of Cytrynbaum and McGoey. I now turn to specific arguments made by Smith, Redman, First Fiscal, Jolian and DOL that pertain to their claims for advance funding.

(i) Smith

[72] Smith argues that the application judge failed to consider his position as an outside director who was not directly involved with legal counsel or the decisions alleged to amount to bad faith.

[73] I disagree. Smith personally benefited from the impugned decisions. His argument flies in the face of the role he was meant to play as an outside director and ignores his position as the chair of Look's compensation and human resources committee. Smith was on the board for a reason: he was expected to exercise independent judgment, engage himself in the board's decisions and ensure that management was acting not it its own self-interest, but in the interest of Look. [page263]

(ii) Redman

[74] Redman was not a member of Look's board of directors, but rather served at the relevant time as Look's chief financial officer. He argues that he acted honestly, in good faith and under the direction of the board. The application judge found that as Look's chief financial officer, Redman was closely involved with McGoey in the equity cancellation proposal to the board and in the manner in which legal retainers were paid. Redman received a substantial payment bonus and equity cancellation payments and he benefited from the retainers that were paid. I am far from persuaded that the application judge erred by finding a strong prima facie case of bad faith against Redman.

(iii) First Fiscal, Jolian and DOL

[75] The corporate appellants submit that the application judge erred by analyzing their claims for advance funding as a request for an interlocutory mandatory injunction and requiring them to make out a case of irreparable harm. They also submit that they had independent contractual rights to advance funding, and that the application judge erred by denying them advancement on the basis of their close ties with their principals.

[76] I agree with the appellants that the application judge erred in applying the test for an interlocutory mandatory injunction. As I have already observed, the applications sought and resulted in a final determination of the claim for advance funding, albeit on a standard more frequently encountered in relation to interlocutory relief. In my view, a claim for advance funding does not require proof of irreparable harm, nor does it turn on the balance of convenience. However, at the end of the day, nothing turns on the application judge's characterization of the claims for advance funding as a request for an interlocutory mandatory injunction, as he provided ample reasons for refusing the applications on other grounds.

[77] The application judge found that neither Jolian nor DOL qualify for indemnity as they were never an officer, director, consultant, employee or agent of the corporation as required by the indemnification agreement. In my view, he did not err is so finding. Jolian and DOL provided the services of their principals, McGoey and Dolgonos, through an intermediary, Unique Broadband Systems Inc. The two companies did not enter any service agreement with Look and neither had any direct contractual relationship with Look with respect to the services provided by their principals. Jolian had an indemnification agreement with Look [page264] but DOL did not. DOL's claim was based on an indemnification agreement with Look assigned to it by another corporate entity. The indemnification agreements, by their terms, only apply to the extent Jolian or DOL were an officer, director, consultant, employee or agent of the corporation. With respect to DOL, I also observe that as Dolgonos is entitled to advance funding and because his defence costs will replicate those of DOL, denial of DOL's claim would appear to have little practical significance.

[78] Finally, while First Fiscal had a direct agreement with Look in respect of Cytrynbaum's consulting services, the application judge nevertheless found that First Fiscal was not entitled to advance funding under the relevant indemnity agreement. I agree with the application judge that as both First Fiscal and Jolian were corporate entities owned and controlled by Cytrynbaum and McGoey and used to channel the proceeds of the impugned payments, they cannot serve to circumvent the finding of a strong prima facie case of bad faith against their principals.

Disposition

[79] For these reasons, I would dismiss the appeals. If the parties are unable to agree as to costs, we will receive written submissions.

Appeal dismissed.

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