COURT OF APPEAL FOR ONTARIO
CITATION: Holmes v. Schonfeld Inc., 2016 ONCA 148
DATE: 20160224
DOCKET: C60734/C60744
Weiler, LaForme and Huscroft JJ.A.
BETWEEN
Scott Holmes and Jennifer Flynn
Plaintiffs (Appellants)
and
Schonfeld Inc. and Bossy Nagy Geoffrey (BNG), previously known as the Michael Bossy Group
Defendant (Respondent)
AND BETWEEN
Scott Holmes and Jennifer Flynn
Plaintiffs
and
Schonfeld Inc. and Bossy Nagy Geoffrey (BNG), previously known as the Michael Bossy Group
Defendants (Respondent/Appellant)
Marc Munro, for the appellants Scott Holmes and Jennifer Flynn
Frank Bowman and Deepshikha Dutt, for the appellant Bossy Nagy Geoffrey (BNG), previously known as the Michael Bossy Group
Aubrey Kauffman and Dylan Chochla for the respondent Schonfeld Inc.
Heard: January 13, 2016
On appeal from the orders of Justice Thomas J. McEwen of the Superior Court of Justice, dated June 18, 2015, with reasons reported at 2015 ONSC 3038.
Weiler J.A.:
A. Overview
[1] Schonfeld was appointed Monitor and Receiver over the assets, undertaking and properties of Holmes and Flynn and their companies. After Schonfeld was discharged, Holmes and Flynn were told by the Canada Revenue Agency (CRA) that, following a reassessment, they owed over one million dollars in unpaid taxes. Holmes and Flynn brought an action against Schonfeld, claiming that Schonfeld did not exercise reasonable care in managing Holmes and Flynn’s assets and that Schonfeld was obliged to engage in reasonable tax planning.
[2] Holmes and Flynn also sued Bossy Nagy Geoffrey (BNG), their accountants and tax advisers before and during the receivership. BNG sought to bring a crossclaim (or, alternatively, third party claim) against Schonfeld.
[3] Schonfeld successfully brought a motion to dismiss all claims against it. The appellants appeal.
B. Issues on Appeal
[4] The appellants Holmes and Flynn raise the following issues:
Did the motions judge err in law in concluding that leave was required?
Did the motions judge misapprehend the evidence and/or fail to consider relevant evidence?
Did the motions judge apply the wrong test for granting leave?
Did the motions judge err in concluding that the appellants Holmes and Flynn had not met the test for leave?
[5] The appellant BNG raises the following issues:
Did the motions judge err in concluding that the “strong prima facie case” standard should be applied to BNG?
Did the motions judge err in failing to take into account the totality of evidence in concluding that BNG’s claim against Schonfeld was without foundation and was frivolous and vexatious?
Did the motions judge exceed its jurisdiction on a leave motion when he concluded that Schonfeld’s conduct did not meet the test for gross negligence?
C. Facts
[6] The appellants Scott Holmes and Jennifer Flynn are involved in longstanding and fractious litigation with Canadian National Railway (CN). On August 8, 2008, CN obtained a Mareva Order and an Anton Pillar Order against Holmes, Flynn, and the companies controlled by them (the Monitored Parties). On August 26, 2008, Schonfeld was appointed as Monitor to manage the assets and pay the legal fees and disbursements of the Monitored Parties. On December 4, 2008, Schonfeld was also appointed Receiver of the Monitored Parties. Schonfeld was discharged on September 26, 2011. According to Holmes and Flynn, most of their assets were disbursed during the course of the receivership.
[7] In early 2012, the CRA wrote several letters to Holmes and Flynn notifying them of outstanding tax liability for the years 2006-2009. This liability arose because Holmes and Flynn failed to repay loans made to them by their corporations; when not repaid within one year, these shareholder loans were considered income and taxed as such. This reassessment by the CRA resulted in Holmes and Flynn owing approximately $1 million in income tax.
[8] On February 5, 2014, Holmes and Flynn brought an action against Schonfeld, claiming that Schonfeld failed to exercise a reasonable duty of care, supervision, and control over the management of their affairs during the course of the receivership. They argued that Schonfeld was obliged to engage in reasonable tax planning while managing their assets and should accordingly be liable for their post-discharge tax liability. Holmes and Flynn also brought an action against their accountants and tax advisors BNG, claiming that they also failed to fulfill their professional obligations. BNG brought a motion seeking leave to commence a crossclaim, or, alternatively, a third party claim, against Schonfeld.
[9] Paragraph 7 of the Monitor Order stated that no proceeding shall be commenced against the Monitor without the Monitor’s consent or leave of the court. Paragraph 26 of the Receiver Order provided that nothing in that order shall derogate from the powers and protections described in the Monitor Order and that all provisions of the Monitor Order shall continue to apply to the activities of the Receiver. Both the Monitor Order and the Receiver Order limited Schonfeld’s liability to gross negligence or wilful misconduct. The Discharge Order contained a release of liability, again excepting gross negligence and wilful misconduct.
[10] Because Holmes and Flynn’s action was commenced without the consent of Schonfeld and without leave of the court, Schonfeld brought a motion seeking an order dismissing the action and dismissing BNG’s crossclaim. Holmes and Flynn denied that leave was required, but, in the alternative, asked for an order granting them leave nunc pro tunc.
D. Decision Below
[11] The motions came before McEwen J. He concluded that, on a plain reading of the Monitor, Receiver, and Discharge orders together, Holmes and Flynn required leave of the court to commence their action against Schonfeld. McEwen J. further held that, while Schonfeld would not suffer any prejudice or substantial injustice if leave were granted nunc pro tunc, leave should nevertheless be denied because it would not have been granted if sought at the appropriate time. He reasoned that, by virtue of the various orders, Holmes and Flynn would have to have a cause of action either in gross negligence or wilful misconduct, and that on either the regular standard for granting leave (where leave will be granted unless there is no foundation for the claim or the action is frivolous or vexatious) or the stricter standard (where leave will be granted if the plaintiffs can demonstrate a strong prima facie case), Holmes and Flynn could not succeed.
[12] McEwen J. concluded that there was no foundation for the claim that Schonfeld’s conduct constituted a “very marked departure” from the standards by which a reasonable and competent receiver in the same circumstances would have conducted itself, nor was there a foundation for the claim that Schonfeld conducted itself with reckless indifference or in a manner that it knew was wrong.
[13] Finally, McEwen J. concluded that BNG could not be in a better position to commence an action than Holmes and Flynn, and accordingly dismissed BNG’s motion for leave.
E. Analysis
(1) Holmes and Flynn’s Appeal (C60734)
[14] Whether or not leave is required for Holmes and Flynn to commence their action is a question of law and the standard of review is correctness. Assuming leave was required, the motions judge’s refusal to grant leave is a discretionary decision. This court should only interfere if the motions judge misdirected himself, “came to a decision that is so clearly wrong that it amounts to an injustice”, or if the motions judge gave no or insufficient weight to relevant considerations: Penner v. Niagara Regional Police Services Board, 2013 SCC 19, [2013] 2 S.C.R. 125, at para. 27.
(a) Did the motions judge err in law in concluding that leave was required?
[15] Holmes and Flynn submit that they did not require leave to commence their action. A plain reading of the various orders shows that leave is required by the Monitor order and not by the Receiver order, and they sought to bring an action against Schonfeld in its capacity as Receiver. Although the appellants acknowledge that paragraph 26 of the Receiver Order incorporates the provisions of the Monitor Order, they submit that the powers and protections of the Monitor Order did not cover the activities of the Receiver. The appellants further argue the separate limitation of liability clause in paragraph 25 of the Receiver Order would be superfluous if paragraph 26 of the Receiver Order incorporated every protection afforded in the Monitor Order.
[16] The trial judge did not err. The Receiver Order is supplemental to the Monitor Order. Properly interpreted, Schonfeld as Receiver is entitled to the protections of paragraph 7 of the Monitor Order, and leave is therefore required. The separate limitation of liability clauses do not detract from this interpretation. Furthermore, the Discharge Order expressly provides that Schonfeld will continue to have the full protections provided for in the Monitor and Receiver orders. I would reject this submission.
[17] The next question is whether leave would have been granted, had it been sought at the appropriate time. In this regard the appellant makes several submissions.
(b) Did the motions judge misapprehend the evidence and/or fail to consider relevant evidence?
[18] The motions judge based his conclusion that Schonfeld’s conduct did not constitute gross negligence or wilful misconduct on five findings of fact. They are: a) the alleged tax liabilities began prior to Schonfeld becoming involved in the matter; b) Homes and Flynn were fully aware of the shareholder loans that had taken place; c) throughout the relevant time BNG provided accounting services and tax advice to Holmes and Flynn; d) Schonfeld’s mandate as Monitor/Receiver did not include providing the type of services to Holmes and Flynn that they now complain they did not receive; and, e) Homes and Flynn either consented to or did not oppose the order that limited Schonfeld’s liability and led to its discharge.
[19] Holmes and Flynn attack these factual findings and argue that they lack any evidentiary foundation (or are immaterial) and should be set aside. They submit that while the tax liability began prior to the appointment of Schonfeld, Schonfeld’s mismanagement increased their tax liability over the course of the receivership, and that the potential tax debt could have been eliminated by simply moving funds from their personal accounts into the corporate accounts. They further submit that their personal knowledge of the existence of the shareholder loans is immaterial to whether Schonfeld fulfilled its duty of care as Receiver. Neither Schonfeld nor BNG consulted with the appellants regarding the management of their affairs.
[20] The appellants’ main argument is that, contrary to the conclusion of the motions judge, the type of “services” involved — income tax advice — was very much within the mandate contemplated by the Receiver Order. Schonfeld was obligated to preserve, protect and maintain control of the property and had access to all of the financial statements and records showing the indebtedness. It also had the power to settle any debts and was obligated to try to realize on the assets of the related companies by collecting the shareholder loans. In addition to the terms of the Receiver Order, Schonfeld also had a common law duty to manage the property as a prudent business person would.
[21] Holmes and Flynn further submit that the fact they did not oppose any of the orders that led to the termination of the receivership is immaterial because the tax liability only became apparent following the discharge of the receiver.
[22] I would not give effect to these submissions. First, there is ample evidence to support the motions judge’s finding of fact that the tax liabilities began prior to Schonfeld becoming involved in the matter. Holmes admits that the re-assessment for the 2006 taxation year involved the advance of a loan and the failure to repay that loan with respect to taxation years that pre-dated the appointment of Schonfeld as Monitor or Receiver.
[23] Second, the powers and authorizations given to Schonfeld as Receiver and Monitor were detailed and precise. The orders directed Schonfeld to liquidate particular assets, in a particular order and to use the proceeds to pay particular expenses. For example, in an email dated February 20, 2009, from Schonfeld to BNG, Schonfeld indicated that, “The Order specifically indicates that funds from 2035113 are to be used to pay the legal fees which are covered in the Mareva.” Had Schonfeld moved funds as the appellants submit it ought to have done, it would not have been in compliance with the orders.
[24] In relation to Flynn, loans made to her and upon which she was reassessed were made by a numbered company which was not a “Monitored Party” under the Monitor Order or the Receiver Order and for which Schonfeld did not receive financial statements.
[25] Third, in the same February 20, 2009 email, Schonfeld candidly told BNG that it did not know how certain payments were to be accounted for from a tax perspective, implying that it was up to BNG. BNG admits that it was, at all material times, the tax accountants of Holmes and Flynn and their companies. This role was disclosed to the Court in the first report of the Monitor dated November 14, 2008. It stated that the Monitored Parties utilized the services of an independent accounting firm to prepare financial statements, statutory filings, and income tax returns, both personal and corporate. It also stated that the Monitor attended at the office of the accounting firm on a regular basis “for the purpose of delivering accounting documents, tax forms and retrieving completed financial statements and tax returns.” This evidence supports the trial judge’s finding that Schonfeld’s mandate as Monitor and Receiver did not include providing the type of services to Holmes and Flynn that they now complain they did not receive.
[26] Finally, the motions judge was entitled to consider that Holmes and Flynn had actual knowledge of their shareholder loans. Schonfeld did not. For example, the “Preliminary Summary of Assets and Liabilities As Identified by Scott Holmes” indicates an amount of money due, as at June 30, 2008, to Monterey Consulting & Construction Ltd. Holmes is not a Shareholder of this company. Monterey is owned by 2035113 Ontario Ltd., and Holmes is the sole shareholder of that company. It appears that Holmes was reassessed by the CRA as a person “connected with a shareholder” pursuant to s. 15(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).
[27] The motions judge was also entitled to take into consideration that Holmes and Flynn’s objection to the conduct of Schonfeld concerning the preservation and protection of their assets was not made in a timely fashion at the discharge hearing.
[28] The motions judge did not misapprehend the evidence. The fact that the motions judge did not advert to some of the evidence upon which the appellants rely does not mean that he failed to consider it: see Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 46; Canadian Broadcasting Corp. Pension Plan v. BF Realty Holdings Ltd. (2002), 2002 CanLII 44954 (ON CA), 160 O.A.C. 72 (C.A.), at para. 64.
(c) Did the motions judge apply the wrong test for granting leave?
[29] Both parties agree that the threshold for leave in this context is not a high one. It is designed to protect the receiver against frivolous or vexatious actions or actions without basis in fact. The party seeking leave must only show a reasonable cause of action with some evidentiary basis, or in other words, “the evidence must disclose a prima facie case”: see GMAC Commercial Credit Corp. - Canada v. TCT Logistics Inc., 2006 SCC 35, [2006] 2 S.C.R. 123, at para. 59.
[30] The appellant submits that the motions judge effectively determined the question of whether Schonfeld was grossly negligent – a factual issue for trial –rather than asking whether a prima facie case of possible negligent conduct was established.
[31] The liability of the Monitor and Receiver in this case was limited by the various orders to gross negligence or wilful misconduct. Accordingly, the analysis as to whether there is a factual foundation for a claim does not relate to mere negligence. In such circumstances, the test is whether the Receiver “demonstrated a very marked departure from the standards by which responsible and competent people in such circumstances would have acted or conducted themselves, or in a manner such that it knew what it was doing was wrong or was recklessly indifferent in its conduct”: Alberta Treasury Branches v. Elaborate Homes Ltd., 2014 ABQB 350, 590 A.R. 156, at para. 39. The motions judge applied this test, and I agree that this is the proper test.
(d) Did the motions judge err in concluding that the appellants Holmes and Flynn had not met the test for leave?
[32] The appellants submit that even if the motions judge applied the correct test, he erred in concluding that the evidence did not establish conduct that constitutes gross negligence or wilful misconduct. They submit that Schonfeld’s admission that it was uninterested in the tax consequences of its conduct is evidence that meets the test.
[33] Based on the motions judge’s findings of fact, which I have upheld, he did not err in concluding that there was no foundation for a claim in gross negligence or wilful misconduct.
[34] The appellants further submit that the motions judge was wrong to rely only on the Receiver Order to determine Schonfeld’s mandate. Schonfeld, they submit, had an overarching duty of care in the management of the Monitored Parties’ assets.
[35] In relation to this latter submission, I note that the Discharge Order contains a release of any and all liability relating to matters raised or which could have been raised within the proceedings; any liability not amounting to gross negligence or wilful misconduct falls within the scope of this release, even if the nature of the claim was not known at the time of discharge. The motions judge correctly noted that a more stringent standard for the granting of leave – a strong prima facie case – may be appropriate in cases where the issues raised in the action could have been raised in the discharge proceedings: see Bank of America Canada v. Willann Investments Ltd. (1993), 23 C.B.R. (3d) 98 (Ont. Gen. Div.), at para 9; Gallo v. Beber (1998), 1998 CanLII 907 (ON CA), 116 O.A.C. 340 (C.A.), at para. 7.
[36] The motions judge noted, at para. 23 of his reasons, that the tax planning issues raised by Holmes and Flynn could have been raised in the discharge proceedings. I agree. Schonfeld’s conduct was approved of by the court and Schonfeld was ultimately discharged, all pursuant to motions served upon Holmes and Flynn. Nevertheless, I would agree with the motions judge’s conclusion that regardless of whether the regular standard described in GMAC or the stricter standard described in Gallo is applied, Holmes and Flynn have failed to establish a prima facie case of gross negligence or wilful misconduct. Accordingly, the motions judge did not err in concluding that Holmes and Flynn should not be granted leave to commence their action against Schonfeld.
(2) BNG’s Appeal (C60744)
[37] As in Holmes and Flynn’s appeal, the motions judge’s refusal to grant BNG leave to bring a crossclaim or third party claim against Schonfeld is a discretionary decision, and this court will only intervene where there is misdirection, the decision is so clearly wrong that an injustice is occasioned, or where no or insufficient weight is given to relevant considerations.
[38] BNG sought leave to commence a crossclaim and counterclaim or a third party claim against Schonfeld for contribution and indemnity. Its position was that the appellants Holmes and Flynn had not suffered any damages. In the alternative, if they had, BNG pleaded that: the damages were premature, excessive, remote and unrecoverable in law, and Holmes and Flynn had not mitigated their losses. BNG further pleaded that any damages were caused either by the negligence of Holmes and Flynn themselves, or by the actions, inactions and gross negligence of Schonfeld, given that Schonfeld knew of the outstanding shareholder loans and failed to require Holmes and Flynn to arrange repayment and/or to ensure that sufficient funds were set aside for such tax liability arising from the consequences of failing to repay such shareholder loans. Further, BNG alleged that Schonfeld failed to take reasonable steps to pursue appropriate strategies to eliminate or minimize potential tax liability and to manage the assets and undertakings of Holmes and Flynn in a manner that would eliminate or minimize tax liability.
[39] The motions judge dismissed BNG’s application for leave, at para. 33 of his reasons, by simply saying, “In law, BNG cannot be in a better position than Holmes and Flynn to pursue its action against Schonfeld. Thus, for the reasons set out above, BNG’s motion requesting leave to file a crossclaim or in the alternative a third party claim is similarly dismissed.”
[40] BNG raises several grounds of appeal, including that the motions judge erred by applying the strong prima facie case standard to BNG. At the outset, I note that the motions judge did not explicitly state that the strong prima facie case standard should be applied to BNG. He stated that he was dismissing BNG’s application for leave for the reasons he had stated above. In my view, the same reasons apply to Holmes and Flynn’s proposed claim and BNG’s proposed crossclaim because there is only one negligence claim, not two, as I will explain below.
[41] As I have noted, the motions judge observed that the strong prima facie case standard may be appropriate where the issues raised in the action could have been raised in the discharge proceedings, and concluded that the reasonableness of Schonfeld’s conduct from a tax planning perspective and the potential tax liability of Holmes and Flynn were issues that could have been raised in the discharge proceedings.
[42] On appeal, BNG points out that it was not a party to the Discharge Motion and had no notice of it, and as such had no legal standing or basis to raise its concerns at the Discharge Motion.
[43] BNG further submits it seeks leave to sue Schonfeld on different grounds than Holmes and Flynn. The essence of BNG’s claim is not that Schonfeld should have provided tax planning advice to the Monitored Parties. BNG submits that Schonfeld failed to make any effort to collect the shareholder loans which were an asset of the Monitored Parties. As a result, the loans were deemed to be income of Holmes and Flynn pursuant to s. 15 of the Income Tax Act. Thus, BNG argues, the conduct at issue was not the same as on the Discharge Motion. The motions judge failed to consider case law before him that highlights a receiver’s duty to take steps to pay tax as it becomes due and to minimize tax liability. Here, Schonfeld allowed the estate’s tax liability to surpass its remaining assets. The motions judge ignored the $1,700,000 in fees and disbursements billed by Schonfeld and removed from the estate.
[44] Schonfeld’s position is that while BNG was not served with the motion records seeking approval of Schonfeld’s conduct, the same principle should apply. Both the Receiver Order appointing Schonfeld as well as the Discharge Order provide that Schonfeld can only be sued for gross negligence or wilful misconduct. Court approval would have little value if it only offered protection from claims brought by served parties. It submits that the conduct at issue was before the court even if BNG was not. BNG’s pleadings rely on the pleadings made by Holmes and Flynn. Schonfeld is an officer of the court. As such, the protections given to Schonfeld by the court apply to anyone seeking to sue Schonfeld.
[45] It is important to clarify the nature of BNG’s involvement in the action.
[46] BNG is a third party to the receivership and was not present at the discharge hearing. Nonetheless, in my view, it is barred from instituting proceedings in negligence by the release clause of the discharge order. The release clause allows the court to protect the discharged receiver, a former court officer, from claims arising out of the exercise of its role: Ed Mirvish Enterprises Ltd. v. Stinson Hospitality Inc., 2009 CanLII 55113 (Ont. S.C.), at para. 14, per Pepall J.
[47] The release clause also allows the receiver to distribute funds upon discharge without the need to hold back funds in case of potential liability: see Ogopogo Beach Resort Ltd. v. Happy Valley Resort Ltd., 2010 BCSC 996, at para. 37. The wording of the release clause in the present case, using the language of the Superior Court’s model order, was broad enough to insulate against third party claims, as it was in the similar order in Ogopogo Beach Resort, at para. 40. The former receiver is not insulated against claims for gross negligence and wilful misconduct, but these can only be brought with leave of the court: see Ed Mirvish Enterprises, at para. 14. This rationale applies equally to would-be claimants who are parties and also to third parties.
[48] BNG, however, did not actually plead a free-standing negligence or gross negligence claim against Schonfeld. It did not plead that Schonfeld owed it a duty of care in tort. BNG’s pleadings only seek contribution and indemnity from its co-defendant Schonfeld, in the event that BNG is found to be liable to Holmes and Flynn. The closest BNG comes to suggesting that Schonfeld was negligent in its conduct towards BNG is when it points out, in its factum at para. 43, that “Schonfeld did not consult BNG before making any financial decisions about the Monitored Parties.” Absent a pleading by BNG that Schonfeld, as Receiver, owed BNG a legal duty to consult it, however, the evidence of a lack of consultation cannot establish a cause of action in negligence, let alone gross negligence.
[49] Ultimately, BNG’s arguments on this appeal benefit Holmes and Flynn by raising additional allegations of negligent conduct on the part of Schonfeld in its capacity as Monitor and Receiver. Unfortunately for BNG, while the allegedly negligent conduct it raises may be different than the allegations of negligence pleaded by Holmes and Flynn, all of this conduct could have, and should have, been raised by Holmes and Flynn during the course of the discharge proceedings.
[50] The motions judge’s conclusion that, “BNG cannot be in a better position than Holmes and Flynn to pursue its action against Schonfeld” simply captured the reality that, given that BNG did not assert a free-standing negligence claim against Schonfeld but instead a crossclaim seeking contribution and indemnity, BNG’s ability to claim against Schonfeld is dependent on Holmes and Flynn’s ability to claim against Schonfeld. Put another way, BNG cannot do indirectly – hold Schonfeld responsible for Holmes and Flynn’s losses – what Holmes and Flynn cannot do directly. Given the motion judge’s conclusion that Holmes and Flynn had not made out a prima facie case, and so accordingly should not be granted leave nunc pro tunc, this was sufficient to also dispose of BNG’s claim. I agree with that conclusion, and would dismiss BNG’s appeal.
F. Disposition
[51] For the reasons above, I would dismiss both appeals.
[52] As the successful party, Schonfeld is entitled to its costs of the appeal. I would award Schonfeld $30,000, inclusive of disbursements and taxes, on a partial indemnity basis, and make Holmes, Flynn and BNG jointly and severally liable for this amount.
Released: “HSL” February 24, 2016
“Karen M. Weiler J.A.”
“I agree H.S. LaForme J.A.”
“I agree Grant Huscroft J.A.”