COURT OF APPEAL FOR ONTARIO

CITATION: Mitchell v. Lewis, 2016 ONCA 903

DATE: 20161129

DOCKET: C60938

Weiler, Rouleau and Roberts JJ.A.

BETWEEN

Ryan Mitchell, The Mitchell Consulting Group, and The Mitchell Consulting Group Inc.

Plaintiffs (Appellants)

and

Robert Lewis, Wendy Lewis, Global Learning Group Inc. also known as Global Learning Giving Initiative also known as GLGI, Global Land Consortium Inc. Ardoch Lake Developments Inc., Colonial Chevrolet Ltd., 2168368 Ontario Inc., Digital Consultation Management Services, and 2168368 Ontario Inc., carrying on business as Digital Consultation Management Services

Defendants (Respondents)

Hossein Niroomand, for the appellants

Michael Magonet, for the respondents

Heard: November 9, 2016

On appeal from the order of Justice L.A. Pattillo of the Superior Court of Justice, dated July 31, 2015, with reasons reported at 2015 ONSC 4614.

L.B. Roberts J.A.:

[1] The appellants appeal the order of the motions judge striking out all but two of the causes of action pleaded in their statement of claim without leave to amend.

[2] The appellants’ action arises out of a consulting agreement dated June 23, 2009 between the appellant, The Mitchell Consulting Group, and the respondents, Global Learning Group Inc. (GLGI) and its affiliated group of companies. The appellants claimed that the respondents breached their obligations by failing to pay amounts owing under the agreement.

[3] In particular, the appellants alleged that the respondents Robert Lewis and Wendy Lewis guaranteed GLGI’s payment for services rendered under the agreement and that they and GLGI further agreed to hold in trust any monies owing to the appellants under that agreement. Further, the appellants pleaded that on or about November 11, 2011, Ryan Mitchell and Robert Lewis reduced to writing the alleged oral trust agreement for funds owed to the appellants up to that time. The alleged written trust agreement provided that Robert Lewis would hold three lots belonging to Ardoch Lake Developments Inc. in trust for the appellants as security for the funds they were owed by GLGI.

[4] The appellants alleged that Robert and Wendy Lewis fraudulently converted monies from GLGI – monies that were owed to and held in trust for the appellants – to their own use. In addition to breach of contract and breach of trust, the appellants claimed in breach of fiduciary duty, fraud, fraudulent misrepresentation, conversion, conspiracy and unjust enrichment.

[5] The motions judge struck out the appellants’ Fresh as Amended Statement of Claim in its entirety, granting leave to file a Further Fresh as Amended Statement of Claim that asserts only the breach of contract claim against GLGI and the breach of trust claim against Robert Lewis in relation to the three lots held by Ardoch Lake Developments Inc.

[6] The motions judge refused the appellants leave to amend the other claims. The appellants’ Fresh as Amended Statement of Claim was the third iteration of its pleading. It followed receipt of the defendants’ detailed factums and a prior attendance before the motions judge, which served to point out the deficiencies in the appellants’ pleading. Nevertheless, the appellants were not able to correct those deficiencies. As a result, the motions judge concluded: “Given the history of the evolution of the Claim, I am not satisfied that granting the plaintiffs leave to further amend the Claim to remedy the above identified deficiencies will result in a proper pleading that the defendants can respond to.”

Analysis

[7] The appellants put forward three main arguments on appeal.

[8] First, they submit that the motions judge erred in allowing the breach of trust claim to go forward only as against Robert Lewis and not also against Ardoch Lake Developments Inc. as the owner of the lots which are impressed with the alleged trust.

[9] I agree. In paragraph 51 of the Fresh as Amended Statement of Claim, the appellants alleged that the respondents breached the trust agreement by diverting funds and failing to perform in accordance with the agreement. They pleaded that under this agreement, Ryan Mitchell had an interest in the Ardoch Lake Developments lots. These lots are owned not by Robert Lewis but by Ardoch Lake Developments Inc. I agree that, to properly plead the breach of trust claim in relation to the lots, it is necessary that the appellants be permitted to plead it as against the owner of those lots.

[10] Next, while the appellants take no issue with the motions judge’s statement of the relevant legal principles to be applied, they submit that he erred in his application of those principles. Specifically, they submit that there were sufficient material facts pleaded to support the claims for unjust enrichment, conspiracy, conversion, fraudulent misrepresentation, and fraud based on the alleged breach of trust.

[11] I do not accept this submission. The motions judge found that the pleading for those claims was deficient in that it contained mostly bald allegations and lacked sufficient particularity in relation to each of the defendants. Further, those claims were based on an alleged oral trust for which no material facts were pleaded. I agree with the motions judge’s characterization of the pleading with respect to those claims and would not interfere. Moreover, I see no error in the motions judge’s exercise of his discretion not to grant the appellants leave to amend their pleading in relation to those claims.

[12] Finally, with respect to the claims of fraudulent diversion of funds and unjust enrichment as against Robert and Wendy Lewis personally, the appellants submit that the motions judge erred in determining that the pleading could not support piercing the corporate veil of the corporations over which Robert and Wendy Lewis had control because there was no allegation that the corporations were sham corporations.

[13] As already noted, the motions judge correctly determined that the claim against Robert and Wendy Lewis personally, based on the alleged breach of an oral trust agreement, was untenable because of the appellants’ failure to plead any material facts.

[14] However, I agree that the motions judge erred by restricting the circumstances in which it would be appropriate to pierce the corporate veil to those involving sham corporations and by failing to consider whether the appellants’ pleading of fraudulent and improper conduct against Robert and Wendy Lewis could be sufficient to support a finding of personal liability against them.

[15] In paragraph 70 of the Fresh as Amended Statement of Claim, the appellants allege that the corporate veil of GLGI and other corporate defendants should be pierced and that Robert and Wendy Lewis are personally liable for the funds owed to the appellants because, among other things, they improperly manipulated the accounts of all of the corporate respondents for their own benefit and fraudulently diverted to their own personal use monies that were owed to the appellants.

[16] The motions judge relied on this court’s decision in ScotiaMcLeod Inc. v. Peoples Jewellers Limited (1995), 1995 1301 (ON CA), 26 O.R. (3d) 481 (C.A.), at p. 491, for the following proposition: “Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal that had gone sour.” The motions judge found that as the Fresh as Amended Statement of Claim contained no allegations that any of the corporate respondents were a sham and, on the contrary, alleged that GLGI was a successful business, the pleading did not support piercing the corporate veil.

[17] In my view, the motions judge adopted too narrow a view of when the corporate veil could be pierced.

[18] While the corporate veil has been pierced in cases involving sham corporations, that remedy is not limited to those cases. Most recently, this court in Shoppers Drug Mart Inc. v. 6470360 Canada Inc., 2014 ONCA 85, 372 D.L.R. (4th) 90, at para. 43, confirmed that the appropriate test to apply in determining whether the corporate veil should be pierced was stated by Laskin J.A. in 642947 Ontario Ltd. v. Fleischer (2001), 2001 8623 (ON CA), 56 O.R. (3d) 417 (C.A.), at para. 68, as follows:

Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if when incorporated “those in control expressly direct a wrongful thing to be done”: Clarkson Co. v. Zhelka at p. 578. Sharpe J. set out a useful statement of the guiding principle in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 7979 (ON SC), 28 O.R. (3d) 423 at pp. 433-34 (Ont. Ct. (Gen. Div.)), aff’d [1997] O.J. No. 3754 (C.A.): “the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.”[^1]

[19] In the present case, while not elegantly pleaded and deficient in particulars, the Fresh as Amended Statement of Claim does allege that Robert and Wendy Lewis, as the operating minds and will of the corporate defendants, directed “a wrongful thing to be done”, namely, to misappropriate monies owing to the appellants to the personal use of Robert and Wendy Lewis. If pleaded with sufficient particularity, this is the kind of “fraudulent or improper conduct” that has led courts in cases like Shoppers to disregard the separate legal personality of a corporate entity and to find personal liability against those in control.

[20] The motions judge erred in concluding that the pleading relating to the alleged diversion of funds by Robert and Wendy Lewis could not, if properly pleaded with sufficient particulars, support a claim for piercing the corporate veil and for personal liability against Robert and Wendy Lewis. Reading the Fresh as Amended Statement of Claim generously with allowance for inadequacies due to drafting deficiencies, the motions judge ought to have granted the appellants leave to amend their claim against Robert and Wendy Lewis to plead a cause of action arising out of their alleged fraudulent diversion and misappropriation of funds.

[21] Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, allows a court at any stage of an action to grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment. While the court retains the discretion not to allow an amendment, the denial of leave to amend should only be made in the clearest of cases, when it is plain and obvious that no tenable cause of action is possible on the facts as alleged: South Holly Holdings Ltd. v. The Toronto-Dominion Bank, 2007 ONCA 456, at para. 6; Conway v. Law Society of Upper Canada, 2016 ONCA 72, 395 D.L.R. (4th) 100, at para. 16.

[22] I recognize that the appellants have had three opportunities to produce a proper pleading and that at a certain point, fairness to the respondents and respect for the integrity of the judicial process require that the appellants not be granted any further indulgences if they cannot deliver a statement of claim free from material deficiencies. However, in the present case, the possibility of a tenable cause of action in relation to the alleged fraudulent diversion of funds by the personal respondents arises from the pleaded facts. I also note that the respondents do not allege that a further amendment to the pleadings will result in prejudice that cannot be compensated for in costs in the event leave to amend were granted.

[23] Accordingly, the appellants shall be given one last opportunity to deliver a statement of claim free from the deficiencies already noted.

Disposition

[24] For these reasons, I would allow the appeal in part, amending para. 2 of the July 31, 2015 order, to allow the appellants leave to file within twenty days from the release of these reasons a Further Fresh as Amended Statement of Claim which asserts only the breach of contract claim against Global Learning Group Inc., also known as Global Learning Giving Initiative, also known as GLGI; the breach of trust claim against Robert Lewis and Ardoch Lake Developments Inc., relating to the three Ardoch Lake lots; and the personal liability claim against Robert and Wendy Lewis for fraudulent diversion and misappropriation of corporate funds.

[25] If the parties cannot agree on the disposition of costs here and below, they may make brief written costs submissions of no more than three pages, not including bills of costs, as follows: the appellants shall deliver their submissions by December 6, 2016; the respondents shall deliver their submissions by December 13, 2016. There shall be no reply submissions.

Released: November 29, 2016

“L.B. Roberts J.A.”

“I agree K.M. Weiler J.A.”

“I agree Paul Rouleau J.A.”

[^1]: As noted by this court in Parkland Plumbing & Heating Ltd. v. Minaki Lodge Resort 2002 Inc., 2009 ONCA 256, 305 D.L.R. (4th) 577, at para. 51, in Transamerica, at pp. 432-33, Sharpe J. (as he then was) accepted the following formulation of the test for lifting the corporate veil, set out in Gower, Modern Company Law, 5th ed. (1992) at pp. 132-33:

There seem to be three circumstances only in which the courts can [lift the corporate veil]. These are:

(1) When the court is construing a statute, contract or other document.

(2) When the court is satisfied that a company is a "mere facade" concealing the true facts.

(3) When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.