Court of Appeal for Ontario

Date: April 26, 2017 Docket: C60962

Judges: Doherty, MacFarland and Rouleau JJ.A.

Parties

Between

Todd Family Holdings Inc. and Future Image Holdings Corporation Respondents (Plaintiffs)

and

Roy John William Gardiner, Barefoot Science Technologies Inc., Dayl Marie Armstrong, Barefoot Science Holdings Inc., Barefoot Science Direct Inc., Barefoot Science Group Marketing Inc. and Advanced Barefoot Technologies Inc. Appellants (Defendants/Third Party Plaintiffs)

and

Lance Todd, Barefoot Science Products & Services Inc., and 2215535 Ontario Inc. Third Party Defendants

Counsel

For the Appellants: Matthew I. Milne-Smith, Carlos Sayao and Bryan D. McLeese (Roy John William Gardiner, Barefoot Science Technologies Inc., Dayl Marie Armstrong and Advanced Barefoot Technologies Inc.)

For the Respondents: David MacKenzie (Todd Family Holdings Inc. and Future Image Holdings Corporation)

Heard: April 5, 2017

On appeal from: The judgment of Justice McIsaac of the Superior Court of Justice, dated July 8, 2015.

Decision

By the Court:

Background

[1] The appellant, Gardiner is an inventor. He developed, patented and marketed rehabilitative shoe and insole products through a series of companies, including the appellant, Barefoot Science Holdings Inc. ("Barefoot Holdings"). The products are sold around the world. The appellant, Armstrong, is Gardiner's wife.

[2] Gardiner was looking for investors in 2004. Lance Todd, who had experience investing in and successfully developing businesses, was approached by an associate of Gardiner's about the possibility of investing in Barefoot Holdings. Based on written material provided to Todd and representations made by Gardiner, Todd decided to invest in Barefoot Holdings. He was also to assume a management position in the company.

[3] Todd first advanced funds in May 2005. He advanced slightly over $1,000,000 between May and December 2005. The money was advanced by the respondent corporation, Future Image Holdings Corporation ("Future"). In addition to the loan, Future purchased shares in Barefoot Holdings from Armstrong for $250,000.

[4] In his evidence, Todd testified that Gardiner represented that Barefoot Holdings owned and controlled the trademarks, patents and other intellectual property relating to the products sold by Barefoot Holdings (the "IP"). In fact, Todd later learned that Gardiner personally maintained effective control over all of the relevant IP. Todd testified that he would not have advanced funds or purchased shares of Barefoot Holdings had he known that Barefoot Holdings did not own and control the IP, the principal asset underlying the value to the business.

[5] The trial judge identified the elements of the tort of deceit (para. 44). He went on to consider and accept Todd's evidence, concluding, at paras. 46-51, that:

• Gardiner effectively represented that Barefoot Holdings owned and controlled the IP;
• Todd relied on this representation; and
• Todd would not have made the loan or purchased the shares but for the representation.

[6] On appeal, counsel for the appellants accepts that Barefoot Holdings borrowed money from Future and that the money has not been repaid. Counsel also accepts that Gardiner, and not Barefoot Holdings, controlled the IP through various agreements at the time the funds were advanced by Future. Lastly, counsel accepts that Gardiner's control of the IP was not disclosed to Todd until well after the advances were made.

A. Grounds of Appeal

(a) The Finding of Deceit

[7] The appellants challenge the trial judge's finding of deceit, both as against Gardiner and Armstrong.

[8] Insofar as Gardiner is concerned, counsel submits that there was no material misrepresentation made by Gardiner that induced Todd to invest in Barefoot Holdings. Counsel submits that on Todd's own evidence, the alleged misrepresentation as to Barefoot Holdings' ownership and control of the IP would only have become relevant when discussions about Barefoot Holdings providing security for the loans began. Those discussions began in November 2005, well after Todd had advanced $500,000 to Barefoot Holdings and committed to advance a further $500,000.

[9] Counsel is correct in his contention that security for the advances made by Future was not discussed between Todd and Gardiner until November 2005. Those discussions were initiated by Gardiner and led to a security agreement by which Barefoot Holdings pledged as security for the loan by Future all "present and after acquired" IP. In offering the IP as security for Barefoot Holdings' loans, Gardiner said nothing to Todd about his personal control of the IP through various agreements.

[10] Counsel for the appellants submits that even if Gardiner's silence, combined with his representations, constitute a material misrepresentation, that misrepresentation could have no causal connection to the $500,000 that was advanced before any discussions about security, or to the additional $500,000 that Todd had committed to advance to Barefoot Holdings before there was any discussion about security.

[11] A claim for deceit can succeed only if a plaintiff demonstrates a causal connection between the misrepresentation and the alleged advancement of the funds. Funds advanced or committed before a misrepresentation cannot be the product of that misrepresentation.

[12] However, the deceit claim advanced at trial was not limited to an alleged misrepresentation made in the context of discussions concerning potential security for the loans in the IP. Todd made it clear that he invested in Barefoot Holdings because he saw the opportunity to build a successful business, as he had done in the past, developing and manufacturing the various products sold by Barefoot Holdings. He understood, based on the representations made by Gardiner from the outset of their discussions, and from the documents provided to him by Gardiner, that the IP, which Todd regarded as central to the value of the business he was being invited to invest in, was owned and controlled by Barefoot Holdings, the company in which he was investing. In fact, Gardiner controlled the IP.

[13] The trial judge appreciated and accepted this aspect of Todd's claim. He said, at para. 45:

I am satisfied that, at the time of his dealings with Lance Todd, he knew that any potential investor would want to know the status of the company's IP for two reasons: first, to allow for the viability and success of the enterprise itself so as to guarantee a return on any investment; and, second to provide potential security for the investment if the company failed. Accordingly in my view, there was both active misrepresentation based on the false impression created by the "pitch" documents provided in August 2004 to Mr. Todd, but, also, material non-disclosure of the true ownership of the IP. [Emphasis added.]

[14] The trial judge accepted that Gardiner's misrepresentations as to the ownership and control of the IP were relevant from the outset to Todd's consideration of the viability of his proposed investment in Barefoot Holdings. That concern operated separately from Todd's further concern, developed when Barefoot Holdings offered security, about the value of the proposed security offered by Barefoot Holdings.

[15] We are satisfied that the evidence provided a basis upon which the trial judge could make the findings he did in para. 45 of his reasons. It is fair to say that Todd spoke of "security" in both the general sense, as assets demonstrating that the borrower, Barefoot Holdings, had worth, and in the narrower sense as assets pledged by the borrower as security should the loan fail. However, Todd made it clear that it was significant to him that Barefoot Holdings owned and controlled the assets that were essential to the development of a profitable business. Those assets consisted of the patents, trademarks, and other IP.

[16] We would not interfere with the finding of deceit against Gardiner.

B. The Finding of Deceit Against Armstrong

[17] The trial judge said virtually nothing about Armstrong's involvement in the relevant matters in his reasons. His entire analysis of the deceit claim against her is found in the following passage from para. 52:

… Ms. Armstrong was complicit in this ploy [Gardiner's deceit] in her capacity as proofreader of such documents as one of her responsibilities in communications director of BFSH (Barefoot Holdings).

[18] The reasons provide no basis upon which Armstrong could be found liable in deceit. On our review of the record, there is no evidence of Armstrong's participation in the discussions relevant to the investment in Barefoot Holdings, much less any complicity in the misrepresentations, providing the basis for the findings of deceit.

[19] It is true that the shares purchased by Future for $250,000 were owned by Armstrong. However, her ownership of those shares does not implicate her in the misrepresentations that caused Future to purchase the shares. Those misrepresentations were made by Gardiner.

[20] The finding of deceit against Armstrong cannot stand.

C. The Damages Awarded for Deceit

[21] In his reasons under the heading "Relief Granted", the trial judge said, at para. 65:

Based on my findings of active deceit and material non-disclosure earlier in these reasons, I have no difficulty in awarding Future Image damages in the amount of $1,250,640.34 (USD) as against the defendants Roy Gardiner and Dayl Armstrong.

[22] The figure referred to by the trial judge represents the loan advance of slightly over $1,000,000 and the $250,000 advanced to purchase Barefoot Holdings shares.

[23] The trial judge went on to make additional monetary awards in favour of Future. He did so on the assumption that Future was entitled to enforce the loan agreement which it had entered into as a result of Gardiner's deceit. For example, one term in the loan agreement called for an interest payment of $500,000 on a specific date. The trial judge (para. 69) awarded that $500,000 to Future.

[24] Ultimately, the trial judge awarded monetary damages to Future in the amount of $2,217,602.28. All of the damages were awarded for "deceit/fraudulent misrepresentation" (para. 75). The trial judge did not award damages for the respondents' claims of lost salary and recovery of expenses. The respondents have not appealed from that aspect of the decision.

[25] We agree with counsel for the appellants' submission that the measure of damages for deceit requires that the injured party be placed in the position it would have been in had the misrepresentation not been made. Damages for deceit are not calculated on the assumption that the injured party is entitled to enforce the agreement entered into as a result of the misrepresentation. Consequently, Future was not entitled, as part of its damage claim for deceit, to claim the $500,000 interest payment required under the terms of the loan.

[26] Future is entitled to the amount it advanced by way of loans and share purchases – $1,250,640.34 – the amount referred to by the trial judge, at para. 65. Future is also entitled to prejudgment interest calculated on the various advances as of the date the advances were made and according to the rates established under the Courts of Justice Act.

[27] We note that the respondents also advanced an oppression claim at trial under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 ("OBCA"). The trial judge found that the respondents "have been exposed to a litany of oppressive machinations at the hands of the defendants [appellants] and they are entitled to significant relief under s. 248 of the OBCA" (para. 62).

[28] The trial judge did not grant any monetary relief under s. 248 of the OBCA. It may be that some of the oppressive conduct identified by the trial judge could justify a monetary award. The record does not, however, permit this court to engage in that inquiry at this stage. Counsel for the respondents did not suggest that if this court found that some of the damages were improperly awarded for deceit, this court should reallocate all or part of those damages to the oppression remedy.

[29] The damage award to Future should be varied to $1,250,640.34 (USD). Future should also receive prejudgment interest on that amount as described above.

D. The "Accounting" Issue

[30] The respondents eventually realized on their security after Barefoot Holdings defaulted on the loan obligations. The respondents took control of the business and by the time of trial in 2015, had operated the business for some six years. It was common ground that any profits earned during that six years should be deducted from any amounts owed to the respondents.

[31] In his evidence, Todd claimed that Barefoot Science Products & Services, the company incorporated to run the business, had not made any profit during the six years that it operated the business. The appellants presented expert evidence suggesting that the business must have made profit sufficient to easily eliminate any debt owed to Future.

[32] Todd's claim that the business had made no profit in the six years he had been in control rested almost entirely on his oral testimony. Todd failed to produce most of the documentation he was required to produce, both under the Rules of Civil Procedure and pursuant to specific court orders. He had no legitimate excuse for his failure to produce the required documentation.

[33] The evidence of the defence expert suggesting that significant profits must have been made was based, to some extent, on information provided by Gardiner, but to a large extent on documents retrieved from third parties. The expert also used documents provided by Todd.

[34] The trial judge took no issue with the evidence of the defence expert. He did not suggest that her evidence was tainted by the information provided by Gardiner. The trial judge described the expert's report as "an impressive analysis" (para. 76).

[35] The trial judge ultimately rejected the defence expert's evidence entirely. He did so on the basis that it was inconsistent with his perception of Todd's circumstances at the time of trial. The trial judge accepted that Todd had been thoroughly victimized by Gardiner and was impecunious at the time of trial. Based on these findings, the trial judge concluded that Todd's evidence that the business had made no profit in the six years during which he controlled the operation should be accepted, despite Todd's failure to produce virtually any supporting documentation.

[36] The trial judge's finding that the business made no money during the six years after Todd assumed control cannot stand. With respect, the trial judge's finding that Todd was victimized by Gardiner, and destitute at the time, provided no basis upon which to come to any conclusion concerning the income of the business during the six years in which Todd operated the business. The trial judge's finding is made even more untenable in the face of significant independent documentary evidence establishing substantial sales by the business during that six-year period.

[37] The trial judge had to come to grips with the available evidence relating to the operation of the business in the six years after Todd assumed control. He could not avoid that task because he believed Todd to be a victim and because he was satisfied that Todd was destitute. Furthermore, the trial judge had to take into account the negative implications flowing from Todd's abject failure to comply with the relevant Rules and prior court orders.

[38] The trial judge's conclusion that there was "absolutely no recovery" in the years that Todd operated the business reflects a failure to engage with the relevant evidence, and reliance on irrelevant considerations. The finding must be set aside.

[39] We were advised by counsel for the appellants during oral argument that the respondents continue to operate the business and that regardless of the outcome of this appeal, the appellants would be seeking a further accounting for the time period since the trial. In our view, that accounting should extend over the entire time period during which the respondents have had control of the business.

[40] We remit the matter to the Superior Court for an accounting and determination of the amount, if any, owing to the respondents. The court can, to the extent necessary, vary any of the extant terms of the trial judge's order.

E. Conclusion

[41] The appeal is allowed. Paragraphs 1, 2, 10 and 15 of the trial judgment are set aside. The findings of deceit and fraudulent misrepresentation against Gardiner stand. The claim in deceit and fraudulent misrepresentation against Armstrong is dismissed. The assessment of damages for Gardiner's deceit/fraudulent misrepresentation is remitted to the trial court on the basis that Future is owed $1,250,640.34 (USD), plus prejudgment interest and less the profits, if any, generated since Future realized on its security and assumed control of the business. Future is entitled to post-judgment interest on any amount found owing to Future.

[42] Paragraphs 3, 4, 5, 6, 7, 8, 9, 12, 13 and 14 of the trial judgment stand. Paragraph 11 is varied by deleting the reference to Dayl Marie Armstrong.

[43] The trial judge awarded costs to the respondents on a substantial indemnity basis in the amount of $960,432.26. In doing so, he relied on his finding that Gardiner had acted in a thoroughly dishonest manner in his dealings with Todd.

[44] We have confirmed the trial judge's finding of deceit as it applies to Gardiner. We also accept the trial judge's finding that Gardiner forged an important document in an effort to take control of the IP, despite his representations to Todd. Those findings of dishonesty could justify costs against Gardiner on a substantial indemnity basis.

[45] Unfortunately, the trial costs cannot be appropriately assessed until the court has determined what amount, if any, remains owing to Future after the accounting process described above. For example, if it should turn out that profits earned since Todd assumed control of the business exceed the debt owed to Future, that finding could have a significant impact on both the plaintiffs' entitlement to costs and the quantification of those costs. Costs of the trial can only be determined after the trial court has assessed the damages, if any, presently owing to the respondents.

[46] There should be no costs of the appeal. The appellants enjoyed considerable success on the appeal, however, they were unsuccessful on the main issue, Gardiner's personal liability for deceit.

Released: April 26, 2017

"Doherty J.A."

"J. MacFarland J.A."

"Paul Rouleau J.A."