Vellenga v. Boersma et al.

[Indexed as: Vellenga v. Boersma]

Ontario Reports

Court of Appeal for Ontario

Tulloch, van Rensburg and Zarnett JJ.A.

August 28, 2020

152 O.R. (3d) 305 | 2020 ONCA 537

Case Summary

Real property — Interests in land — Equitable interests — Constructive trusts — Appeal by defendants from trial judgment finding that property was held in trust by defendant Weijs Investment for Maple Pond Farm dismissed — Appellant Boersma and respondent were equal shareholders and directors of Maple Pond that operated a dairy farm — Corporation sold farm's milk quota — Net proceeds used to purchase a property registered in name of Weijs Investment, a company owned by Boersma's wife — Trial judge did not err in finding Corporation's funds had been used to purchase property in breach of Boersma's fiduciary duty and that alleged interest-free loan by Corporation to Weijs Investment was invalid.

Appeal by the defendants from trial judgment finding that a property was held in trust by the defendant Weijs Investment for Maple Pond Farm. The appellant Boersma and the respondent were equal shareholders and directors of Maple Pond that operated a dairy farm. The Corporation sold the farm's milk quota and the net proceeds were used to purchase a property registered in the name of Weijs Investment, a company owned by Boersma's wife. The respondent sought a declaration that the property was the property of Maple Pond whose funds were used for the purchase. The trial judge found that the Corporation's funds had been used to purchase property, in breach of Boersma's fiduciary duty. The appellants argued that a loan to Weijs Investment by the Corporation was justified on the basis that the Corporation owed Boersma over $1,058,000, by way of agreements of purchase and sale and a demand note. In light of the debt that the Corporation owed to Boersma, he was entitled to loan the funds to Weijs Investment for the purchase of the property. The appellants also argued that, based on the doctrine of laches, the respondent was not entitled to relief as a result of his delay in raising the issue. The trial judge found the agreements of purchase and sale and the demand note purporting to establish a debt to Boersma were not valid since the respondent did not sign the documents. As there was no basis for the loan and no documentation or proper authorization, the transfer of a portion of the milk quota proceeds to Weijs Investment constituted a breach of the duty to act in the best interests of the Corporation. He also found that the respondent had not acquiesced at any point.

Held, the appeal should be dismissed.

The trial judge did not err in finding a breach of fiduciary duty, and thus, oppressive conduct. The trial judge adopted the correct legal approach and properly considered the documentary evidence and the evidence of the various witnesses. It was within his purview to accept the respondent's evidence that he had never signed the agreements of purchase and sale or the demand note, particularly in light of the irregularities with his alleged signature. The trial judge was also entitled to find that the alleged interest-free loan by the Corporation to Weijs Investment was invalid. Even if the corporation was operated informally, Boersma did not establish that he was owed in excess of $1,058,000 by the corporation, or why, when the money was transferred, it was characterized as a loan. The trial judge did not err in imposing a constructive trust on the property in [page306] favour of the corporation. The breach of fiduciary duty resulted in the appellants having obtained an identifiable asset. The imposition of a constructive trust did not prejudice Weijs Investment or award a windfall to the respondent. The trial judge made no finding of unclean hands and there was no basis on which to make this finding on appeal.

Cases referred to

Beardsley v. Ontario (2001), 2001 8621 (ON CA), 57 O.R. (3d) 1, [2001] O.J. No. 4574, 151 O.A.C. 324, 17 C.P.C. (5th) 94, 52 W.C.B. (2d) 45 (C.A.); Kaiman v. Graham, [2009] O.J. No. 324, 2009 ONCA 77, 245 O.A.C. 130, 45 E.T.R. (3d) 163, 75 R.P.R. (4th) 157; Soulos v. Korkontzilas (1997), 1997 346 (SCC), 32 O.R. (3d) 716, [1997] 2 S.C.R. 217, [1997] S.C.J. No. 52, 146 D.L.R. (4th) 214, 212 N.R. 1, J.E. 97-1111, 100 O.A.C. 241, 46 C.B.R. (3d) 1, 17 E.T.R. (2d) 89, 9 R.P.R. (3d) 1; Vellenga v. Boersma, 2018 ONSC 6534 (S.C.J.), costs [2019] O.J. No. 477, 2019 ONSC 484 (S.C.J.); Waterstone Properties Corp. v. Caledon (Town), [2017] O.J. No. 4087, 2017 ONCA 623, 64 M.P.L.R. (5th) 179, 80 R.P.R. (5th) 173; Wilson v. Alharayeri, [2017] 1 S.C.R. 1037, [2017] S.C.J. No. 39, 2017 SCC 39, 65 B.L.R. (5th) 169, 412 D.L.R. (4th) 387

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, ss. 134(1) [as am.], 248 [as am.]

Real Property Limitations Act, R.S.O. 1990, c. L.15, s. 4

APPEAL from judgment of Sweeny J., 2018 ONSC 6534, and from the costs order, [2019] O.J. No. 477, 2019 ONSC 484 (S.C.J.).

Blair W.M. Bowen, for appellants.

Marc Munro, for respondent.

The judgment of the court was delivered by

TULLOCH J.A.: —

I. Overview

[1] The appellant, Peter Boersma ("Dr. Boersma"), and the respondent, Gordon Vellenga ("Mr. Vellenga"), operated a dairy farm together. They operated as equal partners from 1989 until 1995, when they incorporated under Maple Pond Farm Limited (the "Corporation"). Dr. Boersma and Mr. Vellenga were equal shareholders and directors of the Corporation. The second appellant, Adrienne Boersma ("Mrs. Boersma"), Dr. Boersma's wife, was appointed as treasurer.

[2] In 1999, the Corporation sold the farm's milk quota and the net proceeds were used to purchase a property, known as the Boundary Lake Property. However, instead of ownership being held by the Corporation, it was held by the appellant corporation, Weijs Investment Corp. ("Weijs Investment"), which was wholly owned by Mrs. Boersma. [page307]

[3] Mr. Vellenga later commenced an application seeking, among other things, an oppression remedy under s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16. Among other things, he sought an order declaring that the Boundary Lake Property was the property of the Corporation, on the basis that the Corporation's funds were used for its purchase.

[4] The trial judge found that the Corporation's funds had been used to purchase the Boundary Lake Property, in breach of Dr. Boersma's fiduciary duty. He declared that the property was held by Weijs Investment in trust for the Corporation.

[5] The appellants now appeal to this court.

[6] For the reasons that follow, I would dismiss the appeal.

II. Facts and Procedural History

[7] In 1989, Dr. Boersma and Mr. Vellenga entered into a partnership for the purpose of operating a dairy farm called Maple Pond Farm. The partnership was set up as an equal partnership between Dr. Boersma and Mr. Vellenga, with each contributing approximately the same amount of equity.

[8] Dr. Boersma is a retired dentist and businessman. He was primarily responsible for the financial and administrative aspects of the farm. Mr. Vellenga is an experienced dairy farmer who was responsible for the operations of the farm. He has a grade ten education and has no knowledge of business or investing.

[9] In 1995, Maple Pond Farm was incorporated as Maple Pond Farm Limited and the partnership's assets were rolled into the Corporation. At the time, the partners' equity, as recorded on the partnership's financial statements, was $176,573. Dr. Boersma and Mr. Vellenga each received shares of the new corporation and were appointed as the sole directors. The company also appointed Mrs. Boersma to the role of treasurer.

[10] The appellants entered two agreements of purchase and sale and a demand note into evidence, which were allegedly executed around the time that the partnership was rolled into the Corporation. The agreements of purchase and sale, one for Dr. Boersma and one for Mr. Vellenga, stated that the vendors each owned an undivided one-half interest in the property of the partnership. For Dr. Boersma, the purchase price was said to be $1,728,322. For Mr. Vellenga, the purchase price was said to be $5,764. The demand note outlined a debt of $488,185 owed by the Corporation to Dr. Boersma.

[11] At the hearing below, Dr. Boersma, Mr. Vellenga and Deborah Beveridge, the alleged witness to the signings, testified regarding the authenticity of these documents. Dr. Boersma and Ms. Beveridge testified that the agreements had been [page308] signed and properly executed. While Mr. Vellenga's purported signature was present on the documents, he denied ever signing them.

[12] In 1999, the Corporation sold its milk quota for approximately $1.7 million. The net proceeds from the sale were approximately $1,058,000. At the direction of Dr. Boersma, the money was used to purchase a 2,500-acre property located near Parry Sound, known as the Boundary Lake Property. According to the Transfer/Deed of Land, the purchase price was $1 million. While the capital used to purchase the Boundary Lake Property came from the sale of the milk quotas, title was not registered in the name of the Corporation but rather in the name of a separate company, Weijs Investment, which was wholly owned by Mrs. Boersma.

[13] Following the Boundary Lake transaction, the Corporation's financial statements, including the 1999 financial statement and all subsequent statements, recorded the transaction as a long-term loan to Weijs Investment. There was, however, no documentation to substantiate any such loan agreement.

[14] In March 2004, Mr. Vellenga brought an oppression remedy application under s. 248 of the Business Corporations Act, seeking, among other things, an audit of the Corporation and an order granting leave to commence an action for the recovery of moneys improperly acquired by the appellants. In the alternative, he sought an order that the Corporation be wound up, an order appointing a liquidator or receiver/manager for the purpose of winding up, an order for an accounting of the shareholders' accounts, an interim and interlocutory order appointing a receiver/manager and an interlocutory order temporarily preventing the appellants from dealing with, disposing of, or encumbering the Boundary Lake Property.

[15] In June 2004, Festeryga J. issued an order on consent, stating that the appellants had agreed not to deal with, dispose of, or encumber the property.

[16] On December 17, 2015, Mr. Vellenga amended his notice of application, seeking an order declaring that the Boundary Lake Property is the property of the Corporation and appointing a receiver to oversee its sale.

III. Decision of the Trial Judge

[17] The application was directed to trial. At the hearing before Sweeny J. (the "trial judge") in September 2018, the only issue for determination was the respondent's request for a declaration that the Boundary Lake Property was the property of the Corporation. [page309]

[18] Mr. Vellenga argued that, since the loan to Weijs Investment had not been authorized, its purchase of the property using the Corporation's funds had been made on behalf of the Corporation. He sought an order that the property was impressed with a trust and held by Weijs Investment for the benefit of the Corporation.

[19] The appellants disagreed, arguing that the loan to Weijs Investment was justified on the basis that the Corporation owed Dr. Boersma a sum of money in excess of the $1,058,000, by way of the agreements of purchase and sale and the demand note. In light of the debt that the Corporation owed to Dr. Boersma, he was entitled to loan the funds to Weijs Investment for the purchase of the Boundary Lake Property. The appellants also argued that, based on the doctrine of laches, Mr. Vellenga was not entitled to relief as a result of his delay in raising the issue.

[20] The trial judge granted the application, finding that "[t]he use of the net proceeds of the milk quota sale to purchase the Boundary Lake Property was an unauthorized breach of fiduciary duty": at para. 35. The agreements of purchase and sale and the demand note purporting to establish a debt to Dr. Boersma were not valid. The trial judge found as fact, that Mr. Vellenga did not sign the documents. He provided five reasons: (1) he accepted Mr. Vellenga's evidence that he did not sign; (2) the purported signature bore no resemblance to Mr. Vellenga's signature on other documents; (3) he found that Mr. Vellenga would have remembered signing documents with such large numbers; (4) while Ms. Beveridge, the witness, claimed that her signature on the documents indicated that both parties had signed, the events took place 22 years earlier and she had no independent recollection of Mr. Vellenga signing; and (5) the documents were suspect because the amounts did not accord with the partners' equity, as shown on the partnership's financial statements dated December 31, 1994.

[21] The Boundary Lake Property had thus been purchased, without proper authorization, with the Corporation's funds in breach of the fiduciary duty owed by Mr. Boersma to the Corporation. In light of this finding, the trial judge held that the appropriate remedy was for Weijs Investment to hold the Boundary Lake Property in trust for the Corporation: at para. 35, citing Soulos v. Korkontzilas (1997), 1997 346 (SCC), 32 O.R. (3d) 716, [1997] 2 S.C.R. 217, [1997] S.C.J. No. 52, at paras. 36, 45.

[22] The trial judge also rejected the argument that Mr. Vellenga was not entitled to relief because of delay. He found that Mr. Vellenga had not acquiesced at any point. He initiated his application in 2004, alleging that the appellants had improperly [page310] used corporate funds to purchase the Boundary Lake Property. In 2015, he amended the application to request an order declaring that the property was held in trust for the Corporation.

[23] In a separate ruling on costs, the trial judge awarded costs to Mr. Vellenga on a partial indemnity basis, totaling $87,100 inclusive of HST and disbursements.

IV. Issues on Appeal

[24] The appellants raise four issues on appeal:

(1) Did the trial judge err in finding that Dr. Boersma breached his fiduciary duty?

(2) Did the trial judge err in imposing a constructive trust over the Boundary Lake Property?

(3) Was Mr. Vellenga's claim for a constructive trust statute-barred under s. 4 of the Real Property Limitations Act, R.S.O. 1990, c. L.15?

(4) Did the trial judge err in his costs award?

V. Analysis

(1) Did the trial judge err in finding that Dr. Boersma breached his fiduciary duty?

[25] Under s. 248 of the Business Corporations Act, a shareholder or former shareholder may apply to the court for a remedy when the powers of the directors of a corporation have been exercised in a manner that is oppressive, unfairly prejudicial, or in a way that unfairly disregards the interests of the shareholder. In this case, the issue is whether the trial judge erred in finding that Dr. Boersma, as a director of the Corporation, acted oppressively by failing to carry out his fiduciary duties.

[26] The fiduciary duties of directors and officers include the statutory duties under s. 134(1) of the Business Corporations Act, to "act honestly and in good faith with a view to the best interests of the corporation". Directors and officers are also under a duty to "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances".

[27] In his capacity as director, Dr. Boersma directed the Corporation to lend Weijs Investment the sum of $1,058,000, which was used to fund the purchase of the Boundary Lake Property. On appeal, the appellants argue that Dr. Boersma was entitled to facilitate the loan in light of the debt owed to him by the Corporation. The fact that the loan was not recorded does not invalidate the action, as the practice of the Corporation was informal. [page311] The trial judge was wrong to find that Dr. Boersma breached his fiduciary duty.

[28] The trial judge considered and rejected these arguments. The loan was not justified, as the agreements that purportedly established the existence of a debt to Dr. Boersma had not been signed and were therefore invalid. The size of the alleged debt was also inconsistent with the financial records detailing the partners' equity at the time of the rollover. Moreover, the trial judge rejected the report and opinion of the appellants' accounting expert as "after-the-fact attempts to justify the assertion that [Dr. Boersma] was owed in excess of the net proceeds of the milk quota sale": at para. 33. As there was no basis for the loan, as well as no documentation or proper authorization, the transfer of a portion of the milk quota proceeds to Weijs Investment constituted a breach of the duty to act in the best interests of the Corporation.

[29] In Wilson v. Alharayeri, [2017] 1 S.C.R. 1037, [2017] S.C.J. No. 39, 2017 SCC 39, at para. 59, the Supreme Court of Canada outlined the standard of appellate review in shareholder oppression cases. An appellate court must defer to the trial court's findings of fact, absent palpable and overriding error. An appellate court can intervene and substitute its own decision if the trial court's judgment is based on errors of law, erroneous principles, or irrelevant circumstances. Finally, an appellate court can also intervene if the judgment is manifestly unjust.

[30] In this case, I see no error that would justify appellate intervention. The trial judge adopted the correct legal approach and properly considered the documentary evidence, as well as the evidence of the various witnesses. It was within his purview to accept Mr. Vellenga's evidence that he had never signed the agreements of purchase and sale or the demand note, particularly in light of the irregularities with his alleged signature, Ms. Beveridge's lack of independent recollection in witnessing the documents and the clear discrepancies with the financial statements.

[31] The trial judge was also entitled to find that the alleged interest-free loan by the Corporation to Weijs Investment was invalid. Not only was there no legitimate basis for the loan, there was "no evidence of loan documents, a promissory note, or [Mr. Vellenga's] agreement" and "[Mr. Vellenga] did not sign the cheque": at para. 30. Even if the Corporation was operated informally, Dr. Boersma's justification for the transfer of moneys to Weijs Investment was not accepted: he did not establish that he was owed in excess of $1,058,000 by the Corporation, or why, when the money was transferred, it was characterized as a loan. [page312] Both Dr. Boersma, as director, and Mrs. Boersma, as treasurer, had a fiduciary duty to the Corporation to act honestly and in good faith in the company's best interests, as well as a duty to do so with care and diligence. Their actions do not reflect a commitment to these duties. Rather, the appellants acted against the interests of the Corporation by using an asset of the Corporation to enrich themselves. The trial judge did not err in finding a breach of fiduciary duty, and thus, oppressive conduct.

(2) Did the trial judge err in imposing a constructive trust over the Boundary Lake Property?

[32] In Soulos, at para. 45, the Supreme Court outlined four conditions that should generally be satisfied where a court imposes a constructive trust for wrongful conduct:

(1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;

(2) The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;

(3) The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and

(4) There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.

[33] The appellants do not argue that there was any impediment to imposing a trust over the property in favour of the Corporation because this was an oppression remedy application, rather than a derivative action. Nor do they argue that the remedial powers under the oppression remedy are not broad enough to grant relief in the nature of a trust in favour of the Corporation where doing so is necessary to rectify oppressive conduct.

[34] In this case, the appellants argue that the trial judge erred in imposing a constructive trust on the property in favour of the Corporation, as he did not apply the law on constructive trusts from Soulos. In summary, the appellants argue that the trial judge: (1) failed to apply the principle that the fiduciary's wrongful act must give rise to an identifiable asset; (2) failed to consider the prejudicial impact of the constructive trust on Weijs Investment; (3) failed to consider that the trust would constitute a windfall for Mr. Vellenga; (4) failed to consider that a monetary remedy would be adequate in the circumstances; [page313] and (5) failed to consider that Mr. Vellenga had breached his duty of loyalty and was, therefore, disentitled to the equitable remedy of a constructive trust. I will address each of these arguments in turn.

[35] First, I reject the appellants' argument that the breach of fiduciary duty did not result in them having obtained an identifiable asset. The trial judge found that "[t]he Boundary Lake Property was purchased with the Corporation's funds": at para. 35. There is no basis on which to overturn that finding, and it provides a clear and sufficient connection between the property and the breach of fiduciary duty.

[36] Second, I would reject the argument that the imposition of a constructive trust prejudices Weijs Investment. When the Boundary Lake Property is sold by the Corporation, Weijs Investment will receive proceeds consistent with its contribution. As the trial judge explained, "any expenses the [appellants] incurred with respect to the Boundary Lake Property are properly accounted for in the determination of the distribution of the proceeds of the sale": at para. 38. I also note that there is an order appointing a liquidator for the Corporation, dated April 4, 2019, which was stayed pending this appeal.

[37] Third, I would similarly reject the argument that the declaration of trust awards a windfall to Mr. Vellenga. The trust preserves the interest on behalf of the Corporation, not Mr. Vellenga. As the trial judge explained, Mr. Vellenga will be entitled to his "share of the value of that asset when it is sold": at para. 38.

[38] Fourth, I do not agree that the trial judge erred in imposing the constructive trust on the basis that a monetary remedy would have been sufficient. The trial judge was entitled to find that the appellants' acquisition of the Boundary Lake Property with misappropriated corporate funds justified an order declaring that the property is held in trust for the Corporation. This is in line with the deterrent and remedial functions of constructive trusts arising from wrongdoing and breach of fiduciary duty. As set out in Soulos, at para. 45, a constructive trust may be awarded "to ensure that others like the defendant remain faithful to their duties".

[39] Fifth, the appellants argue that Mr. Vellenga had unclean hands and was, therefore, disentitled to the equitable remedy of a constructive trust. Specifically, the appellants assert that Mr. Vellenga breached the duty of loyalty by (a) living rent-free at the farm; (b) selling farm equipment without accounting for the sales to the Corporation; (c) keeping farm equipment for himself without paying (e.g., a truck and snowmobiles); (d) retaining rental proceeds without accounting [page314] for them; and (e) threatening to kill Dr. Boersma in relation to a financial disagreement.

[40] I do not accept this argument. The trial judge made no finding of unclean hands and I see no basis on which to make this finding on appeal. I also accept that there is an insufficient connection between the appellants' argument that Mr. Vellenga had unclean hands and the remedy that simply ensures that the Boundary Lake Property is held in trust for the Corporation. Once the property is sold, and accounts are taken Mr. Vellenga and Mr. Boersma will each be entitled to their respective share of the proceeds, after their respective claims against the Corporation have been addressed.

(3) Was Mr. Vellenga's claim for a constructive trust statute-barred by s. 4 of the Real Property Limitations Act?

[41] Finally, the appellants argue that Mr. Vellenga's claim was statute-barred under s. 4 of the Real Property Limitations Act, which creates a ten-year limitation period for an action to recover land: Waterstone Properties Corp. v. Caledon (Town), [2017] O.J. No. 4087, 2017 ONCA 623, 64 M.P.L.R. (5th) 179, at para. 31. Since Mr. Vellenga became aware that Weijs Investment owned the Boundary Lake Property as of 2004 at the latest, the appellants argue that his trust claim in 2015 was commenced after the expiry of the limitation period.

[42] As this argument is being put forth for the first time on appeal, this court must consider whether or not to grant leave to allow the argument to be heard: Kaiman v. Graham, [2009] O.J. No. 324, 2009 ONCA 77, 245 O.A.C. 130, at para. 18.

[43] The decision to grant leave is discretionary. Appellate courts will not generally entertain entirely new issues on appeal, as "it is unfair to spring a new argument upon a party at the hearing of an appeal in circumstances in which evidence might have been led at trial if it had been known that the matter would be an issue on appeal": Kaiman, at para. 18. The court's discretion is to be "guided by the balancing of the interests of justice as they affect all parties": at para. 18.

[44] In my view, it would not be in the interests of justice to grant leave. Mr. Vellenga first commenced his application in 2004 and later amended his claim in 2015 to specifically include a trust claim. The application was not heard until 2018. The appellants had more than enough time to consider and raise this argument. They provided no persuasive reason to explain their failure to do so.

[45] Furthermore, this court has explained that "[t]he expiry of a limitation period does not render a cause of action a nullity; [page315] rather, it is a defence and must be pleaded": Beardsley v. Ontario (2001), 2001 8621 (ON CA), 57 O.R. (3d) 1, [2001] O.J. No. 4574 (C.A.), at para. 21. While this matter was commenced by way of application and did not involve formal pleadings, the key point is that the limitation argument was not raised at any time prior to this appeal.

(4) Leave to appeal costs is denied

[46] The appellants also sought leave to appeal costs. The parties did not provide submissions on this point; but I will briefly address the issue because it was not expressly abandoned.

[47] I would deny leave to appeal costs. It is well-established that leave to appeal costs is sparingly granted. The trial judge made no error in principle, nor is the result plainly wrong. The trial judge provided cogent reasons, considering various factors, including: the nature of the application, the history of the litigation, the reasonableness of counsel's conduct, as well as the reasonable expectations of the parties.

VI. Disposition

[48] In all the circumstances, I would dismiss the appeal and deny leave to appeal costs.

[49] The respondent is entitled to costs of the appeal on a partial indemnity basis, which I would fix in the amount of $32,500, inclusive of taxes and disbursements.

Appeal dismissed.

End of Document