Court of Appeal for Ontario

Date: 2021-10-25 Docket: C68043

Before: Rouleau, Hoy and Thorburn JJ.A.

Between:

McFlow Capital Corp. Plaintiff (Respondent/Appellant by way of cross-appeal)

And:

Kenneth James, personally and in his capacity as trustee for Laura McClenaghan, Rosemary Cremer and the Estate of Kenneth McClenaghan, Laura McClenaghan, personally and in her capacity as trustee for the Estate of Kenneth McClenaghan, Dorothy Short in her capacity as trustee for the Estate of Kenneth McClenaghan, Rosemary Cremer, Susan James, 1303678 Ontario Inc., Sterling Capital Corporation, Eveline Holdings Ltd., and G.A.C. Investments Ltd. Defendants (Appellants/Respondents by way of cross-appeal)

And Between:

Kenneth James, personally and in his capacity as trustee for Laura McClenaghan, Rosemary Cremer and the Estate of Kenneth McClenaghan, Laura McClenaghan, personally and in her capacity as trustee for the Estate of Kenneth McClenaghan, Dorothy Short in her capacity as trustee for the Estate of Kenneth McClenaghan, Rosemary Cremer, 1303678 Ontario Inc., and G.A.C. Investments Ltd. Plaintiffs by Counterclaim (Appellants/Respondents by way of cross-appeal)

And:

McFlow Capital Corp., Premium Properties Limited and Milton Winberg Defendants to the Counterclaim (Respondents/Appellants by way of cross-appeal)

Counsel: Theodore B. Rotenberg and Ranjan Das, for the appellants/respondents by way of cross-appeal Hilary Book and Samantha Del Frate, for the respondents/appellants by way of cross-appeal

Heard: September 21, 2021 by video conference

On appeal from the judgment of Justice Sandra Nishikawa of the Superior Court of Justice, dated January 20, 2020 and October 9, 2020, with reasons reported at 2020 ONSC 374 and 2020 ONSC 6167.

Thorburn J.A.:

A. INTRODUCTION

[1] This is an appeal by the appellants (defendants), Kenneth James personally (“James”), and in his capacity as trustee for Laura McClenaghan, Rosemary Cremer, and the Estate of Kenneth McClenaghan, and Rosemary Cremer (“Cremer”). The appellants claim the trial judge erred in holding that the oppression and conspiracy claims against Cremer were not statute-barred, awarding punitive damages against Cremer, and ordering substantial indemnity costs payable to McFlow.

[2] The respondents, McFlow Capital Corporation (“McFlow”), Premium Properties Limited (“Premium”) and Milton Winberg, cross-appeal the trial judge’s award of prejudgment interest.

B. THE PARTIES

[3] The claim involves a condominium corporation called Simcoe Condominium Corporation No. 27 (“SCC 27”).

[4] The appellant, James, was the lawyer for both SCC 27, and the first and second mortgagees for 30 of the 44 units (“the majority units”) in SCC 27. The trial judge determined that James held a beneficial interest in the mortgages on the majority units in SCC 27 such that he was able to control SCC 27, himself or through two off-shore companies, Eveline Holdings Ltd. (“Eveline”) and Sterling Capital Corporation (“Sterling”). Eveline and Sterling were James’ alter egos.

[5] The appellant, Cremer, was the bookkeeper and office manager of James’ law firm, a director of SCC 27, and James’ friend and housemate.

[6] The respondent McFlow was the mortgagee of the remaining 14 units (“the minority units”) in SCC 27, which were owned by 1652030 Ontario Limited (“165”).

C. BACKGROUND FACTS

[7] In 2008, SCC 27 issued a special assessment of $40,000 per unit on all the units in the complex (the “2008 special assessment”). The trial judge found that there was no legitimate basis for this assessment amount and that the amount was set high enough that the minority unit owner, 165, would not be able to pay the sum and would be forced into default. Notices of Sale under Lien were issued by SCC 27 only for the minority units, even though the majority units had also not paid the 2008 special assessment.

[8] In April 2009, McFlow, as mortgagee of the minority units, commenced an application for oppression against SCC 27 and James. In May 2009, the court appointed an administrator to manage SCC 27’s affairs.

[9] In May 2009, James swore an affidavit that he was in possession of a $2 million GIC which he said was money paid by the majority mortgagees toward the 2008 special assessment and an earlier assessment in 2004.

[10] On June 3, 2009, the administrator served a Notice of Motion to have the $2 million GIC paid into court pending a determination of its ownership.

[11] On June 4, 2009, the GIC was cashed and funds were wired to Eveline’s account in the Turks and Caicos Islands (“TCI”). In his affidavit dated June 4, 2009, James swore that he was holding the money in trust for Eveline and it was never SCC 27’s property.

[12] The funds were returned to Canada but James’ counsel informed the administrator that James had not personally received the $2 million and no longer had control over any of the funds in the Eveline account.

[13] On June 30, 2009, the court ordered Eveline and James to pay into court all the money derived from the proceeds of the GIC. The money was not paid into court.

[14] In August 2009, McFlow commenced a negligence action against its own counsel and mortgage broker for losses, which was settled for the sum of $875,000.

[15] In December 2009, the administrator listed the minority units for sale.

[16] In 2011, James offered to purchase the minority units and three others for a total of $10,000, which the administrator refused. In 2012, the administrator listed all the units for sale.

[17] The court approved the sale and the sale was completed in August 2013.

[18] In December 2013, the appellants counterclaimed for oppression against McFlow, Premium and Winberg. (Premium was a company related to McFlow, and Milton Winberg was the principal of McFlow and Premium.)

[19] In May 2015, McFlow issued a statement of claim against all the defendants (including the appellants).

D. THE TRIAL JUDGE’S REASONS

[20] At paras. 314-16 of her reasons for decision, the trial judge held that:

After Mr. James took control of SCC 27, the disarray turned into paralyzing dysfunction.… The dysfunction would ensure that no reasonable purchaser or lender would want any involvement in the Minority Units. In the end, only Mr. James would want to purchase the Minority Units, which he could do at a bargain price, leaving him in control of the entire Complex.

No rational condominium corporation, unit owner, or mortgagee would want this level of dysfunction and the attendant stigma, which would cause the property value to fall.… The intent was to cause the owner, 165, and the mortgagee, McFlow, to walk away.

[21] At para. 319 of her reasons, the trial judge found that:

Ms. Cremer has admitted to being involved in the decision to levy the 2008 Special Assessment and to register liens on the Minority Units, as well as the decision to wire the $2 million to the TCI. Ms. Cremer did not perform those acts while fulfilling the proper course of her duties as a director of SCC 27. Rather, she used her position as a director of SCC 27 to perpetrate acts that were prejudicial to its interest and to McFlow’s. Ms. Cremer admits to participating in or directing those decisions and was instrumental to Mr. James’ ability to carry them out. She engaged in the oppression in addition to Mr. James.

[22] In respect of the alleged conspiracy among James, SCC 27 and Cremer, the trial judge held, at para. 341 that,

Mr. James, SCC 27 and Ms. Cremer… acted in concert, by agreement or with a common design. Mr. James was the directing and controlling mind of SCC 27. Mr. James and Ms. Cremer were at all times acting in pursuit of a common design. Whether Mr. James was instructing Ms. Cremer or Ms. Cremer was instructing Mr. James, they both had the same objectives in mind. The predominant purpose of their conduct was to cause injury to the owner and/or mortgagee of the Minority Units by eliminating or rendering valueless their interests in SCC 27. Alternatively, they used unlawful means (oppression and breach of the Condominium Act) in circumstances where they knew or should have known that damage to McFlow was likely to result. As discussed above, their conduct caused McFlow damage.

[23] The trial judge concluded that James’ actions were intended to force out McFlow’s interest in the minority units and that his “actions, and his failures, in precipitating a state of dysfunction were oppressive, or at the very least, unfairly prejudicial, because it was intended specifically to squeeze out McFlow’s interest in the Minority Units.”

[24] She accepted that McFlow had not done enough due diligence before advancing and increasing loans on the mortgages on the minority units but held that McFlow was nonetheless entitled to damages for oppression from James and Cremer pursuant to s. 135 of the Condominium Act, 1998, S.O. 1998, c. 19.

[25] She also granted judgment for conspiracy against Cremer, Eveline and Sterling on the basis that James was the directing mind of Eveline and Sterling and used them to execute his scheme to injure McFlow. She held that the failure to pay the $2 million to the administrator was a “brazen disregard of a court order by an officer of the court.”

[26] The trial judge dismissed the appellants’ argument that McFlow’s claims were statute-barred by the expiry of the limitation period.

[27] At paras. 357-65 of her reasons, she held that until 2013, the only information that McFlow had about Cremer was that she was James’ employee and, from 2008, a director of SCC 27.

While McFlow knew that Ms. Cremer was a director of SCC 27 when it served its Notice of Application in May 2009, she appeared to be nothing more than a nominee director acting for Mr. James…. McFlow did not know and could not have known by the exercise of reasonable diligence, that it had a claim against Ms. Cremer personally. It could not have alleged any facts to support her liability as a director. Moreover, McFlow did not know until 2013 that Ms. Cremer was a beneficiary of the McClenaghan Trust and that after Mr. McClenaghan’s death she was purportedly instructing Mr. James.

[28] The beneficiaries of the McClenaghan Trust were Mr. McClenaghan’s spouse, Cremer and James’ then-spouse. According to James, he and Eveline were trustees of the trust at some points. The trial judge found that the McClenaghan Trust “raises more questions than it answers” and, even if the trust agreement were authentic and the trust legitimate, she rejected James’ argument that it held the beneficial interest in the majority units in SCC 27.

[29] The trial judge ordered the appellants to pay McFlow damages in the amount of $413,595.27 and prejudgment interest of $141,199.14, calculated at the rate of 1.3 percent per annum, as provided for in the Courts of Justice Act, R.S.O. 1990 c. C.43 (“CJA”), which was the interest rate when the action was commenced.

[30] She also ordered punitive damages in the amount of $100,000, and post-judgment interest calculated at the rate of 3 percent commencing on January 20, 2020. She further ordered the appellants to pay substantial indemnity costs of $568,292.05 to McFlow, bearing 2 percent interest, commencing on October 9, 2020.

E. THE ISSUES

[31] While a number of issues were raised in the appellants’ factum, at the time of the hearing, the appellants advised that the only issues to be adjudicated on this appeal are whether the trial judge erred in holding that:

i. the oppression and conspiracy claims against Cremer were not statute-barred; ii. punitive damages should be awarded against Cremer; and iii. substantial indemnity costs were warranted, in addition to punitive damages.

[32] The respondents cross-appeal claiming the trial judge erred in awarding interest at the rate of 1.3 percent as provided in the CJA rather than prejudgment interest at the rate of 6.5 percent, compounded monthly, which was sought by McFlow.

F. ANALYSIS

The First Issue: Were the Claims Against Cremer Statute-Barred?

[33] The appellants submit that the trial judge erred in concluding that the claims against Cremer were not statute-barred.

[34] A claim is discovered on the earlier of the day on which a party knew or ought to have known (i) that the injury, loss or damage had occurred, (ii) that it was caused by an act or omission of the person against whom the claim is made, and (iii) that a proceeding would be the appropriate means to seek to remedy it, or that a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of these matters. At this point, the two-year limitation period is triggered: Limitations Act, 2002, S.O. 2002, c. 24, Sched. B., s. 5(1).

[35] In Grant Thornton LLP v. New Brunswick, 2021 SCC 31, at para. 42, Moldaver J., writing for the Court, held that in respect of a similar provision in the New Brunswick Limitations of Actions Act, S.N.B. 2009, c. L-8.5, “a claim is discovered when a plaintiff has knowledge, actual or constructive, of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn.” Grant Thornton was followed by this court in Gordon Dunk Farms Limited v. HFH Inc., 2021 ONCA 681, at paras. 36-38.

[36] The appellants claim the trial judge applied too high a standard to determine whether McFlow had the requisite degree of knowledge to discover a claim under the Limitations Act and did not consider whether a plausible inference of liability could be drawn.

[37] They claim that in 2009, McFlow knew Cremer was James’ employee and a director at the time of the 2008 special assessment. Since Cremer was a director, McFlow could have made a plausible inference that she supported the assessment in 2009 which McFlow alleged was oppressive and involved a conspiracy, triggering the limitation period.

[38] I do not agree.

[39] The trial judge found that while McFlow knew Cremer was a director of SCC 27 in 2009, she appeared to be nothing more than a nominee director. It was not until 2013 that McFlow knew or could have known by the exercise of reasonable due diligence, that Cremer was a beneficiary of the McClenaghan Trust, which James claimed held the beneficial interest in the majority units, and that after Mr. McClenaghan’s death, she was purportedly instructing James.

[40] Until then, any claim in oppression or conspiracy would have been founded on mere suspicion or speculation which is not sufficient to draw a plausible inference of liability: Grant Thornton, at para. 46.

[41] For these reasons, the first ground of appeal fails.

The Second Issue: Did the Trial Judge Err in Awarding Punitive Damages Against Cremer?

[42] The appellants claim the trial judge erred in awarding punitive damages against Cremer as the only explanation for doing so was Cremer’s role in failing to have the $2 million GIC paid into court. They claim this cannot form the basis of a punitive damage award as the money was to be paid to the credit of the action the court administrator for SCC 27 was to commence and that action was never commenced.

[43] As noted by the trial judge, in deciding whether to make an award of punitive damages, the question is whether the defendant’s conduct was so outrageous that punitive damages are rationally required for deterrence. Trial courts have latitude in determining punitive damages, provided the amount serves a rational purpose, namely prevention, deterrence and denunciation: Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at paras. 94-100; Richard v. Time Inc., 2012 SCC 8, [2012] 1 S.C.R. 265, at para. 190; Cinar Corporation v. Robinson, 2013 SCC 73, [2013] 3 S.C.R. 1168, at para. 134.

[44] Appellate courts should only intervene “where there has been an error of law or a wholly erroneous assessment of the quantum” of punitive damages, that is, if the amount awarded was not rationally connected to the purposes in awarding punitive damages: Richard, at para. 190; Cinar, at para. 134.

[45] The trial judge did not rely exclusively on Cremer’s role with respect to the $2 million GIC. In this case, the trial judge found that Cremer acted in concert, by agreement or in pursuit of a common design with James to cause injury to the owner and/or mortgagee of the minority units by rendering valueless their interests in SCC 27 or to use unlawful means in circumstances where they knew or should have known that damage to McFlow was likely to result.

[46] She held that punitive damages were warranted to denounce and deter James’ years of oppressive conduct and James and Cremer’s dissipation of the $2 million GIC by deliberately hiding the money from the court, the administrator and creditors, knowing that a court order had been issued to pay the money into court. She rejected the appellants’ argument that the obligation to pay the $2 million into court was conditional on the administrator commencing a proceeding. As noted by the trial judge, the funds were only ever paid to the credit of the action, after being seized by the RCMP in an unrelated criminal proceeding.

[47] The award of punitive damages was rationally connected to the policy objectives of deterrence and denunciation and there were adequate grounds to support the trial judge’s decision to impose punitive damages against Cremer.

[48] For this reason, the second ground of appeal fails.

The Third Issue: Did the Trial Judge Err in Awarding Substantial Indemnity Costs?

[49] The appellants also challenge the discretionary costs award. They argue that the trial judge erred in principle by relying on the same conduct that gave rise to her award of punitive damages as the basis of her decision to award costs on a substantial indemnity scale. This, they submit, is contrary to this court’s decision in Sliwinski v. Marks (2006), 211 O.A.C. 215 (C.A.), at para. 29.

[50] Since the substantive appeal is dismissed, the appellants are required to seek leave to appeal the discretionary costs award: CJA, s. 133; Gary Anthony Bennett Professional Corporation v. Triella Corp., 2019 ONCA 225, at para. 7. To grant leave, there must be “strong grounds upon which the appellate court could find that the trial judge erred in exercising his discretion”: Brad-Jay Investments Limited v. Village Developments Limited (2006), 218 O.A.C. 315 (C.A.), at para. 21, leave to appeal refused, [2007] S.C.C.A. No. 92. This includes errors in principle or a costs award that is plainly wrong: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 9, at para. 27, citing Duong v. NN Life Insurance Co. of Canada (2001), 141 O.A.C. 307 (C.A.), at para. 14.

[51] The appellants have not sought leave.

[52] In any event, I see no reason to interfere with the trial judge’s exercise of discretion in awarding costs as the trial judge committed no error in principle. She made numerous findings of egregious conduct by the appellants in the context of McFlow’s oppression claim and held, at para. 21 of her costs’ endorsement that:

[T]he Defendants significantly lengthened the proceedings by raising every possible argument, including limitation periods, laches, election, waiver and unclean hands; failing to make reasonable admissions and serving a blanket denial in response to McFlow's detailed chronology served before trial; and filing lengthy affidavit evidence rife with self-serving editorializing, speculation and rationalization.

[53] The trial judge considered the appellants’ argument, relying on Sliwinski, that an award of substantial indemnity costs would be an “unnecessary double judicial admonishment”.

[54] The trial judge held that Sliwinski was distinguishable from this case as:

[T]he punitive damages award and substantial indemnity costs were in relation to the same conduct; no issue was raised about the defendant’s conduct in the litigation.

In this case, even if the Defendants’ oppressive conduct is sufficiently compensated by the punitive damages award, I would nonetheless find that substantial indemnity costs are warranted based on the Defendants’ conduct in the litigation.

[55] On the basis of these findings of fact which are supported by the evidence, I see no error in the trial judge’s exercise of her discretion to award substantial indemnity costs.

[56] For these reasons, the third ground of appeal fails.

The Fourth Issue: Did the Trial Judge Err in Awarding Prejudgment Interest at the Court of Justice Act Rate Rather Than the Mortgage Rate?

[57] McFlow claims the trial judge erred in awarding prejudgment interest at the CJA rate rather than the mortgage rate.

[58] The party seeking an order to depart from the CJA rate pursuant to s. 130 of the CJA, has the onus to demonstrate that the CJA rate should be displaced: Metropolitan Toronto Police Widows & Orphans Fund v. Telus Communications Inc. (2008), 44 B.LR. (4th) 140 (Ont. SC), at para. 69, aff’d 2009 ONCA 111, 55 B.L.R. (4th) 12.

[59] Awards of compound prejudgment or post judgment interest are generally limited to breach of contract cases where there is evidence that the parties agreed, knew, or should have known that the money would bear compound interest as damages: Bank of America Canada v. Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 55. Compound prejudgment or post judgment interest “may be awarded as consequential damages in other cases but there would be the usual requirement of proving that damage”: Bank of America, at para. 55. The same principles apply to interest at a rate in excess of the rate provided for in the CJA.

[60] This is not a breach of contract case; accordingly, McFlow was required to prove compound interest at a rate in excess of the CJA rates as consequential damages.

[61] McFlow claims that, had it been able to sell the minority units in 2009, it would have had the funds available for reinvestment. McFlow’s principal, Milton Winberg, testified that McFlow could have earned interest similar to the mortgage rate on the minority units, which was 6.5 percent per annum, compounded monthly.

[62] However, the trial judge held that there was no evidence to demonstrate a reasonable probability that McFlow could earn interest at a rate of 6.5 percent compound interest other than Mr. Winberg’s bald assertion. As noted by the trial judge: “McFlow provided no evidence of the interest it was earning on other mortgage loans over the same time period.”

[63] For this reason, the trial judge held that, “I am not satisfied that either party has raised a sufficient basis for departing from the applicable prejudgment interest rate under the CJA, which is the interest rate when the action was commenced, or 1.3 percent. The total amount of prejudgment interest is $141,199.14.”

[64] Since (i) the onus is on the moving party to satisfy the court that the interest rate set out in the CJA should be displaced and (ii) there was no evidence as to the amount McFlow was earning on its other loans at that time, the trial judge declined to exercise her discretion to award interest at a rate higher than that provided for in the CJA.

[65] Given the evidence about McFlow’s lack of due diligence in its lending business, her conclusion that further evidence was required was reasonable. I see no reason to interfere with this exercise of her discretion and for this reason, the cross-appeal fails.

G. CONCLUSION

[66] For the above reasons, I would dismiss the appeal and cross-appeal.

[67] I would award costs of the appeal to the respondents in the amount of $23,000 all-inclusive and costs of the cross-appeal to the appellants in the amount of $2,000 all-inclusive as agreed by the parties.

Released: October 25, 2021 “P.R.” “J.A. Thorburn J.A.” “I agree. Paul Rouleau J.A.” “I agree. Alexandra Hoy J.A.”