Drake v. Goodwin, 2019 ONSC 2865
CITATION: Drake v. Goodwin, 2019 ONSC 2865
LONDON DIVISIONAL COURT FILE NO.: 26-18
DATE: 20190516
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
WILTON-SIEGEL, FREGEAU and RYAN BELL, JJ.
BETWEEN:
JOHN C. DRAKE
Respondent on Appeal
– and –
CHRISTOPHER GOODWIN and REDTAIL INC.
Appellants
Peter W. Kryworuk and John B. Brennan, for the Respondent on the Appeal
Angelo C. D’Ascanio, for the Appellants
HEARD at London on April 1, 2019
Wilton-Siegel J.
REASONS FOR JUDGMENT
[1] The appellants, Christopher Goodwin (“Goodwin”) and Redtail Inc. (collectively, the “Appellants”), appeal an order of Gorman J. dated February 27, 2018 (the “Order”) that granted leave to John C. Drake (“Drake” or the “Respondent”) to commence a derivative action against Goodwin and Privit Inc. (“Privit”) on behalf of Redtail Inc. pursuant to s. 246 of the Business Corporations Act, R.S.O. 1990, c. B.16 (the “Act”).
Factual Background
[2] Drake and Goodwin have been involved in business dealings dating back to the mid-1980s. In 1986, they formed the Drake Goodwin Corporation (“DGC”) as a holding company from which their joint ventures were managed.
[3] Redtail Inc. (“Redtail”) has owned and operated a private golf facility in Port Stanley, Ontario, known as Redtail Golf Course, since 1993. Drake and Goodwin are the only shareholders of Redtail through their respective holding corporations. Each of these parties holds 50% of the voting special shares of Redtail. Initially, each also held 50% of the non-voting common shares. Currently, Drake owns 42.5% of such shares and Goodwin owns 57.5%.
[4] Goodwin is a director and the President of Redtail. Drake is the other director and the Secretary Treasurer of Redtail. Goodwin has managed the day to day business operations of Redtail and its wholly-owned subsidiary, Redtail Food and Beverage Services Inc., (collectively, “Redtail”) since its inception, with Drake being a silent partner. In 2006, Drake transferred 7.5 percent of his non-voting common shares to Goodwin in recognition of Goodwin’s unpaid management services in respect of the golf course.
[5] In April 2012, Drake announced his intention to become more actively involved in the management of Redtail. He gave Goodwin a list of issues that he considered required attention including cash flow, line of credit, more detailed budgets, and the restructuring of employee bonuses. Goodwin responded to the issues raised. He expressed the view, however, that the actual operations required no secondary review and that such a process would confuse and disrupt management.
[6] Until 2012, the Redtail office was located in premises of DGC. DGC employees provided bookkeeping and administrative tasks to Redtail, charging a monthly management fee to Redtail for such services. In November 2012, as a result of a decision to wind-up DGC, the Redtail office was moved into commercial space leased by Privit, a company in which Goodwin holds a 22% equity interest and of which he is an officer and director. At the same time, the two DGC employees who had performed bookkeeping and administrative tasks for Redtail became employed by Privit. Thereafter, these Privit employees performed bookkeeping and administrative tasks for Redtail in return for a management fee.
[7] Drake and Goodwin continued to be at odds over management and finances. Drake sought a buyout or the sale of Redtail, threatening and eventually bringing legal action. He commenced an oppression application by filing and serving a notice of application dated March 3, 2016. To date, however, Drake has not filed an application record and has not progressed the oppression action any further.
[8] In broad terms, the Respondent’s oppression action addresses an alleged breakdown in the relationship of trust and respect between Drake and Goodwin. The Respondent seeks an order winding up or selling Redtail or the interests of the parties in Redtail and, in that connection, a final accounting between the parties of their respective interests in Redtail. In contrast, the proposed derivative action seeks to recover the payments described below on behalf of Redtail.
This Proceeding
[9] This proceeding was commenced by a notice of application dated June 12, 2017 seeking leave to commence a derivative action based on allegedly unauthorized payments by Redtail to employees and contractors of Redtail, Privit and Goodwin’s wife, Janice Goodwin. It is alleged that the payments were made “without underlying purpose or documentation causing serious harm and prejudice to Redtail Inc. and its shareholders and without the consent and authority of the board of Redtail Inc.”
[10] The following summarizes the impugned payments:
(1) An alleged overpayment in the amount of the management fee paid by Redtail to DGC in respect of the 2013 fiscal year;
(2) Monthly management fees paid by Redtail to Privit Inc. effective May 2016 in excess of $7,000, which Drake alleges was contrary to an oral agreement made between Drake and Goodwin on November 20, 2013 that fixed the monthly management fee at $7,000;
(3) Christmas bonuses totalling $10,250 paid by Redtail in the 2016 fiscal year to the two Privit employees who provide services to Redtail, which Drake says were paid without his approval; and
(4) Payments from Redtail to Janice Goodwin in the amount of $80,605.90, which Drake alleges were unauthorized and required approval given Goodwin’s conflict of interest.
The Decision of the Application Judge
[11] In an endorsement dated February 27, 2018 (the “Endorsement”), the application judge held that Drake had satisfied the statutory requirements in s. 246(2) of the Act for the granting of leave. She held that Drake was a valid complainant and that it was unlikely, given Goodwin’s position as a director and potential defendant, that anyone other than Drake could bring and diligently prosecute the proposed action.
[12] The application judge further held that the evidence satisfied her that Drake was acting in good faith. As this finding is no longer being appealed, it is not necessary to address the reasons of the application judge in reaching this conclusion.
[13] The application judge then addressed whether the action was in the best interests of Redtail Inc. She referred to the test articulated by the British Columbia Court of Appeal in Bellman v. Western Approaches Limited, [1981] 130 D.L.R. (3d) 193 at para. 19 that it must appear to be in the best interests of the corporation to bring the action in the sense that an arguable case must be shown to exist. She concluded that the proposed derivative action “discloses an arguable claim that Goodwin breached his duties to Redtail and that he acted in a conflict of interest to the possible detriment of Redtail.”
[14] Based on the foregoing determinations, in the Order, the application judge granted Drake leave to commence a derivative action on behalf of Redtail Inc. and its subsidiary against Goodwin and Privit “in order to pursue recovery of payments allegedly made without authority or improperly in respect of (a) a fiscal 2013 management fee payment to Drake Goodwin Corporation, (b) monthly management fees paid to Privit Inc. effective May 2016, (c) annual bonus payments made to Redtail and Privit Inc. employees that were not expressly approved by the directors of Redtail and, (d) payments to Janice Goodwin; all of which are substantially described in the unissued Statement of Claim found at Tab 8(a), [in the application materials]”. The application judge also ordered that Drake was to have carriage of the action and that Redtail was to pay “such legal fees and other costs as are reasonably incurred in connection with the prosecution of the derivative action.”
The Court’s Jurisdiction and the Standard of Review
[15] This appeal is made pursuant to s. 255 of the Act which provides that an appeal lies to the Divisional Court from any order made by the court under that statute. The standard of review is set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 in paras. 6-10 and 36-37. On a pure question of law, the standard of review is correctness. The standard of review for findings of fact is that such findings are not to be reversed unless it can be established that the trial judge made a "palpable and overriding error". Questions of mixed fact and law are subject to the “palpable and overriding error” standard, unless it is clear that the trial judge made an error of law or principle that can be identified independently in the judge's application of the law to the facts of the case.
[16] As the application judge exercised a discretion pursuant to s. 246(2) of the Act, it is also necessary to have regard to the standard for the reversal of a judge’s exercise of discretion. The Supreme Court addressed this standard in Penner v. Niagara (Regional Police Services Board), 2013 SCC 19 at para. 27 as follows:
A discretionary decision of a lower court will be reversible where that court misdirected itself or came to a decision that is so clearly wrong that it amounts to an injustice: Elsom v. Elsom, [1989] 1 S.C.R. 1367, at p. 1375. Reversing a lower court’s discretionary decision is also appropriate where the lower court gives no or insufficient weight to relevant considerations: Friends of the Oldman River Society v. Canada (Minister of Transport), [1992] 1 S.C.R. 3, at pp. 76-77.
Applicable Statutory Provisions
[17] The relevant provisions of s. 246 of the Act are as follows:
246 (1) Subject to subsection (2), a complainant may apply to the court for leave to bring an action in the name and on behalf of a corporation or any of its subsidiaries, or intervene in an action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate.
(2) No action may be brought and no intervention in an action may be made under subsection (1) unless the complainant has given fourteen days’ notice to the directors of the corporation or its subsidiary of the complainant’s intention to apply to the court under subsection (1) and the court is satisfied that,
(a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;
(b) the complainant is acting in good faith; and
(c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.
Analysis and Conclusions Regarding the Grounds of Appeal
[18] The Appellants’ principal ground of appeal is that the application judge misapplied the test for the determination of whether it appears to be in the interests of Redtail that the proposed action be brought. Although the Appellants’ factum asserts that the application judge erred in finding good faith on the part of Drake, as mentioned, it is our understanding that the Appellants have abandoned this ground of appeal. The Appellants also do not challenge the implicit finding of the application judge that the Respondent has established an arguable case in respect of each of the four causes of action for which leave has been granted in the Order, except to the extent that they assert that the first cause of action is statute-barred. Accordingly, I propose to address the limitation issue first and then consider the more general ground of appeal raised by the Appellants.
The Limitation Defence
[19] The Appellants assert that the application judge erred in failing to find that the proposed claim in respect of the alleged overpayment of $69,454 referred to in paragraph 1(a) of the Order was statute barred.
[20] In the draft statement of claim, the Respondent asserts that Goodwin caused Redtail to pay $69,454 in management fees to DGC in excess of what had previously been agreed to between Drake and Goodwin, being $84,000.
[21] The issue of a further management fee charge to eliminate DGC’s net loss for the 2013 fiscal period was first discussed in a memo of the accountant for Redtail and DGC dated November 18, 2013. At that time, the net loss was $29,522 for the 11 months ended October 31, 2013. The accountant’s email summarizing these circumstances stated as follows: “The net loss of DGC for the period ending November 30, 2013 … could be eliminated by DGC charging a fee to Redtail, Privit and 726526 [Ontario Inc., Goodwin’s private holding corporation] as appropriate.” Accordingly, Drake was aware from this time that a management fee charge would be allocated among one or more of Redtail, Privit and 726526 to eliminate DGC’s net loss.
[22] The final net loss of DGC for fiscal 2013 was $92,752, as reflected in an email of the accountant dated April 4, 2014 addressed to the Redtail bookkeeper at Privit. Redtail Inc. and its subsidiary each paid management fees to DGC of $76,727, for a total of $153,454, for the fiscal year ended November 30, 2013. Drake became aware of this charge in the first half of 2014. The evidence includes emails of the accountants in May and June 2014 to Drake of draft financial statements and the finalized financial statements, respectively, for each of Redtail Inc. and its subsidiary for the period ended November 30, 2013. The management fees paid to DGC are clearly set out in these financial statements.
[23] In addition, Drake’s son, who was assisting him, queried the basis for these payments in emails dated June 16, 2014 and June 30, 2014. A year later, in an email to Goodwin dated April 6, 2015, Drake’s son raised the matter of an “overcharge” of Redtail of $69,454.62 in connection with finalization of the shareholder accounts in the 2014 financial statements. Drake’s son sought a credit in favour of Drake of Drake’s share of this overcharge, being $34,727.31. Drake’s evidence, given on the cross-examination on his affidavit in this proceeding, further confirms that he had knowledge of the foregoing matters more or less contemporaneously with Drake’s son acquiring such knowledge.
[24] Accordingly, Drake had knowledge that Goodwin had authorized the payment of management fees to DGC in the amount of $76,726 by each of Redtail Inc. and its subsidiary more than two years prior to the issuance of the notice of application in this proceeding on June 12, 2017. There is, therefore, a strong case that Respondent’s claim regarding an alleged overpayment of management fees to DGC by Redtail in the amount of $69,454 in respect of the 2013 fiscal year, as described in the draft statement of claim, is statute barred.
[25] However, the Respondent now bases his claim in respect of the fiscal 2013 management fee on the allocation of such charges among Redtail, Privit and 726526 Ontario Inc. He says that he did not learn of this allocation, as opposed to the absolute amount charged to Redtail, until July 2018 when he received a schedule from the Appellants in this proceeding. The schedule indicated that, of the $92,752 required to net out DGC’s loss, $74,757.90, or approximately 80%, was paid by Redtail, $17,994.10, or approximately 20%, was paid by 726526 and nothing was allocated to or paid by Privit.
[26] The Respondent says that Goodwin was in a conflict of interest in allocating the charges in favour of DGC among Redtail, Privit and 726526. He is now effectively arguing that Goodwin misappropriated Redtail’s assets by failing to allocate an unquantified amount of the management fee charges borne by Redtail to Privit or 726526. There are a number of difficulties with this claim, including issues of Drake’s knowledge, the extent, if any, to which Goodwin was involved in the allocation, and the explanation of the allocation that was implemented.
[27] Nevertheless, in considering this ground of appeal, I am also mindful of the following statement of the Court of Appeal in Richardson Greenshields of Canada Ltd. v. Kalmacoff (1995), 22 O.R. (3d) 577 (C.A.) at para. 22, which the application judge also cited:
It should also be borne in mind that s. 339 is drawn in broad terms and, as remedial legislation, should be given a liberal interpretation in favour of the complainant. The court is not called upon at the leave stage to determine questions of credibility or to resolve the issues in dispute, and ought not to try. These are matters for trial. Before granting leave, the court should be satisfied that there is a reasonable basis for the complaint and that the action sought to be instituted is a legitimate or arguable one. The preconditions of s. 339 cannot be considered in isolation. Whether they have been satisfied must be determined in the light of the potential validity of the proposed action.
[28] It is my understanding that the issue of the limitation defence was argued before the application judge. In granting leave, the application judge noted that the proposed defendants in the derivative action would be in a position to assert defences to Drake’s claim. It is my understanding that the application judge was referring, in part, to the limitation defence asserted by the Appellants.
[29] I am sympathetic to the Appellants’ position that the Respondent’s claim in respect of the 2013 management fee paid by Redtail to DGC is statute-barred. However, in order to reach a conclusion on this issue, it is necessary to draw inferences regarding credibility, and regarding the extent of Drake’s knowledge of the allocation that was made, from the documentation and the transcript evidence before the Court. I do not think that the analysis that is required to reach such a conclusion is appropriately conducted in the context of a leave motion, or an appeal of a leave motion, given the need to make such determinations. Such an assessment should be undertaken pursuant to a summary judgment motion, particularly given the enhanced powers under Rule 20 of the Rules of Civil Procedure.
[30] Insofar as a court is required to consider the merits of a proposed derivative action on a leave motion, it is limited to an assessment of whether an applicant has demonstrated the low standard of an “arguable case”, as the application judge noted. Notwithstanding the issues raised by the Appellants, the Respondent has demonstrated an arguable case that the proposed claim is not statute barred. Accordingly, the Appellants’ ground of appeal to the effect that the claim in paragraph 1(a) of the Order is statute-barred is rejected.
Whether the Action Appears to be in the Interests of Redtail
[31] As mentioned, in her consideration of whether prosecution of the action was in the interests of Redtail Inc., the application judge referred to the test in Bellman v. Western Approaches Limited that an arguable case must be shown to subsist. She concluded that the proposed derivative action “discloses an arguable claim that Goodwin breached his duties to Redtail and that he acted in a conflict of interest to the possible detriment of Redtail.”
[32] The Appellants say that the application judge erred in her application of this requirement of the test for leave by restricting her analysis to consideration of a single factor – whether the Respondent had demonstrated an arguable case on the merits. The Appellants suggest that the application judge was required to consider other factors – specifically, whether on a cost/benefit analysis, it is in the interests of the corporation to prosecute the action and the existence of an alternative remedy in the form of the oppression action. In addition, they suggest that, in the present circumstances, the application judge should also have considered the possibility of duplication of, and inefficient use of, judicial resources as well as the possibility of inconsistent findings resulting from the existence of the oppression action.
Preliminary Observations
[33] Before addressing this ground of appeal, I propose to set out certain observations regarding the nature of the Respondent’s claims and the context in which the Respondent’s application for leave to commence the proposed derivative action was considered as these matters inform the conclusion below.
[34] First, the claims can properly be characterized as corporate claims of Redtail, rather than personal claims of Drake. As such, they are appropriately asserted in a derivative action, even if they could also be addressed by an accounting between the two shareholders in the oppression action as discussed below.
[35] Second, on the other hand, the fact that the claims can be pursued as derivative claims is not, by itself, determinative. I agree with the Appellants that, in determining whether it appears to be in the interests of Redtail that the application be brought, it is necessary to look at the circumstances in which leave is sought generally, not just whether the applicant has demonstrated an arguable case: see, for example, Crescent (1952) Ltd v. Jones, [2011] O.J. No 440 (S. Ct.) at para. 20.
[36] Third, in this case, a significant consideration is the existence of the oppression action. The Court of Appeal has recognized that there may be a degree of overlap between claims in a derivative action and in an oppression action, particularly “where directors in closely held corporations engage in self-dealing to the detriment of the corporation and other shareholders or creditors”: see Malata Group (HK) Limited v. Jung, 2008 ONCA 111, 89 O.R. (3d) 36, at para. 31. Accordingly, each situation must be analysed in terms of the particular circumstances.
[37] In this case, I do not think that the existence of the two proceedings, which overlap in certain respects, need be problematic. The oppression action effectively relies on favourable determinations of the claims asserted in the proposed derivative action regarding Goodwin’s alleged misappropriation of Redtail funds, and related issues arising from the absence of director approvals, as evidence of oppression. Given this relationship between the two proceedings, the two actions can be consolidated to avoid the Appellants’ concerns for inconsistent findings and for duplication, and inefficient use, of judicial resources.
[38] On the other hand, the existence of an on-going oppression action based, in part, on common facts and claims with the proposed derivative action distinguishes the present situation from most, if not all, of the reported cases in which the suitability of a derivative action has been considered. There is at least a reasonable argument that the issues raised in the proposed derivative action, being financial in nature, could or should more properly be asserted in the context of the accounting that the Respondent seeks in his oppression action in connection with the winding-up or sale of Redtail or its assets. I accept, however, that, given the relatively modest amount of the proposed claims in the derivative action relative to the value of the Redtail assets and to its revenues, there is a possibility that a court could find that, while valid, the claims in the proposed derivative action do not justify a finding of oppression in the oppression action. Such circumstances might leave the Respondent with no avenue for enforcement of the financial claims of Redtail Inc. if the claims were pursued solely in the oppression action.
[39] Fourth, in the draft statement of claim, it is also alleged that there are further potential wrongful payments not yet known but potentially to be determined in the course of the derivative action. However, while the Order gives Drake carriage of the proposed derivative action, the application judge did not grant leave to pursue an investigation of any such further potential claims. The Order also does not authorize the expenditure of Redtail funds otherwise than in the prosecution of the four claims identified in the Order.
[40] Fifth, the Order does not alter in any manner the existing management arrangements for Redtail. For the same reason, Drake’s carriage of the action does not entitle him to review documentation which he would not otherwise be entitled to review given his role in the corporations, other than the documentation that is directly relevant to the four proposed derivative claims.
[41] Lastly, the Order provided that Redtail would bear the reasonable costs of the action. This is not, however, a carte blanche in favour of Drake. The authorization is subject to a reasonability limitation. Moreover, in my view, Drake is subject to a fiduciary obligation in favour of Redtail in the conduct of the litigation. These considerations are particularly significant in the context of the two smaller claims asserted by Drake. In assuming carriage of the action, Drake assumes the responsibility for ensuring that any monies expended asserting Redtail Inc.’s claims can be justified in terms of the likely recovery.
Conclusion
[42] I turn then to the Appellants’ ground of appeal. I agree that, on its face, the determination of the application judge in the Endorsement appears to be based solely on whether the Respondent has demonstrated an arguable case on the merits, which the Appellants do not dispute. However, the appeal is an appeal of the Order. In my view, for the reasons set out below, there are sufficient grounds to conclude that the Order is reasonable and, as such, that the Appellants have failed to demonstrate a palpable and overriding error, or an error in principle, that justifies setting aside the Order.
[43] First, as discussed above, the application judge could reasonably conclude that the claims were appropriately put forward on behalf of Redtail by way of derivative claims.
[44] Second, in the consideration of the likely costs of the action, it is relevant that the claims being asserted would be addressed in any event in the oppression action if the derivative action did not proceed. Given that these claims are therefore likely to be addressed in one of the two proceedings, the cost/benefit analysis proposed by the Appellants has less force in the present circumstances than in the circumstances reflected in the case law upon which they rely.
[45] Third, as a related matter and as mentioned above, the concern for duplication of judicial resources and inconsistent findings could be addressed by consolidation of the two proceedings, failing which issue estoppel would presumably operate if the derivative action were to proceed to trial before the oppression action.
[46] Fourth, if this matter were being considered de novo, I would have been inclined to require that the Appellants’ claims be pursued within the context of the oppression remedy given the parties’ obvious need to agree upon, or be ordered to implement, a divorce mechanism which would include an accounting of all claims between them. However, for the reasons discussed above, there is no necessary reason why such claims need be asserted as oppression claims given that the claims can be properly asserted by Redtail as corporate claims against Goodwin and Privit.
[47] Fifth, while there is reason to suspect that the Respondent wishes to use the proposed derivative action to support his claim in the oppression action, among other things, to obtain his preferred remedy, the application judge found that Drake was acting in good faith. Given that this finding has not been appealed, I do not think that this Court can proceed on the basis that Drake is intending to abuse the proposed derivative action. In any event, as mentioned above, there are significant legal restrictions and limitations on his conduct of this action that are inherent in the Order that would prevent him from doing so.
[48] Lastly, as mentioned, the decision of the application judge is a discretionary one to which reasonable deference should be shown. In this regard, it is relevant that the application judge heard this application over two days with a full record. To set aside the Order, it is effectively necessary to identify an error in principle in the applications judge’s exercise of her discretion or to find that the decision is so clearly wrong that it amounts to an injustice. Although the reasons in the Endorsement are not as complete as one might hope, I am not persuaded that the Order reflects either such defect.
Disposition of this Appeal
[49] Based on the foregoing, the appeal is denied.
Costs
[50] The parties agreed that costs in the amount of $25,000 on an all-inclusive basis should be payable to the successful party. As the Respondent was substantially successful, costs are awarded in his favour in that amount.
Wilton-Siegel J.
I agree _______________________________
Fregeau J.
I agree _______________________________
Ryan Bell J.
Released: May 16, 2019
CITATION: Drake v. Goodwin, 2019 ONSC 2865
LONDON DIVISIONAL COURT FILE NO.: 26-18
DATE: 20190516
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
WILTON-SIEGEL, FREGEAU and RYAN BELL, JJ.
BETWEEN:
JOHN C. DRAKE
Applicant
– and –
CHRISTOPHER GOODWIN and REDTAIL INC.
Respondents
REASONS FOR JUDGMENT
Wilton-Siegel J.
Released: May 16, 2019