ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 58575
DATE: 2013/06/17

B E T W E E N:

NANCY SWINKELS

David J. Kirwin, for the Plaintiff

Plaintiff

• and -

AMERICAN HOME ASSURANCE COMPANY

Philip Garbutt and William Deley, for the Defendant

Defendant

HEARD: January 25, 2013

LEACH, J.

[1] Before me is a motion by the defendant American Home Assurance Company, (“American Home”), requesting summary judgment dismissing the plaintiff’s claim against it.

[2] In broad terms:

a) The plaintiff is thought to have been the victim of a dishonest or fraudulent investment scheme, in respect of which she is pursuing claims against International Investments Group Inc. (“IIG”) and others, in collateral litigation. However, by way of this separate action, (which has an extended history including interim appellate proceedings), she also seeks reimbursement for her substantial loss from American Home pursuant to a “Financial Institution Bond” (FIB) issued by American Home to another company, PCC First Capital Corporation (“PCC”), on September 6, 2000.

b) The defendant American Home essentially takes the position that the plaintiff’s claim against it is a fundamentally misconceived and somewhat desperate attempt at recovery that is doomed to failure, having regard to the circumstances, the clear provisions and requirements of the relevant FIB, and considerations of issue estoppel arising from the appellate proceedings to date.

[3] For the reasons outlined below, I am of the opinion that the plaintiff’s claim cannot possibly succeed. In my view, there is no “genuine issue requiring trial” in that regard, and summary judgment should be granted, dismissing the plaintiff’s claim against American Home in its entirety.

Background Facts and Chronology

[4] The circumstances giving rise to the plaintiff’s claim are somewhat extended, but are summarized by way of the following chronology:

• On November 27, 2000, American Home, (as the expressly identified underwriter), issued the aforesaid FIB to PCC, (the expressly identified insured). The precise terms of the FIB are addressed in more detail below. Generally, however, it was to provide indemnity coverage for certain specified losses, including defined “fidelity” losses, of up to $10 million USD, (subject to a $50,000 deductible), that were incurred by PCC and discovered within the defined one year bond period running from August 2, 2000, to August 1, 2001, inclusive. Fidelity losses were defined as “dishonest or fraudulent acts”, “committed by an employee” of the insured, (in this case expressly identified as PCC), with the “manifest intent” to “cause the insured [PCC] to sustain such loss”, for the purpose of obtaining “financial benefit for the employee”, and “which, in fact, result in [the employee] obtaining such benefit”. All coverage extended by the bond was expressly made subject to, (amongst other things), the terms, conditions and limitations set forth in the bond.

• In March of 2001, Ms Swinkels was invited by IIG to invest by making her own contribution to a pool of funds that purportedly would be used in connection with “fractional reserve banking”. In particular, Ms Swinkels met with three individuals, all identified as personnel associated with IIG, who are alleged to have made certain representations, and to have provided Ms Swinkels with documentation upon which she relied prior to advancing any funds. This is said to have included a verbal representation by the IIG personnel that IIG somehow was “affiliated” with PCC. As for the documents, they contain a number of references to PCC, and its principal, Bruce Baldock. They also refer to a fidelity bond which, according to the representations of IIG, would be “assigned to IIG”, respond “in the event of defalcation by PCC”, and thereby provide Ms Swinkels with “protection”, in a “safe and secure way”, that would “cover the capital amount of the debenture” that would be issued to Ms Swinkels to document her investment. The draft debenture also provided to Ms Swinkels suggested that security for the investment would be the account into which the invested funds would be deposited, and the “proceeds of all insurance policies and assets of IRG”. The documents also included a two-page “Binder of Insurance” which referred to a “Financial Institution Bond” issued by American Home to PCC, providing coverage “pursuant to the terms, conditions and exclusions” of that policy. However, the policy or bond itself was not included with the documents provided by IIG to Ms Swinkels, and she acknowledges that she took no steps to obtain or review the precise terms of the bond or policy before she advanced funds to IIG; (e.g., by contacting American Home or PCC directly). She also concedes that all of these representations about IIG’s supposed relationship with PCC, the terms and effect of the bond issued by American Home to PCC, and the supposed ability of IIG and its investors to somehow access indemnity through that bond, emanated from IIG. Ms Swinkels had no contact whatsoever with any PCC personnel prior to her advancement of funds.

• On or about April 17, 2001, Ms Swinkels advanced $450,000 USD to IIG. In return, she received a finalized debenture document, in a form similar to the draft debenture she received from IIG personnel in March of 2001. Although the debenture itself indicates that Ms Swinkels was to receive a return on her investment of 3% per annum, Ms Swinkels says the rate of return actually promised to her was 50% per month (sic); i.e., that she would be paid $225,000 USD per month during the term of her investment, which initially was to be twelve months. At the end of that period, she supposedly would have the option of calling for the return of her principal, or directing its reinvestment. The debenture issued to Ms Swinkels makes no reference whatsoever to PCC, to the fidelity bond, or to any policy of insurance. The only security for the investment indicated in the issued debenture was “a bank account at a major Banking institution, chosen at the discretion of IIG”, and the “proceeds of all insurance policies and assets of IIG”. Ms Swinkels says she relied on an additional oral representation made to her by IIG, (although admittedly never reduced to writing), that her principal would never be removed from a bank account, and that it therefore would remain secure in any event.

• On August 1, 2001, the one year bond period under the FIB issued by AH to PCC expired, apparently without the discovery or reporting of any loss by PCC during that period. (This is addressed in more detail below). There is, in particular, apparently no evidence that PCC sustained any direct loss during that period. Nor, in my view, is there any evidence that PCC discovered or reported any alleged claim by Ms Swinkels within that bond period.

• Despite the various promises received by Ms Swinkels, she in fact received no payment of interest pursuant to her IIG investment. Nor was her principal investment with IIG ever returned. By way of a statement of claim issued on June 19, 2006, Ms Swinkels eventually commenced formal litigation against IIG, PCC, Bruce Baldock, (the principal of PCC who was identified by name in the documentation IIG provided to Ms Swinkels in April of 2001), and several other defendants, (not including American Home), seeking recovery of her IIG investment. That litigation is ongoing, (or at least was ongoing at the time the motion before me was argued).

• By way of a statement of claim issued on June 13, 2008, Ms Swinkels commenced this second, collateral but related action against American Home, seeking coverage and indemnification pursuant to the FIB that American Home issued to PCC. The primary relief sought in this second action is a declaration that American Home is “bound to indemnify [Ms Swinkels] for any and all damages proven as against PCC”; damages which are said to flow from PCC and its principal Baldock allegedly having participated, in various ways, in dishonest and fraudulent conduct which deprived Ms Swinkels of the funds she invested with IIG.

• On October 26, 2010, Ms Swinkels obtained an order from Justice Campbell pursuant to provisions of the Business Corporations Act, R.S.O. 1990, c.B.16, permitting her to add PCC as a plaintiff to her second action. In effect, the order permitted Ms Swinkels to maintain a “derivative action” against American Home, in the name of PCC, in this litigation. However, the making of Justice Campbell’s order necessarily was dependent on his finding that Ms Swinkels was a “complainant” pursuant to section 245 of the legislation, which in turn required a finding that Ms Swinkels was a “proper person” to make such an application pursuant to s.245(c) of the Act. Making of the order also required a finding that permitting such a derivative action would be “in the interests of the corporation”, (in this case PCC). American Home sought and obtained leave to appeal from Justice Campbell’s order, and the resulting appeal was heard by the Divisional Court on November 30, 2011.

• On April 10, 2012, the Divisional Court granted American Home’s appeal from the order made by Justice Campbell, in a decision now reported as Swinkels v. American Home Assurance Co. (2012), 2012 ONSC 1820, 110 O.R. (3d) 288 (Div.Ct.). The Divisional Court found that Ms Swinkels was not a “proper person” or complainant, as required by s.245 of the legislation, and that the proposed action was not “in the interests of the corporation” (PCC). It accordingly refused to permit Ms Swinkels to pursue a derivative action against American Home, in the name of PCC, pursuant to the FIB. The reasons and express findings of the Divisional Court in that regard included the following comments, (which I will quote at length as they are relevant and central to a number of American Home’s arguments in relation to the motion now before me):

Throughout the amended statement of claim Swinkels identifies the conduct of Baldock with that of PCC and, in essence, alleges that both Baldock and PCC committed “dishonest and fraudulent acts” in relation to her, the alleged victim, but not in relation to PCC itself. Both the appellants and Swinkels agree that, at all material times, Baldock was the sole officer and direct of PCC and Baldock’s evidence is that all of the shares of PCC were owned either by him or a family corporation. According to Baldock’s evidence, he did not act as an employee of PCC in relation to the subject transaction. Nor is there any evidence in the record before us that he was an employee of PCC at the relevant time.

As well, Swinkels recognizes that Baldock was the controlling mind of PCC, that his actions were the actions of PCC and that his knowledge of what occurred was the knowledge of PCC. Indeed, on the record before us, PCC could not act or have any knowledge about anything except what Baldock did and what Baldock knew.

It follows, as both a matter of logic and a matter of law, that, in the circumstances of this case, it would have been impossible for Baldock to act dishonestly or fraudulently in relation to PCC, his corporation and his alter ego, because it is fundamental that one cannot deceive or defraud oneself. This, alone, would bring the proposed derivative claim outside the scope of the coverage provided by the bond.

If Swinkels proposed derivative action were allowed to proceed as proposed by her, it would follow that, having defrauded Swinkels, PCC would be allowed to recover a sum of money from [American Home] that PCC could hold to indemnify itself against any potential judgment that Swinkels might obtain against it. It would be tantamount to a situation in which a fraudster seeks to recover on a fidelity bond to provide protection for himself against the contingency that his own victim might one day obtain redress in a court. To view the situation in this light shows the absurdity of the result and demonstrates why no insurer would provide such coverage and why any such claim would be found to fail.

Although there can be no doubt that Swinkels did suffer a loss, PCC clearly has not. If anyone was deceived or defrauded by Baldock, it was Swinkels. Nor would a judgment against PCC in favour of Swinkels at some time in the future constitute a “loss” to PCC as required by the fidelity bond.

Accordingly, with respect, I am persuaded that the motions judge could not have reasonably concluded, as he did, that Swinkels fell within the discretionary definition of complainant as a proper person set out in section 245(c) of the [Business Corporations] Act. As shown above, Swinkels’ intended action was clearly bound to fail and it was unreasonable for the motions judge to reach the opposite conclusion and conclude that it appears to be in the best interests of the corporation.

[Original emphasis in italics. Added emphasis in bold print.]

• On August 20, 2012, American home initiated this motion for summary judgment, relying in part on the Divisional Court’s ruling. However, hearing of the motion then apparently was delayed while Ms Swinkels sought leave to appeal the Divisional Court’s ruling to the Court of Appeal for Ontario.

• On October 18, 2012, the Court of Appeal denied Ms Swinkels’ application for leave to appeal.

Summary Judgment – General Principles

[5] The defendant moves pursuant to Rule 20.01(3) of the Rules of Civil Procedure, which reads as follows:

20.01 (3) A defendant may, after delivering a statement of defence, move with supporting affidavit material or other evidence for summary judgment dismissing all or part of the claim in the statement of claim.

[6] Pursuant to the provisions of Rule 20.02, a responding plaintiff then is obliged to go beyond pleaded allegations to set out, “in affidavit material or other evidence”, specific facts indicating a genuine issue requiring trial.

[7] Pursuant to Rule 20.04(2), the court shall grant summary judgment “if the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence”.

[8] Pursuant to Rule 20.04(2.1), a judge may weigh evidence, evaluate credibility, and draw reasonable inferences unless it is in the interest of justice for those powers to be exercised only at trial.

[9] These provisions reflect amendments implemented on January 1, 2010.

[10] Those amendments were considered by the Court of Appeal in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764.[^1]

[11] With this guidance in mind, I now turn to consideration of the defendant’s motion for summary judgment in this case.

Analysis

[12] The plaintiff’s claims necessarily are based on the underlying FIB, and the obligations of American Home, if any, inherently are circumscribed by the terms of that bond.

[13] That inherent reality is made express by the opening preamble of the bond, which states that, in consideration of an agreed premium, “the Underwriter”, (expressly identified in the bond as American Home), agrees to indemnity “the Insured”, (expressly identified as PCC), “subject to the Declarations, Insuring Agreements, General Agreements, Conditions and Limitations and other terms hereof”.

[14] In my view, a plain reading of the bond makes it clear that the path to indemnity requires a claimant to establish numerous preconditions and satisfaction of numerous conditions.

(i) There must be a defined loss in respect of which coverage has been provided.

In this case, the bond agrees to extend indemnification only in relation to defined “fidelity” losses.

A “Fidelity” loss is defined as:

Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.

Such dishonest or fraudulent acts must be committed by the Employee with the manifest intent:

(a) To cause the Insured to sustain such loss, and
(b) To obtain financial benefit for the Employee and which, in fact, result in obtaining such benefit.

[Emphasis added.]

The Divisional Court previously determined that it was impossible for Baldock, the controlling mind of PCC, to defraud PCC itself. That finding gives rise to issue estoppel.

Applying the principles in Angle v. Minister of National Revenue (1974), 1974 168 (SCC), the prerequisites for issue estoppel are present.

Counsel invited the court to exercise discretion not to apply estoppel, referring to Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, but I decline to do so.

(ii) The loss must be that of the insured.

The bond provides coverage only to PCC as the named insured and states that no legal proceeding may be brought by anyone other than the named insured.

The Divisional Court also determined that PCC suffered no loss. That determination is binding.

(iii) The loss must be discovered by the insured during the bond period.

The bond period ran from August 2, 2000 to August 2, 2001. There is no evidence that PCC discovered any such loss during that period.

(iv) There must be timely notice and proof of loss.

The bond requires notice within 30 days and proof of loss within six months of discovery. No such notice or proof of loss was provided.

Authorities such as Ackworth v. General Accident Assurance Co., 1961 165 (ON CA) emphasize that failure to comply with such requirements is fatal.

[15] Having regard to the evidence before me and all the circumstances of the case, I am satisfied that this is a matter amenable to resolution by way of Rule 20.

[16] The dispute is largely document-driven and fundamental prerequisites to indemnification cannot be satisfied.

Conclusions and Order

[17] I find there is no genuine issue requiring trial with respect to the plaintiff’s claim against American Home.

[18] The claim is bound to fail.

[19] In the circumstances, neither the parties nor the court should incur the time and expense of a trial.

[20] The defendant is entitled to summary judgment dismissing the plaintiff’s claim.

Costs

[21] If the parties cannot agree on costs:

a. the defendant may file written submissions within two weeks;
b. the plaintiff may respond within two weeks thereafter;
c. the defendant may reply within one week.

[22] If no submissions are filed within two weeks, there shall be no costs of the motion or the action.

“Justice I. F. Leach”
Justice I. F. Leach

Released: June 17, 2013

[^1]: Hereinafter referred to as “Combined Air, supra”.