CITATION: Sutton v. Balinsky et al. 2015 ONSC 2859
COURT FILE NO.: CV-12-464405
DATE: 20150501
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
DEBORAH SUTTON
Plaintiff
– and –
RONALD BALINSKY, ALLAN LIPMAN, ALAN RUDOLPH, LIPMAN ZENER & WAXMAN LLP and BDO CANADA LLP
Defendants
Milton A. Davis & Samantha M. Green, for the Plaintiffs
J. Gregory Richards & Marie-Andree Vermette, for the Defendants Allan Rudolph and BDO Canada LLP
Alan J. Lenczner, Q.C. & Brendan F. Morrison, for the Non-Party/Appellant, Alain Sutton
HEARD: April 27, 2015
FAIETA, j
REASONS FOR DECISION
[1] The defendants BDO and Rudolph, as well as a non-party, Alain Sutton, appeal an Order issued by Master Glustein (as he then was), dated October 27, 2014, (the “Master’s Order”) that required the production of certain financial records.
Background
[2] The plaintiff commenced this action in September 2012 seeking, amongst other things, damages in the amount of $15 million for breach of fiduciary duty against the defendants Lipman and Rudolph as well as damages for professional negligence and breach of contract against all defendants.
[3] The following allegations are made in the Claim.
[4] The plaintiff married Alain Sutton in 1982. During their marriage they built a successful business which operates under the name Toronto Congress Centre (“TCC”). The plaintiff and Mr. Sutton were both active in the management of the business and were equal partners and shareholders. The defendant Rudolph is an accountant and a managing partner of the defendant BDO Canada LLP (“BDO”). The defendant Rudolph was the sole accountant and financial advisor to the plaintiff and Mr. Sutton from about the time they started TCC. The defendant Lipman is a lawyer and partner of the defendant Lipman, Zener & Waxman (“LZW”). Lipman had worked for the plaintiff since 1978. The plaintiff introduced Lipman to Mr. Sutton after TCC was formed. Lipman acted as solicitor for both the plaintiff, Mr. Sutton and TCC.
[5] The plaintiff claims that the defendant LZW is vicariously liable for the acts or omissions of Lipman and that the defendant BDO is vicariously liable for the acts or omissions of the defendant Rudolph.
[6] In early 2006 the plaintiff and Mr. Sutton separated. The plaintiff approached Lipman to give her advice regarding their separation and to prepare a separation agreement. Lipman and Rudolph arranged for the plaintiff to be represented by the defendant Balinsky and for Mr. Sutton to be represented by Harold Niman.
[7] The plaintiff alleges that a memorandum was prepared by the defendant Rudolph, at the request of the defendant Lipman, which outlined a proposal for a settlement of the Suttons’ matrimonial issues. It contemplated that the plaintiff would receive assets valued at $10.48 million. The defendant Lipman advised the plaintiff that she should accept that proposal for a variety of reasons, including that the proposal was very generous and that it was the best deal that she could ever get from Mr. Sutton. He advised her that Mr. Sutton would fight her forever if she did not accept the proposal. He also advised the plaintiff that she had to use the defendant Balinsky as her lawyer and that if she went to another lawyer, then the deal would be off the table and the defendant Lipman would no longer help her and that she would be in the courts for years and lose a great deal of money on legal fees.
[8] The defendant Rudolph also advised the plaintiff to accept the proposal and concurred with Lipman that the deal was both generous and the only one that the plaintiff was likely to achieve. He also confirmed that Mr. Sutton would fight hard if she commenced legal proceedings and that she would then likely receive nothing.
[9] The marriage contract was presented to the defendant Balinsky by Mr. Sutton’s lawyer. With virtually no negotiation, investigation or due diligence, the defendant Balinsky advised the plaintiff to accept its terms. The sole financial disclosure that the plaintiff received regarding Mr. Sutton’s net worth or financial interest was contained in a two-page net worth statement prepared by the defendant Rudolph. The defendant Balinsky also received some verbal information from the defendant Rudolph regarding the financial affairs of TCC and its subsidiaries.
[10] The defendant signed the marriage contract in 2007 based on the advice that she received from the defendants Lipman, Rudolph and Balinsky that the proposal was a fair and equitable settlement.
[11] The plaintiff alleges that rather than receive assets with a value of $10.48 million, the plaintiff received assets worth less than $4 million. As well, in lieu of spousal support, the plaintiff received a $400,000 salary for 10 years.
[12] On examination for discovery the defendants refused to produce financial statements and other documents related to TCC’s and Alain Sutton’s financial status.
[13] On October 27, 2014 the plaintiff brought a motion for an order to require Rudolph, Lipman and Alain Sutton to produce financial statements and tax returns for TCC after 2007.
The Master’s Order
[14] This appeal is brought solely with respect to paragraph 4 of the Master’s Order:
THIS COURT ORDERS that the Defendants BDO Canada LLP and Allan Rudolph produce the financial statements and tax returns from the date of the marriage contract (May 4, 2007) to the date of this Order for the companies: (a) in which Alain Sutton has an interest (direct, indirect or beneficial); and (b) that were in existence at the date of the marriage contract or that are subsequent iterations of these companies.
[15] The Reasons for the Master’s Order explain the rationale for the provision of the Master’s Order described above as follows:
The only dispute issue is whether post May 2007 (marriage contract) documents are to be produced. The defendants take the position that (i) the claim is for the difference between $10.48 million (what the plaintiff alleges that she thought she obtained) and the less than $4 million she says she did obtain (ii) even if a claim could be made based on the fair value of Alain’s assets, it cannot be made since the pleading is for damages, negligence, and breach of fiduciary duty and not a challenge to the validity of the marriage contract and (iii) in any event, post-valuation information is not relevant. I do not agree.
The claim is not for the difference between $10.48 million and $4 million. The plaintiff (Deborah) claims damages of $15 million based on the defendants’ alleged inducement of Deborah to accept terms of a marriage contract that deprived Deborah of her lawful entitlement (par 52e) and claims negligence because of the defendants’ failure to ensure Deborah obtained full and accurate disclosure of Alain’s net worth and financial interests and failed to conduct a proper investigation into the net worth and financial interests of Alain (par 54 f/g). Consequently, the damages claim, as pleaded is broad enough to support damages based on what Deborah would have obtained if the defendants had properly determined Alain’s financial worth instead of the alleged conduct that the Defendants told Deborah was generous and that she would not get a better deal (para 36) and the allegation that Deborah agreed to sign the marriage contract because she believed the business proposal contained in the memorandum was a fair and equitable settlement (par. 40). Consequently, I reject the first argument.
This is a claim for damages arising out of negligence and breach of fiduciary duty. However, that does not mean that damages cannot be assessed on the basis of the restitutionary principle, i.e. to put the plaintiff in the position she would have been if the defendants had acted in accordance with their alleged professional obligations. There is a tenable claim, based on the pleadings, that if they had done so, the plaintiff would not have signed and as such the value of business interests would have to be determined. Consequently, while this is not a commercial valuation case, the principles of determining the value of a commercial interest still apply. Consequently, I reject the second argument.
As to the third argument, it is settled law that a business valuator can use hindsight valuation information to test the reasonableness of assumptions made at the valuation date, although post-valuation date information cannot be used as the basis for valuation at the valuation date. In the present case, if the plaintiff leads evidence as to the value of Alain’s interests at the valuation date, financial information of these companies after that date can be used to test the reasonableness of any assumptions made by the plaintiff’s valuator or to assess the reasonableness of the assumptions of the defendants’ valuator (see Ramsinghani 2003 Can LII 64231 citing Ford v OMERS). At this motion, the only issue is whether the information is relevant, which it is under the case law and since the damage claim could encompass a valuation issue. The court does not address admissibility or relevance at trial which are issues for the trial judge. Consequently, I reject the defendants’ third argument.
Finally, I limit the scope of the documents to be ordered to financial statements and tax returns of any of Alain’s companies (direct, indirect or beneficial interest) in existence at the date of the marriage contract (or subsequent iterations of these companies), without prejudice to the plaintiff seeking additional supporting documentation if relevant. I order production to the present date, not the 2 years suggested by Alain’s counsel, as there is no basis to limit the sought information to only 2 years (and the seven years post marriage contract date is not excessive). [emphasis added]
The Appeal
[16] The defendants Rudolph and BDO submit that the Court made a “palpable and overriding error” in ordering the production of seven years of post-separation financial information, as there was no evidence which indicated that those records were required for valuation purposes or otherwise relevant to the issues raised by the Statement of Claim. Mr. Sutton characterizes this as an error of law. Mr. Sutton also submits that the Court erred in failing to consider the prejudice he will suffer from the production of such documents. Mr. Sutton also submits that the production order is premature because a summary judgment motion is scheduled to be heard on May 11, 2015 which may result in the dismissal of the action.
The Law
[17] A Master’s decision will be upheld unless the Master: (1) made an error of law or (2) exercised his or her discretion on the wrong principles or misapprehended the evidence such that there is a palpable and overriding error. A “palpable” error is an error that is plainly seen.[^1]
[18] Rule 30.02 provides that every document relevant to any matter in issue in an action that is or has been in the possession, control or power of a party to the action shall be disclosed as provided in Rules 30.03 to 30.10, whether or not privilege is claimed in respect of the document.
[19] In Debora v. Debora,[^2] the Ontario Court of Appeal stated:
The general principle that emerges from both Domglas, supra, and Ford, supra, is that hindsight information is generally inadmissible and cannot be used as part of the process of establishing the value of shares at a particular date. An exception to this principle is that hindsight, or the actual results achieved after the valuation date, maybe compared against the projected or forecasted corporate results made by valuators and used to test the reasonableness of the assumptions made by those valuators.
A similar consensus respecting the use of hindsight emerges in the family law context when the value of a business for equalization purposes is in issue. See: Harry v. Harry (1987), 1987 CanLII 8288 (ON SC), 9 R.F.L. (3d) 121 (Ont. Dist. Ct.); Woeller v. Woeller (1988), 1988 CanLII 8616 (ON SC), 15 R.F.L. (3d) 120 (Ont. Dist. Ct.). … As stated in Harry, supra, at para. 17, “when evaluating the fair market value of a business hindsight is inappropriate.” However, as in the corporate context, “one cannot entirely ignore events which followed [the valuation date] in assessing the fundamental assumptions underpinning the opinions expressed by [the experts].” Woeller, supra at para. 31. …
While other exceptions may evolve from the jurisprudence over time, I would adopt the Ford articulation of the hindsight rule and the exception I have discussed for valuations under the Family Law Act. In both corporate law and family law, where the goal is to determine the fair market value of the business, perfect accuracy is impossible. As Viscount Simon wrote in Gold Coast Selection Trust Ltd. v. Humphrey (Inspector of Taxes), [1948] A.C. 459 at 473 (H.L.), “Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor indeed is it possible.” The valuator must make assumptions as to how a prospective purchaser would have evaluated the business based on the purchaser's knowledge at the time in question and the amount of risk the purchaser would likely have been willing to assume concerning a lawsuit. Hindsight information is not admissible on the question of whether that assumption was correct but, as indicated in Ford, supra, it can be used to test whether that assumption was reasonable.[^3]
Discussion
[20] The central theme of the Appellants’ submissions is that the production of financial records for Alain Sutton’s companies from 2007 to the present (the “post-contract financial records”) is not relevant to any issue raised by the Statement of Claim.
[21] The Appellants submit that there was no evidence before the Court which stated that seven years of post-contract financial records were required for valuation purposes.
[22] A letter dated April 24, 2014 from Farley J. Cohen of Cohen, Hamilton, Steger, addressed to counsel for the plaintiff was included in the motion materials. It stated, in part, that:
Further to your request, we have reviewed the document entitled “Undertakings, under advisements and refusals given at the Examination for Discovery of Allan Rudolph conducted October 23, 2013”. In this regard, we provide the following comments with respect to our requirement for the information necessary to complete our engagement to quantify the losses suffered by Ms. Sutton.
We note that in order for us to quantify the losses suffered by Ms. Sutton, we must first determine her entitlement as a result of the marriage breakdown pursuant to the Family Law Act, including the calculation of Ms. Sutton’s and Mr. Sutton’s net family property (including the valuation of the business interests as at December 31, 2006 (the Separation Date”) and the determination of Ms. Sutton’s and Mr. Sutton’s income for support purposes. …
Refusal: To produce the financial statements including separate divisional statements and corporate income tax returns for each of the companies from fiscal 2002 to present.
CHS Comment: This information is required to determine the value of Mr. Sutton’s and Ms. Sutton’s business interests as at the Separation Date (financial statements and corporate tax returns for 5 years prior to the Separation Date are required for valuation purposes) and Mr. Sutton’s and Ms. Sutton’s income for support purposes (consideration of potential attribution of pre-tax corporate income). [emphasis added]
[23] I agree with the submissions of Mr. Sutton and the defendants Rudolph and BDO that Mr. Cohen’s letter does not clearly indicate that he requires post-separation date financial records for valuation purposes. Instead, Mr. Cohen only states that he requires the production of financial records for five years prior to the separation date for valuation purposes. However, it appears that he requires records from fiscal 2002 to present for support purposes.
[24] Nevertheless, as noted earlier, the plaintiff claims against the defendants Lipman and Rudolph damages in the amount of $15 million for breach of fiduciary duty. Amongst other things, it is alleged that they breached their fiduciary duty by inducing the plaintiff to accept the terms of a separation that deprived the plaintiff of her lawful entitlement and failed to ensure that the plaintiff’s interests were properly protected.
[25] The plaintiff relies upon the following statement by Chief Justice McLachlin, speaking for a majority of the Court in Canson Enterprises Ltd. v. Boughton & Co.:[^4]
A related question which must be addressed is the time of assessment of the loss. In this area tort and contract law are of little help. There the general rule is that damages are assessed based on the value of the shares as at the time of the wrongful act, in view of what was then foreseeable, either by a reasonable person, or in the particular expectation of the parties. Various exceptions or apparent exceptions are made for items difficult to value, such as shares traded in a limited market. The basis of compensation at equity, by contrast, is the restoration of the actual value of the thing lost through the breach. The foreseeable value of the items is not in issue. As a result, the losses are to be assessed at the time of trial, using the full benefit of hindsight: Guerin, supra. [emphasis added]
[26] This principle was affirmed in Authorson (Litigation Administrator of) v. Canada (Attorney General)[^5] by the Ontario Court of Appeal:
The Supreme Court of Canada has sanctioned the view that losses for breach of fiduciary duty may be assessed at the time of trial with the full benefit of hindsight...However the measure of damages for breach of fiduciary duty is restitutionary. Plaintiffs are entitled to be placed in as good a position as they would have been had the breach not occurred….
[27] Accordingly, I reject the submission of Mr. Sutton and the defendants Rudolph and BDO that damages for breach of fiduciary duty are to be valued as at the time that the plaintiff entered the marriage contract in 2007. As both Canson and Authorson state, the foreseeable value of the assets in issue at the time of the breach is not relevant when assessing damages for breach of fiduciary duty. The actual value of the assets lost as a result of the breach is the relevant measure.
[28] I also reject the argument of prejudice and prematurity. There is no legal basis to find prejudice to Mr. Sutton or the defendants given that the plaintiff is entitled to such information based on the pleadings. Further, there is no reasonable basis to argue prematurity given that the Master’s Order was made six months ago. I accept the plaintiff’s submission that a pending summary judgment motion that may not be successful is no legal reason for the plaintiff to have to suffer the prejudice of prosecuting her claim without relevant evidence that this Court has ordered to be produced.
[29] I hereby dismiss the appeals. The Master’s Order contained no reviewable error in requiring the production of seven years of financial records. The parties shall deliver their written costs submissions, maximum length of two pages, within 14 days.
Mr. Justice M. Faieta
Released: May 1, 2015
CITATION: Sutton v. Balinsky et al. 2015 ONSC 2859
COURT FILE NO.: CV-12-464405
DATE: 20150501
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
DEBORAH SUTTON
Plaintiff
– and –
RONALD BALINSKY, ALLAN LIPMAN, ALAN RUDOLPH, LIPMAN ZENER & WAXMAN LLP and BDO CANADA LLP
Defendants
REASONS FOR JUDGMENT
Mr. Justice M. Faieta
Released: May 1, 2015
[^1]: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 3-6, 10-12; Zeitoun v. Economical Insurance Group (2008), 2008 CanLII 20996 (ON SCDC), 91 O.R. (3d) 131, para. 38-41, aff’d (2009), 2009 ONCA 415, 96 O.R.(3d) 639, at para 1.
[^2]: (2006) 2006 CanLII 40663 (ON CA), 83 O.R. (3d) 81 (C.A.)
[^3]: Deborah, at paras. 46, 47 and 51.
[^4]: 1991 CanLII 52 (SCC), [1991] 3 S.C.R. 534, at para. 24.
[^5]: (2007), 2007 ONCA 501, 86 O.R. (3d) 321 (C.A.), at para. 160.