Canadian Council of Human Resources Associations v. Human Resources Professionals Association, 2016 ONSC 7867

Court File No.: 15-63871 Date: 2016-12-14 Ontario Superior Court of Justice

Between: Canadian Council of Human Resources Associations, Plaintiff – and – Human Resources Professionals Association, Defendant

Counsel: R. Benjamin Mills, for the Plaintiff Heather E. Taylor, for the Defendant

Heard: October 13, 2016

Reasons for Judgment on a Motion

McLean J.

Introduction

[1] This is a motion for summary judgment. The Plaintiff, the Canadian Council of Human Resources Associations (“CCHRA”), is bringing this motion for judgment to obtain certain amounts that it claims from the Defendant, the Human Resources Professionals Association (“HRPA”). The two parties are groups of human resources professionals. The Plaintiff is the Canadian national organization. It included the Defendant, HRPA. HRPA is the professional organization for Ontario based human resource professionals. HRPA withdrew from the national association, CCHRA, on June 30, 2014. The organizations are non-profit corporations which are incorporated under separate constating documents. CCHRA is incorporated under federal letters patent. Without going into the details at this point, amounts claimed by CCHRA are amounts that it says were owing to it either prior to the leaving of HRPA or as a proportional share of their membership levies up until that date.

[2] It was noted in the argument of this motion that there is really no issue as to whether the differences between the parties are amenable for a decision under the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. It is clear from the record filed, and the Court makes the finding, that really nothing that could be determined at a trial that would materially add to the record that is already present before the Court. At least one of the invoices is already agreed to and that is invoice 632 in the amount of $67,302.80, which is an amount for the National Knowledge Exam (“NKE”), a part of the certification process for certified human resource professionals. HRPA is not disputing that amount.

[3] The remaining issues are as follows:

1. Are the membership levies for part of the year that HRPA was a member of CCHRA lawful or did CCHRA breach a contractual obligation it had with HRPA by levying these amounts?

2. If those levies are lawful, then are they subject to a set-off by HRPA because funds are owed to HRPA? This claim for set-off is based upon the fact that, due to a surplus in the paid-up membership fund (the Members’ Equity), the Members’ Equity fund should be paid out proportionally to HRPA. Thus a debt would arise to be set off against CCHRA’s claim.

The Facts

[4] As said, CCHRA is a non-profit corporation incorporated under Part II of the Canada Corporations Act, R.S.C. 1970, c. C-32, as amended. It was so incorporated in about the month of September 1994. CCHRA transitioned to the Canada Not-for-profit Corporations Act, S.C. 2009, c. 23, as amended, on October 15, 2014.

[5] The members of the CCHRA are professional associations of human resource professionals. The current members of the CCHRA are as follows:

(a) The Human Resources Management Association of British Columbia and the Yukon;

(b) The Human Resources Institute of Alberta;

(c) The Saskatchewan Association of Human Resource Professionals;

(d) The Human Resource Management Association of Manitoba;

(e) The Human Resources Association of New Brunswick;

(f) The Human Resources Association of Nova Scotia; and

(g) The Human Resources Professionals of Newfoundland and Labrador.

[6] The HRPA was a provincial association member of the CHRPA until its withdrawal on June 30, 2014. It is to be noted that Article 9 of the letters of patent provide that, as a corporation without share or capital, the CCHRA carries on its operations without pecuniary gain to its members or any profit; any accretions to CCHRA are to be used to promote its objects.

[7] Pursuant to these objectives, CCHRA represents the collective interests of the human resources community at a national level and does not simply advance or adhere to the specific interests of a single provincial association. It is an umbrella group for the Provincial Members’ Association.

[8] CCHRA’s operations are based on a cost recovery basis through an annual member levy paid by the provincial associations as part of their membership in CCHRA. The member levy is based on the CCHRA’s budget. The CCHRA’s budget also charges the provincial associations a levy fee for the National Knowledge Exam. The purpose of this exam levy is to recoup costs, on a cost recovery basis, for amounts spent on the exam on the basis of individuals of each association that took the knowledge exam. As said, the amount of this invoice is not in issue.

Issues and Analysis

1. Are the membership levies for part of the year that HRPA was a member lawful or were they a result of a breach of contract in that the levies were improperly applied to HRPA?

[9] Both parties agree the amount of the NKE levy, including HST, is $67,302.80.

[10] The CCHRA submits that HRPA’s share of the operation expenditures for the first six months of 2014 should be fixed at $176,280. There is however a 30% reduction issue.

[11] HRPA seeks judgment in its favour for the balance of its share of Members’ Equity.

[12] In essence, the issues that arise in this action are ordinary ones of financial disentanglement that occur when two intertwined entities go their separate ways. HRPA agrees that Equity requires that HRPA be allowed to draw on its accrued contributions to meet its final levy obligations in order to “ensure fair dealing between the parties”.

[13] HRPA governs and regulates the practice of its members, who are human resource professionals working in Ontario. It is the largest organization of its kind in Canada, with more than 23,500 members. It originated in 1979.

[14] The Plaintiff, CCHRA, was created in September 1994 by eight representatives of provincial human resource associations. HRPA was one of the provincial member associations that formed the CCHRA, and it remained a member until June 30, 2014.

[15] Both CCHRA and HRPA are non-profit associations, and are therefore exempt from income tax to the extent that their operations are conducted without a view to profit. As already said, there is no issue between the parties with respect to the cost of the National Knowledge Exam, as it is admitted to be owing.

[16] As the largest member association in CCHRA, HRPA funded 40% of CCHRA’s operations.

[17] The CCHRA started to accrue Members’ Equity in 2008 once it had paid back the members’ loans, which were used to fund the start-up of CCHRA.

[18] The amount reflected in the Members’ Equity are funds received by CCHRA from its eight provincial member associations in excess of CCHRA expenses.

[19] The balance in the Members’ Equity account as of June 30, 2014 was $648,096.

Outstanding payments owed by HRPA

[20] It’s clear from the facts that CCHRA sent invoice number 6564 pertaining to the 2014 Member Levy to HRPA on or about February 18, 2014. Similarly, CCHRA sent invoice number 565 which also pertained to the 2014 levy to HRPA on or about June 1, 2014. Similarly, invoice 632 that pertains to the National Knowledge Exam was sent to HRPA on September 30, 2014. HRPA refused to pay any of these amounts. It now has admitted, however, that it is liable for invoice number 632, the National Knowledge Exam.

Members’ Levy

[21] The CCHRA acknowledged in materials distributed prior to the Annual General Meeting on February 7, 2014 that $276,684 was available from Members’ Equity for redistribution, while still maintaining a reserve of 50% of budgeted expenditures, in accordance with the established reserve guideline.

[22] The Members’ Levy was calculated each year pursuant to the annual budget for CCHRA operations. The budget would contain spending to support strategic items that the member associations agreed to fund in accordance with the By-Laws.

[23] HRPA argues that in late 2013, when the budget and levy were presented to the CCHRA Board, the CCHRA had no strategic plan in place to support the budget.

[24] HRPA did not agree to fund the operations budget in the amount presented. It argues that the budget should never have been presented for a vote since it did not meet the CCHRA policy, which had incorporated into the By-Laws that “CCHRA does/funds only what all provincial member associations agree to do/fund”.

[25] HRPA further argues that the Executive Director of CCHRA, who prepared the budget, was ill-informed. She did not have access to any staff with historical knowledge of financial decisions made in the past, nor access to documents setting out the rationale for the CCHRA decisions over the years.

[26] While budget approval is listed under the administration category of the Decision Rules in the By-Laws, thereby requiring only greater than 50% in favour to pass at a Board meeting, decisions regarding what spending should go into the budget are core business issues requiring consensus.

[27] The intent of the By-Law is explained in a document created by Debbie Bennett, who was chair of the CCHRA in 2010 when Decision Rules were adopted. It explains that “the budget approval can be by Ottawa accord vote [greater than 50%] as it is merely the implementation of our consensus agreement”.

[28] The CEO of HRPA, Bill Greenhalgh, who has extensive experience in financial management of companies as well as a long history with the CCHRA, was asked to make his suggestions for what the budget should be for 2014. He thought that a 30% reduction was realistic and achievable.

[29] Despite lacking the necessary agreement from HRPA, CCHRA issued Levy invoices to support its 2014 operations based on the disputed budget.

[30] The Levy took no account of the availability of $648,096 of accumulated funds from previous years held in Members’ Equity. The excess funds held in Members’ Equity were well above the established reserve guidelines. Amounts beyond the reserve should have been used to support 2014 operations consistent with the costs-recovery funding model, which was CCHRA policy.

[31] As said, the Plaintiff, CCHRA, moves for summary judgment on the grounds that there is no genuine issue requiring a trial with respect to either the claim or the defence.

[32] The Defendant, HRPA, agrees to have the claim and defence determined by summary judgment if the court is satisfied that it is appropriate.

[33] It should also be noted that following the service of the Plaintiff’s Notice of Motion for Summary Judgment, the parties have had an opportunity to explore the evidence by exchanging affidavits of documents, and completing examinations for discovery, and have had the opportunity to test the evidence by way of cross-examination on the affidavits submitted for this motion. The issues of fact and law that require determination have been identified, and the amounts in dispute are relatively modest.

[34] The HRPA argues that it would be a breach of the By-Laws to compel HRPA to fund operations to which it did not agree and, further, that the Members’ Levy that was issued to HRPA for 2014 is not valid. It did not comply with the CCHRA By-Laws. The budget was unsupported by a strategic plan. When the budget was prepared, CCHRA did not know what activities it would be engaged in for 2014, and had not obtained the requisite agreement from its Member Associations.

[35] The main issue with respect to whether the payments are due is that the budget was not properly passed. The 2014 budget was eventually passed by the CCHRA Board of Directors on February 7, 2014. At this meeting, the budget was approved by a majority of CCHRA’s Board of Directors, pursuant to a voting agreement termed the “Ottawa Accord”. HRPA was provided an opportunity to express its views at these meetings of the CCHRA’s Board of Directors.

[36] The HRPA further argues that it is consistent with CCHRA policies and past practice that CCHRA return the excess funds.

[37] The HRPA argues that the CCHRA’s position that the excess funds belong to it contradicts its past practice and is inconsistent with its tax exempt status as a non-profit corporation.

[38] The HRPA argues that the CCHRA is required to comply with the provisions of the Income Tax Act, R.S.O. 1990, c. I.2, in its financial and accounting practices, and must meet certain conditions to maintain its tax-exempt status in a particular year. This obligation is described in CCHRA Income Tax Interpretation Bulletin IT-496R.

[39] The interpretation bulletin, at paragraphs 8 and 9, addresses the situation the CCHRA found itself in year after year: they earned income in excess of their expenditures. If the accumulated excess is greater than the association’s reasonable needs, then the association will be considered to be operating for profit, and will be subject to taxation.

[40] It is argued by the CCHRA that it knew of their obligations pursuant to the Income Tax Act and arranged their financial practices accordingly. When the CCHRA levied fees from their members in excess of the operational needs, they set the funds aside as Members’ Equity. They made periodic distributions of excess to their members often by sending a refund cheque or applying the excess to future operational expenditures, but also by way of straight draw from the Members’ Equity fund, as occurred in 2010. They were acting properly under the Income Tax Act.

[41] Apparently, the HRPA opposed the 2014 budget on the basis that it viewed the budget as approximately 30% higher than it needed to be and did not provide for payment of all Members’ Equity to the provincial association. This position was expressed at CCHRA audit committee meetings of November 12th and 26th. According to the Members of the Board, HRPA’s proposal would have made CCHRA dependent on HRPA and would have put the CCHRA in a precarious financial position. The argument made by the HRPA with respect to the validity of the levies themselves is basically that the budget was inappropriate for the fiscal period. The CCHRA and the budget itself was invalid because there was no appropriate business plan in place before the Board of Directors, therefore the matter was illegal. However, from the evidence put forward, it seems to the Court that the levies themselves are lawful. They were passed by the Board of Directors in which the HRPA participated. The internal workings of the Board and the technicalities were considered in the vote and the vote was held according to the internal management rules of the corporation. For these reasons factually, the Court finds that the levies themselves were valid. Of course, we must consider the claim as a 30% reduction in the second amount claimed in the second levy. This would seem like a valid reduction as if it was based on actual corporate needs. A reduction of 30%, thus, would seem to be fair in the circumstances.

[42] This leaves the other issue: Is HRPA entitled to set-off using its own funds in the Members’ Equity?

Law and Analysis of Set-off

[43] As part of the materials filed, we were provided information on the law of set-offs, particularly, and I will quote from recent developments in the law of set-offs. In A. Robert Anderson, Thomas Gelbman & Benjamin Pullen, “Recent Developments in the Law of Set-off” in Janis P. Sarra, ed., Annual Review of Insolvency Law 2009 (Toronto: Carswell, 2010), it reads, at pp. 17–18, as follows (footnotes omitted):

B. Legal Set-off

i. Same Party in the Same Right

Legal set-off requires that the obligations between the parties be liquidated debts and that the debts be mutual cross-obligations. A useful interpretation of the law of legal set-off is found in Citibank Canada v. Confederation Life Insurance Co. [(1996), 1996 CanLII 8269 (ON SC), 42 C.B.R. (3d) 288 (Ont. Gen. Div.), aff’d (1998), 1998 CanLII 955 (ON CA), 37 O.R. (3d) 226 (C.A.)]:

For set-off at law to occur, the following circumstances must arise:

1. The obligations existing between the two parties must be debts, and they must be debts which are for liquidated sums or money demands which can be ascertained with certainty; and

2. Both debts must be mutual cross-obligations, i.e., cross-claims between the same parties in the same right.

The law requires an analysis of the obligations between the parties, the nature of the obligations themselves and the mutuality as between the parties. As stated by Palmer:

[T]he link which binds claims together in legal set-off is not the debt itself, but the ownership of that debt.

Palmer explains mutuality in the context of legal set-off as follows:

Mutuality in legal set-off has three main components: first, that the debts be between the same parties; second, that the debts be in the same right; and third, that an assignment of the debt will destroy the mutuality unless the rights of set-off have accrued between the original creditor (the assignor) and debtor prior to the receipt by the debtor of the notice of assignment.

[44] When we consider this as against the fact situation faced here, it would seem that legal set-off is not available. Any right that the HRPA has in the paid in surplus or Members’ Equity is a right that is contingent upon the actions of the Board of Directors as assigning an interest in those sums to the Member. It is not a debt in the sense that it is a liquidated amount that can be demanded instantly. The right in those sums is dependent upon the actions of the directors of the corporation and, until those directors act, there is no direct right in those sums, and therefore no debt arising therefrom. No case law was provided by HRPA that would indicate that a person may sue indirectly for an interest in a paid in surplus or Members’ Equity prior to the actions of the Board of Directors assigning those amounts to the Member. This does not, however, end the matter. Even if legal set-off is not available, then certainly this is a matter that wherein equitable set-off would come into play. As explained in “Recent Developments in the Law of Set-off”, above, at p. 30, equitable set-off was affirmed by the Supreme Court of Canada in Holt v. Telford, 1987 CanLII 18 (SCC), [1987] 2 S.C.R. 193, with the following requirements (footnotes omitted):

1. The party relying on a set-off must show some equitable ground for being protected against his adversary’s demands: Rawson v. Samuel (1841), Cr. & Ph. 161, 41 E.R. 451 (L.C.).

2. The equitable ground must go to the very root of the plaintiff’s claim before a set-off will be allowed: [Br. Anzani (Felixstowe) Ltd. v. Int. Marine Mgmt (U.K.) Ltd., [1980] Q.B. 137, [1979] 3 W.L.R. 451, [1979] 2 All E.R. 1063].

3. A cross-claim must be so clearly connected with the demand of the plaintiff that it would be manifestly unjust to allow the plaintiff to enforce payment without taking into consideration the cross claim: [Fed Commerce & Navigation Ltd. v. Molena Alpha Inc., [1978] Q.B. 927, [1978] 3 W.L.R. 309, [1978] 3 All E.R. 1066].

4. The plaintiff’s claim and the cross-claim need not arise out of the same contract: Bankes v. Jarvis, [1903] 1 K.B. 549 (Div.Ct.); Br. Anzani.

5. Unliquidated claims are on the same footing as liquidated claims: [Nfld. v. Nfld. Ry. Co. (1888), 13 App.Cas. 199 (P.C.)].

A review of the recent jurisprudence reveals that the elements of the equitable set-off test are generally not at issue, with the exception of the third element. Indeed, very little consideration has been given to the other elements of the test. There are generally two overriding concerns when a party asserts equitable set-off: (a) the close-connection or interconnectedness of the cross claims; and (b) whether it would be manifestly unjust not to allow set-off.

There is little debate with respect to the test itself. However, there has been some dispute about what fact situations may allow for equitable set-off. As noted by Lord Denning in Federal Commerce the answer to the question, “what should we do now so as to ensure fair dealing between the parties?” must be asked on a case-by-case basis, and then, “we shall build up a series of precedents to guide those who come after us.”

[45] The CCHRA accrued an excess of funding contributions in the amount of $259,238.40 from the Defendant, the HRPA, in the period prior to HRPA’s withdrawal from membership in CCHRA on June 30, 2014.

[46] HRPA requests to set-off against any obligation owed to CCHRA its share in the excess funds accrued by CCHRA and held as Members’ Equity.

[47] The HRPA argues that a set-off is consistent with CCHRA’s cost-recovery funding model and CCHRA’s past practice and policy with respect to accrued funds. It does not offend the governing legislation, the Letters Patent, or the By-Laws. A set-off would be fair to the parties and in accordance with justice.

[48] The HRPA states that the circumstances support equitable set-off.

[49] The amount of HRPA’s obligation to CCHRA, against which the set-off should be applied, requires determination. The total amount will be the sum of two amounts: the amount invoiced for the NKE levy, plus HRPA’s share of the operational expenditures of CCHRA for the first six months of 2014 (the Members’ Levy amount), with the 30% reduction.

[50] To consider the issue of equitable set-off, it is first necessary to find some equitable ground for being protected against the adversary’s demands and whether that the equitable ground goes to the very root of the Plaintiff’s claim before set-off will be allowed.

[51] In the situation faced here is similar to the decision of The Polish Alliance of Canada v. Polish Association of Toronto Limited, 2014 ONSC 3216, which I find helpful to me. The learned trial judge, F.L. Myers J., at para. 8, quotes the following passage from Wawrzyniak v. Jagiellicz (1988), 1988 CanLII 4528 (ON SC), 64 O.R. (2d) 81 (H.C.), per Campbell J.:

Volunteer associations have a life of their own determined by their charter and constitution and practice. If they acquire property it is theirs according to their own rules. If they give that property to a corporation without unanimity the corporation will ordinarily hold it in trust for the voluntary organization. The members of the association my come and go. Individuals may join and continue until death or they may resign or they may seek to form a new group. The departure of individual members, the formation of a new group, the creation of a new bond of association, have nothing to do with the legal integrity of the original voluntary association unless its constitutional instruments say so. The property of the voluntary association continues to be the property of the members from time to time of the association.

The majority although free to leave ordinarily cannot take with them the assets that belong to the membership at large unless the step is taken with unanimity of all the membership. Unless authorized by the constitution, a mere majority of members cannot cause property to be diverted to another association having different objects. When the majority of an association leave, they trigger the clubman’s veto. The clubman’s veto was discussed by Blair J.A. in [Organization of Veterans of Polish Second Corps of Eighth Army v Army, Navy and Air Force Veterans in Canada, (1978), 1978 CanLII 1606 (ON CA), 20 O.R. (2d) 321, at p. 339, by Wilson J.A., and p. 345 and by Dubin, J.A., dissenting, at pp. 324-28 (“Polish Veterans”)]. They agreed that the transfer of property, as opposed to the transfer of affiliation, could ordinarily be accomplished only by unanimous membership unless the constitution specified otherwise.

[52] Clearly, this approach is very helpful in this situation. With regard to the issue of equitable set-off, there must, as said, be some validity as to the debts themselves. Equitable grounds must go to the very root of the Plaintiff’s claim. Here however, the Defendant is faced with the situation that there has been no action taken by the Board of Directors to payout their portion of the equity. Clearly, in the past the CCHRA’s Board of Directors have done this. In this circumstance, to grant said equitable set-off, the Court would have to put itself in the position of the Board of Directors and force a notional division of the equity paid in.

[53] On the evidence, the HRPA was present at the Board meetings and made its position clear. The Board rejected this, acting in its full authority to do so. Here, there is no majority of the Board leaving. The budget and the control of spending is certainly within CCHRA’s prerogative. They have not exercised their prerogative to set aside an adequate portion of the paid in surplus to HRPA. Thus, there is no mutual debt that would arise to an action taken and it is not for the court to notionally or otherwise force the Board to make such decision. This is a matter within their prerogative and there is nothing on these facts that would require the Court to intervene to put something else in its place.

[54] The Defendant also argued that generally, the general principles of equity would be sufficient for a set-off. However, when these are considered as set forth in Snell’s Equity, 31st ed. (London: Thomson/Sweet & Maxwell, 2005), at ch. 5, p. 93, the Court cannot find anything in the general maxims of equity that would help the Defendant. There is certainly no evidence that either party here comes before the Court without clean hands (see para. 5-15). The closest we can come is the principal, at para. 5-26, that “equity imputes an intention to fill an obligation that is clearly where there is an intention to fulfill, then equity treats that intention as already fulfilled”. However, there is nothing here to impute an intention to the Board of Directors. The Board of Directors of CCHRA has done nothing to allocate those portions of the Members’ Equity such that it could be subject to a set-off. So therefore, the Court finds that there is nothing that would be helpful in that.

[55] In summary, the court finds that the invoices provided to HRPA by CCHRA are valid, subject to the 30% reduction that was indicated in argument. Therefore, the exact amounts payable they will be as follows:

Judgment to CCHRA in the amounts of:

(a) $67,302.80 for the NKE levy invoice - #632; and

(b) $123,396, being the invoice amount of $176,280, less 30%.

Costs

[56] The parties may submit a one-page costs submission within 30 days of the release of this judgment.

McLean J.

Released: 2016/12/14