Court File and Parties

Court File No.: CV-14-512513 Date: 2018-06-06 Superior Court of Justice - Ontario

Re: Sheldon Libfeld, Mark Libfeld, Jay Libfeld and Corey Libfeld And: Patica Corporation, Kingsdale Capital Markets Inc., Patica Securities Limited, David Prussky, David Rosenkrantz, Bennett Jones LLP, Alan Ross and John Kousinioris

Before: Madam Justice Dietrich

Counsel: Harvin Pitch and Adam Brunswick, for the Plaintiffs/Responding Parties Jessica Kimmel and Sarah Stothart, for the Moving Parties/Defendants Patica Corporation, Patica Securities Limited, David Prussky and David Rosenkrantz

Heard: May 15, 2018

Endorsement

[1] The moving parties seek an order pursuant to rule 21 of the Rules of Civil Procedure that: i) the Amended Statement of Claim in this action be struck without leave to amend insofar as the allegations pertain to the defendant David Rosenkrantz; ii) the action against Mr. Rosenkrantz be dismissed; and iii) the title of the proceedings be amended accordingly. They seek this relief on the basis that the Plaintiffs’ claim discloses no reasonable cause of action against Mr. Rosenkrantz.

[2] The moving parties also seek an order that the Crossclaim in this action by Bennett Jones LLP, Alan Ross and John Kousinioris (“Bennett Jones Defendants”) be struck and dismissed insofar as the allegations pertain to Mr. Rosenkrantz on the basis that they are predicated on, and derivative of, the allegations against Mr. Rosenkrantz in the plaintiffs’ claim.

[3] The action relates to the creation and settlement of an income fund known as “Four Winds Income Fund.” The Bennett Jones Defendants, together with Patica Corporation and Patica Securities Limited (“Patica Companies”) are alleged to have co-operated in the creation of the Fund in which the plaintiffs invested.

[4] The Fund is described as a tax deferral arrangement using a mutual fund trust whereby business income earned by two limited partnerships in which the plaintiffs had interests was flowed into the plaintiffs’ respective RRSPs.

[5] In the fall of 2012, the Canada Revenue Agency (“CRA”) took the position that the Fund was not validly constituted as a trust or mutual fund, the arrangement was a sham, and the units of the Fund were not qualifying investments for RRSPs.

[6] The plaintiffs allege that they chose to avoid the CRA’s proposed reassessment and to mitigate their losses by settling with the CRA. In doing so, they agreed to remove from their RRSPs all proceeds received from the Fund including income and capital gains on the proceeds. They now seek to recover their unmitigated losses from their investment in the Fund and claim damages for breach of contract and negligence regarding the Fund allegedly developed and promoted by the defendants. The claims against David Prussky and David Rosenkrantz include a claim for negligent misrepresentation.

[7] The moving parties submit that the claim against Mr. Rosenkrantz cannot succeed, principally because: i) there is no suggestion that the Patica Companies are a sham or that Mr. Rosenkrantz committed any independent tortious act against the plaintiffs; and ii) the plaintiffs have shown no nexus between Mr. Rosenkrantz, personally, and the plaintiffs. Therefore, they submit, Mr. Rosenkrantz cannot be personally liable.

[8] The plaintiffs submit that Mr. Rosenkrantz, as an officer and employee of the Patica Companies, owed a duty of care to the plaintiffs and he breached his contractual obligations to them. Specifically, they allege that Mr. Prussky, another officer and employee of the Patica Companies, who did meet with the plaintiffs several times, acted as Mr. Rosenkrantz’s agent and that Mr. Prussky and Mr. Rosenkrantz were agents of each other and of the Patica Companies, and that they are joint tortfeasors.

Analysis

[9] To strike a pleading on the ground that it discloses no reasonable cause of action, it must be “plain and obvious”, having assumed that the facts as pleaded have been proven, that the claim must fail. The court must look at the pleading generously, as a whole, and determine that it is certain to fail because it contains a radical defect that must result in the claim being struck: Hunt v. T & N plc, [1990] 2 S.C.R. 595, at para. 36.

[10] The facts as stated in the claim are presumed to be true, and must be taken as such unless they are patently ridiculous or manifestly incapable of being proven.

[11] Because negligent misrepresentation is alleged against Mr. Rosenkrantz, the court must consider whether full particulars have been provided as required by rule 25.06(8).

[12] For the reasons that follow, the plaintiffs’ pleading against Mr. Rosenkratnz has a radical defect and it must fail. The Crossclaim predicated on, and derivative of, the allegations against Mr. Rosenkrantz in the plaintiffs’ claim must also fail.

[13] The plaintiffs have already had ample opportunity to properly plead their case having filed their statement of claim well over three years ago and having amended it six months ago. They have also had the opportunity, upon request, to provide further particulars of their claim. These particulars have not made it obvious that there is a tenable cause of action against Mr. Rosenkrantz personally.

[14] That said, this case has the hallmarks of a reasonably complex case and there is much at stake for all of the parties. I am therefore prepared to give the plaintiffs one last chance to amend its claim against Mr. Rosenkrantz, should they choose to do so. Similarly the Bennett Jones Defendants shall be permitted to amend the Crossclaim, should they choose to.

Pleadings Against Corporate Officers

[15] The plaintiffs have chosen to advance claims in negligence against Mr. Rosenkrantz as an officer and director of the Patica Companies, and in such a case, it is not unreasonable to hold them to a higher standard regarding the content of their pleadings. Latitude for drafting deficiencies is less liberal in claims against corporate representatives: Abdi Jama (Litigation Guardian of) v. McDonald’s Restaurant of Canada Ltd., [2001] O.T.C. 203 at paras. 9-12 (Ont. C.A.) (Abdi). In Abdi, a tenuous personal claim against corporate representatives was rejected based on a concern that personal liability was alleged in an effort to gain leverage in the litigation or for tactical purposes.

[16] Courts are generally reluctant to pierce the corporate veil to allow a plaintiff to sue individual directors and have set a high bar for doing so: A-C-H International Inc. v. Royal Bank (2005), 2005 17769 (ON CA), 197 O.A.C. 227, at para 29 (Ont. C.A.). To find an officer or employee liable for a tort alleged to have been committed by the company, there must be a basis for alleging that the officer/employee dominated and directed the company to engage in wrongful conduct, which conduct was a kin to fraud, deceit, dishonesty or want of authority: Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 7979 (ON SC), 28 O.R. (3d) 423 at para. 22 (Ont. C.A.) and Montreal Trust Co of Canada v. ScotiaMcLeod Inc. (1995), 1995 1301 (ON CA), 26 O.R. (3d) 481 at para. 25 (Ont. C.A.), leave to appeal ref’d [1996] 3 S.C.R. vii. The pleadings do not support a finding of such domination and direction by Mr. Rosenkrantz.

[17] Based on the Amended Statement of Claim, there is no evidence to suggest that the Patica Companies were used as a sham from the outset. Therefore, to be found liable in tort, it would have to be alleged that Mr. Rosenkrantz acted outside of the scope of his duties or contrary to the best interests of the Patica Companies in a manner that caused harm to the plaintiffs, or, he acted in furtherance of his duties but his acts themselves are tortious. These allegations are also not pled.

[18] The pleading does not specify how Mr. Rosenkrantz breached a duty to the plaintiffs in respect of the creation and settlement of the Fund trust. A claim against a director (or officer) must attribute “specific, identified acts or omissions to the individual[s]” and the facts giving rise to personal liability must have been specifically pleaded, in order to survive a rule 21 motion: Aird v. Harmony House of Kirkland Lake, [2001] O.J. No. 1405, at para. 25 (S.C.J.), and Tran v. University of Western Ontario, 2014 ONSC 617, [2014] O.J. No. 407 at paras. 25-26; aff’d 2015 ONCA 295. In 46035 Ontario Ltd. v. 1002953 Ontario Ltd., 1999 789 (ON CA), [1999] O.J. 4071, at para. 8 (C.A.), the court stated that “properly pleaded” as it relates to personal liability of corporate directors, officers and employees must be read as “specifically pleaded”, a separate claim must be stated against the individual in his personal capacity.” The plaintiffs have not pleaded essential and material facts that would ground the claims against Mr. Rosenkrantz.

Negligent Misrepresentation

[19] The plaintiffs allege that Mr. Rosenkrantz is liable for negligent misrepresentation by omission or silence. The plaintiffs have not provided cogent reasons for deviating from the general rule that mere silence is not representation. Generally, such circumstances are limited to a situation in which a defendant has said or done something that ought to have been supplemented or corrected, or where words are spoken in his presence that he knows to be incorrect and there is a sufficient relationship of proximity to impose a duty on him to correct what was said: Sidhu Estate v. Bains, 1996 3332 (BC CA), 1996 Carswell BC 1262, [1996] B.C.J. No. 1246 (B.C.C.A.), leave to appeal ref’d [1996] S.C.C.A. No. 403, at para. 31. In the case at bar, the plaintiffs allege that representations were made by Mr. Prussky when Mr. Rosenkrantz was not present. They have failed to plead the necessary material facts and particulars of a cause of action for negligent representation. Bald assertions are not enough. The pleadings fail to disclose any special relationship between Mr. Rosenkrantz and the plaintiffs that could give rise to a duty of care. The pleadings do not disclose any relationship between the plaintiffs and Mr. Rosenkrantz other than through the Patica Companies and Mr. Prussky. Failure to allege the specific overt representation that was made and the failure to detail the special relationship that gave rise to the duty were fatal to pleadings against a director in the case of Montez (Collingwood South) Inc. v. Holborn Property, 2011 ONSC 6901. At para. 18 of that decision, the court affirmed that more than a bare assertion of the existence of a special relationship as might give rise to a duty of care is required.

[20] The pleading fails to disclose any nexus between Mr. Rosenkrantz personally and the plaintiffs. It discloses no meetings between them or communications, orally or in writing. The plaintiffs argue that because documentation, produced by the CRA, and provided as part of the particulars, reveals that members of Mr. Rosenkrantz’s family became unit holders in the Fund trust, this somehow creates the necessary nexus between Mr. Rosenkrantz and the plaintiffs. The plaintiffs have not pleaded this fact in the claim and have not provided any evidence to show that, even if it is true, the plaintiffs were aware of the Rosenkrantz family’s investment in the Fund or that the plaintiffs relied on this fact to their detriment. Greater particularity is required if a claim of negligent misrepresentation is to succeed.

Agency and Statements Made on Behalf of Others

[21] It is also alleged that Mr. Prussky was acting on behalf of Mr. Rosenkrantz or as his agent. This allegation in the Amended Statement of Claim reads as follows:

In the alternative, if Rosenkrantz was not present at the meetings with Prussky and the Plaintiffs, or Sheldon Libfeld, Prussky made the representations on behalf of Patica and Rosenkrantz. In addition, Rosenkrantz knew that the representations had been made by Prussky with the intention that the Plaintiffs rely upon them, and his failure to advise the Plaintiffs of the inaccuracy of those representations (as pleaded in paragraph 38 below) constitutes negligent misrepresentation on his part.

[22] Here the pleadings allege a negligent misstatement without any indication of what statement may have been.

[23] In the same allegation, reference is made to an agency relationship without any support for how this agency relationship arose. To establish agency, the plaintiffs must plead the existence of actual authority or ostensible authority granted to Mr. Prussky by Mr. Rosenkrantz to act on his behalf: Rockland Industries Inc. v. Amerada Minerals Corp. of Canada Ltd., 1980 188 (SCC), 1980 CarswellAlta 314, [1980] 2 S.C.R. 2, paras. 32, 38, 40, citing Freeman & Lockyear v. Buckhurst Park Properties (Mangal) Ltd., [1964] 2 Q.B. 480, at 505-506 (C.A.), [1964] 1 All E.R. 630 (C.A.). Although the plaintiffs allege an agency relationship, they provide no authority or ostensible authority by which Mr. Prussky was authorized to act on behalf of Mr. Rosenkrantz. Rule 25.06(2) of the Rules of Civil Procedure states that a party may raise any point of law in a pleading, but conclusions of law may be pleaded only if the material facts supporting them are pleaded. The material facts to support an agency relationship are missing from the pleading.

[24] In Durling v. Sunrise Propane Energy Group Inc., 2012 ONSC 4196, at para. 78, claim subsequently amended and reconsidered, 2012 ONSC 6570, leave to appeal allowed in part, denied in part, 2013 ONSC 5830 (Div. Ct.), a pleading of agency was struck when it was missing basic facts establishing the alleged agency; for example, when the alleged agency agreement had been made, whether it was express or implied, who the principal was and who the agent was, the purpose of the agency, and whether the agents were agents of one another.

[25] Even a generous review of the pleading does not reveal any such authority. These are bald allegations and are not easily reconciled with the plaintiffs’ original allegations that Mr. Rosenkrantz and Mr. Prussky made certain representations on behalf of the Patica Companies. The alleged agency has not been proven.

[26] The plaintiffs, in their factum, stated that: i) Mr. Prussky and Mr. Rosenkrantz are the “only” directors and officers responsible for developing, marketing and implementing the tax strategy “for the plaintiffs” on behalf of the Pactica Defendants; ii) that Mr. Prussky and Mr. Rosenkrantz “acted together” to market and implement the tax strategy; and iii) that each of Mr. Prussky and Mr. Rosenkrantz acted together in a “common design” and are “joint tortfeasors” and the actions of one bind the other. However, none of these facts is specifically pleaded in the Amended Statement of Claim.

[27] The plaintiffs submit that a tort can be imputed to several persons who are agents of a principal as joint tortfeasors on the basis of agency, vicarious liability and concerted action so that the acts of one agent bind the other. As well, they submit that an employee, officer or director and/or agent of a corporation who commits a tort against a third person may be personally liable, even if the wrongful act was committed by and with the authority of the principal. Again, the pleading does not contain the necessary factual underpinning to support the agency claim.

Disposition

[28] The Amended Statement of Claim in this action is struck insofar as the allegations pertain to the defendant David Rosenkrantz with leave to amend. A fresh Amended Statement of Claim shall be delivered to the defendants within 21 days of this endorsement failing which the action against Mr. Rosenkrantz shall be dismissed. The Crossclaim by the Bennett Jones Defendants is struck insofar as the allegations pertain to Mr. Rosenkrantz, on the basis that they are predicated on, and derivative of, the allegations against Mr. Rosenkrantz in the Amended Statement of Claim, with leave to amend the Crossclaim within 30 days of this endorsement, failing which the Crossclaim insofar as the allegations pertain to Mr. Rosenkrantz shall be dismissed.

Costs

[29] Having required the Bills of Costs of the parties, taking into account the offer to settle made by the moving parties to the plaintiffs, and considering the general principles set out in rule 57 of the Rules of Civil Procedure, the moving parties shall be entitled to their costs of the motion on a partial indemnity basis in the amount of $32,923.

Dietrich J.

Released: June 6, 2018