Extreme Venture Partners Fund I LP et al. v. Varma et al.

[Indexed as: Extreme Venture Partners Fund I LP v. Varma]

Ontario Reports Ontario Superior Court of Justice Conway J. July 24, 2019 148 O.R. (3d) 360 | 2019 ONSC 4459

Case Summary

Judgments and orders — Exchange rate — Defendants breaching their fiduciary duties and conspiring to conceal and acquire assets on undervalued basis — Plaintiffs awarded damages and disgorgement of profits in U.S. dollars — Fact that Canadian dollar was now significantly weaker than on date of payment not constituting reason to depart from default exchange rate in s. 121(1) of Courts of Justice Act — Courts of Justice Act, R.S.O. 1990, c. C.43, s. 121(1).

Judgments and orders — Prejudgment interest — Plaintiffs pleading prejudgment interest — Plaintiffs awarded damages and order for disgorgement of profits — Judgment making no reference to prejudgment interest — Trial judge seeking submissions on applicable exchange rate and prejudgment interest — Plaintiffs not required to ask trial judge to reconsider reasons in order to be entitled to prejudgment interest — Trial judge still seized of matter — Plaintiffs awarded prejudgment interest. [page361]

The plaintiffs obtained judgment against the defendants on the basis that the defendants had breached their fiduciary duties and conspired to conceal and acquire assets on an undervalued basis. They were awarded damages and an order for disgorgement of profits, both in U.S. dollars. The trial judge sought submissions on the applicable exchange rate and on prejudgment interest. The defendants submitted that the court should exercise its discretion under s. 121(3) of the Courts of Justice Act, R.S.O. 1990, c. C.43 to use the exchange rate that existed on the date of the transactions in question, rather than applying the default rule in s. 121(1) that the applicable exchange rate was the rate existing on the date of payment.

Held, the default exchange rate should be used; the plaintiffs should be awarded prejudgment interest.

The fact that the Canadian dollar was now significantly weaker than on the date of payment did not constitute a reason to depart from the default exchange rate in s. 121(1) of the Courts of Justice Act.

While the judgment did not refer to prejudgment interest, the plaintiffs had pleaded prejudgment interest and the court was still seized of the matter. The plaintiffs were not required to ask the court to reconsider the reasons for judgment in order to be entitled to prejudgment interest.

Hollowcore Inc. v. Visocchi, [2016] O.J. No. 4055, 2016 ONCA 600, 58 C.C.L.I. (5th) 47, 54 C.L.R. (4th) 179, 351 O.A.C. 228, 269 A.C.W.S. (3d) 182, varg [2014] O.J. No. 5535, 2014 ONSC 6802, 40 C.C.L.I. (5th) 17, 247 A.C.W.S. (3d) 340 (S.C.J.) [Leave to appeal to S.C.C. refused [2016] S.C.C.A. No. 426, 2017 CarswellOnt 1211]; Stott v. Merit Investment Corp. (1988), 63 O.R. (2d) 545, [1988] O.J. No. 134, 48 D.L.R. (4th) 288, 25 O.A.C. 174, 19 C.C.E.L. 68, 8 A.C.W.S. (3d) 148 (C.A.) [Leave to appeal to S.C.C. refused (1988), 63 O.R. (2d) x, [1988] S.C.C.A. No. 185, 49 D.L.R. (4th) viii]; Zesta Engineering Ltd. v. Cloutier, [2014] O.J. No. 5150, 2014 ONCA 762, 20 C.C.E.L. (4th) 168, 246 A.C.W.S. (3d) 449, varg [2010] O.J. No. 4485, 2010 ONSC 5810, [2011] CLLC para. 210-003, 86 C.C.E.L. (3d) 1, 77 B.L.R. (4th) 7, 194 A.C.W.S. (3d) 593 (S.C.J.), consd

Other cases referred to

Brennan v. Admiral Bay Resources Inc., [2013] O.J. No. 1293, 2013 ONSC 1654 (S.C.J.); Couper v. Nu-Life Corp., [2016] O.J. No. 3655, 2016 ONSC 3682 (S.C.J.); Extreme Venture Partners Fund I LP v. Varma, [2019] O.J. No. 2518, 2019 ONSC 2907 (S.C.J.); Honey Bee (Hong Kong) Ltd. v. VitaSound Audio Inc., [2018] O.J. No. 5170, 2018 ONSC 5787 (S.C.J.); Lee v. Choice Bank Inc., [2019] O.J. No. 144, 2019 ONCA 24, affg [2018] O.J. No. 2773, 2018 ONSC 3225 (S.C.J.); PCL Constructors Canada Inc. v. Global Events Management Group Inc., [2016] O.J. No. 757, 2016 ONSC 689 (S.C.J.); United States of America v. Shield Development Co. (2005), 74 O.R. (3d) 595, [2005] O.J. No. 2040, 139 A.C.W.S. (3d) 259 (C.A.), affg 2004), 74 O.R. (3d) 583, [2004] O.J. No. 5840 (S.C.J.); Zucchetti Rubinetteria SpA v. Natphil Inc., [2011] O.J. No. 2813, 2011 ONSC 3845, 204 A.C.W.S. (3d) 160 (S.C.J.)

Statutes referred to

Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 121, (1), (3), 128(1), (4)(a)

Authorities referred to

Fridman, G.H.L., The Law of Contract in Canada, 3rd ed. (Toronto: Carswell, 1992) Perell, Paul M., and John W. Morden, The Law of Civil Procedure in Ontario, 3rd ed. (Toronto: LexisNexis, 2017) [page362]

RULING on exchange rate and prejudgment interest.

Counsel:

Won J. Kim, Megan B. McPhee and Aris Gyamfi, for plaintiffs/defendants by counterclaim. Ira Nishisato, Katherine J. Menear and Katie Archibald, for defendants/plaintiffs by counterclaim, Amar Varma, Sundeep Madra, Varma Holdco Inc., Madra Holdco Inc., Extreme Venture Partners Annex Fund I LP and EVP GP Annex Fund I Inc. David E. Lederman, Daniel Cappe and Larissa Fulop, for defendants Chamath Palihapitiya and El Investco 1 Inc.

[1] CONWAY J. — After a five-week trial, I released my reasons on May 14, 2019 and found in favour of the plaintiffs: Extreme Venture Partners Fund I LP v. Varma, [2019] O.J. No. 2518, 2019 ONSC 2907 (S.C.J.) ("Judgment"). I made the following orders, at para. 316:

(a) In respect of the Annex Fund Claim, each of Amar and Sunny shall pay punitive damages to Fund I in the amount of $250,000.

(b) In respect of the Xtreme Labs Claim, Chamath, El Investco, Amar, Sunny, Varma Holdco and Madra Holdco, jointly and severally, shall pay damages in the amount of USD$3.36 million to Fund I, Ray and Imran.

(c) In respect of the Xtreme Labs Claim, Chamath, El Investco, Amar and Sunny, jointly and severally, shall pay in disgorgement of profits the amount of USD$12.33 million to Fund I.

[2] In para. 317 of the Judgment, I invited written submissions on the exchange rate that should apply to the orders in (b) and (c), which were in U.S. dollars. The parties have now provided those submissions. As well, the plaintiffs made submissions on their request for prejudgment interest, to which the defendants responded. I have reviewed all of the parties' submissions on these two issues.

Exchange Rate

[3] As noted, the two orders in respect of the Xtreme Labs Claim are in U.S. dollars. The total amount awarded for damages and disgorgement of profits was US$15,690,000.

[4] Orders payable in a foreign currency are subject to s. 121(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 ("CJA"). The default rule is that the applicable exchange rate to be used is the rate on the day before payment is received by the judgment creditor:

Foreign money obligations

121(1) Subject to subsections (3) and (4), where a person obtains an order to enforce an obligation in a foreign currency, the order shall require payment of [page363] an amount in Canadian currency sufficient to purchase the amount of the obligation in the foreign currency at a bank in Ontario listed in Schedule I to the Bank Act (Canada) at the close of business on the first day on which the bank quotes a Canadian dollar rate for purchase of the foreign currency before the day payment of the obligation is received by the creditor.

[5] However, s. 121(3) of the CJA gives the court the discretion to apply a different exchange rate date if it considers using the rate on the date of payment to be inequitable:

Discretion of court

(3) Subject to subsection (4), where, in a proceeding to enforce an obligation in a foreign currency, the court is satisfied that conversion of the amount of the obligation to Canadian currency as provided in subsection (1) would be inequitable to any party, the order may require payment of an amount in Canadian currency sufficient to purchase the amount of the obligation in the foreign currency at a bank in Ontario on such other day as the court considers equitable in the circumstances.

[6] The plaintiffs argue that the default rule should apply and that the exchange rate should be determined as of May 14, 2019, the date of judgment. On that date, the applicable U.S.-Canadian exchange rate was $1.3469 and the total award for the Xtreme Labs Claim in Canadian dollars would be CDN$21,132,861.

[7] The plaintiffs are incorrect in their submission that the default rate is the rate existing on the date of judgment. Section 121(1) expressly provides that the default rate is the exchange rate on the date "payment of the obligation is received by the creditor". The applicable date is the date of payment, not the date of judgment.

[8] The defendants submit that the court should exercise its discretion under s. 121(3) to use the exchange rate that existed on the date of the transactions in question. They submit that it would be inequitable to use the current exchange rate, which reflects a significantly weakened Canadian dollar than on the date of the transactions, and would create an enormous windfall for the plaintiffs. The exchange rate on the date of the Xtreme Labs sale (August 15, 2012) was $0.9891 and on the date of the Hatch Labs sale (March 11, 2014) was $1.1035. According to the defendants' calculations, the plaintiffs should be entitled to CDN$3,323,376 for the Xtreme Labs sale and CDN$13,606,155 for the Hatch Labs sale. The defendants further submit that the plaintiffs' expert used the date of the transactions in his report for conversion of currency and that the plaintiffs are now estopped from asserting a right to the current exchange rate.

[9] I reject the defendants' submissions.

[10] The default date of payment rule was introduced in the late 1970s. According to Paul M. Perell and John W. Morden, The [page364] Law of Civil Procedure in Ontario, 3rd ed. (Toronto: LexisNexis, 2017), at para. 11.24:

In the late 1970s, the law above the conversion of judgments in domestic currency underwent change in England and in Canada. The old law, at least with respect to some matters, was that the date of the wrongdoing (date of the breach rule) would be used for the purposes of conversion. The change in the common law was to move to a time of payment rule. Section 121 of the Courts of Justice Act was introduced to codify the new approach, which was to use the date of the payment of the obligation. The policy underlying s. 121 is to ensure a creditor is properly compensated for his or her loss. 1

[11] It has been recognized that the parties have no control over exchange rate fluctuations and that choosing an exchange rate may inevitably advantage or disadvantage a party. As stated in Fridman's Law of Contracts: 2

The underlying philosophy of damages is compensation for what the plaintiff has lost. Giving the plaintiff the nominal value of his debt or damages is, in one sense compensating him. Allowing the debtor to pay off the creditor in devalued currency results in no realistic compensation of the plaintiff. Conversely, the creditor may reap an unexpected windfall by an appreciation of the currency. Can the law ever ensure perfect justice in this respect? Can it guard against every conceivable possibility of this kind? The law certainly recognizes that physical events cannot always be taken into account in assessing liability. Why should the law have to concern itself with fiscal or economic events that might even be thought of as within the foresight of the parties and, therefore, something with respect to which they should plan?

[12] The case law has established the following principles with respect to the application of s. 121 and the exercise of the court's discretion to choose a date other than the date of payment:

(a) The onus is on the party relying on s. 121(3) to show that there has been an inequity: Zucchetti Rubinetteria S.p.A. v. Natphil Inc., [2011] O.J. No. 2813, 2011 ONSC 3845 (S.C.J.), at para. 20.

(b) A change in the exchange rate alone does not create an inequity: Hollowcore (C.A.), at para. 73. [page365]

(c) An award of prejudgment interest can compensate plaintiffs for the fact that they did not have access to their funds in the intermittent period. Lack of access is not a reason to depart from the general rule: Hollowcore (C.A.), at para. 73.

[13] Courts have regularly applied the default rule in s. 121(1): see Zucchetti. See, also, Honey Bee (Hong Kong) Ltd. v. VitaSound Audio Inc., [2018] O.J. No. 5170, 2018 ONSC 5787 (S.C.J.); Lee v. Choice Bank, [2018] O.J. No. 2773, 2018 ONSC 3225 (S.C.J.), affd [2019] O.J. No. 144, 2019 ONCA 24; PCL Constructors Canada Inc. v. Global Events Management Group Inc., [2016] O.J. No. 757, 2016 ONSC 689 (S.C.J.); Brennan v. Admiral Bay Resources Inc., [2013] O.J. No. 1293, 2013 ONSC 1654 (S.C.J.); United States of America v. Shield Development Co. (2004), 74 O.R. (3d) 583, [2004] O.J. No. 5840 (S.C.J.), affd 2005), 74 O.R. (3d) 595, [2005] O.J. No. 2040 (C.A.).

[14] The defendants rely on several cases to support their argument that the court should exercise its discretion to use the date of the transactions. None of those cases assists them.

[15] In Stott v. Merit Investment Corp. (1988), 63 O.R. (2d) 545, [1988] O.J. No. 134 (C.A.), at pp. 565-66 O.R., leave to appeal to S.C.C. refused (1988), 63 O.R. (2d) x, [1988] S.C.C.A. No. 185, Finlayson J.A. for the majority of the Court of Appeal upheld the trial judge's exercise of discretion to convert a debt into Canadian dollars on the day that the debt arose. He noted the general rule that foreign money obligations are to be converted to Canadian dollars at the date of recovery but upheld the trial judge who had selected an earlier date based solely on the specific facts of that case.

[16] In Zesta, this court exercised its discretion to apply the exchange rate at the date of the transaction. The reason for doing so was to more properly reflect the loss to the plaintiff at the time the wrong was committed. The defendant was found to have breached his fiduciary duties owed as vice president to the plaintiff corporation. The court exercised its discretion to assist the innocent company against its former officer. Otherwise, there would have been an inequity: the plaintiff would have recovered less in Canadian dollars in 2010 than he would have been entitled to in 1999 when the wrong occurred.

[17] In Hollowcore, the Court of Appeal upheld a trial judge's exercise of discretion to put the plaintiffs in the same position they would have been in but for the wrong committed by the defendants. The same situation occurred in Couper v. Nu-Life Corp., [2016] O.J. No. 3655, 2016 ONSC 3682 (S.C.J.). [page366]

[18] In those cases, the court exercised its discretion to prevent the inequity of allowing the defendant to benefit from a depreciated exchange rate under the default rule. The case at bar is precisely the opposite. The defendants were found to have breached their fiduciary duties and conspired to conceal and acquire assets on an undervalued basis. Choosing the transaction dates with a more favourable exchange rate in favour of the defendants would allow them to benefit from their wrongful conduct in this case, at the expense of the plaintiffs.

[19] In essence, the defendants' submission is that the exchange rate has not fluctuated in their favour and that the amounts at issue are significant. Having regard to the principles set out in the case law, the defendants have not satisfied their onus of establishing any inequity or any basis to depart from using the default rule.

[20] Finally, the plaintiffs are not precluded from relying on the provisions of the default rule in s. 121(1). While their experts did use earlier exchange rate dates in their damage reports, the plaintiffs ultimately did not rely on those reports in their closing submissions. They made it clear to the court that they were relying on a different method of calculating damages, were seeking disgorgement of profits and were asking for judgment in U.S. dollars. 3 Having obtained judgment on that basis, I see no reason why they cannot enforce their statutory right to have the U.S. dollar judgment converted as at the date of payment, pursuant to s. 121(1) of the CJA.

Prejudgment Interest

[21] The plaintiffs seek prejudgment interest. The defendants argue that because I did not refer to prejudgment interest in the Judgment, the plaintiffs can only request same by asking me to reconsider those reasons. I reject that submission. The plaintiffs pleaded prejudgment interest. They have made their submissions on this issue, to which the defendants have had an opportunity to respond. I am still seized of this matter and have not previously disposed of the prejudgment interest issue.

[22] Section 128(1) of the CJA provides as follows:

128(1) A person who is entitled to an order for the payment of money is entitled to claim and have included in the order an award of interest thereon [page367] at the prejudgment interest rate, calculated from the date the cause of action arose to the date of the order[.]

[23] Section 128(4)(a) of the CJA provides that prejudgment interest shall not be awarded on punitive damages. The plaintiffs do not seek same on the punitive damages in the Annex Claim.

[24] The plaintiffs claim prejudgment interest from August 15, 2012, the date the Xtreme Labs sale closed and, they submit, the date the cause of action arose. Since the Judgment was rendered on May 14, 2019, the number of days between the date of Judgment and when the cause of action arose is 2,463 days. The proceeding was commenced in the third quarter of 2014, where the prejudgment interest rate is 1.3 per cent.

[25] The defendants submit that the damages for the Xtreme Labs sale and the disgorgement of profits should be dealt with separately. They agree on the August 15, 2012 date for the Xtreme Labs sale damages, but state that the loss arising from the Hatch Labs sale only occurred on April 3, 2014 (the date they first received profits from the sale that closed on March 11, 2014). Prior to that, they argue that there was no cause of action for disgorgement of profits because there were no profits to disgorge.

[26] In my view, the defendants are improperly equating the remedy of disgorgement with the date that the cause of action arose. Disgorgement of profits was the remedy for Amar and Sunny's breach of fiduciary duty and Chamath/El Investco's knowing assistance with respect to the concealment of Xtreme Labs' 13 per cent equity interest in Hatch Labs. The cause of action was the concealment of this asset at the time that the defendants purchased the shares of Xtreme Labs on August 15, 2012. That was the date the cause of action arose and the date from which prejudgment interest should be calculated.

[27] The proceeding was commenced in the third quarter of 2014 and the prejudgment interest rate is therefore 1.3 per cent.

[28] Apart from the starting date, the parties use the same formula for calculating prejudgment interest. Using the starting date of August 15, 2012 date, the calculation according to the parties' formula is:

of days * interest rate * amount / 365

2,463 days * 0.013 * US$15,690,000 4 USD / 365 = US$1,376,378.38 [page368]

Decision

[29] To summarize:

(a) With respect to the conversion of the US$3.36 million in damages on the Xtreme Labs Claim into Canadian dollars, Chamath, El Investco, Amar, Sunny, Varma Holdco and Madra Holdco shall pay an amount in Canadian currency sufficient to purchase the amount of the damages award at the close of business on the first day on which the bank quotes a Canadian dollar rate for purchase of U.S. dollars before the day payment of the obligation is received by Fund I, Ray and Imran, all in accordance with s. 121(1) of the CJA.

(b) With respect to the conversion of the US$12.33 million in disgorgement of profits on the Xtreme Labs Claim, Chamath, El Investco, Amar and Sunny shall pay an amount in Canadian currency sufficient to purchase the amount of the disgorgement award at the close of business on the first day on which the bank quotes a Canadian dollar rate for purchase of U.S. dollars before the day payment of the obligation is received by Fund I, all in accordance with s. 121(1) of the CJA.

(c) The total damage and disgorgement of profit award of US$15,690,000 shall bear prejudgment interest at the rate of 1.3 per cent from August 15, 2012 to May 14, 2019 in the amount of US$1,376,378.38.

Order accordingly.

Notes

1 See, also, Hollowcore Inc. v. Visocchi, [2016] O.J. No. 4055, 2016 ONCA 600, 351 O.A.C. 228, at para. 75, revg in part on other grounds [2014] O.J. No. 5535, 2014 ONSC 6802, 40 C.C.L.I. (5th) 17 (S.C.J.), leave to appeal to S.C.C. refused [2016] S.C.C.A. No. 426, 2017 CarswellOnt 1211; Zesta Engineering Ltd. v. Cloutier, [2010] O.J. No. 4485, 2010 ONSC 5810, 86 C.C.E.L. (3d) 1 (S.C.J.), at para. 296, vard on other grounds [2014] O.J. No. 5150, 2014 ONCA 762, 20 C.C.E.L. (4th) 168.

2 G.H.L. Fridman, The Law of Contract in Canada, 3rd ed. (Toronto: Carswell, 1992), at p. 761, as quoted in Hollowcore (S.C.J.), at para. 253.

3 The defendants submit that I should not have considered the plaintiffs' reply submissions that contained these arguments. I was prepared to and did review the reply submissions. However, I reached the same conclusion based on my own consideration of these factors at trial, quite apart from the reply submissions.

4 The plaintiffs incorrectly used the number $15,960,000 in their submissions on prejudgment interest. The correct number is $15,690,000.

End of Document