Court File and Parties

COURT FILE NO.: CV-19-00631819-00CL

DATE: 20201016

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: KF Capital Ltd., Kelowna Flightcraft Ltd., Aergen Canadian Holdings Inc. and KF Capital International Ltd., Plaintiffs

AND:

Vernon Victor Kakoschke, Melania Roman, Gothic Enterprises Inc., and Kakoschke 2012 Family Trust, Defendants

AND BETWEEN:

Vernon Victor Kakoschke, Melania Roman, Gothic Enterprises Inc., and Kakoschke 2012 Family Trust, Plaintiffs by Counterclaim

AND:

KF Capital Ltd., KF Capital International Ltd., and Barry Paul Lapointe, Defendants to the Counterclaim.

BEFORE: C. Gilmore, J.

COUNSEL: Earl A. Cherniak, Q.C., William E. Pepall and Jason Squire, Counsel, for the Moving Party Defendants, Plaintiffs by Counterclaim.

Sarit E. Batner and Moya J. Graham, Counsel, for the Plaintiffs, Defendants by Counterclaim.

HEARD: September 21, 2020.

ENDORSEMENT on motion

GILMORE J.

OVERVIEW

[1] The Defendants, Mr. Vernon Kakoschke (“Mr. Kakoschke”) and Gothic Enterprises (“Gothic”), bring this motion to enforce certain indemnity agreements and to require that Mr. Barry Lapointe (“Mr. Lapointe”) personally indemnify them for interim legal expenses of this litigation.

[2] The Plaintiffs’ position is that the indemnity agreements are void ab initio and that the moving parties have not met the test for a mandatory interim injunction which they must do to obtain the relief they seek on this motion.

[3] In the main action, the Plaintiff corporations (“KF”) claim against Mr. Kakoschke, his wife Melania Roman (“Ms. Roman”) and Gothic, a return of all dividends and salary paid to Mr. Kakoschke totalling over $3M. They also seek a return of shares of KF and Aergen by Mr. Kakoschke who is alleged to have engaged in self-dealing and a breach of his fiduciary duty to KF.

[4] In the Statement of Defence and Counterclaim, Mr. Kakoschke, Ms. Roman and Gothic claim against KF and Mr. Lapointe for a declaration that the January 2001 and the September 2016 Indemnity Agreements are binding and enforceable and seek advance payments for this litigation pursuant to those Agreements. They also claim aggravated and punitive damages of $500,000.

BACKGROUND FACTS

[5] KF is a group of privately-owned companies in the aviation business which are incorporated pursuant to the laws of British Columbia. Mr. Lapointe is the founder of KF. He is a commercial pilot and an aircraft engineer. Mr. Lapointe is furthermore the Chairman, CEO and sole controlling shareholder of KF which employs 1,100 people. Mr. Kakoschke estimates that Mr. Lapointe has a personal net worth exceeding $400M.

[6] Mr. Kakoschke is a trained lawyer and was called to the Bar in Ontario in 1982. He practiced at McMillan LLP from 1989 to 1998. He then resigned from the Law Society of Upper Canada and worked in investment banking with Newcourt Capital and then Allco Canada Finance from 1998 to 2003. Mr. Kakoschke was then re-admitted to the Ontario Bar and returned to McMillan LLP from September 2003 to January 31, 2010, in the banking and finance group of that firm.

[7] Mr. Kakoschke joined KF in February 2010 as General Counsel where he remained until his retirement in April 2019. Mr. Kakoschke also served as President of KF as of 2013 and further served as Trustee with respect to a number of Mr. Lapointe’s trusts.

[8] As KF was not a publicly traded company, it was run by a “Board of Advisors.” In 2001, Mr. Lapointe invited a group of trusted business colleagues to form the Board of Advisors (“the Advisors”). The Advisors did not have the same legal or fiduciary obligations as a Board of Directors but provided recommendations to Mr. Lapointe understanding that he retained complete control of all decision-making for KF. Mr. Kakoschke was one of the people invited to join the Advisors in 2001.

[9] One of the reasons for forming the group of Advisors was to ensure that KF had a proper succession plan such that Mr. Lapointe’s Advisors could form a Board of Directors upon his demise. One of KF’s largest customers was Purolator Courier. Purolator insisted that KF have such a plan or KF would risk losing Purolator’s $80M per year contract.

The 2001 Indemnity Agreement

[10] At the very first Advisors’ meeting in 2001, the Advisors discussed indemnities for the participating members of the group given that there was no liability insurance in place for them. While some of the Advisors wanted liability insurance, Mr. Lapointe responded that it was not necessary since he was giving his personal covenant to indemnify them. There is evidence that the Advisors would not have agreed to continue without an indemnity. Indeed, Mr. Lapointe’s own evidence is that he would not have served on the Purolator Board of Directors without both liability insurance and an indemnity agreement.

[11] The 2001 Indemnity Agreement which was signed on January 15, 2001, provides in part (my emphasis):

1.1 Indemnity. Subject to Section 1.2, the Shareholder and the Corporations undertake and agree jointly and severally to indemnify the Advisor and his legal representatives, heirs, successors and assigns (any of the same an “Indemnified Party”), to the fullest extent permitted by law, against any liability or expense (including, without limitation, costs, charges, legal fees and disbursements…) that any Indemnified Party may suffer or incur in respect of any claim, action, suit or proceeding (whether civil, criminal, administrative or investigative and whether brought by or on behalf of any or all of the Corporations or otherwise) or any threat thereof, involving an Indemnified Party or to which an Indemnified Party is made party and which arises as a direct or indirect result of the Advisor being or having been on the Board of Advisors of the Corporation [sic], including any act or thing done or not done in the Advisor’s capacity as a member of the Board of Advisors of the Corporation.

1.2 Limitation. The Shareholder and the Corporations shall not be obliged to indemnify an Indemnified Party against any liability or expense that such Indemnified Party may suffer or incur as a result of or based upon any admitted or established wilful misconduct or fraudulent action of the Advisor.

1.3 Payment. Within ten days after receipt of a claim for indemnification under this Agreement, accompanied by evidence of the indemnifiable liability or expense, the Shareholder and the Corporations shall pay or cause to be paid the indemnification claim unless the indemnification claim is not covered by this Agreement or the payment thereof is not permitted by applicable law or requires court approval. … Any claim for indemnification, if paid by the Shareholder or the Corporations, shall be subject to repayment in the event that the indemnification claim is not covered by this Agreement or the payment thereof is not permitted by applicable law.

4.4 Severability. …In particular, if any one of the Shareholder and the Corporations is restricted by law from providing the Indemnity in Article 1 in respect of a particular claim, such restriction shall not affect the enforcement of the indemnity against the other of them in respect of such claim.

[12] Mr. Lapointe was a party to the 2001 Indemnity Agreement both personally as well as jointly and severally with his corporations. The 2001 Indemnity Agreement indemnifies Advisors against claims brought by or on behalf of the indemnifying corporations with the only exception being for liability and expenses suffered as a result of the Advisors’ own wilful or fraudulent conduct. Other Advisors who received the benefit of the 2001 Indemnity Agreement included David Harrison, Iain Harris and David Burke.

[13] While initially taking the position that he did not prepare the 2001 Indemnity Agreement, Mr. Kakoschke corrected his evidence when presented with an email dated January 18, 2001, sent by him to Bob Monaghan (then General Counsel for KF) to which he had attached a standard form Indemnity Agreement used by McMillan. In the email he asked for Mr. Monaghan’s comments on the draft.

[14] The Indemnity Agreement presented to Mr. Lapointe was very similar to the precedent provided to Mr. Monaghan. The only changes were that the word “Director” was changed to “Advisor,” the governing law was changed to that of British Columbia and Gothic was added as an indemnitee. The 2001 Indemnity Agreement was executed with the necessary changes by all of the Advisors.

[15] The Plaintiffs take the position that Mr. Kakoschke was in a conflict of interest in relation to the 2001 Indemnity Agreement as he was listed amongst the group of Advisors and worked on the Agreement with Mr. Monaghan. This is denied by the Moving Parties who submit that KF’s General Counsel at the time, Mr. Bob Monaghan, had Mr. Lapointe’s confidence and Mr. Monaghan put Mr. Lapointe’s stamp on the agreement with Mr. Lapointe’s knowledge and consent. Mr. Lapointe’s evidence is that he received no independent legal advice about Mr. Kakoschke’s 2001 Indemnity Agreement, does not recall giving Mr. Monaghan approval to stamp it and was not given any advice about the legal implications of signing it.

[16] In issue in this case is the second paragraph of section 1.1 of the Indemnity Agreement, which Mr. Kakoschke interprets as meaning he is entitled to claim interim expenses even where the claim originates with any of the KF corporations (as opposed to a third party). Mr. Lapointe’s position is that the 2001 Indemnity Agreement was never intended to cover the costs of a former Advisor’s defence to claims of misconduct by KF or he would never have signed it. He understood the 2001 Indemnity Agreement to mean that his Advisors would be indemnified against claims from third parties. That seemed entirely fair to him. He never imagined it could mean that he would be required to indemnify legal fees for a claim brought by KF against an Advisor for alleged wrongdoing. Mr. Kakoschke’s response is that neither he nor the other Advisors would have continued to serve had the Indemnity Agreement not been in place.

The 2016 Indemnity Agreement

[17] By 2016, KF had grown both financially and in terms of its diversity. The Advisors, and in particular Mr. David Burke, sought an update to the 2001 Agreement given their new trustee roles. Mr. Kakoschke’s role in KF had also expanded significantly since 2001 and he was involved in Mr. Lapointe’s personal and estate planning.

[18] The relevant provisions of the 2016 Indemnity Agreement are set out below (my emphasis):

1.1 (d) “Expenses” means all expenses reasonably and actually incurred by or on behalf of the Indemnitee in connection with a Proceeding including legal fees and disbursements …

(e) “Fiduciary Status” describes the status of a person who, at the relevant time and whether or not before or after the date hereof, is or was … a director, officer, trustee or advisor to any member of the [KF Group] … ;

(h) “Proceeding” means any threatened, pending or completed claim, action, suit … or any other proceeding … in which the Indemnitee, by reason of his or her Fiduciary Status, is or may be joined as a party … or may be liable for or in respect of any Penalties or Expenses; but excludes any such … proceeding brought against the Indemnitee by or on behalf of any member of the [KF Group] or any Indemnitor…;

4.1 From time to time prior disposition of a Proceeding, the Indemnitors will pay on a joint and several basis all Expenses actually and reasonably incurred by or on behalf of the Indemnitee in connection with such Proceeding. …

6.1 …it will be presumed that the Indemnitee is entitled to the benefit sought under this Agreement and that the Indemnitee complied with his fiduciary duties and the Indemnitors will have the burden of proof to overcome such presumption on a balance of probabilities.

7.1 If … payment or advancement of Expenses due the Indemnitee under this Agreement is not made within 20 days after receipt by the Indemnitors of a request for … advancement or payment of Expenses, the Indemnitee will be entitled to adjudication in an appropriate court of competent jurisdiction of such Indemnitee’s entitlement to such right….

7.2 In any judicial proceeding commenced pursuant to this Part 7, the Indemnitors will have the burden of proving that the Indemnitee is not entitled to … advancement or payment of Expenses….

10.1 The rights of indemnification, payment and advancement provided by this Agreement will not be deemed exclusive of any other rights to which the Indemnitee may at any time be entitled including under applicable law, … any indemnity previously provided by any Indemnitor, … or otherwise. The provisions set forth in this Agreement are provided in addition and as a means of furtherance and implementation of, and not in limitation of, any such rights afforded the Indemnitee under any of the foregoing. To the extent that there is a change in applicable law, or an amendment to any relevant document … that allows greater indemnification or rights to payment or advancement of Expenses that would be afforded under such documents and this Agreement at the date hereof, it is the intent of the parties hereto that the Indemnitee will enjoy by virtue of this Agreement the greater benefit so afforded by such change. …

10.2 The rights provided hereunder will vest upon the Indemnitee acquiring Fiduciary Status, including upon his appointment as a director, adviser, trustee or otherwise, whether prior to or subsequent to the date hereof. …

13.6 This Agreement is not intended to supersede or cancel any written agreement made by Lapointe or any member of the [KF Group] as indemnitor(s) and the Indemnitee prior to the date hereof and such prior agreement shall remain in full force and effect. In the event of any conflict or inconsistency between the provisions of any such prior agreement and the provisions hereof, the provision(s) that … is more favourable to the Indemnitee shall prevail to the extent of such conflict or inconsistency.

[19] Sally Dennis, a partner at Farris LLP, was engaged for trusts and succession planning advice for Mr. Lapointe. She first met Mr. Lapointe in 2014. In 2016, she began meeting with Kakoschke as a conduit to Mr. Lapointe. Ms. Dennis’ evidence was that she took instructions from and reported to Mr. Kakoschke on behalf of Mr. Lapointe at all times. She only met Mr. Lapointe alone on two occasions and the 2016 Indemnity Agreement was never discussed at those meetings.

[20] The 2016 Indemnity Agreement arose in the context of restructuring Mr. Lapointe’s trust as part of his succession plan. Ms. Dennis’ evidence was that any revisions she made to the draft 2016 Indemnity Agreement were made at the express direction of Mr. Kakoschke.[^1] Ms. Dennis specifically denies that she was retained to draft the 2016 Indemnity Agreement but made changes to it only on Mr. Kakoschke’s instructions. Ms. Dennis was not cross-examined on her affidavit.

[21] Mr. Lapointe’s evidence was that Ms. Dennis did not provide him with any legal advice on any of the Indemnity Agreements signed in 2016 nor the interplay between the 2001 and 2016 Indemnity Agreements.

[22] Mr. Kakoschke deposed that Sally Dennis inserted paragraph 13.6 into the 2016 Indemnity Agreement and that she arranged for Mr. Lapointe and all directors and trustees to attend at her office to sign the 2016 Indemnity Agreement.

[23] The Plaintiffs’ position is that Mr. Kakoschke negotiated both sides of the 2016 Indemnity Agreement without independent legal advice for Mr. Lapointe. Further, KF and Mr. Lapointe received no independent legal advice about the interplay between the 2016 and the 2001 Indemnity Agreements.

[24] Conversely, Mr. Kakoschke’s evidence is that he expected Ms. Dennis to provide any legal advice that Mr. Lapointe needed about either the trusts issues or the 2016 Indemnity Agreement and that her description of herself as a mere “scribe” for Mr. Kakoschke and KF in relation to the 2016 Indemnity Agreement is disingenuous given that she is a partner at a major law firm.

[25] Mr. Kaksochke’s evidence further provides that he asked Ms. Dennis to lead the negotiations on the 2016 Agreement with respect to both Mr. Lapointe and Stikeman Elliot LLP (who was acting for another Advisor, David Burke). Mr. Kakoschke submits that by way of Farris LLP and Sally Dennis, KF and Mr. Lapointe had independent legal advice with respect to the drafting of the 2016 Indemnity Agreement. He notes that separate but identical agreements were signed by five other Advisors and several senior officers of KF.

The Friends of Barry Program

[26] In 2005, KF was awarded a contract for Contracted Flying Training and Support (“CFTS”) by the Department of National Defence. At the time, Mr. Kakoschke was an Advisor and a partner at McMillan. McMillan and Mr. Kakoschke acted as external legal counsel for CFTS. Mr. Kakoschke was instrumental in securing over $130M in debt financing needed for the CFTS program.

[27] CFTS also required $53M in equity financing. Mr. Kakoschke proposed that Mr. Lapointe’s friends, advisors and senior employees, including Mr. Kakoschke, fund an equity participation program for CFTS to fund part of the equity financing (approximately $13M). This became known as the Friends of Barry or “FOB” Program. The return for preferred shareholders (“Class AW shares”) was capped at 14% per annum pre-tax and tied to the performance of the program and there was a 5% interest rate on any loan from Mr. Lapointe used to fund the purchase.

[28] The Special Rights and Restrictions Attached to Class AW Shares in the KF Articles of Incorporation provide that KF may redeem the AW Shares if the employment of an employee shareholder was terminated for any reason other than retirement in the normal course. There was no such mechanism for shares held by non-employee shareholders. That is, for Advisors such as Mr. Kakoschke and Mr. Burke, there was no way for Mr. Lapointe to get back his AW shares even if those individuals were no longer associated with KF. Mr. Lapointe’s evidence is that he was not provided with any legal advice on the issue of redemption rights for non-employees.

[29] Mr. Kakoschke denies this allegation and provides in his evidence a copy of notes from his journal in 2006, in which he recorded having explained the redemption rights as between employee and non-employee shareholders to Mr. Lapointe. Mr. Petraroia also presented a summary of share conditions to the Advisors at a meeting sometime between 2008 to 2010. Further, Mr. Lapointe was aware when Mr. Greg Carter, the Director of Flight Operations, retired he was entitled to retain AW shares as of right. Mr. Lapointe accepted this.

[30] Mr. Kakoschke designed the program which was fully discussed by the Advisors. For various reasons the program did not proceed in 2005. It was not finalized until 2007.

[31] In 2007, McMillan was retained to act for both KF and the FOB investors on the transaction. Mr. Kakoschke’s position is that KF’s corporate counsel, Mr. Dominic Petraroia, provided independent legal advice to KF due to the clear conflict of the intended investors. Mr. Kakoschke’s evidence is that Mr. Petraroia edited the share terms and reported on shareholder resolutions for the FOB program.

[32] The Plaintiffs submit that, in fact, Mr. Kakoschke instructed Mr. Petraroia on behalf of KF and that Mr. Petraroia sought Mr. Kakoschke’s approval for any changes. The Plaintiffs rely on various email exchanges between Mr. Petraroia and Mr. Kakoschke in June 2007 and in particular an email dated June 6, 2007, in which Mr. Petraroia refers to proceeding with shareholders’ documentation if changes “met with Vern’s approval.”[^2] The Plaintiffs take the position that Mr. Kakoschke did not ensure that Mr. Lapointe or KF had independent legal advice on the FOB transaction and that by the time Mr. Petraroia was involved the key terms of the deal had already been finalized.

[33] Mr. Kakoschke and his family participated as FOB investors on three occasions:

a. In 2007, Mr. Kakoschke received $1,000,000 in preferred shares. Mr. Lapointe loaned him $500,000 for this purchase. This was admittedly arranged in recognition of Mr. Kakoschke’s instrumental role in the financing of the FOB Program.

b. In 2010, Mr. Kakoschke purchased another $1,000,000 in preferred shares with a further $500,000 loan from Mr. Lapointe. $250,000 of the shares were subscribed to by Mr. Kakoschke’s spouse, the Defendant Melania Roman.

c. In 2012, the Kakoschke 2012 Family Trust subscribed to a further $500,000 of preferred shares without financial assistance from Mr. Lapointe.

[34] Mr. Kakoschke therefore subscribed to $2.5M of AW preferred shares and used $1.5M of his own capital to purchase them. The loans payable to Mr. Lapointe ($1M) are repayable regardless of the outcome of the FOB Program. The 14% annual dividend was paid to Mr. Kakoschke in every year up to 2019.

[35] In 2017, KF pursued a competition for a new military pilot training program called Future Aircrew Training (“FAcT”) in a joint venture with another company. During the course of negotiations, Mr. Kakoschke approached Mr. Lapointe about amending the definition of “Project” with the CFTS contract to include FAcT. The amendment had the potential to result in additional dividends for AW shareholders and in fact extended the term of the AW shares to the end of the FAcT program.

[36] Mr. Lapointe’s evidence was that McMillan was instructed by Mr. Kakoschke to draft documentation for the amendment in August 2017 and that neither he nor KF received legal advice from anyone other than Mr. Kakoschke about the amendment. Mr. Kakoschke admitted that the retainer for McMillan was limited to the implementation of the amendment and not the content or substance of it. Mr. Kakoschke’s evidence was that no one turned their mind to Mr. Lapointe needing legal advice on these matters as he was not vulnerable. Mr. Kakoschke points out that the economic return to KF for the amendment was far higher than the 14% shareholder dividend.

[37] In the months leading up to 2019, the relationship between KF and Mr. Kakoschke began to deteriorate. As he approached his 65th birthday, Mr. Kakoschke made a proposal to KF and Mr. Lapointe to either stay on with new terms or retire. Mr. Lapointe accepted Mr. Kakoschke’s offer to retire.

[38] At the time of his retirement, Mr. Kakoschke took the position that he was not a full-time employee and therefore KF could not redeem his shares upon retirement. He describes his employment as a “casual position of General Counsel” and therefore outside the definition of “Employee Shareholder” for the purpose of share redemption rights. He also points to the retirement of other shareholders who retired in the normal course and kept their shares without having them redeemed.

[39] Mr. Lapointe complains that he did not receive independent legal advice about Mr. Kakoschke’s employment agreement as General Counsel characterizing his role as “a casual position.” That is, Mr. Kakoschke never brought to his attention the connection between this characterization and the definition of “Employee Shareholders” for the purpose of redemption rights under the terms of the AW shares.

[40] Mr. Lapointe and Mr. Kakoschke signed a retirement agreement in February 2019. The agreement stipulated that Mr. Kakoschke would continue to serve as a director and trustee of certain of the KF companies and, among other things, transfer 1,000 of his AW shares in KF Capital for the redemption amount of $1M in exchange for the debt he owed to Mr. Lapointe. KF agreed not to redeem the balance of Mr. Kakoschke’s 1,500 shares.

[41] However, Mr. Kakoschke did not return the shares as contemplated and now takes the position that the agreement is a nullity because no agreement was reached on consulting services. His position is that there was no retirement agreement but that, rather, the parties signed a draft letter of intent (the “LOI”) with respect to Mr. Kakoschke’s retirement arrangements. The LOI was never intended to be binding.

[42] The Statement of Claim in this action was issued on November 27, 2019. On December 9, 2019, Mr. Kakoschke requested by letter to Mr. Lapointe indemnity pursuant to the 2001 Indemnity Agreement. Mr. Kakoschke received a response from KF on December 17, 2019, indicating that the 2001 Indemnity Agreement did not apply to claims made by the Corporations against Mr. Kakoschke and Gothic. The letter further stated that Mr. Kakoschke’s wilful misconduct and fraudulent actions as set out in the Statement of Claim also excluded any indemnification.

[43] Mr. Kakoschke sent a further letter to KF on March 12, 2020, seeking indemnification for legal expenses in the amount of $125,217.15 up to February 28, 2020. A copy of his counsel’s accounts was provided. Mr. Kakoschke’s evidence is that he has incurred further legal fees such that his claim for indemnity up to May 29, 2020, totals $228,806.22. The litigation is complex and legal fees are projected to mount accordingly.

[44] Mr. Kakoschke, his wife and Gothic have received dividend payments on their AW preferred shares for the last 12 years. Mr. Kakoschke submits that the Plaintiffs by Counterclaim are owed $350,000 on their $2.5M investment which was payable on April 15, 2020. Mr. Kakoschke’s position is that this payment was wrongfully withheld by KF thereby exerting improper financial pressure on the Defendants.

ISSUES AND ARGUMENT

Does the Cytrynbaum Jurisprudence Apply to this Motion?

[45] Both parties agree that this case is outside of the statutory regime related to indemnification by corporations as the relevant British Columbia statute which governs this matter does not permit advance funding by corporations in claims such as this. However, reference was made to the Cytrynbaum case as set out below for certain findings which are relied upon by the Moving Parties.

[46] The Moving Parties argue that, following Cytrynbaum, advance funding should only be denied in Ontario where the court is persuaded, on a preliminary assessment of the merits, that the corporation has made out a strong prima facie case of bad faith on the part of the applicant for funding. The Plaintiffs argue that Cytrynbaum does not apply to the case at hand and that, as such, the Moving Parties can only obtain the relief sought on this motion through a mandatory injunction.

[47] I agree with the Plaintiffs. A review of the facts in Cytrynbaum shows that the reasoning of the Court of Appeal is inapplicable to the present case.

[48] In Cytrynbaum v. Look Communications Inc., 2013 ONCA 455, 116 O.R. (3d) 241, the Ontario Court of Appeal dealt with an appeal from former corporate directors of Look Communications who sought funding for legal costs to defend an action brought against them by Look alleging that they had wrongfully conferred certain financial benefits upon themselves. Look resisted the application for advance funding relying on s.124(4) of the Canada Business Corporations Act, R.S.C. 1985 c.C-44 (“CBCA”).

[49] The indemnification provisions of the CBCA are set out below:

Indemnification

124 (1) A corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation or another individual who acts or acted at the corporation’s request as a director or officer, or an individual acting in a similar capacity, of another entity, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the corporation or other entity.

Advance of costs

(2) A corporation may advance moneys to a director, officer or other individual for the costs, charges and expenses of a proceeding referred to in subsection (1). The individual shall repay the moneys if the individual does not fulfil the conditions of subsection (3).

Limitation

(3) A corporation may not indemnify an individual under subsection (1) unless the individual

o (a) acted honestly and in good faith with a view to the best interests of the corporation, or, as the case may be, to the best interests of the other entity for which the individual acted as director or officer or in a similar capacity at the corporation’s request; and

o (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the individual had reasonable grounds for believing that the individual’s conduct was lawful.

Indemnification in derivative actions

(4) A corporation may with the approval of a court, indemnify an individual referred to in subsection (1), or advance moneys under subsection (2), in respect of an action by or on behalf of the corporation or other entity to procure a judgment in its favour, to which the individual is made a party because of the individual’s association with the corporation or other entity as described in subsection (1) against all costs, charges and expenses reasonably incurred by the individual in connection with such action, if the individual fulfils the conditions set out in subsection (3).

[50] Look took the position that former directors of the corporation should be denied advance funding because they did not act honestly and in good faith. The Applications judge held that officers and directors were entitled to the benefit of the presumption of good faith and that it was Look’s onus to lead evidence to rebut that presumption (para. 27). The Applications judge then went on to find that Look had made out a strong prima facie case that the director appellants had acted in bad faith by conferring approximately $9M in personal benefits on themselves at Look’s expense (para. 29). He concluded that all individual applicants, save one (who was not found to be subject to s.124(4)), should be denied advance funding.

[51] The Applications judge also denied the claim for advance funding by certain corporate appellants who were not directors. As they were not directors, the Applications judge held that s.124(4) did not apply. Rather, in the Applications’ judge’s view, the corporate appellants were effectively asking for a mandatory injunction. The Applications judge held that the corporate appellants failed to meet the test for such an injunction as they had not led any evidence of irreparable harm.

[52] The Court of Appeal held that the Applications judge had erred in applying the test for a mandatory injunction in relation to the corporate appellants. The Court held at para. 76 that “a claim for advance funding does not require proof of irreparable harm nor does it turn on a balance of convenience.” The Moving Parties argue that, following this case, the Court should only deny funding where there is a strong prima facie case that the Moving Parties have acted in bad faith.

[53] The Plaintiffs counter that the Cytrynbaum does not apply to the current facts. First, the Plaintiffs note that, in Cytrynbaum, the matter was heard by way of application and a final decision was rendered. In contrast, by seeking to enforce a contract which is the subject of a trial, the Moving Parties in this case are seeking partial summary judgment or a mandatory injunction. Second, the Plaintiffs note that, in the case at bar, the Moving Parties seek to enforce indemnity agreements, or contracts, against Mr. Lapointe personally. In contrast, Cytrynbaum dealt with enforcing indemnity agreements against a corporation.

[54] The Moving Parties agree that Cytrynbaum is factually different from the case at bar because in Cytrynbaum advance funding was sought against a corporation and not an individual. However, the Moving Parties submit that there is no law that prevents an individual from seeking indemnity from a personal indemnitor where corporate indemnitors are also present. For example, in 1445369 Ontario Inc. v. Bandkohal, 2013 ONSC 5481, 18 B.L.R. (5th) 326, the Court granted summary judgment on a personal indemnity agreement and in Northbridge General Insurance Corporation v. Langston Hall Development Corporation, 2014 ONSC 156, 39 A.C.W.S. (3d) 321, the Court granted partial summary judgment against certain Defendants in relation to an Indemnity Agreement which was given as collateral security on a surety bond. As such, they argue that Cytrynbaum still sets out the applicable test on this motion for advance funding.

[55] I do not agree with the Moving Parties’ interpretation of Cytrynbaum. First, we are not dealing with claims solely brought by corporations. The claim for advance funding is also requested by Mr. Kakoschke against Mr. Lapointe personally. The cases relied upon by the Moving Parties on this point are not of assistance. I note they are both cases in which summary judgment or partial summary judgment was granted and in neither case was the execution or interpretation of the Indemnity Agreement in issue.

[56] Second, Cytrynbaum was heard as an Application, not an interlocutory motion, and a final judgment on the Application was rendered. The Court of Appeal’s reasoning evidently placed emphasis on the fact that, there, “the applications sought and resulted in a final determination of the claim for advance funding” (para. 76). That is not the case here. Different tests must necessarily apply. Even if successful on the motion, the Moving Parties would be required to wait until a trial decision was rendered to receive funding in any event.

[57] In summary, I agree with the Plaintiffs that this is a motion seeking a mandatory interim injunction as the relief sought by the Moving Parties involves the interpretation of the Indemnity Agreements which is a matter for trial and cannot be granted on an interim basis. Cytrynbaum simply does not apply to the facts before the Court.

[58] As such, in deciding whether to grant the relief sought by the Moving Parties, the court must consider the test for a mandatory injunction as set out in R. v. Canadian Broadcasting Corp., 2018 SCC 5, 1 S.C.R. 196 at para. 15:

15. In my view, on an application for a mandatory interlocutory injunction, the appropriate criterion for assessing the strength of the applicant’s case at the first stage of the RJR — MacDonald test is not whether there is a serious issue to be tried, but rather whether the applicant has shown a strong prima facie case. A mandatory injunction directs the defendant to undertake a positive course of action, such as taking steps to restore the status quo, or to otherwise “put the situation back to what it should be,” which is often costly or burdensome for the defendant and which equity has long been reluctant to compel. Such an order is also (generally speaking) difficult to justify at the interlocutory stage, since restorative relief can usually be obtained at trial. Or, as Justice Sharpe (writing extrajudicially) puts it, “the risk of harm to the defendant will [rarely] be less significant than the risk to the plaintiff resulting from the court staying its hand until trial.” The potentially severe consequences for a defendant which can result from a mandatory interlocutory injunction, including the effective final determination of the action in favour of the plaintiff, further demand what the Court described in RJR — MacDonald as “extensive review of the merits” at the interlocutory stage.

Have the Moving Parties Established a Strong Prima Facie Case?

[59] Mr. Kakoschke must establish at this preliminary stage that the Agreements on which he intends to rely are both enforceable and applicable. I find that he has not done so for the following reasons.

Mr. Kakoschke as a Fiduciary

[60] Mr. Kakoschke owed fiduciary duties to Mr. Lapointe and KF as their lawyer. Clearly Mr. Kakoschke must have been aware that it was of the utmost importance for him to act in a manner that was in the best interests of both KF and Mr. Lapointe. Some instances which cast doubt on his recognition of this this duty include:

i. Evidence that he was instrumental in expanding the meaning of “Project” such that the FAcT program extended and expanded the dividends on his AW preferred shares. Mr. Kakoschke admitted that Mr. Lapointe received no independent legal advice on the amendment to the CFTS contract to include FAcT.

ii. Evidence that he was involved in the negotiations with respect to the FOB equity financing deal specifically regarding the benefits and dividends payable to AW shareholders (which included Mr. Kakoschke) such that Mr. Lapointe did not receive independent legal advice. While Farris LLP was involved in the transaction, Mr. Petraroia sought Mr. Kakoschke’s approval for all changes to the relevant documents.

iii. Evidence that he provided the template for the 2001 and the 2016 Indemnity Agreements and was integrally involved in their drafting and further evidence that Mr. Lapointe was never advised of the consequences of the interplay of the two agreements. While Mr. Monaghan was involved in the drafting of the 2001 Indemnity Agreement, he was General Counsel for KF and not counsel for Mr. Lapointe personally. Ms. Dennis’ affidavit confirms that she was never asked to provide independent legal advice to Mr. Lapointe on the 2016 Indemnity Agreement and that she did not have a copy of the 2001 Indemnity Agreement. Her evidence is that all revisions to the 2016 Indemnity Agreement were made expressly at the direction of Mr. Kakoschke. She was not cross-examined on her affidavit.

iv. Evidence that he did not bring the definition of his role as General Counsel as a “casual” employee to Mr. Lapointe’s attention with regard to the redemption rights of the AW shares. Mr. Lapointe was unaware of the significance of this definition and the potential effect it would have on the company’s ability to redeem shares held by Mr. Kakoschke.

[61] I agree with the Moving Parties that a lack of independent legal advice or conflict alone is insufficient to vitiate a contract. I further agree that Mr. Lapointe cannot realistically be portrayed as a vulnerable individual. However, a pattern over many years of Mr. Lapointe being urged to agree to many contracts (the Indemnity Agreements, the FOB terms and amendments, and the Employment Agreement) without independent legal advice, all which greatly benefitted Mr. Kakoschke, creates a concern. Where Mr. Kakoschke insists that legal advice was given, such evidence was contradicted by Ms. Dennis, by Mr. Lapointe or by his own evidence.

[62] I find that this creates part of the factual matrix necessary to support the Plaintiffs’ argument that the Defendants do not have a prima facie case for a mandatory injunction.

The Indemnity Agreements

[63] The 2016 Indemnity Agreement is different from the 2001 Indemnity Agreement in two significant ways which are relevant to this motion. First, the 2016 Agreement makes it clear at both clause 10.1 and 13.6 that the Indemnitee is entitled to the greater benefit of the two Agreements, and second, no indemnification is provided to an Indemnitee for a proceeding brought by a member of the KF Group (such as the within proceeding). Mr. Kakoschke relies on the 2001 Agreement as providing the greater benefit to him of the two Agreements. There is evidence, however, that neither of the Indemnity Agreements would permit the relief sought by Mr. Kakoschke on this motion.

[64] Mr. Kakoschke provided a template from McMillan for the 2001 Indemnity Agreement. The signed version was virtually identical to the template with only a few non-substantive changes. He confirmed in cross-examination that the 2001 Indemnity Agreement was drafted in a manner that was “broadly in favour of the indemnitees.” I reject the argument that KF’s General Counsel at the time, Mr. Monaghan, was providing independent legal advice to Mr. Lapointe. The emails exchanged between Mr. Monaghan and Mr. Kakoschke at the time reveal that Mr. Monaghan sought direction and approval from Mr. Kakoschke on the 2001 Indemnity Agreement.

[65] Further, Mr. Lapointe’s evidence on this point makes sense. That is, he would never have signed the 2001 Indemnity Agreement if he had known that it meant he had to indemnify Mr. Kakoschke or other Advisors for that matter, against claims from other than third parties.

[66] Since Mr. Kakoschke relies on the 2001 Indemnity Agreement, a close examination of its terms is needed. Section 1.1 of the Indemnity Agreement describes an Indemnified Party as one who may suffer liability or expense as a result of a claim which “arises as a direct or indirect result of the Advisor being or having been on the Board of Advisors of the Corporation….”

[67] However, the claims against Mr. Kakoschke in this action relate to breaches of fiduciary duties with respect to his role as General Counsel, President of KF and external counsel in relation to the FOB arrangement in 2005 and the amendments in 2017. I agree with the Plaintiffs that the allegations do not arise from the period of time in which he was an Advisor and the 2001 Indemnity Agreement was drafted. There is a good argument that in relying on the 2001 Indemnity Agreement, Mr. Kakoschke does not fit into the definition of an Indemnitee.

[68] Mr. Kakoschke relies on the 2001 Indemnity Agreement because he wants to benefit from the broad definition in the Agreement with respect to claims brought “by or on behalf of the Corporation.” Such claims are specifically excluded in the 2016 Indemnity Agreement. The Plaintiffs point out that Section 2.2 of the 2001 Indemnity Agreement gives the Corporations the right to assume the defence of any such claims but that the Indemnitee can participate in the defence if they wish to retain counsel at their own expense.

[69] For reasons which are obvious, this provision is inconsistent with Mr. Kakoschke’s interpretation of the 2001 Indemnity Agreement. That is, it would not make sense that the Plaintiffs would take over the defence of their own claim. The more logical and reasonable interpretation is that maintained by Mr. Lapointe: the 2001 Indemnity Agreement was intended to provide indemnity for third party claims and the Plaintiff corporations could take over the defence of those claims at their option.

[70] Mr. Kakoschke does not rely on the 2016 Indemnity Agreement because it does not benefit him. He asks for an advance payment, which is permitted in the 2016 Indemnity Agreement but is not permitted in the 2001 Indemnity Agreement. In order to achieve the benefits he seeks, Mr. Kakoschke describes the Agreements as an “Indemnity Regime.”

[71] I do not agree that the two Agreements can form any type of “regime.” They are separate contracts created for different purposes. The 2001 Agreement was prepared to provide personal indemnification for Mr. Lapointe’s Advisors in the absence of insurance. The 2016 Indemnity Agreement was prepared in large part to provide assurance to important clients such as Purolator that Mr. Lapointe had a succession plan in place. Clients such as Purolator had valid concerns that without a succession plan in place, their business with KF would collapse in the event of Mr. Lapointe’s illness or demise.

[72] The 2001 Indemnity Agreement contains no right of advance payment. The 2016 Indemnity Agreement does. Mr. Kakoschke cannot pick and choose from the separate Agreements, argue that they amount to an “indemnity regime” and thereby create an obligation for advance payment when none exists.

[73] I find that the Moving Parties have not established a prima facie case for a mandatory injunction. The contracts on which they rely (and others) are tainted by conflict and a lack of independent legal advice. The Indemnity Agreements do not form a regime such that Mr. Kakoschke can pick and choose what parts benefit him. The Agreements were drafted for different purposes at different times and are not interchangeable. Finally, the common-sense approach to the 2001 Indemnity Agreement is clear. If the Agreement permitted the Plaintiffs to take over the defence of a claim, how could such a claim include one brought by KF? The result would be an obvious absurdity.

[74] Finally, in requesting interim relief Mr. Kakoschke must convince the Court that he is likely to win at trial. This means he must show it is likely that the 2001 Indemnity Agreement will be found to be valid, that he is entitled to an advance payment, that ss 10.1 and 13.6 work in the fashion he suggests, that the provisions of the 2016 Indemnity Agreement which benefit Mr. Kakoschke can successfully be “imported” into the 2001 Indemnity Agreement, and that the manner in which the 2001 Indemnity Agreement was negotiated and signed was unimpeachable. The Court has considerable doubt at this stage that all of those hurdles will be successfully met by Mr. Kakoschke at trial.

Have the Moving Parties Established Irreparable Harm?

[75] Mr. Kakoschke laments that without advance payment of his legal fees by Mr. Lapointe and KF he may not have his day in court. There is no evidence that this is the case. In fact, Mr. Kakoschke had the benefit of a good salary for his work at KF and dividend payments on his AW shares that averaged $350,000 a year for many years.

[76] The case law is clear that irreparable harm is harm which cannot be quantified in monetary terms or cannot be quantified. Any harm which may be suffered by Mr. Kakoschke is easily quantifiable by determining the legal fees which would have been payable to him as an advance in the event he is successful at trial.

[77] As such, I do not find that Mr. Kakoschke will suffer irreparable harm by having the indemnification of his legal fees remain as a triable issue.

Does the Balance of Convenience Favour Mr. Lapointe?

[78] The status quo should be preserved until trial when the issue of the enforceability and interpretation of the Indemnity Agreements with respect to advance payments will be litigated on a complete record.

ORDERS

[79] The motion is dismissed.

[80] If the parties cannot agree on costs, I will receive written submissions of no more than three pages in length exclusive of any Offers to Settle or Bill of Costs. Case law must be hyperlinked. Costs submissions are due on a seven-day turnaround starting with the Defendants seven days from the date of this Endorsement. If no costs submissions are received within 35 days of the date of this Endorsement, costs will be deemed to be settled.

C. Gilmore, J.

Date: October 16, 2020

[^1]: Affidavit of Sally Dennis, sworn July 29, 2020, para 9. [^2]: Reply Affidavit of V. Kakoschke sworn August 13, 2020, Exhibit H.