COURT FILE NO.: CV-20-00636573-0000
DATE: 20201026
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
10948420 CANADA INC.
Plaintiff
– and –
CY BEST GROUP INC., JOYCE CHEN, JIMMY CHEN, SIMON HONG, and CHERYL KWAN
Defendants/Moving Parties
Ben Lerer, for the Plaintiff
Ken Macdonald, for the Defendants/Moving Parties
HEARD: October 1, 2020
papageorgiou j.
Nature of the Motion
[1] This is a motion to strike out all claims against officers and directors and shareholders pursuant to Rule 21.01(b).
General Nature of the Case
[2] The litigation arises out of a commercial lease.
[3] CY is a warehousing company which owns and operates real property.
[4] The defendants Jimmy Chen and Joyce Chen are directors and shareholders of CY, and Simon Hong is a senior employee, officer and/or director of CY (collectively the “Individual Defendants”)
[5] The Statement of Claim alleges that the plaintiff entered into a lease in respect of certain property (the “Leased Property”) with the defendant CY Best Group Inc. (“CY”).
[6] The Individual Defendants were not parties to the lease and there is no allegation they had any pre-contractual dealings with the plaintiff. There is an allegation that another defendant Cheryl Kwan, the agent, misrepresented the premises to the plaintiff (defined as the “First Representation” in the Claim), but she is not a party to this motion.
[7] The plaintiff alleges that shortly after entering into the lease the plaintiff discovered the Leased Property could not be used for the plaintiff’s intended use as a table tennis club because it was not “demised”, it violated the building code and could not legally be operated as a tennis club. The plaintiff alleges CY and the Individual Defendants then promised the plaintiff that CY would remedy the issues. (the “Second Misrepresentation”). On the basis of the Second Misrepresentation, the plaintiff continued to pay rent and provided a deposit for leasehold improvements. However, CY never addressed the issues. CY then entered the Leased Property, changed the locks and distrained everything inside. The plaintiff has claimed damages for negligent misrepresentation, breaches of contract, breach of fiduciary duty, conversion and unjust enrichments. CY has counterclaimed for breach of the lease. Ultimately, the plaintiff advised CY that it was accepting CY’s conduct as repudiation of the lease.
[8] With respect to the Second Misrepresentation, the plaintiff has provided particulars with respect to what Mr. Chen said, but no particulars with respect to the remaining Individual Defendants.
[9] During the argument, the plaintiff expanded upon its claim and underlying facts it might plead if the claim was struck out and leave to amend granted. The plaintiff explained that CY is a single purpose corporation which was incorporated by the defendants Jimmy and Joyce Chen to purchase and lease the Leased Property, and knew of the other issues, but proceeded to rent it to the plaintiff in any event. Later, when the plaintiff learned of the issues with the Leased Property, Jimmy Chen (and later Joyce Chen and the defendant Simon Hong, made representations that they would address the issues, knowing at the time that they had no intention of doing so, for the purposes of inducing the plaintiff to remain on the Leased Property instead of cancelling the lease. The plaintiff relied upon these representations and continued to pay rent for approximately ten months. Ultimately, the plaintiff says that the Individual Defendants caused CY to change the locks on the doors and distrain all the plaintiff’s property. The plaintiff indicated that if it were given an opportunity, it could provide more particulars about when the representations were made, what specifically was said and by whom.
Grounds for the motion
[10] The grounds for the motion are as follows:
a. The Individual Defendants are officers/directors/shareholders of the defendant CY Best Group Inc. (“CY”). No separate cause of action lies against them; and
b. The statement of claim does not set out the requisite elements required for lifting the corporate veil or negligent misrepresentation.
Decision
[11] For the reasons that follow the claims against the Individual Defendants are struck out with leave to amend.
The Test on a Rule 21 Motion
[12] To succeed on a Rule 21 motion to strike, the moving party must demonstrate that it is plain and obvious that the claim has no reasonable chance of success. In R. v. Imperial Tobacco, 2011 SCC 42, [2011] 3 S.C.R. 45, at paras. 17, 19, the Supreme Court of Canada stated as follows:
A claim will only be struck if it is plain and obvious, assuming the facts pleaded to be true, that the pleading discloses no reasonable cause of action… Another way of putting the test is that the claim has no reasonable prospect of success
The power to strike out claims that have no reasonable prospect of success is a valuable housekeeping measure essential to effective and fair litigation. It unclutters the proceedings, weeding out the hopeless claims and ensuring that those that have some chance of success go on to trial.
[13] Under Rule 21.01(1)(b), a party may move to strike out a pleading on the ground that it does not disclose a cause of action. On such a motion, the following principles apply:
a. All allegations of fact, unless plainly ridiculous or incapable of proof, must be accepted as proven: Aviva Canada Inc. v. Lyons Auto Body Limited, 2019 ONSC 6778, at para 30;
b. The defendant, in order to succeed, must show that it is plain and obvious and beyond doubt that the plaintiff could not succeed in the claim: Haggan v. Mad Dash, 2019 ONSC 3654, at para 15;
c. The novelty of the action will not militate against the plaintiff: Haggan, at para 20;
d. The Statement of Claim must be read as generously as possible with a view to accommodating any inadequacies in the allegations due to drafting deficiencies: South Holly Holdings Ltd. v. The Toronto-Dominion Bank, 2007 ONCA 456, at para 4; and
e. A claim will be found legally insufficient when its allegations do not plead all the necessary elements necessary for a recognized cause of action: Aviva at para 31.
[14] Leave to amend should be denied only in the clearest of cases: South Holly Holdings, at para. 6. In Aviva, at para. 33, the Court explained as follows:
On motions brought under the procedure to strike a claim or defence as untenable in law, leave to amend the pleading may and usually will be given, and leave to amend will only be denied in the clearest cases when it is plain and obvious that no tenable cause of action is possible on the facts as alleged and there is no reason to suppose that the party could improve his or her case by any amendment.
Officer and director liability
[15] The seminal cases on officer and director liability are Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 CanLII 2447 (ON CA), 155 D.L.R. (4th) 627 (Ont. C.A.) and ScotiaMcLeod Inc. et al. v. Peoples Jewellers Ltd. et al. (1995), 1995 CanLII 1301 (ON CA), 129 D.L.R. (4th) 711 (Ont. C.A.). They provide that for a director or officer to be liable:
a. The actions of the individual must themselves be tortious; or
b. The actions of the individual must exhibit a separate identity or interest from those of the employer so as to make the employee’s conduct his or her own discrete conduct: Normart, at para. 18; ScotiaMcLeod, at p. 720.
[16] The defendants seek to strike out the claims against the Individual Defendants in their capacity as officers and directors citing ScotiaMcLeod and Normart, and other cases decided in reliance on Normart and ScotiaMcLeod, for the following propositions:
a. Officers and directors may not be sued unless they are acting outside the scope of their duties, not in the corporation’s interest, or unless there is a personal interest served by the officer or director’s conduct;
b. Officers and directors may not be sued for the same tort which is alleged against the corporation. (The defendant’s complaint in this case is that the pleading alleges that the Individual Defendants and CY are liable in respect of the Second Misrepresentation);
c. It is impermissible to convert a straight breach of contract claim against the corporate defendant into a personal claim against its officers, directors (and shareholders) for tactical reasons; and
d. Claims asserted against officers and directors must be particularized and differentiated.
[17] In my view, the case law supports the defendant’s position set out in paragraphs c) and d) above. With respect to paragraphs a) and b), Mr. Lerer, counsel for the plaintiff, provided me with a compelling and thorough analysis of the binding appellate authority in this area which supports his argument that officers and directors may be liable for torts they commit, when they are acting in the course of their duties, performing the usual duties associated with their position, in the perceived interests of the corporation and even when the factual basis for the claim against the officers and directors and the corporation is the same or the same tort is alleged.
[18] In ADGA Systems International Ltd. v. Valcom Ltd. et al. (1999), 1999 CanLII 1527 (ON CA), 168 D.L.R. (4th) 351 (Ont. C.A.), the Court of Appeal held that the personal defendants in that case could be sued personally for actions which they took in the course of their duties, which they believed were in the best interests of the corporation and which alleged torts arose out of the same factual matrix pursuant to which the corporation was also sued. Justice Carthy noted that the sole issue before him was whether “on the assumption that the defendant [corporation] committed a tort against the [plaintiff], the sole director and employees of [the corporation] can be accountable for the same tort as a consequence of their personal involvement directed to the best interests of the corporation”: at p. 4. He concluded that it could be: at p. 11.
[19] Justice Carthy recognized the policy concerns about the growing proliferation of lawsuits against officers and directors and the impact this may have on the ability of businesses to function efficiently if officers and directors are continually brought into litigation in respect of decisions they make in that capacity. There is a concern that lawsuits may be brought against officers and directors for strategic reasons, discovery purposes or to provide a plaintiff with leverage. Nevertheless, he stated, at para. 9:
That being said, it is not appropriate to extend the reasoning of ScotiaMcLeod beyond its intended application by reading it as protecting all conduct by officers and employees in pursuit of corporate purposes.
[20] Justice Carthy began his analysis with Said v. Butt, [1920] 3 K.B. 497 a case involving allegations of inducing breach of contract against a managing director which was dismissed. In dismissing the action, the Court considered the implications of permitting actions against officers/directors/employees of a corporation and concluded that:
[I]f a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken… Nothing that I have said today is, I hope, inconsistent with the rule that a director or a servant who actually takes part in or actually authorizes such torts as assault, trespass to property, nuisance, or the like may be liable in damages as a joint participant in one of such recognized heads of tortious wrong: cited in ADGA, at para. 14.
[21] Justice Carthy extracted the following principle from Said v. Butt, at paras. 15, 18:
[I]t provides an exception to the general rule that persons are responsible for their own conduct. That exception has since gained acceptance because it assures that persons who deal with a limited company and accept the imposition of limited liability will not have available to them both a claim for breach of contract against a company and a claim for tortious conduct against the director with damages assessed on a different basis. The exception also assures that officers and directors, in the process of carrying on business, are capable of directing that a contract of employment be terminated or that a business contract not be performed on the assumed basis that the company’s best interest is to pay the damages for failure to perform. By carving out the exception for these policy reasons, the court has emphasized and left intact the general liability of any individual for personal conduct.
[22] With respect to Normart, Carthy J.A. concluded that even though it was not stated in the reasons, the fact pattern in Normart was a classic Said v. Butt case where the alleged conduct by the directors was associated with an alleged breach of contract by the corporation: ADGA, at para. 41.
[23] In NDB Bank v Dofasco Inc. (1999), 1999 CanLII 3826 (ON CA), 181 D.L.R. (4th) 37. (Ont. C.A.), the trial judge found that the VP of Finance of A Ltd, Mr. Melville, liable for alleged misrepresentation as to its financial status to a creditor. Mr. Melville was found to be acting in the course of his duties in what he perceived to be the best interests of the corporation. Mr. Melville appealed citing ScotiaMcLeod and argued that he could not be held personally responsible for actions he carried out as an officer unless it could be shown that his actions were separately tortious or exhibited a separate identity or interest from the company. The Court of Appeal dismissed his appeal, relying on ADGA, at para. 42:
The short answer to the appellant’s submission is that the respondent established to the trial judge’s satisfaction that Mr. Melville’s actions were themselves tortious. In the subsequent decision of this court in ADGA Systems International Ltd. v. Valcom Ltd. (1999), 1999 CanLII 1527 (ON CA), 43 O.R. (3d) 101, 168 D.L.R. (4th) 351, Carthy J.A. speaking for the court confirmed that the general rule is that officers are liable for their own tortious acts.
The consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception
[24] See also Correia et al. v. Canac Kitchens et al., 2008 ONCA 506, 91 O.R. (3d) 353, at paras 86-88 and Sataur v. Starbucks Coffee Canada Inc., 2017 ONCA 1017, 140 O.R. (3d) 307.
[25] Based upon my review of all of the cases referred to, and both counsel’s helpful submissions, the following general principles are applicable to pleadings in cases brought against officers and directors:
a. Officers and directors may be liable for actions taken in the course of their employment where there is fraud, deceit, want of authority: ScotiaMcLeod, at p. 720;
b. Officers and directors may be liable for torts they commit even if their actions are undertaken in their capacity as officers and directors in the interests of the corporation: ADGA, at paras. 18, 39.
c. Said v. Butt is an exception to the above proposition. It provides that where a plaintiff’s case against a corporate defendant arises out of contractual negotiations and/or a breach of contract, the plaintiff may not also hold officers and directors who caused the corporation to breach the contract liable: ADGA at para 14
d. The Said v. Butt exception will extend to cases where there is an attempt to convert an action which is in essence a breach of contract claim against the corporation into a personal tort committed by the officers and directors. In determining whether this is the case, courts look to the underlying factual basis for and the damages flowing from the alleged personal cause of action against the officer and director and whether they are in essence the identical underlying facts and damages related to the breach of contract case against the corporation: Normart, at para. 16; Haggan, at paras. 27-30, 32-35;
e. An officer and director may be sued for the same tort alleged against the corporate defendant: ADGA, at p 9.
f. There is no requirement that the actions of the officer or director be undertaken outside the scope of his or her duties, that such conduct is not in the interests of the corporation or that the officer and director derived a personal interest for liability to follow: AGDA, at para. 18; NBD, at para. 44. However, in my view the fact that such conduct is not undertaken in the course of his or his duties and/or is not in the best interests of the corporation, and/or that the officer or director derived a personal interest will support the plaintiff’s argument that the officer and director has committed a separate tort or that his or her actions exhibit a separate identity or interest.: ScotiaMcLeod, at p. 720.
g. Pleadings alleging personal liability against officers and directors should be carefully scrutinized to ensure that there are proper particulars which disclose the basis for personal liability. In Tran v. University of Western Ontario, 2015 ONCA 295, at para. 17, the Court stated as follows:
While the scope of individual liability as distinct from corporate liability is not always clear, it is undisputed that when a plaintiff purports to sue both a corporation and individuals within that corporation (whether officers, directors or employees), the plaintiff must plead sufficient particulars which disclose a basis for attaching liability to the individuals in their personal capacities: Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 CanLII 2447 (ON CA), 37 O.R. (3d) 97, at p.102. As Labrosse J.A. explained in 460635 Ontario Ltd. v. 1002953 Ontario Inc. (1999), 1999 CanLII 789 (ON CA), 127 O.A.C. 48, at para. 8: “‘[P]roperly 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.”
See also Aviva, at paras. 63-64.
h. Undifferentiated claims which make allegations against officers and directors together without specifying who did what are insufficient. See for example, Twelve Gates Capital Group v. Mizrahi Development Group, 2018 ONSC 7656, at paras. 24-25.
[26] Accordingly, the claim is not struck out on the basis that there is no pleading that the Individual Defendants were acting outside the course of their duties, in their own interests or because the same tort is alleged against the Individual Defendants and CY.
[27] However, I must consider whether the Individual Directors’ actions, as pleaded, are separately tortious, whether what is alleged exhibits a separate identity or interest, whether the plaintiff has attempted to convert a simple breach of contract claim against the corporation into a personal tort against the officers and directors, and whether the pleading is sufficiently particularized and differentiated so as to disclose a basis for attaching liability to the Individual Directors in their personal capacity.
Negligent Misrepresentation
[28] The elements of negligent misrepresentation are:
a. There must be a duty of care based on a “special relationship” between the representor and the representee;
b. The representation in question must be untrue, inaccurate, or misleading;
c. The representor must have acted negligently in making said misrepresentation;
d. The representee must have relied, in a reasonable manner, on said negligent misrepresentation; and
e. The reliance must have been detrimental to the representee in the sense that damages resulted.
846-6718 Canada Inc. v. 177904 Interior Ltd., 2018 ONSC 1563, at para. 334, citing Queen v. Cognos, 1993 CanLII 146 (SCC), [1993] 1 S.C.R. 87 at p. 110.
[29] The defendants argue that the plaintiff has not pleaded the required elements and that in any event, the alleged representation was not a representation of fact, but rather a promise to perform future work addressing the deficiencies alleged. In 846-6718 Canada Inc., at para. 319, the Court held that a false representation as to future conduct can be treated as a misrepresentation in the following circumstances:
… Similarly, although a promise as to the future conduct of the promisor or a third party is not a misrepresentation, it has been held that such a promise implies a statement that the present intention of the promisor is to carry out the promise, or that the promisor’s belief is that the third party will act as stated, and this statement of fact, if false, can be treated as a misrepresentation.
[30] As noted above in oral argument, the plaintiff stated that the basis for the Second Misrepresentation Claim is that the Individual Defendants made the Second Misrepresentation that they would address deficiencies when they knew that they had no intention of doing so. Although not pleaded, this could form part of a reasonably constituted claim for misrepresentation.
[31] I have carefully considered the defendants’ argument that this case is an impermissible attempt to convert a straight-forward breach of contract claim into a personal claim for strategic reasons and am satisfied that the claim should not be struck out on that basis on a Rule 21 motion. In my view, it is not plain and obvious that this is the case or that the plaintiff is sure to fail on this basis. Although there is certainly a breach of contract claim in this case in respect of the lease itself, the misrepresentation alleged is outside of that breach and relates to what the plaintiff says were deliberate misrepresentations made after the breach which it relied upon to its detriment resulting in the payment of additional rent and lost time when it could have looked for other premises.
[32] In my view, read generously, the plaintiff pleads the required elements and a sufficiently particularized and differentiated claim which sets out what Mr. Chen did specifically, except for the failure to plead that he had no intention of performing the work promised at the time the Second Misrepresentation was made. See paragraphs 19-23 of the Claim and paragraph 3 of the Reply. Accordingly, this pleading is struck out but with leave to amend.
[33] There is no separate, articulated and differentiated pleading of negligent misrepresentation related to the other Individual Defendants, and no particulars as to what they said, and when, that constituted a misrepresentation. Accordingly, the claim against these defendants, Joyce Chen and Simon Hong (19-23 of the Claim and paragraph 3 of the Reply) is struck out, but with leave to amend.
[34] I note that the plaintiff also suggested that it considered pleading fraudulent misrepresentation but has not done so yet because of the seriousness of such a pleading. The plaintiff may also amend to plead fraudulent misrepresentation if it has determined at this time that that is advisable.
Lifting the Corporate Veil
[35] With respect to the allegations against Jimmy and Joyce Chen it is claimed that they should be personally liable for CY’s actions.
[36] The leading case on piercing the corporate veil is Yaiguaje v. Chevron Corporation, 2018 ONCA 472, 141 O.R. (3d) 1. Yaiguaje provides, at para. 65, that one of the bases for piercing the corporate veil is establishing that the company is a “mere façade” concealing the true facts. Where this is alleged, the party must satisfy the court that:
a. There is complete control of the subsidiary, such that the subsidiary is the “mere puppet” of the parent corporation; and
b. The subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity: Yaiguaje, at para. 66.
[37] The Court explained as follows, at para. 70:
The Transamerica test is consistent with the principle reflected in the various business corporation statutes in Canada that corporate separateness is the rule. Where the corporate form is being abused to the point that the corporation is not a truly separate corporation and is being used to facilitate fraudulent or improper conduct, the law recognizes an exception to this rule. It is important that courts be rigorous in their application of the Transamerica test because the rule is provided for in statute and stakeholders of corporations have a right to believe that, absent extraordinary circumstances, they m ay deal with the corporation as a natural person.
[38] The defendants argue that the plaintiff’s pleading does not meet the high threshold required to pierce the corporate veil and I agree. There is no pleading that CY is a mere puppet of the Individual Defendants or that it was incorporated for a fraudulent purpose, that it was used by the parent as a shell for the Individual Defendants, that it was under the complete dominance and control of the Individual Defendants or that it has been used as an instrument of fraud or as a shield. Accordingly, the pleading in paragraph 4 of the Reply is struck out with leave to amend.
[39] If the parties cannot agree on costs they may make submissions, no longer than 5 pages each as follows:
a. The defendants within 15 days of receipt of this decision;
b. The plaintiff within 15 days of receipt of the defendants’ submission; and
c. The defendant may also deliver a 2 page reply within 7 days thereafter.
[40] I am seized of this matter for any future pleadings motions, subject to my availability on the civil team.
Papageorgiou J.
Released: October 26, 2020
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
10948420 CANADA INC.
Plaintiff
– and –
CY BEST GROUP INC., JOYCE CHEN, JIMMY CHEN, SIMON HONG, and CHERYL KWAN
Defendants/Moving Parties
REASONS FOR JUDGMENT
Papageorgiou J.
Released: October 26, 2020