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Individual Acts and Corporate Benefits: Towards a More Expansive Standard for Company Liability

by Michael L. Byers

A recent Ontario Court of Appeal decision has arguably expanded the scope of a company’s liability for the actions of those who control it. While much of the commentary on DBDC Spadina Ltd. v. Walton (“Walton”)[1] has focused on its analysis of the tort of knowing assistance of breach of fiduciary duty,[2] Walton’s discussion and application of the ‘corporate identification doctrine’ – which courts use to attribute a company with the knowledge of its principal – is worth pausing on. Walton makes it easier for litigants to use the corporate identification doctrine as a ‘sword’ to impose liability to other companies controlled by the same person or persons who have committed wrongful acts.

Background

Walton arose from a multi-million dollar real estate fraud. The Waltons convinced investors (including the appellants and respondents) to invest in companies they incorporated to invest in commercial real estate projects. Each project was to be funded 50% by the Waltons and 50% by investors. The Waltons never actually invested their own money, and moved investors’ money through a number of different companies that they controlled. The investors eventually obtained judgments against the Waltons that the Waltons could not satisfy.

A priority dispute between victims of the fraud over the remaining assets held by companies used in the fraudulent scheme ensued, culminating in the Ontario Court of Appeal’s Walton decision. The appellants had invested in the ‘Schedule B Companies’, and sought to execute against the ‘Schedule C Properties’ held by the ‘Schedule C Companies’, in which the respondents invested. Justice Newbould’s dismissal of the appellants’ claims was overturned by the Court of Appeal, albeit with a spirited dissent by Justice Van Rensberg.[3] 

Walton’s Relaxation of the Corporate Identification Doctrine

The test for when a corporation will be liable for the acts of its directing mind was set out by the Supreme Court of Canada in Canadian Dredge & Dock Co. v. R. (“Canadian Dredge”). In Canadian Dredge, Justice Estey held that a company would be affixed with such liability where the act of a directing mind: (a) was within the field of operation assigned to the individual; (b) was not totally in fraud of the company; and (c) the individual’s actions were, by design or result, partly for the benefit of the company.[4] Although Canadian Dredge concerned the criminal liability of a corporation, the three-part test set out by Justice Estey was subsequently applied in civil cases.[5] In the Supreme Court of Canada’s recent decision in Deloitte & Touche v. Livent Inc. (Receiver of)[6] (“Livent”), which was released in late 2017, the majority questioned the strict application of the Canadian Dredge test in civil cases, and held that courts retained discretion not to strictly apply it where it would not be in the public interest to do so.[7]

On the authority of Livent, Justice Blair for the majority in Walton held that the Canadian Dredge test (particularly the second and third criteria) should be applied in a “less demanding fashion” in civil cases, particularly those such as Walton that arose from a complex fraud involving a number of victims and corporate actors operated by a fraudster. He rejected the argument that it was necessary to show that each individual company specifically benefitted from the scheme.[8] Justice Blair concluded that the Schedule C Companies should be affixed with liability for the actions of their directing minds, and granted judgment in favour of the appellants in the amount of $22,680,852, less certain deductions. In reaching this conclusion, Justice Blair found that a transfer of monies from a ‘clearing house’ corporate entity used by the Waltons to the Schedule C Companies benefited those companies generally, even if it could not be conclusively demonstrated that it benefitted each specific entity and it did not benefit their shareholders (the respondents, who were also victims of the fraud).[9] This grounded the conclusion that the Schedule C Companies had knowledge of the fiduciary duty that Ms. Walton owed to the plaintiffs, and participated in her breach of those duties.[10]

In her dissenting reasons, Justice Van Rensberg disagreed that “relaxing” the approach to the corporate identification doctrine was warranted on either policy grounds or on the authority of Livent. She was of the view that a specific benefit needed to flow to each Schedule C Company to impose liability on it, and that in any event Livent provided her with the discretion to refrain from applying the corporate identification doctrine, which she would have exercised to dismiss the appellants’ claims.[11]

The majority’s application of a less rigid standard allowed Justice Blair to disregard some of the strictures of separate corporate personality and reach what the majority saw as a more fair outcome for the appellants. By concluding that it was not necessary for the appellants to show that each of the Schedule C Companies separately benefitted from the fraud, the majority’s approach relieved the appellants of a significant legal and evidentiary burden, allowing them to obtain judgment against the Schedule C Companies without having to trace the flow of funds to them, which is often extremely challenging or impossible in cases involving complex frauds.

Conclusion

Prior to Walton and Livent, the application of the corporate identification doctrine was criticized by some for being muddled and inconsistent.[12] While these two decisions have provided some clarity, the combination of a less stringent standard and greater latitude for judicial discretion creates uncertainty as to when the doctrine may apply. Given the importance of the case to commercial litigation generally, and Justice Van Rensberg’s strong dissent, the litigious saga of the Waltons’ fraud may well end up before the Supreme Court of Canada. If not, it will be interesting to see whether lower courts are willing to follow Justice Blair’s reasoning and expand the pool of liable corporate defendants in particular cases.

While Walton is most clearly useful to victims of complex frauds, its potential utility is not limited to such cases. Plaintiffs, particularly sympathetic ones, now have another tool that may be used to pursue other entities within a corporate structure other than the one with which they dealt with directly.

 

[1] 2018 ONCA 60.

[2] In short, the court held that knowing assistance of breach of fiduciary does not require the plaintiff to trace specific funds to a particular corporate defendant in order to be able to obtain damages against that defendant.

[3] Justice Blair held that Justice Newbould had erred by finding that Ms. Walton was not a directing mind of the Schedule C Companies in light of an earlier finding by Justice Brown (then sitting on the Commercial List of the Superior Court of Justice) that she was.

[4] [1985] 1 S.C.R. 662, 19 C.C.C. (3d) 1 at p 38.

[5] See e.g. Standard Investments Ltd. v. Canadian Imperial Bank of Commerce (1985), 22 D.L.R. (4th) 410 (Ont. C.A.), leave to appeal refd (1986), 53 O.R. (3f) 663. Since 2004, amendments to the Criminal Code, R.S.C. 1985, c C-46, have made it easier to impose liability on corporations in the criminal context. A corporation may now be liable for the acts of a broadly-defined “senior officer”; it need not be a directing mind: see ss. 2, 22.1.

[6] 2017 SCC 63.

[7] Livent, supra at para 104. The majority in Livent concluded that the defendant auditor could not affix the plaintiff (the receiver of Livent) with knowledge of the fraud committed by Livent’s principals in order to avoid liability for a negligent audit.

[8] Walton, supra, at paras 69-73.

[9] Walton, supra, at paras 78-83.

[10] Walton, supra, at paras 78-96.

[11] Walton, supra, at paras 234-237.

[12] See e.g. Darcy L. MacPherson, “The Civil and Criminal Applications of the Identification Doctrine: Arguments for Harmonization”, Alberta Law Review, (2007) 45: 1 171.

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