Sep 1, 2020

COURT OF APPEAL SUMMARIES (August 24 – 28, 2020)

Vellenga v. Boersma, 2020 ONCA 537 (CanLII)

[Tulloch, van Rensburg and Zarnett JJ.A.]

Counsel:

Blair W.M. Bowen, for the appellants

Marc Munro, for the respondent

Keywords: Corporations, Directors, Breach of Fiduciary Duty, Oppression, Remedies, Constructive Trust, Civil Procedure, Limitation Periods, Laches, Real Property, Civil Procedure, New Argument on Appeal, Ontario Business Corporations Act, R.S.O. 1990, c. B.16, ss. 134(1), 248, Real Property Limitations Act, R.S.O. 1990, c. L.15, s. 4, Soulos v. Korkontzilas, [1997] 2 S.C.R. 217, Wilson v. Alharayeri, 2017 SCC 39, Waterstone Properties Corporation v. Caledon (Town), 2017 ONCA 623, Kaiman v. Graham, 2009 ONCA 77, Beardsley v. Ontario (2001), 57 O.R. (3d) 1 (C.A.)

Facts:

The appellant, Dr. B, and the respondent, Mr. V, operated a dairy farm together. They operated as equal partners from 1989 until 1995, when they incorporated under Maple Pond Farm Limited (the “Corporation”). Dr. B and Mr. V were equal shareholders and directors of the Corporation. The second appellant, Mrs. B (Dr. B’s wife), was appointed as treasurer.

In 1999, the Corporation sold the farm’s milk quota and the net proceeds (just over $1 million) were used to purchase a property, known as the Boundary Lake Property. However, instead of ownership being held by the Corporation, it was held by the appellant corporation, Weijs Investment Corp. (“Weijs Investment”), which was wholly owned by Mrs. B. Dr. B’s reason for doing this was that he claimed he was owed money by the Corporation in excess of the net proceeds of sale of the milk quota.

Five years later, Mr. V commenced an application seeking, among other things, an oppression remedy under s. 248 of the OBCA. Among other things, he sought an order declaring that the Boundary Lake Property was the property of the Corporation, on the basis that the Corporation’s funds were used for its purchase.

The trial judge found that the Corporation’s funds had been used to purchase the Boundary Lake Property, in breach of Dr. B’s fiduciary duty. He found the documents produced by Dr. B to evidence the debt to him were not valid and had not been signed by Mr. V. Dr. B was therefore found not entitled to cause the Corporation to “loan” the proceeds of sale to Weijs Investment. He declared that the property was held by Weijs Investment in trust for the Corporation. Dr. B and Mrs. B appealed.

Issues:

1. Did the trial judge err in finding that Dr. B breached his fiduciary duty?

2. Did the trial judge err in imposing a constructive trust over the Boundary Lake Property?

3. Was Mr. V’s claim for a constructive trust statute-barred under s. 4 of the Real Property Limitations Act?

4. Did the trial judge err in his costs award?

Holding:

Appeal dismissed.

Reasoning:

1. No. There was no error that would justify appellate intervention. The trial judge adopted the correct legal approach and properly considered the documentary evidence, as well as the evidence of the various witnesses. It was within his purview to accept Mr. V’s evidence that he had never signed the agreements of purchase and sale or the demand note, particularly in light of the other evidence.

The trial judge was also entitled to find that the alleged interest-free loan by the Corporation to Weijs Investment was invalid. Not only was there no legitimate basis for the loan, there was no evidence of loan documents, a promissory note or Mr. V’s agreement.

2. No. There are four conditions that should generally be satisfied where a court imposes a constructive trust for wrongful conduct: (1) The defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands; (2) The assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff; (3) The plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and (4) There must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.

The Court rejected the appellants’ argument that the breach of fiduciary duty did not result in them having obtained an identifiable asset. The trial judge found that the Boundary Lake Property was purchased with the Corporation's funds. There was no basis to overturn that finding.

The Court also rejected the argument that the imposition of a constructive trust prejudices Weijs Investment. Pursuant to the trial judge’s order, when the Boundary Lake Property is sold by the Corporation, Weijs Investment will receive proceeds consistent with its contribution to the property.

The Court rejected the argument that the declaration of trust awards a windfall to Mr. V. The trust preserves the interest on behalf of the Corporation, not Mr. V. Pursuant to the trial judge’s order, Mr. V will be entitled to his share of the value of that asset when it is sold.

The Court did not agree that the trial judge erred in imposing the constructive trust on the basis that a monetary remedy would have been sufficient. The trial judge was entitled to find that the appellants’ acquisition of the Boundary Lake Property with misappropriated corporate funds justified an order declaring that the property is held in trust for the Corporation. This is in line with the deterrent and remedial functions of constructive trusts arising from wrongdoing and breach of fiduciary duty. A constructive trust may be awarded to ensure that others like the defendant remain faithful to their duties.

The Court did not accept the appellants’ arguments that Mr. V had unclean hands, such that he was not entitled to a remedy of constructive trust. The trial judge made no finding of unclean hands, and there was no basis to make such a finding. There was also an insufficient connection between the allegations of unclean hands and the remedy granted. Once the property is sold, accounts will be taken and each party will be entitled to their respective share of the proceeds.

3. No. Section 4 of the Real Property Limitations Act creates a ten-year limitation period for an action to recover land.

Mr. V first commenced his application in 2004, five years after the acquisition of the property. While the claim to a constructive trust was not added until 2015 by way of amendment, the limitation period argument was not raised at trial and was only first raised on appeal.

Appellate courts will not generally entertain entirely new issues on appeal, as it is unfair to spring a new argument upon a party at the hearing of an appeal in circumstances in which evidence might have been led at trial if it had been known that the matter would be an issue on appeal. The court’s discretion is to be guided by the balancing of the interests of justice as they affect all parties. It was not in the interests of justice to grant leave. Mr. V first commenced his application in 2004 and later amended his claim in 2015 to specifically include a trust claim. The application was not heard until 2018. The appellants had more than enough time to consider and raise this argument. They provided no persuasive reason to explain their failure to do so. Furthermore, the expiry of a limitation period does not render a cause of action a nullity; rather, it is a defence and must be pleaded. While this matter was commenced by way of application and did not involve formal pleadings, the key point is that the limitation argument was not raised at any time prior to this appeal.

4. No. Leave to appeal costs was denied. It is well-established that leave to appeal costs is sparingly granted. The trial judge made no error in principle, nor was the result plainly wrong. The trial judge provided cogent reasons, considering various factors, including: the nature of the application, the history of the litigation, the reasonableness of counsel’s conduct, as well as the reasonable expectations of the parties.