Corporate Liability for Fiduciary Wrongdoing
What claims are available to assert against the corporation itself where a party has suffered losses at the hands of the corporation’s fiduciaries? There are multiple causes of action to assert against a corporation where a director, officer or someone else in a fiduciary position commits a wrong such as fraud or misrepresentation. Vicarious liability comes to mind but where that cause of action is most often found in the employment context and holds an employer liable for the acts of employees, the corporate attribution, corporate identification and “knowing assistance” causes of action are premised on different principles. These causes of action hold the corporation liable on the basis that the wrongdoing of the fiduciary is in fact the wrongdoing of the corporation itself. It is as though the corporation itself has committed the wrong. This is a fundamental difference from the vicarious liability cause of action.
The Supreme Court of Canada recently opined on corporate attribution, corporate identification and “knowing assistance” in a decision that will form the basis of many briefs and factums in the years to come. The SCC in Christine DeJong Professional Corp. v. DBDC Spadina Ltd., 2019 SCC 30 adopted the reasoning of the dissent in the underlying Ontario Court of Appeal decision of DBDC Spadina Ltd. v. Walton, 2018 ONCA 60.
The Court of Appeal decision is very lengthy and the facts are complicated. Two sets of unrelated investor groups were induced to invest as equal shareholders with the rogue Waltons in a number of companies that would be used for real estate development in Ontario. Group 1 created the Schedule C companies as equal shareholders with the Waltons and Group 2 created the Schedule B companies as equal shareholders with the Waltons. These respective companies were used to purchase various properties. As it turned out, the investments were a scam perpetrated by the Waltons for their own personal benefit.
Through a series of applications, Group 1 was ultimately able to get tracing orders and constructive trusts over various Schedule C properties to which it had invested. Group 2 on the other hand was not so lucky. Group 2 ultimately brought a series of applications and eventually, the majority of the Court of Appeal found that Group 2 had suffered a net loss due to the fact money could be traced from the Group 2 accounts, through the Waltons’ clearing house account, and into the accounts of Group 1. Group 1 was unaware of any of these transactions.
The majority of the Court of Appeal decided that despite the innocence of Group 1 to the transactions flowing through its account, Group 2 would have judgment against Group 1’s Schedule C companies on a joint and several basis with the Waltons because the wrongful acts of its directing mind and fiduciary, Mrs. Walton, could be attributed to the Schedule C companies themselves - i.e. corporate attribution, corporate identification and “knowing assistance”. The majority reviewed the law and criteria on establishing the above causes of action including the factors in Canadian Dredge and concluded that given the Schedule C companies and the fact that Group 1 received the net funds into their accounts, Group 2 was the net loser and could have judgment against the Schedule C companies.
In a strong dissent by Madam Justice van Rensburg, a dissent judgment that was ultimately adopted by the SCC as its own, she concluded that the Schedule C companies could not be held liable to Group B on the basis of corporation attribution, corporate identification and “knowing assistance”. She was unable to conclude that the Schedule C companies had actual knowledge or had participated in the fraud along with Mrs. Walton, the fiduciary. Rather, she viewed it as a case of two innocent parties that had both been defrauded by the Waltons and the Schedule B companies were really in no different spot than that Schedule C companies. She based this decision in large part due to her conclusion that the tracing order relied on by the majority to find Group B was a net loser in the tracing exercise was wrongfully utilized for that purpose (the tracing document had been created for an entirely different purpose earlier in the lawsuit).
Perhaps most importantly, the dissenting Justice found that public interest is an important policy consideration when applying the doctrines of corporate attribution, corporate identification and “knowing assistance”. Here, given Groups 1 and 2 and their related companies were both victims of the Waltons, it would be inappropriate to attribute the wrongful acts of Mrs. Walton to the Schedule C companies and allow Group 2 to recover against those companies.
These two cases will be relied on in a variety of instances going forward, both as a sword and shield, but it is clear that no matter what the facts, the public interest in applying these doctrines will be front of mind for the courts.
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