On May 14, 2019, in Christine DeJong Medicine Professional Corp. v. DBDC Spadina Ltd., 2019 SCC 30 the Supreme Court of Canada granted Christine DeJong Medicine Professional Corporation’s appeal and unanimously adopted Justice van Rensburg’s dissenting reasons as their own. In reversing the earlier decision of the Ontario Court of Appeal, the Supreme Court has provided guidance on when a party will be found to have participated in a breach of trust.
As described in our previous blog post, at the heart of this proceedings was a dispute between the victims of the real estate investment fraud perpetrated by the Waltons. The DBDC Parties were controlled by Dr. Bernstein and had invested approximately $111 million with the Walton’s “Schedule B Companies.” Christine DeJong Medicine Professional Corporation (“DeJong”) invested approximately $4 million in the Walton’s “Schedule C Companies.”
The issue that the Supreme Court considered was whether the Schedule C companies were also liable to the DBDC Parties on the basis of knowing assistance for breach of trust. The lower courts had concluded that they should be liable because Ms. Walton had acted as the directing and controlling mind of the Schedule C Companies such that her actions could be attributed to them based on the three criteria from Canadian Dredge and Dock Company Limited v. R., 1985 CanLII 32 (SCC) (“Canadian Dredge“).
The Canadian Dredge criteria require consideration of whether the action taken by the directing mind was:
- within the field of operation assigned to that person;
- not totally in fraud of the corporation; and
- by design or result, partly for the benefit of the company.
In the decision of the Ontario Court of Appeal, Justice van Rensburg disagreed with the majority’s finding that relied on a “net transfer analysis” as evidence of the participation of the Listed Schedule C Companies in Ms. Walton’s fraud. The net transfer analysis only showed that funds were diverted out of the Schedule B accounts into an account that was used by the fraudsters as the centre of their scheme. Justice van Rensburg concluded that the net transfer analysis was insufficient because it did not show where the money went after it was transferred. As the flow of monies were not traceable, no particular Schedule C Company account could be said to have received the benefit of Schedule B Company monies. Ultimately, Justice van Rensburg concluded that:
…while the Listed Schedule C Companies may have participated in Ms. Walton’s overall fraudulent scheme, in the sense that they were used by her in the “shell game” to co-mingle investor funds, and to avoid making her own contributions, the net transfer analysis does not provide the evidence that they participated in her breach of fiduciary duty to the DBDC Applicants so as to attract personal liability for knowing assistance. Nor is there any other evidence of their participation.
Justice van Rensburg also rejected the majority’s finding that a less rigorous approach should be applied to the Canadian Dredge criteria where a dispute arises out of a complex and long-running fraud that implicates numerous victims.
Although they did not uphold the majority position in the Court of Appeal’s reasons, the Supreme Court responded to a statement from the majority’s decision that Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (“Livent”), invited a “flexible” application of the criteria stated in Canadian Dredge for attributing individual wrongdoing to a corporation. In responding to this statement, the Court reconciled the Canadian Dredge criteria with Livent, which directs the courts to refrain from applying corporate attribution where, in the circumstances of the case, it would not be in the public interest to do so. The unanimous decision of the Supreme Court is that “while the presence of public interest concerns may heighten the burden on the party seeking to have the actions of a directing mind attributed to a corporation, Canadian Dredge states minimal criteria that must always be met.”
- Courts have discretion to refrain from applying corporate attribution where it would not be in the public interest to do so.
- The Supreme Court has not backed away from the Canadian Dredge criteria even in instances where a complex and long-running fraud has been perpetrated.
With thanks to Brittany Shales for assistance in writing this post.