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Fiduciary - Breach of Fiduciary Duties. Extreme Venture Partners Fund I LP v. Varma
In Extreme Venture Partners Fund I LP v. Varma (Ont CA, 2021) the Court of Appeal considered joint and several liability in the context of breach of fiduciary duty:(e) Joint and Several Liability
[85] The Palihapitiya Appellants submit that the trial judge erred in law by holding them jointly and severally liable with the Varma/Madra Appellants. They argue, relying on an English trial court decision, Ultraframe (UK) Ltd. v. Fielding, [2005] EWHC 1638 (Ch.), that a knowing assistant’s liability ought not to be synonymous with a fiduciary’s because the knowing assistant, who has not given an undertaking of loyalty, is not in the same position as the fiduciary. The court ruled in that case, at para. 1600:I can see that it makes sense for a dishonest assistant to be jointly and severally liable for any loss which the beneficiary suffers as a result of a breach of trust. I can see also that it makes sense for a dishonest assistant to be liable to disgorge any profit which he himself has made as a result of assisting in the breach. However, I cannot take the next step to the conclusion that a dishonest assistant is also liable to pay to the beneficiary an amount equal to a profit which he did not make and which has produced no corresponding loss to the beneficiary. As James LJ pointed out in Vyse v. Foster (1872) LR 8 Ch App 309:"This Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the Court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the Court finds that he actually made more, constituting moneys in his hands "had and received to the use" of the cestui que trust." [86] There is Canadian jurisprudence where our courts have found a knowing assistant to be jointly and severally liable: see, for example, the decision of this court in Enbridge Gas Distribution Inc. v. Marinaccio, 2012 ONCA 650. Contrary to the assertion of the Palihapitiya Appellants, the Canadian cases do not all involve situations where the knowing assistant was found to be a constructive trustee: see, for example, Imperial Parking Canada Corporation v. Anderson, 2015 BCSC 2221. Counsel for the Palihapitiya Appellants was unable to point to any Canadian authority that supports his position.
[87] There is also academic commentary that supports a finding of joint and several liability for the knowing assistant (also referred to by some as the dishonest assistant). Steven Elliott and Professor Charles Mitchell, in their article “Remedies for Dishonest Assistance”, (2004) 67 Mod L Rev 16, write at p. 40 that:[A] well established line of Canadian authority flowing from Canada Safeway Ltd v Thompson tells us that a dishonest assistant is jointly and severally liable for whatever unauthorised profit the wrongdoing fiduciary has made….This is consistent with and finds support in the secondary nature of liability for dishonest assistance. [Footnotes omitted.] [88] Ultraframe is the leading case in England on the issue of a knowing assistant’s joint and several liability: see Geoffrey Morse, ed, Palmer’s Company Law (London, UK: Sweet & Maxwell, 2021), at vol. 2, ch. 8.3614. Based on a legal article filed with this court, however, it appears that the English approach towards knowing assistance is not followed in Australia: see Madison Robins, “Accessory Liability in Canadian Law” (2020) Annual Rev Civ Litigation 1, at p. 9. In any event, there is little reason to hew closely to the Ultraframe approach; the reasoning in that case is in my view inconsistent with the policy goals underlying equitable remedies. A court exercising its equitable jurisdiction seeks to fashion remedies that are fair in the circumstances of the case before it. While I agree that a knowing assistant should not be penalized, experience tells us that a judgment against a faithless fiduciary is often uncollectable. Indeed, that is one of the reasons why plaintiffs normally seek an order for joint and several liability. As between the wronged beneficiary and the knowing assistant, in most circumstances, the loss more equitably falls on the shoulders of the knowing assistant who has deliberately taken steps to procure a breach of fiduciary duty.
[89] I do not purport to establish a rule that liability should always be joint and several between the faithless fiduciary and the knowing assistant. There may be circumstances where a different order should be made. Courts should be given sufficient flexibility to fashion a fair remedy in the circumstances of the particular case. In this case, where Palihapitiya was intimately involved in the breach of the fiduciary duty as part of a conspiracy where he received most of the profits, there is no equitable reason why the liability should not be joint and several. . DBDC Spadina Ltd. v. Walton
In DBDC Spadina Ltd. v. Walton (Ont CA, 2018) the Court of Appeal considered constructive trusts as a remedy for breach of fiduciary duty:[135] The DBDC Applicants contest these constructive trust dispositions. They submit that the Application Judge erred in granting the constructive trusts in favour of DeJong, arguing that:(a) there was no unjust enrichment at the expense of the DeJong Companies resulting from the misappropriation of the DeJong investments;
(b) the diverted DeJong investments could not be linked to the acquisition, preservation, maintenance or improvement of any property owned by a DeJong Company;
(c) DeJong had other available remedies as against the Waltons and the DeJong Companies; and
(d) the interests of other creditors and third parties would be adversely affected by the award of a proprietary remedy in priority to all other claims. [136] The Application Judge did not grant constructive trusts over the properties owned by the DeJong Companies on the basis of unjust enrichment. In the case of 3270 American Drive, this was because the equity funds advanced by DeJong for the purchase of that property were diverted elsewhere and not used for that purpose (it was Dr. Bernstein’s investments that were improperly diverted and used to purchase 3270 American Drive, leading to the granting of a constructive trust in the DBDC Applicants’ favour over the property). In the case of 324 Prince Edward Drive, 260 Emerson Avenue and 777 St. Clarens Avenue, the DeJong monies were utilized, in part, for the purchase of the respective properties, but this did not constitute an unjust enrichment because the funds were intended to be used for that purpose.
[137] Instead, the Application Judge granted constructive trusts in favour of DeJong against the foregoing properties as a remedy for breach of fiduciary duty. In doing so, he relied upon the well-accepted principle that a constructive trust remedy is not restricted to circumstances in which there has been an unjust enrichment, but may be imposed as well “to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which in ‘good conscience’ they should not be permitted to retain”, and can “aris[e] on breach of a fiduciary relationship”: Soulos v. Korkontzilas, 1997 CanLII 346 (SCC), [1997] 2 S.C.R. 217, at paras. 17 and 19.
[138] However, in Indalex Ltd., Re, 2013 SCC 6, [2013] 1 S.C.R. 271, the Supreme Court of Canada revisited the factors to be taken into account by a court when imposing a constructive trust as a remedy for breach of fiduciary duty. Speaking for the majority on this point, Cromwell J. held at para. 227 that “a remedial constructive trust for a breach of fiduciary duty is only appropriate if the wrongdoer’s acts give rise to an identifiable asset which it would be unjust for the wrongdoer (or sometimes a third party) to retain.”[12] Concurring on this point, Deschamps J. affirmed, at para. 78, that “[i]t is settled law that proprietary remedies are generally awarded only with respect to property that is directly related to a wrong or that can be traced to such property.”
[139] The decision whether to impose a constructive trust is discretionary, and there is no question that a judge of first instance is entitled to considerable appellate deference in the exercise of that discretion, absent an error in principle. Respectfully, I have come to the conclusion that the Application Judge erred in principle in two respects when he imposed a constructive trust in favour of DeJong in these circumstances: first, in his failure to apply the Indalex principle that the fiduciary’s wrongful acts must give rise to an identifiable asset; secondly, in his failure to give effect or consideration to the interests of other creditors and third parties, and to the fact that DeJong had other remedies available to it.
(1) The Application Judge Failed to Apply Indalex
[140] Drawing upon the Court’s earlier decision in Soulos, Cromwell J. in Indalex, at para. 228, reiterated the four conditions that must be present before a remedial constructive trust may be ordered for breach of fiduciary duty:
(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 obligations 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.
[141] Referring to (2) above, Cromwell J. went on to add, at para. 230:
To satisfy the second condition, it must be shown that the breach resulted in the assets being in [the wrongdoer’s] hands, not simply…that there was a “connection” between the assets and “the process” in which [the wrongdoer] breached its fiduciary duty. [Underlining added; italics in original.] . Plate v Atlas Copco Canada
In Plate v. Atlas Copco Canada Inc. (Ont CA, 2019) the court commented on passive acquiesence as a means of breach of fiduciary duty:(b) “Passive Acquiescence” and Breach of Fiduciary Duty
[101] The appellant argues that the concept of passive acquiescence as it relates to the conduct of fiduciaries is not known to law and liability cannot be imposed on this basis.
[102] I disagree. A fiduciary who knows about wrongdoing committed against the beneficiary has a duty to tell the beneficiary: Dunsmuir v. Royal Group, 2017 ONSC 4391 (CanLII), 41 C.C.E.L. (4th) 93, at para. 134, aff’d 2018 ONCA 773 (CanLII), 50 C.C.E.L. (4th) 310, at para. 14. As a matter of law, a fiduciary who knows of a fraudulent scheme perpetrated against the beneficiary and passively acquiesces to its continuation has breached his duty to the beneficiary.
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