An Ontario lawyer has won an appeal of the decision of a New Brunswick judge who slapped her with a steep fine last year after striking her clients’ claim in a fraud case.
Sandra Dawe, managing partner at Shibley Righton LLP, was representing a group of auditors for Deer Island Credit Union Ltd.
Directors of the company took the auditors to court last year in a lawsuit accusing them of negligence for failing to notice that a former employee had cheated the company out of more than $1.8 million between 1995 and 2007.
The auditors denied the allegations and brought a third-party claim arguing that it was in fact the 16 directors who were negligent and had contributed to the company’s losses.
In his Nov. 30, 2011, ruling, New Brunswick Court of Queen’s Bench Justice Hugh McLellan criticized Dawe for a claim that was “irresponsible and an abuse of the process of court.”
In addition, he ordered Dawe to pay a fine of $45,000 after noting he didn’t believe she had acted in an honest belief that the auditors’ claim against the directors had merit. He also threatened to put her in prison if she didn’t pay the money by the set deadline.
McLellan also said Dawe was pursuing the third-party claim on her own without a request by her clients, an accusation the New Brunswick Court of Appeal found was without evidence. But on Nov. 1, the appeal court reversed McLellan’s underlying ruling. It cited several principles the trial judge had overlooked and misapplied.
The appeal court reasoned that the trial judge’s “preoccupation with the need to protect corporate directors appears to be based on a flawed understanding of Salomon [v. Salomon & Co. Ltd.],” a previous case in which a judge ruled that once it’s legally incorporated, a corporation should be treated like “any other independent person, with rights and liabilities appropriate to itself.”
The issue revolves around the question of when the corporate veil can be lifted to hold the directors of a company responsible.
“The corporate veil should not, in general, be lifted to make principals of the corporation liable for its obligations,” the appeal court said.
But officers, directors, and employees are responsible for their own misconduct even if they acted in the best interests of the company, the appeal court ruled, adding Dawe had a legitimate claim against the directors of Deer Island Credit Union.
“It was my view from the beginning that the ruling was incorrect,” says Dawe, who adds she felt both relief and satisfaction from the appeal court’s decision.
The 2011 ruling caused her a lot of stress, says Dawe, who notes the publicity following McLellan’s decision compromised her reputation as a competent lawyer. “Having that happen and be made public isn’t something any lawyer likes to see,” she says.
In addition to seeing the fine tossed out, “I was pleased to overturn the underlying decision,” she says. “It was a satisfying thing to be at the end of a stressful time.”
In his ruling, McLellan told Dawe she should have been aware of an Ontario Court of Appeal case, Piedra v. Copper Mesa Mining Corp., that he said was a clear indication of how fiercely the courts will protect directors of companies from baseless litigations.
But the two cases have an important difference, the appeal court judges said.
In Piedra, the plaintiffs opposed a proposed mining project in Ecuador to be carried out by a subsidiary of Copper Mesa Mining. They alleged that the subsidiary’s security agents harassed and threatened them because of their opposition to the plan. They claimed the directors at Copper Mesa Mining were responsible for the way the subsidiary’s security agents treated them.
In that case, the proximity of the directors to the alleged crimes wasn’t established, the appeal court said, adding the trial judge in Piedra had concluded that a corporate director “has no established duty in law to be mindful of the interests of strangers to the corporation when discharging his or her duty as a director.”
“In the present case, the claims against the third parties are not novel,” the New Brunswick appeal court said.
“Because negligence claims against directors constitute part of the legal landscape in Canada, the issue which arose in Piedra, the application of the Cooper-Anns test, has no relevance to the real issues between the appellant and the third parties.”
In the case involving Deer Island Credit Union, “directors are responsible for balancing financial statements,” says Edward Waitzer, a partner at Stikeman Elliott LLP who focuses on corporate law. While the appeal court’s ruling is “a routine decision,” he notes it’s not uncommon for some judges to be inexperienced in corporate cases.
“The trial judge overreacted and it sounds like he didn’t understand what was going on,” says Waitzer.
Dawe agrees. She notes the appeal court “simply reaffirmed the law. It didn’t create a new law.”
What was bizarre, according to Waitzer, was that “the trial judge goes after the lawyer personally.” In fact, the plaintiffs’ lawyers hadn’t asked the judge to fine Dawe.
For her part, Dawe says she has “no idea” why the judge would believe she was pursuing the third-party claim without her clients’ request.
She filed a complaint with the Canadian Judicial Council against McLellan immediately after his ruling. But she declined to reveal the status of her complaint at the moment. The council didn’t respond to a request to confirm the status of the matter by press time.