6 February 2019By Cynthia Spry
The Globe and Mail has suggested that the fall of the Fortress group of companies “could become Canada’s largest syndicated mortgage failure”, as “[b]etween 2008 and 2017, Fortress … raised a staggering $920 million from 14,000 retail investors to fund mortgages for an array of developments.”1
In McDowell v. Fortress Real Capital Inc.2, the Court of Appeal recently upheld the decision of Justice Perell to strike claims against two individual officers and directors of Fortress Real Capital Inc. and Fortress Real Developments Inc. (collectively, “Fortress”), in four proposed class proceedings, without leave to amend.
Background: These four proposed class proceedings concerned investments by small investors, through four syndicated mortgages, in four land development projects. Two of the mortgages went into default, but certain terms of the mortgages purported to preclude the investors or their trustees from enforcing the mortgages. The other two mortgages were removed from title through power of sale proceedings and proceedings under the Companies’ Creditors Arrangements Act, R.S.C. 1985, c. C-36. As a result of these sales, newly-incorporated companies linked to Fortress became the owners of the lands, free from the mortgages in which the appellants had invested.
The appellants brought proposed class proceedings against, among others, the individuals and corporations who had promoted and formally sold the investments, including two directors and officers of the Fortress companies, the lawyer who purportedly provided independent legal advice to the appellants, the trustees, and the mortgagors.
The appellants’ primary allegations were that the proposed defendants had failed to properly disclose, or misled them about, key information regarding the development projects, particularly the risks of investing. They sought to enforce the remaining two mortgages, to rescind contracts relating to the investments, and to obtain damages for breach of fiduciary duty, breach of contract, misrepresentation, and negligence.
Eight of the defendants brought motions to strike the claims against them. Four motions were settled; four proceeded. At first instance, Justice Perell struck, among others, the claims against the individual directors and officers of Fortress, without leave to amend. The investors appealed.
The Issue: Were the individual respondents responsible, as the directing minds of Fortress, for the companies’ alleged breach of contract, breach of fiduciary duty, misrepresentation and negligence?
Finding of the Court of Appeal: The court found that there was no pleaded legal basis on which to find the directors and officers liable. Under the test laid out in ScotiaMcLeod Inc. v. Peoples Jewellers Ltd., a director or officer of a corporation will not be personally liable for actions taken on behalf of the corporation unless some of their conduct is tortious in itself or exhibits a separate identity of interest from that of the corporation.3
In this case, the pleadings did not contain sufficient particulars of tortious conduct by the individuals, separate from that of the companies.
The appellants submitted that it was sufficient for the pleadings to set out numerous claims of fraud, deceit and dishonesty by Fortress, and allege that the two directors and officers knew or ought to have known about it, and that they permitted it to occur. The respondents countered that there was no specific pleading of fraud, deceit or dishonesty by the individual respondents.
The Court agreed with the respondents. While one of the Statements of Claim did allege misrepresentations by the individual respondents, there was no specific pleading of negligent or fraudulent misrepresentation, nor that the appellant relied on the misrepresentation to his detriment, nor that the representations were being made personally (by the individual directors and officers) rather than on behalf of Fortress.
The Court also found that no purpose would be served by granting leave to amend. The pleading had already been amended a number of times, and the Court held that if there were relevant allegations, these would have been made already.
The Takeaway: This case highlights the importance of crafting one’s case carefully, right from the very beginning. While theoretically in Ontario leave to amend may be granted up to and even after trial, absent prejudice that cannot be compensated by costs or an adjournment, there is a very real risk that leave may not, in fact, be granted.
2 2019 ONCA 71.
3 (1995), 26 O.R. (3d) 481 (C.A.).