Company officers face $83 million in personal claims for bad borrowing certificates

ROYAL BANK OF CANADA v. CHESSWOOD GROUP LTD., et al. 
Can a bank sue executives personally for losses caused by inaccurate financial reporting?

Summary: The Ontario Superior Court of Justice allowed Royal Bank of Canada (RBC) to proceed with negligence and oppression claims against several former officers of Chesswood Group Ltd. arising from allegedly inaccurate borrowing base and compliance certificates that caused the bank to over-advance funds and suffer losses of approximately $83 million. The individual defendants sought to strike the claims, arguing that they owed no independent duty of care to RBC and that their alleged conduct was undertaken in the course of their employment. The Court rejected those arguments in respect of three officers, finding that it was not plain and obvious that they could not be held personally liable for failing to implement adequate controls or ensure the accuracy of financial certificates provided to the lender. The Court also noted that Chesswood's CFO allegedly permitted his electronic signature to be applied to certificates without reviewing them. While the Court dismissed the claims against one individual defendant, it allowed the proceedings against the others to continue, leaving questions of personal liability to be determined on a fuller evidentiary record.

Royal Bank of Canada commenced a claim against the corporate defendant, Chesswood, and several individual defendants. All but one of the individual defendants were employees and officers of the corporate defendant who were alleged to have committed specific acts or made certain omissions in connection with the creation and delivery of erroneous borrowing base and compliance certificates to RBC, which led RBC to over-advance and suffer a loss of approximately $83 million. The last individual defendant, Wittlin, was, among other things, the largest shareholder in Chesswood and a director and officer of two subsidiaries of Chesswood, whose assets were included in the borrowing base.

 RBC pleaded that Wittlin was exercising influence over the operations and business direction of Chesswood during the material time. RBC did not plead that Wittlin actually did anything tortious. Rather, RBC sought to tie him into conclusory paragraphs against “the Defendants,” especially in its pleading of oppression. In its statement of claim, RBC made particularized allegations against the other individuals concerning their alleged negligence in performing their duties with reference to the creation and delivery of borrowing base and compliance certificates.

The individual defendants moved to strike the action as against each of them under Rules 21.01(1)(a) and (b) on the basis that the Statement of Claim and the proposed Amended Statement of Claim did not state reasonable causes of action against them. They argued that they did not owe RBC a duty of care because there was insufficient proximity between each individual defendant and RBC.

Absent allegations which fit within the categories of fraud, deceit, dishonesty or want of authority, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own. Here, there was no fraud, deceit, dishonesty, or want of authority pleaded. Therefore, to state a claim against the individual officers of the corporate defendant, RBC had to plead a tort or wrongful acts demonstrating that the individual was pursuing an interest separate from that of the company.

The Court rejected the individual defendants’ argument that the acts alleged against them were the same acts pleaded as breaches of contract by their employer, such that they were not being sued for independent torts or pursuing an interest independent of their employer’s contractual interest. The Court cited the Supreme Court of Canada’s decision in London Drugs Ltd. v. Kuehne & Nagel International Ltd., in which the majority of the court held that the question of whether a duty of care arises will depend on the circumstances of each particular case, not on pre‑determined categories and blanket rules as to who is, and who is not, under a duty to exercise reasonable care. The mere fact that the employee is performing the “very essence” of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.

The Court noted that it was not outside the realm of current case law to think that the borrower’s officers could be held to have been duty-bound to implement at the outset and properly supervise the due creation and delivery of these documents. The quality control assurances that they finally implemented after the very substantial breaches were exposed could provide a roadmap to the inadequacy of the initial efforts (or lack thereof). It was not impossible for a court to find that the officers ought to have known that if they took inadequate steps to ensure the correctness of the certificates, the plaintiff would foreseeably suffer damages of the very type it suffered.

A finding of proximity was not impossible on the facts pleaded against the three officers. Accordingly, it was not plain and obvious that the negligence claims against them could not succeed. As well, it was not impossible to conclude that a court may find it reasonably foreseeable that if the Chief Financial Officer of Chesswood failed to even review certificates before allowing others to attach his electronic signature to them, the plaintiff would claim against him for its resulting, foreseeable losses. The Court agreed that, but for one of the individual defendants, the draft amended pleading stated a case for oppression against the others. The requisite elements were pleaded with particularity, including the attribution to individuals required by Wilson v. Alharayeri, 2017 SCC 39. Whether judgment against each individual was warranted was a question requiring evidence.

The Court dismissed the motions of all but one of the individual defendants.

Judge: Justice FL Myers

Professionals involved:

• Blakes for RBC

• Stockwoods for Christopher Wallbank

• Ross Nasseri for Ryan Marr

• Lax O’Sullivan for Daniel Wittlin

• Adair Goldblatt Bieber for Chesswood Group and and Tobias Rajchel