Kicking directors off the board

Deposed director spends $75,000 in legal fees fighting the board
An ethics review or a kangaroo court?

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Stagg v Condominium Plan No. 882-2999, 2013 ABQB 684
Between:
Rod Stagg and Greg Stokowski  Plaintiffs/Applicants  and
The Owners: Condominium Plan 882-2999, Sunreal Property Management Ltd. and Wayne Herve Defendants/Respondents

Court of Queen’s Bench of Alberta
Docket: 1201 06002
Date: 19 November 2013
Justice W. A. Tilleman

Mr. Stokowski, as a member on the board of directors of the corporation and acting as a duly delegated agent of the condo corporation, spent $14,527.31, a $10,000.00 deposit for the purchase of a new hot tub and $4,527.31 for related equipment. The Board then failed to reimburse him.

The board then would not approve and post the correct version of a board meeting’s minutes. The board went on to have Mr. Stokowski removed from the board.

Mr. Herve, a board member stated on a few occasions that he “dared” the Applicants to “come after the Board”, as then the Board would be obliged to enter into a lawsuit where the Applicants would lose

The Applicants then sued the board asking for compensation for the $14,527.31 Mr. Stokowski spent on the condo’s behalf and that the board approve the proper board meeting minutes.

The courts appointed an Investigator who stated that the board had acted in bad faith and that the proper minutes were not the one’s the board had approved and posted.

The board made it worse for themselves when they mislead the owners on the status of the Investigator’s report and blamed the Applicants for the need of a $500 per unit special assessment to pay their legal bills.

Finally, the board ignored the advice of their property management company to settle and avoid further litigation.

Settlement
The parties finally settled in the Applicants favour.

Costs
The Applicants asked for solicitor-client costs on a full indemnity basis in the amount of approximately $75,000. The Applicants also request the Respondents bear the full cost of the Investigator’s Report.

The Applicants also argued that as a matter of precedent, it would send the wrong message to condominium corporation boards if the end result of this case was that the Applicants had to bear the prohibitive legal fees they expended in order to recover $14,527.31—money that was properly spent by them and would encourage the “I dare you” attitude.

Conclusion
The judge awarded the Applicants full costs.

He also ordered that the Investigator’s Report be filed with the Court and made available to all parties, with the cost of the Report being borne by the Corporation.

The Report and the Judgment should be specifically provided to all of the unit owners in the Corporation without charge, as they are the beneficiaries of this information.

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Stanley Gordon vs
York Region Condominium Corporation No. 818
Ontario Superior Court—Newmarket
Court File No: CV-12-110220-00
21 August 2013
Justice J.R. McCarthy

Stanley Gordon was a director of his condo corporation from May of 2006 to November 2011. He was removed as a director as the result of an ethics review held by the Board on 21 November 2011.

Bylaw #9 states that a director shall cease to be qualified to be a director and shall be deemed to have resigned from the board of upon the happening of certain events. One of those events is if the director violates the director’s code of ethics on three occasions over the course of the director’s term unless determined otherwise by a court.

The applicant’s position
Mr. Gordon asked the court to declare that his removal from the condo corporation’s board on 21 November 2011 was invalid together with a declaration that Article 6.03(c)(x) of bylaw No. 9 is invalid as it is contrary to section 33 of the Act.

As well, he requested an order to be re-instated as a director of the corporation.

The corporation's position
The corporation brought a counter-application seeking:
(a)
a declaration that the bylaw article is valid,
(b)
a declaration that the Mr. Gordon resigned as director of the corporation following the ethics review on 21 November 2011,
(c)
an order upholding the determination of the ethics review, and
(d)
or declarations or findings that Mr. Gordon breached the standard of care of a corporate director, failed to act honestly and for other findings of fact.

Findings
The judge found that the article of Bylaw No. 9 of the corporation is entirely consistent with subsection 56(1) of the Act. It deals directly with qualification, resignation or removal of a board member. It is not inconsistent with any other section of the Condominium Act.

Justice McCarthy agreed with the corporation’s lawyer that subsections 33(1) and 51(a) of the Act are merely permissive; they indicate how a director may be removed in the absence of a bylaw dealing with removal before a term and do not prevent a bylaw being passed by which a director may be removed.

The owners’ will
The judge was of the view that Bylaw No. 9 expresses the desire of the majority of the unit owners that a director should be disqualified from holding office upon the happening of any number of events. One of those events would be a conclusion by the board of here violations of the director’s code of ethics.

The code of ethics was adopted by and agreed to by the members of the corporation.

Three violations of the code of ethics would have the same effect of disqualifying a director as if the director became an undischarged bankrupt, was convicted of a criminal offence, or ceased to own a condominium unit.

Concerns with the process
The ethics review calls for a procedure to be followed. That procedure calls for an ethics review preceded by certain preliminary steps of notification. The procedure is to be the same as that used by the board to decide all corporate matters, except to ensure fairness, it permits the subject director to be present at the board meeting and to be heard. The board is then expected to determine the matter and render a decision.

It was the judge’s decision that he should accept the board`s decision unless it had acted capriciously or unreasonably and that the principals of procedural fairness and natural justice cannot be ousted from such an ethics review.

While the review may not require findings, it must certainly involve considerations of some modicum of evidence. Indeed, in the present case, the board relied upon witness statements.

That being the case, the board was, in the judge's view, required to adhere to some minimal standard of procedural fairness and the basic standard of procedural fairness and the basic principles of natural justice. Not to do so would be unreasonable and capricious.

Insufficient notice
In this case, it is clear that Mr. Gordon was provided with notice of the hearing on 18 November 2011 through his solicitors. The notice itself with full particulars was dated on 21 November 2011, the very day of the hearing.

I find that procedural fairness requires that reasonable notice of such an ethical review should have been given to Mr. Gordon in advance of that date. One business day prior to the review date is simply not sufficient, fair or necessary.

Disclose evidence
As well it is unclear whether the Mr. Gordon received the witness statements that the board intended to rely upon. Mr. Gordon and one of the other directors, said he did not. A third director could not confirm that these statements were disclosed prior to the review. Certainly no evidence was tendered to show that an email, memo or letter was provided to Mr. Gordon attaching the statements or summarizing their content.

Must be a fair hearing
It is a fundamental principle of natural justice and procedural fairness that a
person facing the termination of his standing or office, should be made aware in a fulsome manner of the case which he has to meet. Moreover, the fact that this was a review of alleged ethical violations which would impact not only on Mr. Gordon’s standing as a director but also on the his reputation in the community, required that Mr. Gordon be provided with some assurance that he would receive a fair hearing.

Biased director
In this case, it was plain and obvious that Director Rotman was looking to have Mr. Gordon removed from the board and was seeking to unite the other board members to effect this removal. Rotman admitted this in cross-examination and
it was made plainly obvious in his emails to the other directors, dated 16 November 2011.

The email dated 18 November 2011 from Rotman to the other directors in advance of the ethics review contains the following statements:
“I would ask you to limit your questions to the decision at hand, to act on this information for the purpose of voting that Stan Gordon be removed from his position as a director of the corporation.”

And this is followed by:
“We must arrive at a decision quickly so that our decision for the removal of Mr. Gordon can be given to him as quickly as possible when he returns to the meeting.”

That one of the directors resigned in protest over the manner in which the review was conducted provides an indication that a person close to the situation was concerned about the procedure being followed. Any reasonable person would be.

Justice from the dark agesThe judge stated that it is one of the principles of natural justice and a key element of procedural fairness that a person who is to be making the decision should not have predetermined the matter before a review. At the very least, Director Rotman should have recused himself from the review and desisted from attempting to influence other directors who would be participating in the review.

It is clear from the letter from the corporation’s lawyer to Mr. Gordon dated 11 November 2011 that the board in advance of the hearing had already made a determination of ethical violations. The relevant excerpt from that letter reads as follows:

“Your actions clearly establish that you do not act ethically.”

The judge therefore found that the ethics review conducted by the condominium corporation violated principles of fundamental justice, natural justice and procedural fairness.

Irregularities be dammed
The corporation’s lawyer argued that the court should allow the determination made at the ethics review since the review was conducted according to the bylaw.

Alternatively and regardless of any procedural irregularities, violations of principles of natural justice or procedural fairness, there exists an ample evidence for the court to conclude that Mr. Gordon is guilty of at least three ethical violations and is therefore disqualified as a director.

Justice McCarthy did not agree with the corporation’s lawyer that deference is in order regardless of his findings of violations of procedural fairness and natural justice.

Courts don’t want to get involved
The judge was not prepared to substitute his findings for those made at the review level for the following reasons.
1.
First, this is not a judicial review of a statutorily created and defined administrative tribunal charged with adjudication under a statute. The standard of review for correctness and errors in law are not at play in this Application and may not be applicable.
2.
There are no findings, conclusions or otherwise made by the board to even review.
3.
He did not believe that this court should usurp the powers of the board entrusted to it by the members of the corporation to conduct a proper ethics review of its own.
4.
It would not be an economical use of the courts resources to embark on such a exercise.
5.
Even if such an exercise were to be undertaken, a trial of an issue would be required since the weighing of evidence and assessment of credibility might be the only proper context in which to carry out such an exercise.

The judge emphasized that deference to a decision arrived at by a board in good faith is one thing; however, deference to violations of principles of natural justice and procedural fairness is quite another.

Judgment
The judge granted an order setting aside the disqualification of the applicant as a director. Leave was granted to the board to conduct a fresh ethics review within ninety days.

The portion of the application, which sought a declaration that Article 6.03(c) (x) of the bylaws was invalid, was dismissed.

The applicant’s request for reinstatement as a director was denied.

The entirety of the corporation’s counter-application was dismissed. The court declined to usurp the authority of the board by conducting an evidentiary review of its own.

This was a case of divided success. The applicant won himself an order setting aside his disqualification from the board but was unsuccessful in obtaining the declaration of invalidity of the by-law. The applicant did not persuade the court that he should be reinstated pending a further ethics review.

The Board was at liberty to conduct a fresh ethics review of the Applicant within 90 days, the results of which shall be minuted by the board. In the event that the board of directors does not conduct a fresh ethics review after 90 days, Mr Gordon may move for re-instatement as a director or such other remedy as he may request.

Director Rotman shall not form part of the board for the purpose of any further ethics reviews of Mr. Gordon.

Costs
Neither side was awarded costs. The judge stated:

“While violations of principles of natural justice and procedural fairness are not trifles, the ultimate relief obtained by the applicant fell well short of what was sought at the outset. The actual article under which the ethics review took place, and under which leave to conduct a fresh ethics review was granted, survived the challenge of validity. Any reinstatement of the applicant is still dependent upon the outcome of a legitimate ethics review.

The motion was made necessary by the respondent’s (the board) staging of the ethics review in circumstances which were, to say the least, unfair to the point of embarrassing. A failure to disclose the substance of the case a person has to meet in advance of such a hearing brings to mind justice from the dark ages. That failure by the respondent weighs heavily on this court’s mind in considering the merits of their argument on costs.”


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