Court cases—board of directors

Will the courts remove a director from the board?
Inside management rule
Director suing a director—small claims
Two directors fought for control of the board
Director looked out for his private economic interests
President wrote false status certificates

 
York Condominium Corporation No. 137 v. Hayes
CV-11-437248
August 2012

The respondent, a director on the board, assaulted three residents, left a threatening phone message with a fellow director and verbally abused a resident over a four month period.

In response, the board tried to have a Superior Court justice:
1. Bar her from all the common elements aside from access to & from her unit.
2. Bar her from communicating with any condo residents or employees.
3. Have the court remove her from the board.
4. Force her to vacant and sell her unit.

The board failed on most points and only succeeded in getting a restraining order demanding that the respondent behave herself.

This is a big win for condo owners as the judge decided that it up to the owners to remove a director and it confirms that the courts will be very reluctant to kick owners out of their homes.

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Rogers Cable Communications Inc. v. CCC. No. 53
05-CV-030376
07 March 2005
The Honourable Mr. Justice Albert J. Roy

This is a very interesting case where Rogers tried to sue a condo corporation because it signed a contract with a single director on the condo board and it claimed that their contract was binding on the condo corporation.

The evidence before the judge indicated that the agreement between CCC No. 53 and the Plaintiff was signed by a single member of the Board of Directors thinking that this agreement was simply a continuation of an earlier agreement when in fact he was granting an agreement in perpetuity to Rogers that the condo corporation would not enter into any bulk service agreement with any cable service provider.

In this case, a single member of the Board of Directors signed the document without knowledge or the authority of the Board of Directors.

The judge found that the “indoor management rule” does not apply to condominium corporations so a single member of the Board of Directors cannot bind the condominium corporation.

In accordance with the Act, all decisions of the Board of Directors must be taken at a meeting of the Board of Directors where a quorum has been established.  Further, contracts cannot be executed without authorization by resolution of the Board.

The judge stated: “I would have thought that Rogers would have made sure their contract received the approval of the Board of Directors if they wanted a binding agreement.”

Rogers lost this case.

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Scourtoudis v Renaud
Small Claims Court—Brampton
Court file No.
SC-12-005312-00
Before:
M. Klein, Deputy Judge
Released:
February 24, 2014

Judgment
“Let me say, "right out of the gate," that the facts in this case are really quite straight forward however, the claim before this court is for only $837.80 and ought never to have warranted a two day trial. But for the conduct of the Defendants (husband and wife) at trial, I find that this proceeding was unnecessarily protracted (dragged out).

The Defendants were their own worse enemies, filling the courtroom with two days of (unnecessary) outbursts, numerous side comments and throwing emotionally charged grunts and groans at the opposing party. On the second day of trial, I flatly stated on the record, that if the Defendants wished, I would clear the courtroom and turn it into a boxing ring, so that they could rid of their frustrations. This was indeed how disruptive and bad it got.”

The facts
The plaintiff and one of the defendants are directors of their condo corporation.
In the summer of 2011, the defendant, Karen Renaud, suggested that it would be far less expensive if the townhouse owners themselves mulched the grounds instead of hiring a contractor. This case was about who paid what and if the defendants owed the plaintiff any of the costs
 
It would be informative for you to read the actual judgment as the judge refers to a letter that the plaintiff and the condo's treasurer sent to defendants as being quite troubling.

The problem was that both the plaintiff and the defendants used their own money to pay for the mulch required for this project and no proper records were kept.

Judgment
The Plaintiff's claim is dismissed.
 
Although the Defendants were successful in defending the Plaintiff's claim, the judge was very cognizant of the fact that the Plaintiff retained a paralegal, who diligently put forward her client's claim. However, but for the disruptiveness of the Defendants, this trial would never have taken as long as it has.

The judge therefore ordered the Defendants to pay to "Kanwaljit Kaur Bains, in Trust" the sum of $600, being only a very small portion in compensation for costs thrown away by the Plaintiff.

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YCC No. 42 v. Gosal et al./YYC No. 42 v. Karim et al
Ontario Supperior Court of Justice
CV-14-496029 & CV-14-496588
Before: Justice Penny
Released: 02 April 2014

This case involved two conflicting applications arising out of an election to fill two vacant positions on the Board of Directors of YCC No. 42. The election took place during the AGM on 26 September 2013.

The first application purported to be authorized by the pre-26 September 2013, or “old,” Board (the “Khan Application”). Mr. Fulton purports to act for the Corporation in the Khan Application. This application seeks to set aside the results of the election.

The second application in response to the first application, purports to be authorized by the post-26 September 2013, or “new,” Board (the “Gosal Application”). Ms. Dirks purports to act for the Corporation in the Gosal Application. This application seeks to uphold the results of the Election.

The hearing and what lead up to it is described elsewhere on this website.

Issues
Justice Penny stated that there were essentially three issues arising out of these applications:
1.
was the Chair’s purported decertification of the Election and removal of directors in late November, 2013 valid?
2.
if no, have Khan and Karim proved that the election should be invalidated on account of improper proxies? and,
3.
in any event, what terms and conditions should apply to the grant, registration and voting of proxies at the next AGM and/or election of directors?

Background
There is a very high percentage of nonresident unit owners in this Corporation. As a result, most of the votes cast at elections are by proxy. The grant, registration and voting of proxies has created problems in the past. Justice D.M. Brown wrote, in an earlier endorsement:

"YCC 42 is a very dysfunctional community. From my reading of the materials in the various motions brought before me, one factor contributing to such dysfunction is the high number of units not occupied by owners, but leased out. It appears that many unit owners no longer have a direct interest in the health of the YCC 42 community, save for collecting rent. As well, factions have formed and appear to use proxies to further their particular points of view."

Although expressing concerns about the use of proxies in the pending 2012 election, Justice Brown held that:

"unit owners may use proxies to vote in the referendum in accordance with the Act, Declaration, By-law and rules."

On 01 October 2013, following the election the Chair, Mr. Campbell, reported that he had counted the votes and had declared 135 of the tendered proxies invalid – 75 on account of apparent tampering and the remainder on other grounds, such as the owner being in arrears of payment of corporation fees and therefore not entitled to vote. He concluded:

The final result of the election of directors at the 2013 AGM was as follows:
Amina Gure      255
Sandeep Gosal  248

Accordingly, the Chair hereby certified that Amina Gure and Sandeep Gosal were elected at the 2013 AGM to the board of directors of YCC 42.

What happened next was an accusation by one of the applicants that
massive proxy fraud occurred prior to the election and that a new election should be held. Several weeks after closing the AGM, and declaring who had won the election, the Chair decertified the election and called for a new election to be held.

To understand all the events that took place, the reader must read the actual judgment in its entirety. It makes for very disturbing reading.

Conclusions
1.
The result of the election as affirmed by the Chair’s report of 01 October 2013 is valid and stands.
2.
The Khan Application is dismissed. The Gosal Application is allowed, to the extend specified in these Reasons.
3.
At the next election of directors all proxies shall be deposited with the corporation by one of two methods:
 1.
the proxy shall be deposited prior to the meeting in person by the owner or his Power of Attorney (POA), upon showing proof of identity and in the case of a POA, the instrument granting the POA; or
 2.
the proxy shall be deposited by mail by the owner or his POA prior to the meeting, enclosing a photocopy of proof of identity and, in the case of a POA, a photocopy of the instrument granting the POA.
Any proxies not received in accordance with these instructions shall be considered invalid and shall not be counted.

Costs
Released: 16 April 2014

"Gosal and Gure were successful in their application. Khan and Karim were unsuccessful. The Corporation is entitled,  therefore, to costs as against Khan and Karim, whose application was not authorized by a majority of the board. I do not think this case warrants departure from the normal scale of costs.

However, the Corporation's costs include the cost of injunction proceedings before Belobaba J. fixed in the amount of $2,500. I therefore find Khan and Karim are  liable to YCC  42 for its  costs in  application CV-14-496588  in  the  amount of $30,000 (inclusive of fees, disbursements and all applicable  taxes). These costs are enforceable as a common expense  against any units owned by Khan and Karim in accordance with s.134(5) of the Condominium  Act, 1998."

You can reading the Costs Endorsement here.

Comments—by the editor
This court case highlights the following:

Some directors will go to great lengths to gain control of the board.
Proxy fraud is a serious concern. (it is not limited to just this corporation.)
The rules listed in Nathan’s Company Meetings for Share Capital and Non-share Capital Corporations, 10th Edition are recognized by the courts.
Directors who make decisions without passing a resolution at a formal board meeting, with all the directors invited, are not acting on behalf of the corporation. (This is something the corporation's suppliers and contractors, including the lawyers, should keep in mind.)
Any allegations of election improprieties must be made during the AGM or soon after.
The chair’s duties are over once the AGM is closed.
Any accusations of election fraud require proof that will stand up in court.
The chain of custody of the proxies and ballots must not be compromised.
Going to court can be risky.

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Ballingall v. Carleton Condominium Corporation No. 111
Ontario Superior Court of Justice
Court File No: 14-60620
Justice Aitken
Heard: February 5, 9, 2015 (at Ottawa)

CCC 111 is a 27-storey condominium tower, comprised of 242 units, located in Ottawa. It is almost 40 years old.

The Applicants are owner residents of units at CCC 111, and one was President of the Board until her resignation in January 2014.

John  MacMillan owns and occupies one unit and owns four other units, which he has been renting to university students for several years. He has been on the Board of the Corporation since June 2012, and has been the Board’s President since approximately March 2014.

The corporation’s Declaration states that:
“each unit shall be occupied and used only as a private single family residence and for no other purpose ... .”

Mr. MacMillan wanted to continue to rent out his units to unrelated university students and misused his position on the board to block attempts to enforce the declaration.

Justice Aitken ruled:
"A reasonably prudent director of a condominium corporation, attempting to meet his responsibilities as a director, would not undermine Board decisions, mislead unit owners as to the Board’s responsibilities and their efforts to meet those responsibilities, encourage unit owners to distrust the Board, undermine the legal advice from the Corporation’s legal counsel, mislead unit owners as to what that advice entailed, provide his own legal advice to unit owners, and on one occasion post to his personal website legal advice received by the Board without the consent of the Board.

A reasonably prudent director, acting in good faith, would not make the Board dysfunctional, would not promote antagonism and dissent on the Board, and would not threaten other Board members.

A reasonably prudent director would not put his own economic interests ahead of the legitimate interests of all categories of unit owners. A reasonably prudent director would seek a compromise that respected the disparate, but legitimate, interests of all unit owners in the context of the community established by the Corporation’s Declaration, By-laws, and Rules."

This is an important win for owner-residents. It is best that you read the actual judgment to get a good understanding of all the details involved with this application.

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Trez v.Wynford

Superior Court of Justice—Ontario
Court File No: CV-14-10493-00CL
Date: 10 December 2015
Before: Justice L. A. Pattillo

This application came out of a complicated case dealing with a married couple, (Ronauld and Norma Walton) who owned Wynford, a company that bought the majority of units in a commercial office condominium located at 18 Wynford Drive in Toronto. They then became the president and secretary of the condo’s board of directors. They also controlled the company that was hired to manage the condo corporation.

The other directors, were Dr. Stanley Bernstein, a business partner of the Waltons, George Habib, the president and Chief Executive of an association which owns units in MTCC 1037 and Jonathan Griffiths, a lawyer who also owns a unit in MTCC 1037. Dr. Bernstein denied any knowledge that he was appointed a director.

The Waltons then took out a mortgage on their units from a mortgage company (Trez). Prior to closing to mortgage, Trez received two separate status certificates from MTCC 1037 dated March 6, 2013 signed by Norma Walton in her capacity as President of MTCC 1037 and a statutory declaration, also dated March 6, 2013, sworn by Norma on behalf of Wynford.

Following due diligence undertaken by both Trez and its lawyers, the Loan was fully advanced to Wynford on March 7, 2013.

The Status Certificates among other things:
a)
stated that Wynford was not in default of payment of common element fees for the Wynford Units;
b)
appended a list of all the Wynford Units which clearly stated under the column “Common Expenses Payment” that the Wynford Units were not in default; and
c)
stated that the MTCC 1037 reserve fund was in good order.

The Statutory Declaration stated, among other things, that:
a)
Norma Walton was unaware of any corporation who would have any claim or interest in the Wynford Property that is adverse or inconsistent with Wynford’s title to the Wynford units;
b)
there were no special assessments contemplated by MTCC 1037 and there were no legal actions pending or in conflict by or against MTCC 1037;
c)
Wynford had complied with all terms, conditions, rules and regulations contained in the respective Condominium Declaration, By-Laws and Regulations since Wynford purchased the Wynford units; and
d)
the representations made to Trez in the Commitment Letter and the other related security arising therefrom was true and accurate.

In or around December 2013, MTCC 1037’s evidence is that the minority directors of the Board learned that the Waltons potentially had been negligent or worse fraudulent and acted in bad faith in their role as directors and officers of MTTC 1037. Subsequently, at a court ordered annual general meeting of MTCC 1037 held on February 13, 2014, the Waltons were removed as directors and a new board of directors was elected.

It was at this AGM that the MTCC 1037 unit owners learned for the first time that Wynford was in arrears of payment of its common element fees and that no statutory lien for common element fee arrears had been registered against the Wynford units. The new board did not learn the exact amount of the arrears until sometime in March 2014.

In May 2014, the Receiver made payment of Wynford’s common element fee arrears to MTCC 1037 for the months of February, March and April 2014. The receiver then continued to keep Wynford’s common element fees current.

Wynford’s common element fee arrears are $1,284,508.23. Up to March 7, 2013, the date when the loan was fully advanced and the mortgage registered, Wynford’s arrears were $811,841.34.

MTCC 1037 has commenced an action against, among others, the Waltons and have sought, among other things, the following declarations against them: that they acted fraudulently, negligently and in bad faith by failing to pay Wynford’s share of its common expenses totaling $1,284,508.23; that they acted fraudulently, negligently and in bad faith by failing, as controlling members of the Board, to lien the Wynford units for arrears of the common element fees and that they breached the Act by failing to act honestly and in good faith.

It is interesting to note that at the time they bought their Wynford units, the Waltons were lawyers licenced and in good standing with the LSUC.

MTCC No. 1037 wanted the court to give it the fees that were in arrears and failed in their attempt two arguments.

The status certificates
The mortgagee relied on the status certificates and had no basis to believe that there were any problems or issues in respect of them. The Waltons were involved in running a substantial successful real estate business at the time. Further, the fact that the Waltons were in control of Wynford and on MTCC 1037’s board was not unusual or cause for suspicion. They were just two of five directors and given the units that Wynford owned, it was not unusual that the Waltons would be on the board and hold positions as officers of MTCC 1037.

Both MTCC 1037 and Trez filed affidavits from condominium experts addressing the issue of Trez’s due diligence and, in particular, the effect of the status certificates. MTCC 1037 retained Ms. Denise Lash, Chair of the Condominium Corporation Group at Aird & Berlis LLP. Trez retained Ms. Audrey Loeb, head of the Miller Thompson LLP’s Condominium Practice Group. Both lawyers are well qualified based on experience to testify in respect of status certificates.

Mortgagee’s opinion
Relying on Section 76 of the Act, Ms. Loeb states it is her opinion that it was reasonable for Trez and its counsel to rely on the Status Certificates and that they contained no representations which would raise suspicions on the part of counsel or Trez that would shift the onus to them to “look behind” the status certificates.

MTCC No. 1037’s position
Ms. Lash on the other hand states that there were several issues or potential issues, including significant breaches of the Act, which were clear on the face of the status certificates which should have alerted Trez and its counsel to potential issues with the information contained therein and given rise to further inquiry. In particular, Ms. Lash points to the non-arm’s length relationships of the Walton to MTCC 1037 and Wynford; the failure to include a reserve fund balance in the Status Certificates within the time period prescribed by the Act; and the failure to include current audited financial statements for MTCC 1037 with the Status Certificate.

The Act contains detailed provisions to provide information to purchasers and mortgagees of both newly-built condominium units and re-sale units. For re-sale units, s. 76 of the Act provides for status certificates. Section 76(1) provides that the status certificate, which is a prescribed form, must contain a variety of organizational and financial information about both the unit and the corporation as a whole. In particular, s. 76(1)(i) requires a copy of the budget of the corporation for the fiscal year, the last annual audited financial statements and the auditors’ report on the statements and s. 76(1)(m)(ii) requires the amount of the reserve fund no earlier than at the end of a month within 90 days of the date of the certificate.

Section 76(6) provides:
The status certificate binds the corporation, as of the date it is given or deemed to be given, with respect to the information that it contains or is deemed to contain, as against a purchaser or mortgagee of a unit who relies on the certificate.

In the present case, the status certificates specified an amount of the reserve fund as at December 31, 2010, a date some two years before the status certificates were issued. Further, the financial statements attached to the status certificates were for the year ending December 31, 2010.

Ms. Lash states that because these documents were not in accordance with the Act’s requirements for condominium corporations, that it should have raised red flags for Trez and its counsel requiring further inquiry.

Decision
The issue here is the arrears of common element expense fees. The status certificates clearly stated there were no arrears of common element expense fees. Trez and its counsel were entitled to rely on that statement.

In my view, the documents provided by the Act to be appended to the status certificate are provided for information purposes only. Section 76(4) of the Act provides that if the status certificate omits material information that it is required to contain, it shall be deemed to include a statement that there is no such information.

The judge did not accept Ms. Lash’s evidence that a purchaser is required to go behind the status certificate where the information provided is incomplete or missing and inquire further. The Act is clear that a purchaser or mortgagee is entitled to rely on the information contained in the status certificate.

The judge agreed with Ms. Loeb’s statement at paragraph 16 of her February 20, 2015 affidavit where she states:

If the recipient of a status certificate were given the onus of confirming the statements by the condominium corporation by cross-referencing and analyzing the corporation’s documents, then the very purpose of the status certificate would be severely diluted. Few, if any, purchasers or mortgagees would take any comfort in the status certificate if they knew that, at some point in the future, they may be held to account for their efforts to cross-check and verify the corporation’s representations.

Ruling
In the judge's view, for the reasons stated, he was satisfied that Trez and its lawyers carried out satisfactory due diligence in respect of the loan. There was nothing in the status certificates that should have raised any concerns about MTCC 1037 or its financial situation and in particular Wynford’s common expense fees. Trez was entitled to rely on the status certificates and particularly the explicit representation that Wynford had no common expense arrears.

For the above reasons, he did not consider that MTCC 1037’s criticisms of Trez’s due diligence are well founded.

Directors’ responsibilities
As between Trez and MTCC 1037, it is the latter, in the judge's view, that was in the better position to have discovered Wynford and the Walton’s failure to pay common element fees. It is no answer to say that the minority directors were kept in the dark. As board members they had a duty to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”. They should not have acceded full control of the board to the Waltons. Nor should they or the unit holders have acquiesced in the failure to provide up to date financial statements.

Lessons for condo owners
The owners of these commercial condo units may well be able to absorb over $1 million in missing maintenance fees but most owners in residential condo corporations are far less fortunate. If one person, or a couple, have too much power in your condo, clip their wings.

If there are not regularly held AGMs and if there are not annual audited financial statements, then dump the board or sell your unit and get out.

Lessons for prospective buyers
If you have put in an offer on a condo and the status certificate package does not contain current audited financial statements and the minutes of a current AGM, then walk away. Something is wrong.

I have talked to a couple of owners at a Scarborough condo who read in the status certificate that there was $300,000 plus in the reserves. The missing audited financial statements stated that the reserves had a bank overdraft of $27,736. The owners and the board talked about terminating the condo in the last AGM. Little wonder these documents were missing from the status certificate package.

Lessons for directors
If you are asleep on the job and there are no regularly called meetings or you are not privy to all the financial affairs of the corporation, then you either vote to replace the president, you inform the owners what is going on, you take the controlling directors to court or you resign your position and sell your unit. You may be held personally responsible if you do nothing.

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