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Introduction

We have written twice in the past about piercing the corporate veil. Despite the unambiguous language of the precedents referred to, these cases continue to pop up. In the case discussed below, it was clear the trial judge did not like the principal of the corporate defendant, who held the principal personally liable for damages, including punitive. The punitive damages were upheld on appeal, however, the principal’s behaviour was not enough to pierce the corporate veil.

Recent Case

A corporate landlord took steps to terminate the lease of one of its commercial tenants which operated a restaurant. The landlord also took the assets of the tenant and sold them, claiming the right of distraint to cover overdue rent. The tenant then sued the landlord for damages, claiming the lease was improperly terminated and that the asset seizure was illegal distraint or a conversion. The tenant also sought to make the landlord’s principal a personal defendant and took the position that liability should be joint and several.

At trial, the termination was found to be proper but that the distraint that followed was illegal. Damages were assessed at just shy of $75,000.00. This included $10,000.00 for punitive damages. The damages were awarded against both the corporate landlord and its principal. The landlord appealed.

Trial Findings

The trial judge did not give lengthy reasons for finding that the corporate veil could be ignored. The rationale came down to the following five paragraphs in the reasons:

Joint and Several Liability

I find the defendants jointly and severally liable. While the subject property is registered in the name of Buckingham Properties Inc., the individual defendant cannot hide behind the corporate veil in the circumstances of this case.

The individual defendant was the officer, director, sole shareholder and directing mind of the corporate entity. He dealt personally throughout with the plaintiff, and the relationship of landlord-tenant was between Mr. Mandelbaum and Mr. Josefsberg.

Directors may be held responsible for the tortious acts of their company where those acts were expressly directed by them: Beaver Steel Inc. v. Skylark Ventures Ltd., [1983] B.C.J. No. 54 (S.C.), referring to Rainham Chemical Works Ltd. v. Belvedere Fish Guano Co., [1921] 2 A.C. 465.

Mr. Mandelbaum’s conduct vis-à-vis the plaintiff and the distraint and conversion of the plaintiff’s business property to his new tenants were acts of Mr. Mandelbaum acting personally and as sole owner and director of the corporate defendant.

I am satisfied, based on all of the evidence and the case law that this is a case where the corporate veil should be pierced. The sole officer and director of the corporate defendant, Mr. Mandelbaum, cannot, in the circumstances, hide behind the corporate veil. Thus, I find the corporate defendant and William Mandelbaum jointly and severally liable.

The Appeal

The landlord appealed on all issues. The Ontario Court of Appeal (ONCA) dealt with the personal liability finding and reversed it on appeal.

In the first place, the lease in question was made between the corporate parties and not between their principals. This issue was neither pleaded nor supported by any of the evidence. The fact that all corporations act through their officers and directors. In doing so, they do not personally become parties to the underlying transaction.

Secondly, when attempting to affix tortious liability separate from that of the company, the particulars of such conduct need to be pleaded as set out in McDowell v. Fortress Real Capital Inc.:

It is unconscionable to find an officer or director of a company liable in circumstances where they do not know the precise nature of the alleged malfeasance and how it leads to liability separate from that of the corporation.

There was no such pleading here. Further, the Beaver Steel case relied on by the judge when dealing with the tortious acts of directors and officers was not the leading case in Ontario. In ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. it was said:

The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact- specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour…

Additionally, there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, 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.

None of these elements were present in the case at hand. The trial result would make every corporate principal personally liable every time the company committed a tort. This was not one of the exceptional cases referred to in leading decisions.

The exceptional team of Toronto corporate commercial lawyers at Milosevic Fiske LLP regularly represent clients in complex commercial litigation matters ranging from straightforward contract and partnership disputes to complex multi-party commercial claims. We can provide you with advice and guidance suited to your unique situation. Call us at 416-916-1387 or contact us online to learn more about how we can help.