



COURT OF APPEAL FOR ONTARIO

CITATION: Todd Family Holdings Inc. v. Gardiner, 2017 ONCA
    326

DATE: 20170425

DOCKET: C60962

Doherty, MacFarland and Rouleau JJ.A.

BETWEEN

Todd Family Holdings Inc. and Future Image
    Holdings Corporation

Respondents
(Plaintiffs)

and

Roy John William Gardiner,
    Barefoot Science Technologies Inc., Dayl Marie Armstrong
, Barefoot
    Science Holdings Inc., Barefoot Science Direct Inc., Barefoot Science Group
    Marketing Inc. and
Advanced Barefoot Technologies Inc.

Appellants
(Defendants/Third Party
    Plaintiffs)

and

Lance Todd, Barefoot
    Science Products & Services Inc., and 2215535 Ontario Inc.

Third Party Defendants

Matthew I. Milne-Smith, Carlos Sayao and Bryan D.
    McLeese for the appellants, Roy John William Gardiner, Barefoot Science
    Technologies Inc., Dayl Marie Armstrong and Advanced Barefoot Technologies Inc.

David MacKenzie for the respondents, Todd Family
    Holdings Inc. and Future Image Holdings Corporation

Heard:  April 5, 2017

On appeal from the judgment of Justice McIsaac of the Superior
    Court of Justice, dated July 8, 2015.

By the Court:

[1]

The appellant, Gardiner is an inventor.  He developed, patented and
    marketed rehabilitative shoe and insole products through a series of companies,
    including the appellant, Barefoot Science Holdings Inc. (Barefoot Holdings). 
    The products are sold around the world.  The appellant, Armstrong, is
    Gardiners wife.

[2]

Gardiner was looking for investors in 2004.  Lance Todd, who had
    experience investing in and successfully developing businesses, was approached
    by an associate of Gardiners about the possibility of investing in Barefoot
    Holdings.  Based on written material provided to Todd and representations made
    by Gardiner, Todd decided to invest in Barefoot Holdings.  He was also to
    assume a management position in the company.

[3]

Todd first advanced funds in May 2005.  He advanced slightly over
    $1,000,000 between May and December 2005.  The money was advanced by the
    respondent corporation, Future Image Holdings Corporation (Future).  In
    addition to the loan, Future purchased shares in Barefoot Holdings from
    Armstrong for $250,000.

[4]

In his evidence, Todd testified that Gardiner represented that Barefoot
    Holdings owned and controlled the trademarks, patents and other intellectual
    property relating to the products sold by Barefoot Holdings (the IP).  In
    fact, Todd later learned that Gardiner personally maintained effective control
    over all of the relevant IP.  Todd testified that he would not have advanced
    funds or purchased shares of Barefoot Holdings had he known that Barefoot
    Holdings did not own and control the IP, the principal asset underlying the value
    to the business.

[5]

The trial judge identified the elements of the tort of deceit (para.
    44).  He went on to consider and accept Todds evidence, concluding, at paras.
    46-51, that:

·

Gardiner
    effectively represented that Barefoot Holdings owned and controlled the IP;

·

Todd
    relied on this representation; and

·

Todd
    would not have made the loan or purchased the shares but for the
    representation.

[6]

On appeal, counsel for the appellants accepts that Barefoot Holdings
    borrowed money from Future and that the money has not been repaid.  Counsel
    also accepts that Gardiner, and not Barefoot Holdings, controlled the IP
    through various agreements at the time the funds were advanced by Future.  Lastly,
    counsel accepts that Gardiners control of the IP was not disclosed to Todd until
    well after the advances were made.

A.

Grounds of Appeal

(a)

The finding of deceit

[7]

The appellants challenge the trial judges finding of deceit, both as against
    Gardiner and Armstrong.

[8]

Insofar as Gardiner is concerned, counsel submits that there was no
    material misrepresentation made by Gardiner that induced Todd to invest in
    Barefoot Holdings.  Counsel submits that on Todds own evidence, the alleged
    misrepresentation as to Barefoot Holdings ownership and control of the IP
    would only have become relevant when discussions about Barefoot Holdings
    providing security for the loans began.  Those discussions began in November
    2005, well after Todd had advanced $500,000 to Barefoot Holdings and committed to
    advance a further $500,000.

[9]

Counsel is correct in his contention that security for the advances made
    by Future was not discussed between Todd and Gardiner until November 2005.  Those
    discussions were initiated by Gardiner and led to a security agreement by which
    Barefoot Holdings pledged as security for the loan by Future all present and
    after acquired IP.  In offering the IP as security for Barefoot Holdings
    loans, Gardiner said nothing to Todd about his personal control of the IP
    through various agreements.

[10]

Counsel for the appellants submits that even if Gardiners silence,
    combined with his representations, constitute a material misrepresentation,
    that misrepresentation could have no causal connection to the $500,000 that was
    advanced before any discussions about security, or to the additional $500,000 that
    Todd had committed to advance to Barefoot Holdings before there was any
    discussion about security.

[11]

A claim for deceit can succeed only if a plaintiff demonstrates a causal
    connection between the misrepresentation and the alleged advancement of the
    funds.  Funds advanced or committed before a misrepresentation cannot be the
    product of that misrepresentation.

[12]

However, the deceit claim advanced at trial was not limited to an
    alleged misrepresentation made in the context of discussions concerning
    potential security for the loans in the IP.  Todd made it clear that he
    invested in Barefoot Holdings because he saw the opportunity to build a
    successful business, as he had done in the past, developing and manufacturing
    the various products sold by Barefoot Holdings.  He understood, based on the
    representations made by Gardiner from the outset of their discussions, and from
    the documents provided to him by Gardiner, that the IP, which Todd regarded as
    central to the value of the business he was being invited to invest in, was
    owned and controlled by Barefoot Holdings, the company in which he was
    investing.  In fact, Gardiner controlled the IP.

[13]

The trial judge appreciated and accepted this aspect of Todds claim. 
    He said, at para. 45:

I am satisfied that, at the time of his dealings with Lance
    Todd, he knew that any potential investor would want to know the status of the
    companys IP for two reasons:
first, to allow for the viability and
    success of the enterprise itself so as to guarantee a return on any investment;
    and, second to provide potential security for the investment if the company
    failed.
Accordingly in my view, there was both active misrepresentation
    based on the false impression created by the pitch documents provided in
    August 2004 to Mr. Todd, but, also, material non-disclosure of the true
    ownership of the IP.  [Emphasis added.]

[14]

The trial judge accepted that Gardiners misrepresentations as to the
    ownership and control of the IP were relevant from the outset to Todds
    consideration of the viability of his proposed investment in Barefoot
    Holdings.  That concern operated separately from Todds further concern,
    developed when Barefoot Holdings offered security, about the value of the
    proposed security offered by Barefoot Holdings.

[15]

We are satisfied that the evidence provided a basis upon which the trial
    judge could make the findings he did in para. 45 of his reasons.  It is fair to
    say that Todd spoke of security in both the general sense, as assets
    demonstrating that the borrower, Barefoot Holdings, had worth, and in the
    narrower sense as assets pledged by the borrower as security should the loan fail. 
    However, Todd made it clear that it was significant to him that Barefoot
    Holdings owned and controlled the assets that were essential to the development
    of a profitable business.  Those assets consisted of the patents, trademarks, and
    other IP.

[16]

We would not interfere with the finding of deceit against Gardiner.

B.

the finding of deceit against armstrong

[17]

The trial judge said virtually nothing about Armstrongs involvement in
    the relevant matters in his reasons.  His entire analysis of the deceit claim
    against her is found in the following passage from para. 52:

Ms. Armstrong was complicit in this ploy [Gardiners deceit]
    in her capacity as proofreader of such documents as one of her responsibilities
    in communications director of BFSH (Barefoot Holdings).

[18]

The reasons provide no basis upon which Armstrong could be found liable
    in deceit.  On our review of the record, there is no evidence of Armstrongs
    participation in the discussions relevant to the investment in Barefoot
    Holdings, much less any complicity in the misrepresentations, providing the
    basis for the findings of deceit.

[19]

It is true that the shares purchased by Future for $250,000 were owned
    by Armstrong.  However, her ownership of those shares does not implicate her in
    the misrepresentations that caused Future to purchase the shares.  Those
    misrepresentations were made by Gardiner.

[20]

The finding of deceit against Armstrong cannot stand.

C.

the damages awarded for deceit

[21]

In his reasons under the heading Relief Granted, the trial judge said,
    at para. 65:

Based on my findings of active deceit and material
    non-disclosure earlier in these reasons, I have no difficulty in awarding
    Future Image damages in the amount of $1,250,640.34 (USD) as against the
    defendants Roy Gardiner and Dayl Armstrong.

[22]

The figure referred to by the trial judge represents the loan advance of
    slightly over $1,000,000 and the $250,000 advanced to purchase Barefoot
    Holdings shares.

[23]

The trial judge went on to make additional monetary awards in favour of
    Future.  He did so on the assumption that Future was entitled to enforce the
    loan agreement which it had entered into as a result of Gardiners deceit.  For
    example, one term in the loan agreement called for an interest payment of $500,000
    on a specific date.  The trial judge (para. 69) awarded that $500,000 to
    Future.

[24]

Ultimately, the trial judge awarded monetary damages to Future in the
    amount of $2,217,602.28.  All of the damages were awarded for deceit/fraudulent
    misrepresentation (para. 75).  The trial judge did not award damages for the
    respondents claims of lost salary and recovery of expenses.  The respondents
    have not appealed from that aspect of the decision.

[25]

We agree with counsel for the appellants submission that the measure of
    damages for deceit requires that the injured party be placed in the position it
    would have been in had the misrepresentation not been made.  Damages for deceit
    are not calculated on the assumption that the injured party is entitled to
    enforce the agreement entered into as a result of the misrepresentation.  Consequently,
    Future was not entitled, as part of its damage claim for deceit, to claim the
    $500,000 interest payment required under the terms of the loan.

[26]

Future is entitled to the amount it advanced by way of loans and share
    purchases  $1,250,640.34  the amount referred to by the trial judge, at para.
    65.  Future is also entitled to prejudgment interest calculated on the various advances
    as of the date the advances were made and according to the rates established under
    the
Courts of Justice Act
.

[27]

We note that the respondents also advanced an oppression claim at trial
    under the
Ontario Business Corporations Act
, R.S.O. 1990, c. B.16
(OBCA).  The trial judge found
    that the respondents have been exposed to a litany of oppressive machinations
    at the hands of the defendants [appellants] and they are entitled to
    significant relief under s. 248 of the OBCA (para. 62).

[28]

The trial judge did not grant any monetary relief under s. 248 of the
    OBCA.  It may be that some of the oppressive conduct identified by the trial
    judge could justify a monetary award.  The record does not, however, permit
    this court to engage in that inquiry at this stage.  Counsel for the
    respondents did not suggest that if this court found that some of the damages
    were improperly awarded for deceit, this court should reallocate all or part of
    those damages to the oppression remedy.

[29]

The damage award to Future should be varied to $1,250,640.34 (USD). 
    Future should also receive prejudgment interest on that amount as described
    above.

D.

the accounting issue

[30]

The respondents eventually realized on their security after Barefoot
    Holdings defaulted on the loan obligations.  The respondents took control of
    the business and by the time of trial in 2015, had operated the business for
    some six years.  It was common ground that any profits earned during that six
    years should be deducted from any amounts owed to the respondents.

[31]

In his evidence, Todd claimed that Barefoot Science Products &
    Services, the company incorporated to run the business, had not made any profit
    during the six years that it operated the business.  The appellants presented
    expert evidence suggesting that the business must have made profit sufficient
    to easily eliminate any debt owed to Future.

[32]

Todds claim that the business had made no profit in the six years he had
    been in control rested almost entirely on his oral testimony.  Todd failed to
    produce most of the documentation he was required to produce, both under the
Rules
    of Civil Procedure
and pursuant to specific court orders.  He had no legitimate
    excuse for his failure to produce the required documentation.

[33]

The evidence of the defence expert suggesting that significant profits
    must have been made was based, to some extent, on information provided by
    Gardiner, but to a large extent on documents retrieved from third parties.  The
    expert also used documents provided by Todd.

[34]

The trial judge took no issue with the evidence of the defence expert.  He
    did not suggest that her evidence was tainted by the information provided by
    Gardiner.  The trial judge described the experts report as an impressive
    analysis (para. 76).

[35]

The trial judge ultimately rejected the defence experts evidence
    entirely.  He did so on the basis that it was inconsistent with his perception
    of Todds circumstances at the time of trial.  The trial judge accepted that
    Todd had been thoroughly victimized by Gardiner and was impecunious at the time
    of trial.  Based on these findings, the trial judge concluded that Todds
    evidence that the business had made no profit in the six years during which he
    controlled the operation should be accepted, despite Todds failure to produce
    virtually any supporting documentation.

[36]

The trial judges finding that the business made no money during the six
    years after Todd assumed control cannot stand.  With respect, the trial judges
    finding that Todd was victimized by Gardiner, and destitute at the time, provided
    no basis upon which to come to any conclusion concerning the income of the
    business during the six years in which Todd operated the business.  The trial
    judges finding is made even more untenable in the face of significant
    independent documentary evidence establishing substantial sales by the business
    during that six-year period.

[37]

The trial judge had to come to grips with the available evidence
    relating to the operation of the business in the six years after Todd assumed
    control.  He could not avoid that task because he believed Todd to be a victim
    and because he was satisfied that Todd was destitute.  Furthermore, the trial
    judge had to take into account the negative implications flowing from Todds abject
    failure to comply with the relevant
Rules
and prior court orders.

[38]

The trial judges conclusion that there was absolutely no recovery in
    the years that Todd operated the business reflects a failure to engage with the
    relevant evidence, and reliance on irrelevant considerations.  The finding must
    be set aside.

[39]

We were advised by counsel for the appellants during oral argument that
    the respondents continue to operate the business and that regardless of the
    outcome of this appeal, the appellants would be seeking a further accounting
    for the time period since the trial.  In our view, that accounting should
    extend over the entire time period during which the respondents have had
    control of the business.

[40]

We remit the matter to the Superior Court for an accounting and
    determination of the amount, if any, owing to the respondents.  The court can,
    to the extent necessary, vary any of the extant terms of the trial judges
    order.

E.

conclusion

[41]

The appeal is allowed.  Paragraphs 1, 2, 10 and 15 of the trial judgment
    are set aside.  The findings of deceit and fraudulent misrepresentation against
    Gardiner stand.  The claim in deceit and fraudulent misrepresentation against Armstrong
    is dismissed.  The assessment of damages for Gardiners deceit/fraudulent
    misrepresentation is remitted to the trial court on the basis that Future is
    owed $1,250,640.34 (USD), plus prejudgment interest and less the profits, if
    any, generated since Future realized on its security and assumed control of the
    business.  Future is entitled to post-judgment interest on any amount found
    owing to Future.

[42]

Paragraphs 3, 4, 5, 6, 7, 8, 9, 12, 13 and 14 of the trial judgment
    stand.  Paragraph 11 is varied by deleting the reference to Dayl Marie
    Armstrong.

[43]

The trial judge awarded costs to the respondents on a substantial
    indemnity basis in the amount of $960,432.26.  In doing so, he relied on his
    finding that Gardiner had acted in a thoroughly dishonest manner in his
    dealings with Todd.

[44]

We have confirmed the trial judges finding of deceit as it applies to
    Gardiner.  We also accept the trial judges finding that Gardiner forged an
    important document in an effort to take control of the IP, despite his
    representations to Todd.  Those findings of dishonesty could justify costs against
    Gardiner on a substantial indemnity basis.

[45]

Unfortunately, the trial costs cannot be appropriately assessed until
    the court has determined what amount, if any, remains owing to Future after the
    accounting process described above.  For example, if it should turn out that
    profits earned since Todd assumed control of the business exceed the debt owed
    to Future, that finding could have a significant impact on both the plaintiffs
    entitlement to costs and the quantification of those costs.  Costs of the trial
    can only be determined after the trial court has assessed the damages, if any,
    presently owing to the respondents.

[46]

There should be no costs of the appeal.  The appellants enjoyed
    considerable success on the appeal, however, they were unsuccessful on the main
    issue, Gardiners personal liability for deceit.

Released: DD  APR 26 2017

Doherty J.A.

J. MacFarland J.A.

Paul Rouleau J.A.




