A. INTRODUCTION
On November 16, 2011, the Ontario Superior Court of
Justice issued supplementary reasons for the decision of Victoria Order of
Nurses for Canada v. Greater Hamilton Wellness Foundation (the “Decision”).
For a summary of the Decision, see Charity Law Bulletin No. 265. Both the Decision and supplementary reasons are now publicly available on
CanLII. By way of background, the Greater Hamilton Wellness Foundation (the
“Foundation”) was found in the Decision to have breached its fiduciary duty and
trust obligations to the successor to the Hamilton branch of the Victorian
Order of Nurses. The applicants in the Decision, the Victorian Order of Nurses
for Canada (“VON Canada”) and its Ontario branch (“VON Ontario”), were
successful in obtaining a court order that the Foundation transfer all of its
corporate property as of December 15, 2009 to VON Ontario as the successor to
the Hamilton branch. The parties disagreed on the amount of administrative and
overhead costs that the Foundation would be permitted to deduct from the corporate
property to be transferred to VON Ontario. The court resolved this dispute by
issuing the supplementary reasons.
B. POSITION OF VON ONTARIO AND THE FOUNDATION
The court framed the issue to be resolved as whether the
Foundation should repay any funds that it used to cover its administrative and
overhead expenses pending the determination of the Decision from the
$1,470,670.60 that was to be transferred to VON Ontario. The crux of the
disagreement was the parties’ differing approaches to calculating the amount of
such administrative and overhead expenses.
1. Approach of the Foundation to costs and its
position
The Foundation argued that all of its expenses between
December 15, 2009, the date set out in an injunction of the court, dated
January 28, 2010, barring the Foundation from disbursing or in any way
transferring any money or assets raised or received by it to a non-VON entity
(the “Order”), and September 30, 2011, were administrative and overhead costs.
According to the Foundation’s calculations, the Foundation incurred $122,636.50
in overhead and administrative expenses, which lowered the amount due to VON
Ontario, less accumulated interest and an earlier transfer to VON Ontario, to
$1,243,691.00.
The arguments advanced by the Foundation that it should
be permitted to draw on the funds restrained by the Order for its
administrative and overhead costs included that the Order was negotiated by the
parties on the understanding that the Foundation would be permitted to exclude
overhead and administrative costs from the funds it was restrained from
disbursing. In addition, the Foundation also argued that scope of the Order encompassed
nearly all of its property at the time and to prevent the Foundation from using
any such funds to pay its administrative and overhead costs would have
effectively required the Foundation to cease operating, given the period of
time that passed between the Order and the hearing of the application.
2. Approach of VON Canada and VON Ontario to costs
and their position
While VON Canada and VON Ontario accepted the amount of $1,243,691.00,
they noted that the administrative and overhead expenses claimed by the
Foundation exceeded its revenue by an amount of $109.608.08. VON Canada and VON
Ontario took the position that this “shortfall” amount plus any costs awarded
to them should be paid by the Foundation and/or the Foundation’s directors
personally.
In this regard, VON Canada and VON Ontario argued that the
Order was for all intents and purposes an asset preservation order. Since the Order
was not designed to relieve the Foundation of its responsibilities to meet its
financial obligations, the shortfall between the funds raised by the Foundation
after December 15, 2009 and its total expenses should not to be borne by VON
Ontario. As well, VON Canada and VON Ontario argued that VON Ontario should be
restored to the position that it would have been, had the Foundation met its
fiduciary obligations (i.e. there would have been no depletion of the funds by
the amount of the costs because VON Ontario would be controlling the funds).
In addition, VON Canada and VON Ontario pointed out that
the directors of the Foundation had the opportunity to take steps in order to
mitigate their exposure to costs, including for example, a mediated settlement.
Although not stated by the court in the supplementary reasons, it can be
presumed that the directors did not accept an offer by VON Canada and VON
Ontario to deal with these issues through mediation.
C. THE DECISION
The court agreed with VON Canada and VON
Ontario in characterizing the Order as an asset preservation order. While the
court noted that the Order permitted the Foundation to continue to operate as a
general fundraiser, the court concluded that an interpretation of the Order
which allowed the Foundation to permanently encroach on the funds restrained by
the Order would have defeated the essential purpose of the Order. The
court order permitted the Foundation to access the funds on a temporary basis in
order to prevent it from ceasing operations during litigation. The court stated
that, “The Directors cannot reward themselves with the payment of their own
expenses during their dispute with [VON Canada and VON Ontario], no matter how
reasonable they might be.”
In addition, while the court recognized
that there was some delay between the Order and the hearing of the application,
VON Canada and VON Ontario had raised the issue of encroachment on the funds
restrained by the Order when they sought to bring a motion to deal with the
issue in February of 2011. However, the court intervened to schedule a hearing of
the application instead. As such, the Foundation had been aware of the position
that VON Canada and VON Ontario would take for some time. The court concluded
that the “short-fall” amount should be added to the $1,243,691.00, for a
total of $1,344,607.07.
D. CONCLUSION
These supplementary reasons indicate that fiduciaries in
breach of their duties will not be permitted to run up administrative and
overhead costs during litigation in order to deplete the property that they are
holding in trust. While the supplementary reasons do not break down the
administrative and overhead expenses claimed by the Foundation, the comment
from the court that the directors are not permitted to reward themselves by
paying their own expenses implies that some of the administrative and overhead
expenses claimed were with respect to the costs of the litigation. While the
facts and circumstances in this case are unique and unlikely to reoccur, the
supplementary reasons confirm the duty of directors of charitable organizations
to act gratuitously in their capacity as directors and to not receive any
benefit from their position, whether it be directly or indirectly. This is a
continuing duty even when the future of the charity is uncertain, such as in
extended litigation over the assets of the charity.
