(the “litigation trust”) constituted for the benefit of its creditors. In exchange,
SFC’s creditors released their claims for repayment of debts owed to them by SFC.
The trustee of the litigation trust commenced an action against the defendant,
who was SFC’s CEO and the chairman of its board of directors, for damages for
fraud and breach of fiduciary duty. The action was allowed. The trial judge found
that the defendant had directed a massive fraud in breach of his fiduciary duties to
SFC and that his conduct caused a loss to SFC. He awarded damages equal
to what he found to be SFC’s loss — $2,627,478 — as well as punitive damages in
the amount of $5 million. The defendant appealed.
Held, the appeal should be dismissed.
A deferential standard of appellate review applies to a trial judge’s interpretation
of the terms of a CCAA plan of compromise and arrangement. Absent an extricable
error of law, an interpretation that involves palpable and overriding errors of fact, or
one that is clearly unreasonable, the trial judge’s interpretation should not be
The trial judge did not err in his conclusion that the claims advanced in this
action were causes of action that had been held by SFC and that had been transferred to the litigation trust by SFC under the plan. He properly rejected the defendant’s argument that the claims were not causes of action that were transferred to the
litigation trust because they were the same as, or overlapped with, the claims made
in the class actions. Shareholders and noteholders may have causes of action arising
from misrepresentations made to them when acquiring securities, and may have
rights to sue for damages they personally have suffered. But the existence of those
causes of action does not detract from the existence of a separate and distinct cause
of action of the corporation, based on wrongdoing against or breach of duties owed
to it. The causes of action asserted by the litigation trust did not become indistinguishable from the personal rights of action of creditors of SFC because the credits
were litigation trust beneficiaries.
The trial judge did not err in his causation analysis or assessment of damages.
His conclusion and his assessment of damages were premised on five core factual
findings: that SFC’s raising of money in the debt and equity markets was something which was caused by the defendant’s wrongdoing; that but for the defendant’s
deceit, SFC would never have undertaken obligations of that magnitude to lenders
and shareholders; that but for the defendant’s wrongdoing, SFC would not have
entrusted the funds raised on the capital markets to the defendant and his
management team; that the defendant, rather than directing SFC’s spending on
legitimate business operations, poured hundreds of millions of dollars into
fictitious or over-valued lines of business where he engaged in undisclosed related-party transactions and funneled funds to entities that he secretly controlled; and
that SFC suffered losses as a result. Those findings were available to him on the
record. He applied the appropriate legal principles to his causation analysis. He
approached the “but for” causation test on the robust common sense approach the
law contemplates. He was alive to the need to be satisfied that the loss was caused
by the chain of events flowing from the wrongdoing after considering whether
there were intervening causes that broke the chain of causation.
The trial judge’s assessment of damages did not create the risk of double recovery
from the defendant, as SFC’s causes of action against the defendant were separate
and distinct from those asserted in the class actions.
The transfer of the shares of SFC’s subsidiaries to holding companies owned by
SFC’s creditors pursuant to the plan was not an election that barred the trustee
from suing for damages arising from the defendant’s conduct.