Background and History:
In this case, the couple co-founded a successful company during their marriage. The couple separated in 2010 but remained engaged in ongoing family law proceedings related to their children. The central issue in this case was the ownership of common shares in the company.
The husband filed an application seeking to compel the sale of the wife’s common shares in the company. On the other hand, the wife filed an action seeking a declaration that she owned 50% of the company's common shares. The trial judge determined that both the parties held equal shareholdings in the company and valued them at $10,800,000. As a result, the judge ordered the husband to purchase the wife's common shares for $5,400,000.
After the trial, the husband appealed the decision. The appeal court upheld this order.
Legal Issues:
There are several legal issues in this case. However, this blog post will focus on why this type of appeal is difficult to be successful on. Further, this blog post will cover the ‘clean hands’ principle as it relates to equitable relief.
Legal Analysis:
1. Difficulty with appealing findings of fact or mixed fact and law
The Court of Appeal found that the appeal primarily rested on findings of fact made by the trial judge. To be successful on appealing findings of fact, there must have been an overriding and palpable error on the part of the trial judge. It is a high bar to meet because the trial judge is deemed to be in the best position to assess the evidence firsthand. The Court of Appeal states quite clearly:
[5] [the husband] submits that the trial judge made numerous reversible errors. In our view, all of the grounds of appeal hinge upon the trial judge’s unassailable findings and effectively amount to an invitation for this court to redo the trial judge’s findings of fact and mixed fact and law absent any error. That is not our task.
Ownership of Common Shares
The husband argued that the trial judge's reasons for concluding that the wife owned 50% of the company's common shares lack a legal basis. He relies on the original shareholders' ledger, which shows a division of 70% to him and 30% to the wife. However, the appeal court disagreed with this argument, as the trial judge explicitly accepted the wife’s position, as pleaded in her amended statement of claim and supported by evidence, that an agreement existed between the parties for equal shareholdings. The court found that the corporate records alone were not conclusive, and the trial judge's factual findings, including the agreement between the parties, equal compensation and dividends, and the wife’s belief of being a 50% shareholder, supported her conclusion. Thus, the court rejected this ground of appeal.
[9] …These were all factual findings the trial judge was entitled to make based on the record before her, and we see no reason to interfere with them on appeal.
Valuation of Shareholdings
Both parties presented expert opinions on the value of the company's shareholdings. The husband claimed the trial judge erred by not giving effect to his expert's opinion. However, the court found that the trial judge accepted some aspects of both experts' evidence and reached a conclusion within the range of their opinions. As such, the court saw no reason to interfere with the trial judge's decision on this matter.
[13] …As she was entitled to do, the trial judge accepted some but not all of each experts’ evidence. Although generally preferring the approach of Doug’s expert, she did not reject Melissa’s expert’s opinion. She determined that the value of the shareholdings should be more than Doug’s expert’s opinion of value but less than the opinion of value proffered by Melissa’s expert. The trial judge’s conclusion was open to her on the record. We see no basis to interfere with it.
In essence, the Court of Appeal was not prepared to find that the trial judge made reversible findings of fact.
2. "Clean Hands" Doctrine:
The husband argued that the wife’s improper withdrawals from the company and company line of credit should disentitle her to the equitable remedy granted by the trial judge. The Court of Appeal reiterated the ‘clean hands’ principle. If a person seeks to get equitable relief in court, they must come with clean hands. In other words, that party must not have engaged in bad conduct in relation to the claim:
[14] The “clean hands doctrine” comes from the 18th century maxim that “he who comes to equity must come with clean hands”: see e.g., Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612, at para. 22; Bolianatz Estate v. Simon, 2006 SKCA 16, 264 D.L.R. (4th) 58, at para. 116; Dering v. Earl of Winchelsea (1787), 1 Cox 318, 2 E.R. 1184, at pp. 319-320.
However, in this particular case, the appeal court clarifies that the trial judge did not actually grant equitable relief but found an agreement between the parties, leading to the relief granted:
[16] First, the trial judge did not grant equitable relief. As we earlier concluded, the trial judge made no error in finding that there was an agreement between Doug and Melissa to increase Melissa’s common shareholdings to 50%. This was not the granting of equitable relief but the finding by the trial judge of the existence of an agreement between the parties and the granting of the relief that flowed from that agreement.
Even if the relief was based on an equitable remedy, the Court of Appeal still took issue with the husband’s position. The Court of Appeal implied that for the ‘clean hands’ doctrine to apply, the misconduct on the part of the party seeking an equitable remedy must have been related to the issue at hand. The issue at hand was the division of shares in the company. Yet, the wife’s conduct, withdrawing money from the company, was not related to that issue:
[17] Moreover, because Melissa’s withdrawals from the company and from Doug’s line of credit are unrelated to the proper division of the shares, Melissa’s conduct would not fall within the application of the “clean hands” doctrine: see e.g., BMO Nesbitt Burns Inc. v. Wellington West Capital Inc. (2005), 2005 CanLII 30303 (ON CA), 77 O.R. (3d) 161 (C.A.), at para. 27; Toronto (City) v. Polai, 1969 CanLII 339 (ON CA), [1970] 1 O.R. 483 (C.A.), at pp. 493-494, aff’d 1972 CanLII 22 (SCC), [1973] S.C.R. 38.
The Court of Appeal states that the "clean hands" doctrine does not automatically disentitle a party from obtaining relief, and the trial judge can exercise their discretion after considering all relevant circumstances. Therefore, the court finds no basis to interfere with the trial judge's decision.
[18] In any event, the “clean hands” doctrine does not automatically disentitle a party with “unclean hands” from obtaining any relief. Equitable principles are not based on the application of strict rules but are applied at the judge’s discretion and are “crafted in accordance with the specific circumstances of each case”: Pro Swing Inc., at para. 22. As this court observed in Sorrento Developments Ltd. v. Caledon (Town), 2005 CanLII 2549 (Ont. C.A.), at para. 5: “It is a matter of discretion for the trial judge whether to refuse to grant equitable relief on the basis that a litigant has not come to court with clean hands”. Here, the trial judge carefully considered the circumstances surrounding both withdrawals.
…
[20] The trial judge did not condone Melissa’s unauthorized withdrawal of the $600,000 from Doug’s line of credit, which Melissa repaid. However, as she was entitled to do, the trial judge exercised her discretion to grant Melissa relief, having regard to all the circumstances, including Doug’s conduct that she found precipitated Melissa’s rash but wrongful act. Para. 61 of her reasons shows that she did not simply excuse Melissa’s conduct because of Doug’s conduct but situated Melissa’s conduct in the context of all the relevant circumstances:
In all the circumstances I would still exercise my discretion and award an equitable remedy. There are complex family dynamics at play here. In fact, the evidence was that there are still ongoing acrimonious family law proceedings related to the children. Doug led Melissa down the garden path regarding her continued equal treatment from the family business. Then, he suddenly pulled the rug out from under her. Melissa panicked. By firing her, Doug had cut off her only source of employment income. All of Melissa's relevant work experience had been gained in a company whose president was now claiming that she was fired for cause. Doug also refused to authorize dividends from the company, without explanation, and Melissa had no other source of income. She made a rash, and I am sure regrettable, decision to withdraw monies from Doug's line of credit, to which she had access. Melissa repaid the money.
Conclusion:
The appeal court finds no reversible errors in the trial judge's decision. The trial judge's findings regarding the ownership and valuation of common shares, and the application of the "clean hands" doctrine, are all supported by the evidence and applicable legal principles.