Canada: Unlawful Conduct Conspiracy: HSBC Bank Canada v Fuss

Last Updated: August 2 2013
Article by Justin R. Seitz

The Alberta Court of Appeal recently considered a case concerning the tort of unlawful conspiracy in HSBC Bank Canada v Fuss, 2013 ABCA 235. After applying the five elements of the tort as set out in Agribrands Purina Canada Inc v Kasamekas, 2011 ONCA 460 (Agribrands), the trial judge awarded damages in favour of the respondent, HSBC Bank Canada (HSBC), in the sum of $1,761,901.14. The appellants, David Fuss (Fuss) and his wife, Rhonda Thuna (Thuna), appealed the trial judge's decision.  

Background

82836 Alberta Ltd. (828) was a wholesale and retail distributor of satellite systems and electronics. In 2001 HSBC provided 828 with financing through an operating line of credit, and pursuant to a GSA executed in HSBC's favour, any money collected or received by 828 was subject to a trust. At that time Cameron Kendrick (Kendrick) was 828's only director and shareholder. Fuss was a director of two Ontario corporations that were suppliers of 828, Ariza Technology Inc. (Ariza) and Incredible Electronics Inc., and a director of a third company that later became a 50% shareholder in 828, HBC Business Credit Inc. (HBC). Thuna was made director of 828 when HBC became a shareholder in that corporation.

828 often exceeded the limit of its operating line of credit. Eventually 828 did not have sufficient funds to pay HSBC, and in February of 2004 HSBC began dishonouring 828's cheques. In order to continue the business Kendrick and Fuss opened an account with TD Canada Trust (TD), however this account was opened in another company's name - Electronic Wholesale (Edmonton) Ltd. (EWE). Any receivables and proceeds from the sale of 828's inventory were deposited in the TD account. HSBC was advised of the account but it was not advised that the 828's business was operating under EWE, or that the account was in EWE's name.

In March of 2004 HSBC made a demand for payment. Between March and May of that same year $202,350.82 was paid to Ariza from EWE's TD account. Another company was incorporated in April of 2004 - 1100336 Alberta Ltd. (1100) - which took over 828's business, including its stock, receivables and employees (Fuss and Kendrick's fathers were directors). HSBC was not advised of 1100's involvement with 828's business.
In June 2004, HSBC appointed Price Waterhouse Coopers to serve as the privately appointed receiver and manager of the business and undertakings of 828, and in July of that year petitioned 828 into bankruptcy. Since 828's remaining stock had little value, and its electronic records had been destroyed, HSBC recovered very little. HSBC sued Kendrick, Fuss, Thuna and the corporations they controlled.  

The trial judge found that Kendrick was responsible for producing misleading or incorrect financial information, and destroying 828's financial records. This was fraudulent conduct, and although Fuss and Thuna were not aware of Kendrick's fraud, they were aware of and participated in the transfer of 828's business to 1100. The trial judge was convinced that the transfers from 828 to 1100, and the use of EWE's account, were an intentional and deliberate process designed to sequester 828's assets in 1100, leaving 828 with the liability to HSBC and ultimately preventing HSBC from realizing on its security. The trial judge was satisfied that the elements of the unlawful conduct conspiracy tort had been proven.

The Appeal Court Decision
 

After considering the relevant standards of review, the appeal court went on to address the five elements necessary for the tort of unlawful conduct conspiracy as set out in Agribrands, at paragraph 26:

1. they act in combination, that is, in concert, by agreement or with a common design;

2. their conduct is unlawful;

3. their conduct is directed towards the respondents;

4. the appellants should know that, in the circumstances, injury to the respondents is likely to result; and

5. their conduct causes injury to the respondents.  

With respect to the first element, the appellants argued that in order for the parties to have acted in concert they would of had to agree to participate in Kendrick's fraud. Since the trial judge did not find that Fuss and Thuna were aware nor participated in Kendrick's fraud, they could not have acted in combination. As the appeal court correctly pointed out, the agreement or common design in the circumstances was to divert 828's business and assets to EWE and then to 1100, thereby depriving HSBC's ability to recover the debt; it did not matter that Fuss and Thuna were unaware of Kendrick's fraud.  

Considering the second element, whether Fuss and Thuna's conduct was unlawful, the appeal court found it unnecessary to consider the trial judge's conclusions on director's duties because it attributed other conduct to the appellants that was unlawful. The appellants committed unlawful conduct by converting the property of 828 since the transfer of 828's property was not for fair market value (at para. 31). Furthermore, the appellants made preferential payments to Ariza which was also unlawful conduct (at para. 32).  

Thirdly, the appellants argued that their unlawful conduct was not directed at HSBC. They argued that since they owed their fiduciary duties to the companies in which they were directors, then breaches of those duties could not have been directed at HSBC. Again the trial judge pointed out that the purpose of Kendrick and Fuss' actions were to prevent HSBC from realizing on its security, thus defeating HSBC's claim and sinking 828 with debt. The trial judge found that Thuna willingly participated in the common scheme knowing its effect. According to the appeal court these factors established that the appellants' conduct was directed at HSBC (at para. 33).

The fourth element requires a finding of constructive intent (para. 34). The appeal court was convinced that the appellants knew that transfers between the various companies, which stripped 828 of its assets, would result in HSBC suffering a substantial loss as it would be unable to recover the debt.  

For the final element the appellants tried to argue that the loss was caused by Kendrick's fraud and HSBC's decision to overextend its loan to 828, and not because of any unlawful conduct on their part. This argument did not hold much water with the appeal court, the judges holding that "but for the conduct of the conspirators, the respondent would have been paid in full" (para. 35). Again, the facts of the case support this finding; there was sufficient assets in 828 prior to the transfers of assets to allow 828 to pay HSBC in full.  

Takeaway

The five elements for the tort of unlawful conspiracy, as pronounced in Agribrands, remains the test to be applied. With respect to the first element, it appears that a broad view as to what constitutes an agreement or common design will be applied; whether co-conspirators were working in concert to achieve an unlawful goal is the main consideration, and the fact that one might be ignorant of what the other is doing to achieve this goal is no excuse to limit liability.  

Sources:

HSBC Bank Canada v. Fuss, 2013 ABCA 235

HSBC Bank Canada v. 1100336 Alberta Ltd. (Incredible Electronics Wholesale), 2011 ABQB 748

Agribrands Purina Canada Inc. v. Kasamekas, 2011 ONCA 460

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