Canada: Alberta, Canada Court Holds Senior Executive Personally Liable To Employer

In Breen v Foremost Industries Ltd, 2023 ABKB 552, the Court of King's Bench of Alberta dismissed the claim of a President and CEO that he had been wrongfully dismissed from his employment, finding that his employment had been justly terminated for cause due to his misconduct and breach of his fiduciary and other duties. Ruling on the employer's counterclaim, the court held that because the executive knowingly and willfully breached a number of duties that he owed to the employer, including his fiduciary duty, a duty of care and skill, a duty to safeguard the employer's property, a duty to avoid conflicts of interest, and his duties of loyalty, honesty, and good faith, he was personally liable for $480,000 in compensatory damages and $50,000 in punitive damages.

Background

After becoming President and CEO of Foremost Universal Limited Partnership (Universal) in 2001, the employee was made President of a mutual fund, Foremost Income Fund (FIF) in 2003. FIF oversaw Universal's operations and those of other businesses in the Foremost group of companies (Foremost Group). The employee was responsible for all businesses in the Foremost Group and reported to FIF's board of directors.

In 2011, the executive entered into an employment agreement with FIF, which required him to comply with the Foremost Group's policies, practices, and procedures, and avoid and disclose potential conflicts of interest. The employee was also to consult with the FIF board and obtain its approval on matters beyond his authority such as expenditures that exceeded his spend authorization limit; contracts with "red flag" terms; employee compensation; and material and out-of-the-ordinary matters. The employee engaged in several of these activities without seeking board approval, and deposited misappropriated funds and placed them into his numbered company.

The board repeatedly warned the executive about its concerns regarding his performance and conduct; however, his misconduct continued. In 2014, the executive's employment was terminated for just cause.

Decision

The court found the executive's employment was appropriately terminated for cause and dismissed his wrongful dismissal action. It then made the executive personally liable for $480,000 in compensatory damages and $50,000 in punitive damages. In fact, the court indicated that if a higher punitive damage award had been requested, it might have been inclined to award it.

The court found the executive had irrevocably shattered Foremost Group's confidence and trust in him, was dishonest, breached "the faith inherent in the work relationship," and conducted himself in a manner that was "fundamentally or directly inconsistent with [his] obligations to the Foremost Group."

The court determined that the executive, "breached his duties of honesty and good faith with a view to the Foremost Group's best interests" and "allowed his own self-interest to prevail..." It highlighted that this breach was compounded by the fact that the executive "obtained a personal benefit."

Upon considering the counterclaim for punitive damages, the court observed that the executive held the highest management position in the Foremost Group, and since he was in control of its day-to-day operations, the Foremost Group was vulnerable to him. The court noted that it was in this context that the executive engaged in embezzlement while acting as the Foremost Group's fiduciary. The court ordered compensatory damages in respect of the misappropriated amounts; however, it found this insufficient to express its disapproval for the executive's breaches of statutory, contractual, and fiduciary duties. To meet the objectives of general and specific deterrence and to denunciate the executive's "shameful conduct," the court also made the executive personally liable to the Foremost Group for $50,000 in punitive damages. The court emphasized that it made this award because of "the most offensive aspect of this case," i.e., because the executive took funds from the Foremost Group while he knew or ought to have known that it was fraudulent; in a manner that was "planned and deliberate"; persisted in doing so although he knew that what he was doing was wrong; and attempted to cover up what he had done.

Bottom Line for Employers

It is unsurprising that the court in Foremost Industries found that when an employer discovers that a senior level executive is engaging in severe misconduct that irrevocably destroys the employer's confidence and trust in him, the employer is justified in dismissing the executive for cause. The decision leaves little doubt that courts will hold senior executives or other fiduciaries responsible for satisfying their fiduciary duty, duty of care and skill, duty to safeguard the employer's property, duty to avoid conflicts of interest, and duties of loyalty, honesty, and good faith.

However, another aspect of the court's decision in Foremost Industries is less common, i.e., that the court held the executive personally liable to the employer for $50,000 in punitive damages and stated that it might have been inclined to make such an award in a much higher amount had it been requested. This decision suggests that employers should not hesitate to ask courts to hold their fiduciaries personally liable for a punitive damage award in circumstances where the fiduciary has executed a deliberate plan to fraudulently misappropriate the employer's funds for their own benefit.

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