Monkhouse Law Successful in Fending off $1.7 Million Counter-Claim, Instead Securing Extraordinary Damages for Ex-President, Toronto Employment Lawyer

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After an 11-day trial, Andrew Monkhouse and Samantha Lucifora of Monkhouse Law were recently successful in defending an Ex-President against fraud, breach of fiduciary duty and unjust enrichment allegations,  and instead obtained an award for wrongful dismissal and extraordinary damages due to the former-employer’s treatment of their ex-employee.

The decision can be found at Ruston v Keddco Mfg. (2011) Ltd., 2018 ONSC 2919.

Background:

Since 2011 Mr. Ruston had been the President and General Manager of Keddco Mfg. (2011) Ltd. (“Keddco”). He started with Keddco in 2004 in Sales and worked his way up to the top managerial position in the company. During Mr. Ruston’s tenure as President, Keddco had a location in Sarnia and Edmonton, opened a new location in Houston and had also acquired a competitor CSP. Keddco would produce two financial statements: one for Keddco Canada (Edmonton and Sarnia) and one for Keddco USA (Houston), however Mr. Ruston’s performance, incentivized through a cash bonus related to company profit, was based on the financials of both Keddco Canada and Keddco USA.

In June, 2015 Mr. Ruston, the President and General Manager of Keddco Mfg. (2011) Ltd. (“Keddco”) owned by parent-company Canerector was terminated on allegations of ‘fraud’ but told little else. Due to this lack of explanation, he informed his now-former employer that he would seek counsel. In response Mr. Ruston was told that litigation would be a very expensive process.

Upon suing for wrongful dismissal Mr. Ruston was met with a $1.7 million counter-claim containing allegations of fraud, breach of fiduciary duty and unjust enrichment.  The facts the Defendant relied on for cause were also those that underpinned the fraud, breach of fiduciary duty and unjust enrichment claim. They were:

(a)  Manipulation of the financial statements in that he engaged in the following:

  •  ▪  The unwarranted reversal of inventory reserves;
  •  ▪ The inappropriate realization of profits by the defendant on product sourced from India intended for Keddco USA; and
  • ▪ The inappropriate realization of profits on transfers of inventory from the defendant to Keddco USA.

(b) Negligence and/or willful blindness relating to the alleged purchasing of excess inventory.

The Decision:

Ultimately the Defendant’s argument was the manipulation of financial statements and excess inventory was allegedly done for the purpose of inflating profits recorded on Keddco’s financial statements, so that the bonus payment was higher, as it was directly related to how much profit Keddco made.  Justice Chiappetta found that there was no basis for the allegations and completely exonerated Mr. Ruston ultimately finding that he was wrongfully dismissed for the following reasons:

Manipulation of financial statements:

1. The unwarranted reversal of inventory reserves on financial statements in 2013

  • ▪ The Treasurer and Vice President Finance who ultimately made the decision did not testify
  • ▪ Canerector’s Corporate Culture, authored by the Chairmen of the Board and former CEO, wrote that there was a lot of flexibility when it came to inventory valuation
  • ▪ Ruston’s genuine belief that the inventory with a provision against it was sell-able and requested to have to the end of 2015 to show progress in its selling
  • ▪ Policies were put in place for all Canerector business after this reversal, making the reversal a moot point
  • ▪The new Canerector CEO knew of the reversal in January 2015 and chose to increase Mr. Ruston’s bonus despite this knowledge
  • ▪ Otherwise no indication that this two-year old reversal played a role in the reason for Mr. Ruston’s termination

2. The inappropriate realization of profits on Keddco Canada financial statements by inventory sourced from India and intended for USA

  • ▪ The defendant agreed that the former part-owner of the supplier in India was the employee with sole-responsibility for sourcing the product and setting up the transfer and he did not testify
  • ▪ The defendant agreed Mr. Ruston did not deal with these orders
  • ▪ There was no evidence the orders even occurred as alleged
  • ▪ The documents referenced price lists for the inventory that was not disclosed
  • ▪ Ruston’s business judgment informed his direction to transfer the inventory through Canada on its way to the US to keep pricing consistent
  • ▪ There was no policy or general accounting rule dictating terms to the contrary

3. The inappropriate realization of profits with high profit margins on transfers of inventory from Keddco Canada to Keddco USA

  • ▪ Ruston was instructed by Canerector to keep the sales prices consistent who in turn instructed the responsible employee
  • ▪ The responsible employee did not testify and the defendant put forward evidence suggesting they did not trust the responsible employee
  • ▪ Documentary evidence suggested Mr. Ruston intended to continue to monitor the profitability of Keddco USA, and prices/transfers of inventory once he had a better feel for the US market but knew that the profit margins in the US were higher
  • ▪ The measure the Defendant employed to show excess profit margins was not a fair marker and no inventory-specific profit margins was put forward by the Defendant
  • ▪ The financials reflected at least some items were transferred at a negative profit margin
  • ▪ All transfers were disclosed in the monthly financial information which was reviewed by the Defendant
  • ▪ There was no policy to the contrary
  • ▪ There was a plan in place to secure a buyer for the transferred inventory
  • ▪ The financial experts who testified at trial agreed the profit on one financial statement (Keddco Canada) based on an inventory-sale to the other (Keddco USA) would:
    • ▪ Be cancelled out in consolidated company statements
    • ▪ Result in a corresponding loss to Keddco USA once the inventory was sold
    • ▪ The policy was that the bonus would be payable based on the performance of both Keddco Canada and Keddco USA and thus Mr. Ruston was unconcerned with the number of transfers and the recorded profit
    • ▪ Though the Defendant based Mr. Ruston’s 2014 bonus based only on Keddco Canada profit, Mr. Ruston only knew this around the time of payout in Feb. 2015
    • ▪ Intercompany transfers are still being done to date at Keddco

b. Negligence and/or willful blindness relating to two alleged purchases of excess inventory

  • ▪ The first purchase falls within Mr. Ruston’s business judgement in responding to a recall of Keddco product
  • ▪ Ruston was unaware of the second purchase and its purchase would have been contrary to a policy in place to get his approval
  • ▪ Ruston made efforts to transfer the inventory to other Canerector division managers
  • ▪ The Defendant thought the second purchase was a mistake
  • ▪ A employee who made the second purchase but did not testify and is still an employee of the Defendant
  • ▪ There was no evidence of financial loss
  • ▪ There was no evidence of the inventory being in excess

Given the complete lack of evidence, Her Honour found that these allegations were created later in older to scare Mr. Ruston when he brought his claim for wrongful dismissal.

The Award:

To compensate for this wrong at the hands of the Defendant, Mr. Ruston was awarded wrongful dismissal damages including:

  • ▪ 19 months worth of base salary as notice of his termination based on:
    • ▪ his age of 54
    • ▪ 11-year tenure
    • ▪ Senior managerial position
    • ▪ lack of availability of similar employment given his ties to a smaller community
    • ▪ continued unemployment with only a brief, temporary period of employment
    • ▪ serious, unfounded cause allegations
  • ▪ 19 months’ worth of car allowance, and RRSP contributions
  • ▪ 19 months’ pay in lieu of health and dental benefits fixed at 10% of base salary due to lack of evidence of cost to the Defendant
  • ▪ Bonus calculated on a per-month basis using a two-year average including:
    • ▪ 5 month-stub bonus for time worked
    • ▪ 19 month bonus during notice period

What is note-worthy of the bonus, is that not only did the Defendant fail to establish that Mr. Ruston boosted profits to increase his bonus, but they also failed to establish that the bonus would not have been payable to Mr. Ruston had he continued to work.

The Defendant was further punished for its conduct and ordered to pay $100,000 in punitive damages for:

  • ▪ Threatening Mr. Ruston with a hefty counter claim and pursuing that threat
  • ▪ Threatening another employee in the same manner
  • ▪ Intimidating Mr. Ruston during the termination, a vulnerable time for him, and making the litigation process more expensive and prolonged
  • ▪ Lack of disclosure of cause allegations during termination meeting
  • ▪ Dropping certain allegations after an 11-day trial upon not putting forward any evidence
  • ▪ Failure to call witnesses with direct knowledge of serious allegations
  • ▪ Retaining an expert in a manner that did not make a reasonable effort to prove their claim
  • ▪ Completely unfounded yet very serious allegations

The Defendant was also ordered to pay Mr. Ruston $25,000 in moral damage to help compensate for the manner in which he was treated including:

  • ▪ Ruston’s lack of knowledge of why he was being terminated until the counter-claim containing personal attacks and public, unfounded allegations of fraud
  • ▪ Agreement on both sides that facing a claim of fraud would be very stressful and costly
  • ▪ Evidence suggesting Mr. Ruston was devastated and the claim weighed on him and was very stressful

In sum, Mr. Ruston was awarded well in excess of a half-million dollars. The determination of quantum of Mr. Ruston’s legal fees payable by the Defendant has yet to be determined.

The author, Samantha Lucifora, was co-counsel and responsible lawyer for Mr. Ruston’s manner. She practises in all areas of workplace law for both employees and employers.

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