Tuesday, October 25, 2011

Dismissed CEO Wins Awkward Partial Summary Judgment Motion

There is a recent judgment in the Hinke v. Thermal Energy International Inc. case, by Justice Ray, on a motion for partial summary judgment.

Put briefly, Hinke founded TEI in 1991 and was its principal until he brought it public in 1994, and continued on as its President and CEO.  In 2004, he recruited Timothy Angus into a senior position, and while conducting his due diligence prior to accepting the position, Angus discovered a letter from the TSX-V asking to review certain transactions, which had been received a few weeks earlier but not produced to the Board of Directors. Angus produced the letter to the Board, Hinke resigned as President in February 2005, and Angus became President and CEO.

Hinke's position with the company at this point seems unclear.  His existing contract was set to expire on June 25, 2005, which would have triggered certain severance entitlements, etc.  On June 5, 2005, Hinke and TEI agreed to enter a new employment agreement, and then they went about discussing some of its terms.  It had not yet been finalized when Hinke's employment was terminated, allegedly for cause, on June 23, 2005.

Hinke then sued for wrongful dismissal, among other things, and TEI counterclaimed alleging oppression, breach of fiduciary duties, and negligence.

It should be a simple matter of two arguments about the same facts.  If the facts underlying TEI's claim are warranted, then that probably constitutes just cause, right?  Well, maybe not.  Simply put, while there were disciplinary letters leading up to June, including some threatening termination, the Court concluded that entering a new agreement on June 5 was inconsistent with an intention to terminate Hinke's employment for cause.  In effect, by entering into a new agreement, TEI undermined any case for just cause it was attempting to build.

The Court therefore held TEI to proving just cause based on conduct after June 5, which is a tall order considering how little time had passed since then.

This motion related only to the wrongful dismissal elements of the claim, and was successful.  The remainder of the claim, however, along with the full counterclaim remain outstanding.  (This judgment, however, has been stayed pending disposition of the other issues.)

My Thoughts

The dimensions of an eventual trial have been shifted.  This is a brilliant tactical move, because it shifts the stakes significantly.  The defence is no longer able to challenge the wrongful dismissal allegations, but its allegations of misconduct are limited to proving its own counterclaim now (and damages are often difficult to establish) and the consequences of failing could potentially have brutal consequences in terms of moral damages for breaching the duty of good faith and fair dealing.  This could press a settlement of the other issues.

However, if they don't settle, then think about the trial that results.  Among other things, Hinke is likely to make the same pitch that succeeded here - if his actions were really oppressive and breached his fiduciary duties, then the company would not have entered into the June 5 agreement.  It may not be as strong a pitch, in context, but if it fails, and if the counterclaim does succeed, then we will be left with the Courts saying that the employer was entitled to hold him to account for all that misconduct, but they were not entitled to fire him on a for cause basis.  There's an inconsistency there.

Here's where the inconsistency becomes worse:  In employment law, there is a doctrine referred to as "after-acquired cause".  (See the Lake Ontario Portland Cement case.)  In a nutshell, when an employee is terminated on a for cause basis, and the employer later discovers the full breadth of the misconduct - or even entirely new areas of misconduct - the employer is entitled to rely on those in support of allegations of just cause.  And condonation falls off the rails in these cases, too:  An employer can't be said to have condoned what they didn't know about.  So the possible trouble with the Court's finding that the employer was limited to relying on misconduct from June 5 to June 23 is this:  The employer is also entitled to rely on any misconduct, regardless of when it occurred, that they discovered after June 5, and even after June 23.  (Note:  For all I know, it is entirely possible that the employer may have known the full particulars of the misconduct alleged prior to June 5, in which case this issue wouldn't arise.  While it seems unlikely, that very possibility may justify the Court's decision if it wasn't disposed of in the employer's evidence:  There's an obligation in summary judgment motions to "lead trump or risk losing".  It may be a defect with the employer's case, or it may be a defect in how the employer led its case.)

One other interesting point:  The Court notes that the employer's defence did not claim setoff - i.e. they're counterclaiming for damages, but they didn't lead those same allegations in the defence as a way of saying "Even if the plaintiff's claim is legitimate, we still don't owe him money because he owes us all this".  It's understandable to do so in such a case, because of the natural inclination to think that the success of the claim and counterclaim, on the facts, would be mutually exclusive.  However, such a pleading of setoff likely would have blocked a partial summary judgment motion with such a limited scope as this one.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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