Breaches of Fiduciary Duty by MAAC’s Board
In the following article you will find:-
- A Definition of Fiduciary Duty
- An Example of a Breach of Fiduciary Duty by MAAC’s Board
- A Description of the Efforts made to Disclose this Breach to the Membership
- A Description of the Board Efforts to Cover-up Their Action
- Extracts from the Legal Opinion on the Matter of the Breach
- The False Characterization of the Legal Opinion Provided to the AGM
- An Extract from the Letters Patent illustrating the Fiduciary Duty that was Breached
On another page of this website, concerning Financial Issues with MAAC, mention was made of the payment of a large sum to an ex-employee. The way in which this was carried out, and the fact that it was never directly reported to the membership, and was probably included in the accounts for a financial year other than that in which the decision to make the payment, and the issuing of the cheque, were carried out, is all discussed on that page. There is more to this story, however.
Before we get into that, however, let us make sure we understand what “fiduciary duty” means. The word ‘fiduciary’ comes from the Latin fidus – which means faithfulness. The dog’s name ‘fido’ has that root. The word fiduciary can be used as either a noun or as an adjective. As a noun, a ‘fiduciary’ is someone in whom trust is placed – such as a banker, for instance. Because, so often, the trust that is conferred is over a financial matter, many people suppose that this is what the meaning of the word is confined to. That is incorrect. When used as an adjective – such as in the expression ‘fiduciary duty’ – it simply means the duty that is imposed as a result of the trust placed in the person. That duty encompasses any of the matters that the person is entrusted with. So, in the case of a director of a NFP corporation, their fiduciary duty extends to all of the matters entrusted to the Board of Directors, it includes financial affairs, but it also includes duties to the membership, to the community at large, etc. Now that we have an understanding of the scope of these duties, let us look at an instance of breach of that duty arising out of the payment to an ex-employee.
It was recommended, during the Board meeting at which this was discussed, that an expert on remuneration be consulted to determine whether there was any justifying legislation which would mean that the Association was obliged to pay such a sum to an employee subsequent to their retirement. This was not done, but a Board member produced a document, containing much false, misleading, or simply irrelevant, information – which purported to support the proposed payment. Five of the thirteen directors disagreed with the motion to make the payment and voted against it. Four of those five directors subsequently wrote to the Board to record their dissent and to recommend that a legal decision be obtained to determine whether such a decision could be found to be a breach of the director’s fiduciary duty. In this instance the duty that was referred to was a director’s duty to ensure that the assets of the corporation are spent in pursuit of the objectives of the corporation and in the association’s best interests. A legal opinion was sought, and we will discuss that in a later paragraph.
In an effort to make MAAC’s membership aware of what had been done in their name, with their money, two members of the association, who had become aware of the transaction, submitted questions concerning the matter to the 2021 AGM. Both questions were redacted, so the membership as a whole was not able to hear or read what was asked. An answer, however, was given – for the whole membership to hear. The same answer was given for both questions and it read:-
We’ve had to redact a question that deals with a Board approved decision related to a confidential matter. The decision being questioned was made following professional advice and later confirmed by legal counsel to be within the Board’s authority
No professional advice was sought prior to making the decision. The document purporting to support the proposal to make this gift was not prepared by a person qualified in the labour laws of Ontario and no other advice was sought or relied upon. Legal advice was sought after the decision had been made and following the objections of the four directors who registered their dissent. Contrary to the statement made to the AGM by the President, and confirmed by the Executive Director, that advice did not confirm that the decision was within the Board’s authority. The legal advice says, in part:-
“…it is possible that a breach of fiduciary duty may arise in cases such as this – if, for example, the amount paid cannot be viewed as reasonable in the circumstances, then the duty has been breached.”
The legal opinion also states at one point, prior to expressing the above guarded opinion:-
“We have not been made aware of the facts of the situation at hand other than as presented here. We do not know Ms. Patrick’s salary at the time of her dismissal, for example, or the amount that she was actually paid as a retirement allowance . We also have not been informed as why there was a
decision to pay a retirement allowance, whether an expert in the field was consulted or how the amount paid was determined.”
A lot can be taken from the above. Firstly, apparently the lawyer, when asked to express an opinion was not provided with the pertinent facts of the situation but was, instead, provided with limited information and asked a very generic question. This explains why the opinion provided was slightly provisional. There is no explanation why the lawyer did not ask for the complete information that would have allowed them to provide a completely definitive response.
The information provided, and the question asked, were described in this preamble to the letter:-
“You have advised that:
1. during the meeting of the Board of Directors (the “Directors”) of MAAC held on February14, 2022, a majority of the Directors present voted to pay a one-time retirement allowance to Linda Patrick;
2. before the vote was taken, the Directors present were informed that there was no legal obligation to pay a retirement allowance and that this would be purely a discretionary spending decision; and
3. since the decision was made, four Directors have questioned the propriety of this expense, alleging that the Directors who voted for the allowance breached their fiduciary duty and, in particular, that the fiduciary “duty also requires that the Board, or their servants, do not disburse monies that they have no legal obligation to pay and which bring s no benefit to MAAC in the furtherance of its purposes.”
You have asked that we provide our opinion on the following questions:
1. whether the claim that the fiduciary duty was violated has validity; and
2. what liability, if any, may the Directors be exposed to in relation to the fiduciary duty breach claim. ….”
We will leave it to Board members who were present to advise whether or not this was a fair representation of what occurred at the Board meeting leading up to the communication with the lawyer.
There is, however, another tantalizing piece of information in the earlier passage quoted here from the legal letter. The writer refers to the employee having been dismissed. Of course, if an employee is dismissed, under Ontario law there is an obligation to pay a termination package, consisting of the equivalent of some number of weeks salary. The number of weeks depends upon the reasons (if any) for the dismissal. It is possible that the lawyer used this term carelessly, being aware that the resignation was voluntary, but that would be unusual – lawyers are typically very precise in their language about such things. It is also possible that the lawyer was told that the employment was ended by a dismissal rather than the voluntary retirement that appeared to be the case from the employee’s notice to the Board. That would obviously have a very significant bearing on the opinion provided. We do not have access to everything that the lawyer was told in her instructions.
It seems quite clear that this Board has made a decision that is in breach of their fiduciary duty. The Board is required to protect the assets of the corporation and to ensure that they are used for its benefit, to support its objectives, and in its best interests. There are many, detailed, explanations of the fiduciary duties of directors of NFP Corporations that can be found. The following quotation from one such source succinctly describes a theme that is to be found at the very top of every one of them, regardless of what else might be contained:-
“Fiduciary Duty – Directors stand in a fiduciary relationship with the corporation and have a duty to act honestly, loyally, and in good faith, in the best interests of the corporation.”
The decision to distribute a substantial portion of the corporation’s funds to a person to whom the corporation had no financial obligation, and where no compensatory benefit could possibly accrue to the corporation as a result, is, in our view, a clear breach of the directors’ fiduciary duty to the corporation. This is compounded by the fact that several directors alerted the Board to this issue and yet the others continued in their path anyway. A token gift to a retiring employee is not an unusual practice, and would probably be considered to be within the discretion of a Board such as this. Some sort of memento would not have been out of order.
Now we would like to go back to what happened at the 2022 AGM – besides the anomalies of financial reporting that have been described on another page of this website. As we have seen above, the Board of Directors of MAAC refused to allow questions that would have revealed to the members of the association a matter of significant spending of Association funds. That spending did not appear on any approved budget, satisfied no corporate obligation, and brought no benefit to the corporation. What happened next, however, compounds this error significantly. While still refusing to disclose to the membership what the issue was – instead of then ignoring the matter, the President of the Association, with the verbal support of the Interim Executive Director, made the claim (that was distributed to the whole membership) that the Board had followed professional advice before making the decision and had subsequently obtained legal advice that their actions had been entirely within their purview.
To summarize – besides misusing Association funds, in a clear breach of their fiduciary duty, the leadership then proceeded to go to some lengths to keep that information from the membership and to actually mislead the membership over what had transpired.
In support of the position taken here we offer the following extracts from the Letters Patent (otherwise known as the Articles of Incorporation) of MAAC:-
with all the rights and powers given by the said act and for the following purposes and objects
namely: –
(a) To foster, enhance, assist, aid engage in and develop scientific development in model
aeronautics; to give recognition to leadership in the field of model aeronautics and to offer
guidance in and direction of affairs affecting model aeronautics on a national basis;
(b) To provide a central organization to record and disseminate information relating to model
aeronautics;
(c) To publish scientific journals and news bulletins relating to model aeronautics;
(d) To guide and direct national model aviation activities to the end that model aeronautics
may be advanced in Canada in a manner that will best serve aviation as a whole and as
well to serve as liaison with the Ministries of Government concerned with aviation in
Canada.
(e) To act as a representative of the Aero Club of Canada in establishing and maintaining
official regulations governing the conduct of model airplane records and contests and to
issue sanctions for same in accordance with any authority granted by the Aero Club of
Canada as representative on Canada Of the Federation Aeronautique Internationale;
(f) To direct the technical organization and/or conduct national and international model
aircraft contests held within Canada in accordance with any authority granted by the Aero
Club of Canada;
(g) To licence model aircraft and fliers thereof for competitions in accordance with authority
vested in the Model Aeronautics Association of Canada by the Aero Club of Canada;
(h) To have recognized by the Aero Club of Canada all official model aircraft competitions
and records which are sanctioned by the Model Aeronautics Association of Canada.
(i) To enable the holding of model aircraft contests with the sanction of the Model
Aeronautics Association of Canada.
(j) To allow those interested in model land and watercraft to join the organization.
None of the purposes or objects of the corporation include enriching an ex-employee beyond what wages or salary are due for services rendered, Then there is the concluding paragraph:-
And it is further ordained and declared that the business of the said Corporation shall be carried
on without the purpose of gain for its members and that any profits or other accretions to the
Corporation shall be used in promoting its objects.
Directors of a Corporation are entrusted with acting in accordance with the objects of that corporation and using any funds accrued by the corporation only for promoting those objects. That is their fiduciary duty.