By Jennifer M. Leddy

An agricultural society that was the beneficiary of an estate terminated the corporate membership of a director for an apparent conflict of interest when her family members sold property of the estate, but the director successfully sued and had her membership reinstated. In Dillon v Carp Agricultural Society, published March 28, 2024, the Ontario Superior Court of Justice found the respondent, Carp Agricultural Society (“CAS”) had “breached the rules of natural justice in the manner that it investigated” and set aside the decision to revoke the applicant’s membership. CAS, a registered charity, had concluded the applicant, Ms. Laurie Dillon, had breached her fiduciary duties as a director because she was in a conflict of interest in relation to the sale of the estate property. The court decided the CAS Board had erred in its conclusion and reinstated the applicant’s membership in the CAS pursuant to section 191 of the Ontario Not-for-Profit Corporations Act (the “ONCA”), which gives the court jurisdiction and broad authority to make compliance orders and, in these circumstances, allowed the court to determine if the Applicant has been aggrieved” by the process that led to the revocation of her membership.

The applicant and her husband, Tim Dillon, are both real estate agents in Ottawa. The applicant learned in late 2020 that CAS was a 75 percent beneficiary of an estate, which comprised mainly the deceased testator’s house. The testator had promised his neighbor, Taylor White, the right of first refusal on his house after his death at an asking price of $300,000. Mr. White refused to purchase the house because he thought that it was only worth $240,000. The estate trustee, Margaret Blair, was the applicant’s neighbor, and sought Mr. Dillon’s advice on the house’s worth. He suggested it would be worth about $310,000 but also said that the only way to test the price would be to put it on the market, which Ms. Blair did not do. The applicant’s father, Bruce Baird, ended up purchasing the property for $300,000, for which Ms. Blair insisted that Mr. Dillon receive a commission. Mr. Baird then sold the property in 2021 for $500,000. Neither the applicant nor her husband, nor the real estate brokerage they worked for, owned by the applicant’s mother, took a commission when they represented Mr. Baird in the $500,000 sale.

In June 2021, the applicant attended a meeting at the CAS office and brought documentation supporting her claim that “she had not been involved in any of the transactions” regarding the sale of the estate property. In August 2021, the CAS formed an Executive Committee to investigate the sale of the property, which it completed in November 2021, finding the applicant in breach of fiduciary obligations, in conflict of interest and breach of CAS’s Constitution, Policies and Procedures. “[D]iscipline was warranted”, the CAS had concluded, because the applicant failed to disclose a conflict of interest and her husband had received a commission from the sale of the property, which the applicant’s father had sold for profit. While the minutes of the CAS Board meeting did not mention the investigation’s conclusions, they stated that the Board requested the applicant’s resignation as a director, or her membership would be revoked.

The applicant declined to resign, appealed the revocation decision and requested that “she be given the opportunity to plead her case in person before the members of the Board.” The CAS reopened the investigation in January 2022 and directed a series of questions in writing to the applicant, who submitted further documentation in March 2022 to support her appeal. However, the CAS maintained and communicated its original decision in an April 2022 letter. “No reasons were given”, the court noted, “and no information about the findings that were relied upon was provided.”

In its analysis, the court cited the CAS’s Constitution and Disciplinary Policy, finding the CAS Board had “improperly handled the process” from the first meeting when issues of the estate came to its attention, and failed to follow its own Constitution or its own By-laws. The process followed by the Executive Committee and the reasons it provided did not “allow for a meaningful analysis to determine if the CAS Constitution’s Disciplinary Policy was followed” either in its investigation or decision phases. the court found. Although the boards of not-for-profit corporations, such as the CAS, “are not held to a standard of perfection”, and “should be granted deference”, the court stated that the CAS Board “followed a process that was fundamentally flawed and did not follow its constitution.” The Board also failed to follow a “fair and reasonable process” as required by section 51 of the ONCA.

Turning to the CAS’s allegation of a conflict of interest, “there was no material contract or transaction before the CAS Board,” and therefore “no conflict of interest to declare.” The notion of conflict of interest was misinterpreted by the CAS, as the charity was simply a beneficiary and entitled to receive only what was bequeathed in the will; there was “no transaction before the CAS Board that requires a vote of any kind.” Finally, the court ruled there was no breach of the applicant’s fiduciary duty, because she had not personally profited from her trust obligations nor put her own interests ahead of the CAS, which the court held not to have been prejudiced by the applicant’s husband providing realty services to the estate. “The payment of the commission does not flow from the trust obligations of the Applicant”, the court stated. As for the Applicant’s status as a director or officer, the court declined to comment.

Once again, this case is a reminder that not-for-profits and charities must follow their own By-laws and Policies when disciplining members. If they fail to do so, the court may step in and issue a compliance order. In addition, the case provides a strong warning that the rules of natural justice must be filed in the discipline of corporate members.

​Read the April 2024 Charity & NFP Law Update