Piercing the Corporate Veil Affirmed on Second Look

In the case of Lynch v. Segal 2006 CarswellOnt 7929 (Ont. C.A.), the court on appeal was asked to look at a vesting order granted at trial that vested land held by two defendant corporations, which the trial judge found to not be legally distinct from the Appellant spouse Mr. Segal. This was to be used by the Wife as a remedy to ensure that lump sum child and spousal support awards would be paid. The Honourable Justice Blair writing for the appeal court succinctly alluded to the outcome awaiting Mr. Segal, a very wealthy individual, when he referred in his opening paragraph to the Appellant’s “ability to organize his business affairs in a way that disguises his ownership (direct or beneficial) in the assets underlying his wealth.” The Court described Mr. Segal’s modus operandi as a skeletal incorporation of companies for validity with no shares issued unless the structure was challenged, in which case they could be issued so that the appearance that another owned the corporation was given. Ms. Lynch, the Wife, an experienced New York lawyer and aware of her spouse’s business practices, was awarded over $8 million as a lump sum child and spousal support award and approximately $380,000.00 in arrears and further awards totaling over $2 million at an uncontested trial. The awards would have been of little worth to Ms. Lynch, as Mr. Segal had already fled the jurisdiction, but for the fact that she was lucky enough to discover two properties in Ontario held by corporations that she added as defendants to her action. Ms. Lynch sought declarations that Mr. Segal was the beneficial owner of the corporations’ shares and/or their property as well as a vesting order in her favour with respect to the shares and/or property. In reference to the trial judge’s finding that Mr. Segal was the beneficial owner of the shares and the land, the Court of Appeal cited the Wildman decision and commented that the Court “will not enforce the separate entities notion where it would yield a result too flagrantly opposed to justice” and further the Court noted that “a more flexible approach is appropriate in the family law context, particularly where – as here—the corporations in question are completely controlled by one spouse, for that spouse’s benefit, and no third parties are involved.”

Additionally, a crucial element of the trial judge’s decision was the order to vest the lands and not the shares of the holding corporations in the hands of the Wife, the specific issue that was upheld on appeal. The Appellate Court found the trial judge’s ability to do so based in his finding that Mr. Segal was the beneficial owner of not only the shares in the defendant corporations but the beneficial owner of the lands. Without vesting of the lands themselves, the Court opined that it was likely Mr. Segal would engage in further corporate machinations to defeat Ms. Lynch’s ability to realize on her support orders.

Although the number of litigants with the legal background of Ms. Lynch, which likely facilitated her ability to track down and actually find property that could be used to satisfy the matrimonial monetary orders, may be few, the value of $4.236 million dollars that changed hands in this instance, with the transfer of the title in the properties to Ms. Lynch, is certainly worthy of a second look.

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