Claims Against Individual Directors And Officers Of Fortress Struck Without Leave To Amend

The Globe and Mail has suggested that the fall of the Fortress group of companies "could become Canada's largest syndicated mortgage failure", as "[b]etween 2008 and 2017, Fortress ... raised a staggering $920 million from 14,000 retail investors to fund mortgages for an array of developments."1

In McDowell v. Fortress Real Capital Inc.2, the Court of Appeal recently upheld the decision of Justice Perell to strike claims against two individual officers and directors of Fortress Real Capital Inc. and Fortress Real Developments Inc. (collectively, "Fortress"), in four proposed class proceedings, without leave to amend.

Background: These four proposed class proceedings concerned investments by small investors, through four syndicated mortgages, in four land development projects. Two of the mortgages went into default, but certain terms of the mortgages purported to preclude the investors or their trustees from enforcing the mortgages. The other two mortgages were removed from title through power of sale proceedings and proceedings under the Companies' Creditors Arrangements Act, R.S.C. 1985, c. C-36. As a result of these sales, newly-incorporated companies linked to Fortress became the owners of the lands, free from the mortgages in which the appellants had invested.

The appellants brought proposed class proceedings against, among others, the individuals and corporations who had promoted and formally sold the investments, including two directors and officers of the Fortress companies, the lawyer who purportedly provided independent legal advice to the appellants, the trustees, and the mortgagors.

The appellants' primary allegations were that the proposed defendants had failed to properly disclose, or misled them about, key information regarding the development projects, particularly the risks of investing. They sought to enforce the remaining two mortgages, to rescind contracts relating to the investments, and to obtain damages for breach of fiduciary duty, breach of contract, misrepresentation, and negligence.

Eight of the defendants brought motions to strike the claims against them. Four motions were settled; four proceeded. At first instance, Justice Perell struck, among others, the claims against the individual directors and officers of Fortress, without leave to amend. The investors appealed.

The Issue: Were the individual respondents responsible, as the directing minds of Fortress, for the companies' alleged breach of contract, breach of...