Date: 20040202
Docket: T-992-92
Citation: 2004 FC 172
Toronto, Ontario, February 2nd, 2004
Present: Roger R. Lafrenière, Esquire
Prothonotary
BETWEEN:
ALMECON INDUSTRIES LTD.
Plaintiff
and
ANCHORTEK LTD., EXPLOSIVES LIMITED
ACE EXPLOSIVES ETI LTD.
and WESTERN EXPLOSIVES LTD.
Defendants
REASONS FOR ORDER AND ORDER
[1]
These are written reasons confirming those rendered orally at the conclusion of the hearing of the motion brought by the Plaintiff, Almecon Industries Ltd. ("Almecon"). The relief requested by Almecon includes an order compelling Frank Bodell, Scott Makin, Exploration Plastics Ltd., Victory Plastics Ltd. and ATK Blow Moulding Inc. (the "Respondents") to pay into Court the amount of $350,000.00. It also seeks an order that Hudson & Company Insolvency Trustees Inc.,
the Trustee in Bankruptcy for the Defendant, Anchortek Inc. ("Anchortek"), immediately provide a copy of all of Anchortek's financial documents and business records in its possession.
[2] Both the Respondents and the Trustee in Bankruptcy resist the motion on jurisdictional and procedural grounds. As a preliminary objection, they submit that this Court is without jurisdiction to entertain this motion in light of the provisions of the Bankruptcy and Insolvency Act ("the BIA"). They also argue that the procedure set out in Rules 377 and 378 of the Federal Court Rules, 1998, dealing with the preservation of property, does not apply to the circumstances of this case.
[3] The background to this motion may be briefly stated. On December 19, 2001, Mr. Justice Gibson granted judgment in favour of Almecon, finding the four Defendants in this proceeding, including Anchortek, liable for infringement of Canadian Patent No. 1,220,134. The Judgment declared that certain of Almecon's patents were valid, and that Anchortek had infringed Almecon's interest therein through the manufacture and sale of the "Energy Plug" during the period from 1992 to 1996 . The Judgment was upheld by the Court of Appeal on April 1, 2003.
[4] A reference was ordered on questions as to the damages arising from the infringement and any profits arising therefrom. Almecon has, at this stage, only examined the Defendants on the issue of profits, and not on damages, and is entitled to elect the profits of each of the Defendants as its remedy. The quantum of Almecon's claim remains to be determined.
[5] Concerned that its ability to recover on the judgment was being jeopardized by Anchortek's precarious financial position, Almecon initially brought this motion for a preservation order against Anchortek on November 4, 2003. However, within days of being served with the motion, Anchortek made an assignment in bankruptcy. Undaunted by this unexpected turn of events, Almecon amended its motion to request similar relief against the Respondents and the Trustee in Bankruptcy as follows:
1. An Order to preserve property pursuant to Rules 377 and 378 by compelling ATK Blow Moulding Inc., Victory Plastics Ltd., Exploration Plastics Ltd., Francis W. ("Frank") Bodell and Scott Makin to jointly and severally pay into Court, within 5 business days, the amount of $350,000.00.
2. An Order that Frank Bodell and Scott Makin, and representatives of Anchortek Ltd., Victory Plastics, ATK Blow Moulding and Exploration Plastics Ltd. attend in Toronto, Ontario at their own expense at a time and place to be selected by the Plaintiff, to answer questions relating to
I) the finances, business, assets and liabilities of Anchortek, Victory Plastics, ATK Blow Moulding and Exploration Plastics Ltd., including the origin of these assets and whether these assets were transferred, directly or indirectly, from Anchortek Ltd. and including the production of all of these companies financial documents, since the first date of infringement in 1992 for Anchortek and since the date of incorporation for the remaining companies;
ii) the finances, assets and liabilities of Frank Bodell, including the origin of these assets and whether these assets were transferred, directly or indirectly, from Anchortek Ltd. and including the production of all of his personal financial documents since the first date of infringement in 1992; and
iii) the finances, assets and liabilities of Scott Makin, including the origin of these assets and whether these assets were transferred, directly or indirectly, from Anchortek Ltd. and including the production of all of his personal financial documents since the first date of infringement in 1992.
3. An Order that the Trustee in Bankruptcy for Anchortek, Hudson & Company Insolvency Trustees Inc., immediately provide a copy of all Anchortek financial documents and business records in its possession.
4. Costs of this motion on a solicitor and client basis fixed in the amount of $1500 payable by ATK Blow Moulding Inc., Victory Plastics Ltd., Exploration Plastics Ltd., Francis W. ("Frank") Bodell and Scott Makin personally and forthwith; and
5. Such further and other relief as this Honourable Court may deem just.
[6] None of the Respondents are parties to this action. Mr. Bodell and Mr. Makin are the principals of a group of companies that includes Anchortek. The Respondents are, however, according to Almecon, the recipients of the fruits of the infringement of Almecon's property. Almecon maintains that a preservation order is required against the Respondents because of their improper course of conduct since judgment was granted against Anchortek.
[7] The allegations made by Almecon against the Respondents are fairly serious. They include the suspicious transferring of Anchortek's assets, the filing of misleading affidavits, and the failure by the Respondents to reasonably cooperate in answering questions about Anchortek's assets and liabilities. Almecon contends that the Respondents' actions were orchestrated to frustrate Almecon's ability to recover on its judgment.
[8] Anchortek has admitted on discovery that it made sales of the Energy Plug and produced invoices of its sales to its distributors, who are co-defendants in this proceedings ("Distributors"). The Distributors have admitted that they in turn purchased the Energy Plug from Anchortek and re-sold these plugs to third party customers in the oil and gas industry.Based on information obtained by Almecon to date, it appears that approximately 1.9 million infringing Energy Plugs were manufactured and sold during the relevant period.
[9] Almecon calculates that it is owed a minimum amount of profits of $350,000.00. This number is derived from taking the admitted number of sales, and subtracting Anchortek's claimed expenses. According to Anchortek, the total expenses attributable to the sales of the Energy Plug are 37.84 cents, which gives a profit figure of $243,873.90 when applied to sales of 1.9 million plugs. The interest which has accrued on a potential profits award of $243,873.90 is $109,174.93. The minimum liability of Anchortek for its infringement, based on its own cost figures, including interest, is $353,048.83. Neither the Respondents nor the Trustee in Bankruptcy have challenged Almecon's assumptions or calculations. Accordingly, I am satisfied that, for the purposes of this motion, Anchortek's profits from the sale of the Energy Plug from 1992 to 1996 was $350,000.00.
Analysis and conclusions
[10] Section 69.3 of the BIA states that "on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged".
[11] Almecon submits that the property in question is not the "debtor's property" but rather is its own property that was misappropriated by Anchortek. It argues that an infringer is the plaintiff's trustee with respect to the profits that were illegally made by the patent infringement: Teledyne
Industries Inc. et al. v. Lido Industrial Products Ltd. (1982), 68 C.P.R. (2d) 204; Ductmate Industries Inc. v. Exanno Products Ltd. (1987), 16 C.P.R. (3d) 15 at 21 (F.C.T.D.); Baker Energy Resources Corp. v. Reading & Bates Construction Co. et al (1995), 58 C.P.R. (3d) 359 (F.C.A.).
[12] According to Almecon, the Respondents have misappropriated its property and have committed a species of fraud. The property, in this case, includes the illegal profits made by Anchortek through infringement. Equity demands, therefore, that the Respondents must reveal and disgorge these profits to Almecon. Moreover, equity will trace the fruits of the infringement and demand that the profits be repaid to the rightful owner.
[13] Almecon submits that Anchortek was a trustee with respect to the illegal profits on its behalf, and that the trustee may not exercise any distribution powers over this property based on the wording of section 67(1)(a) of the BIA. That section states that "the property of a bankrupt divisible among his creditors shall not comprise (a) property held by the bankrupt in trust for any other persons." Almecon submits that the present motion is, accordingly, not precluded by the bankruptcy provisions: Boe v. Boe (1987), 66 C.B.R. (N.S.) 143 (Sask. Q.B.).
[14] Notwithstanding the forceful and compelling submissions of counsel for Almecon, I conclude that the motion must fail for the following reasons.
[15] First, as a result of the assignment in bankruptcy of Anchortek, there is an automatic and wide-ranging stay with respect to any proceedings which may be commenced or continued against the company. By pursuing this motion, Almecon is clearly circumventing the mandatory provisions of the BIA, and attempting to conduct its own parallel enforcement proceedings.
[16] The BIA sets out a complete statutory scheme for asserting claims against a bankrupt or against property allegedly held in trust by the bankrupt and imposes a stay of proceedings for the recovery of any claim provable in bankruptcy. Under Section 71(2) of the BIA, all property of the bankrupt is vested in the Trustee.
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Section 71(2) Vesting of Property in Trustee - On a receiving order being made or an assignment being filed with an official receiver, a bankrupt cease to have any capacity to dispose of or otherwise deal wit his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.
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Article 71(2) Biens dévolus au syndic - Lorsqu'une ordonnance de séquestre est rendue, ou qu'une cession est produite auprès d'un séquestre officiel, un failli cesse d'être habile à céder ou autrement aliéner ses biens qui doivent, sous réserve des autres dispositions de la présente loi et des créanciers garantis, immédiatement passer et être dévolus au syndic nommé dans l'ordonnance de séquestre ou dans le cession, et advenant un changement de syndic, les biens passent de syndic à syndic sans transport, cession, ni transfert quelconque.
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[17] Property under Section 2(1) is defined as:
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"property"includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, and whether situated in Canada or elsewhere, and includes obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property.
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"biens"Biens de toute nature, meubles ou immeubles, en droit ou en équité, qu'ils soient situés au Canada ou ailleurs. Leur sont assimilés les sommes d'argent, marchandises, droits incorporels et terres, ainsi que les obligations, servitudes et toute espèce de droits, d'intérêts ou de profits, présents ou futurs, acquis ou éventuels, dans des biens, ou en provenant ou s'y rattachant.
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[18] Under Section 69.4, a creditor who is affected by operation of Section 69 may apply to the Court for a lifting of the stay. No such application has been made to the Bankruptcy Court that has jurisdiction.
[19] In Always Travel Inc v. Air Canada, 43 CBR (4th) 163, a recent decision involving a stay under the Companies'Creditors Arrangements Act(the CCAA), another insolvency statute, Mr. Justice Hugessen came to the conclusion that the proper court to decide whether the proceedings should go forward was Ontario Superior Court of Justice. In my view, the remedies sought against Anchortek or its property must be determined in the Bankruptcy Court in Alberta, which derives its exclusive authority from the BIA.
[20] Second, even if this Court had jurisdiction over the parties, Almecon has not established that any property is being held in trust by on or behalf of Anchortek. There is no evidence that the illegal profits are, or have been, retained or set aside by Anchortek as a specific fund. A party claiming an interest in trust property within the meaning of subsection 67(1) of the BIA must establish that a trust exists under general principles of law. The claimant must establish three certainties: (a) certainty of intent; (b) certainty of subject matter; and (c) certainty of object.
[21] In this case, the alleged "trust property", being the profits, were earned by Anchortek between 1992 and 1996. In the absence of any evidence to the contrary, one can reasonably infer that the profits from the sales of the Energy Plug were reinvested into the company. It would be impractical, if not impossible, to trace the profits earned almost a decade ago. Almecon has wholly failed to establish certainty of subject matter. Simply stated, "where money has been converted to other property and cannot be traced, there is no property held in trust under section": British Columbia v. Henfrey Samson Belair, 1989 CarswellBC 351 (S.C.C.), at pp. 13-1; Re Acepharm Inc., 1999 CarswellOnt 1904 (O.C.A.). Accordingly, I conclude that there is no "trust" within the meaning of the common law or the BIA.
[22] Third, apart from the prohibition on bringing this motion under the stay provisions of the BIA, I conclude that the relief sought by Almecon on this motion is not available under Rules 377 and 378 of the Federal Court Rules, 1998. To come within the ambit of the Rules, the Plaintiff must identify specific property which is sought to be preserved: Molson Breweries v. Kuettner [1999] F.C.J. No. 1941 (Proth.). In this case, the "property to be preserved" are the illegal profits. Yet, as I concluded earlier, those profits do not exist as an identifiable fund which can be directed for payment into Court. Moreover, I am not satisfied that Rules 377 and 378 give the Court authority to grant security for damages or profits, particularly when that have yet to be established.
[23] Notwithstanding my conclusion that this Court is not the proper forum to address Almecon's grievances, I feel compelled to make the following observations. Mr. Bodell and Mr. Makin appear to have conducted the affairs of Anchortek in recent months such as to leave it as a shell of a company. Certain assets that were owned by Anchortek were transferred to some of the Respondents shortly before Anchortek's bankruptcy under suspicious circumstances. Moreover, on three separate occasions, Mr. Bodell refused to provide details of Anchortek's assets and liabilities (examination for discovery in June 2003, written examination in August 2003, and cross-examination on affidavit
in October 2003). By way of example, during his cross-examination, Mr. Bodell refused to answer questions about the identity of secured creditors, what security interests were held by others, the amount of cash, inventory or receivables held by Anchortek, and what machinery was owned by Anchortek that could potentially be sold to satisfy the Judgment.
[24] I conclude that the recent actions of Anchortek's principals were clearly intended to frustrate Almecon's attempt to obtain a proper accounting of Anchortek assets and liabilities and to ultimately recover on its judgement. Consequently, the dismissal of this motion should not be interpreted as condonation of their conduct.
[25] In the circumstances, there shall be no order as to costs of this motion.
ORDER
THIS COURT ORDERS that
1. The motion is dismissed.
2. There shall be no order as to costs of this motion.
"Roger R. Lafrenière"
Prothonotary
FEDERAL COURT
Names of Counsel and Solicitors of Record
DOCKET: T-992-92
STYLE OF CAUSE: ALMECON INDUSTRIES LTD.
Plaintiff
and
ANCHORTEK LTD., EXPLOSIVES LIMITED
ACE EXPLOSIVES ETI LTD.
and WESTERN EXPLOSIVES LTD.
Defendants
DATE OF HEARING: DECEMBER 4, 2003
PLACE OF HEARING: TORONTO, ONTARIO.
DATED: FEBRUARY 2, 2004
REASONS FOR ORDER
AND ORDER BY: LAFRENIÈRE P.
APPEARANCES BY: Mr. Bruce Stratton For the Plaintiff
Mr. Henry Lue For the Plaintiff
Mr. George Benchetrit For the Respondents to the Motion
Mr. Ken Page For the Defendant,
Anchortek Ltd.
SOLICITORS OF RECORD: Dimock Stratton Clarizio LLP
Barristers and Solicitors Toronto, Ontario. For the Plaintiff
Chaiton & Chaiton LLP
North York, Ontario. For the Respondents to the Motion
Page Arnold, LLP
Barristers & Solicitors
Toronto, Ontario. For the Defendant,
Anchortek Ltd.
FEDERAL COURT
TRIAL DIVISION
Date: 20040202
Docket: T-992-92
BETWEEN:
ALMECON INDUSTRIES LTD.
Plaintiff
and
ANCHORTEK LTD., EXPLOSIVES LIMITED
ACE EXPLOSIVES ETI LTD.
and WESTERN EXPLOSIVES LTD.
Defendants
REASONS FOR ORDER
AND ORDER