Mustang Helicopters Inc. v. Heli Source Ltd., 2012 ABQB 269

Court of Queen ’ s Bench of Alberta Citation: Mustang Helicopters Inc. v. Heli Source Ltd., 2012 ABQB 269 Date: 20120423 Docket: 1201 00365 Registry: Calgary Between: Mustang Helicopters Inc. Plaintiff - and - Heli Source Ltd., Jim Freake, 873094 Alberta Ltd., Alin Cote, Douglas Paris and Kenneth Bryan Bennett Defendants _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice T.F.

McMahon _______________________________________________________ Introduction [ 1 ] This is an application to set aside an Anton Pillar order which was granted ex parte on January 10, 2012 upon the application of the Plaintiff Mustang Helicopters Inc. ( “ Mustang ” ). It is common ground that this is a de novo hearing. The Defendants who are the Applicants have filed no affidavits in response to the Affidavit of the President of Mustang upon which the order was based.

The only new material, apart from argument, is the transcript from the cross-examination of that deponent on his affidavit. [ 2 ] Mustang argues that the fruits of the search can also be considered but here there has been limited access to that material so far. It largely remains in the possession of the independent supervising solicitor. The first report of the independent supervising solicitor lists, among the items seized from the possession of one of the Defendants, bundles of Mustang insurance documents and Mustang credit

card numbers as well as Mustang correspondence and maintenance reports. [3] I concluded on the original ex parte application that the four-part test enunciated by the Supreme Court of Canada inCelanese Canada Inc. v.

Murray Demolition Corp., 2006 SCC 36 , [2006] SCJ 35 had been met: 1. a strong prima facie case, 2. the alleged damage must be very serious, 3. convincing evidence that the defendant has in its possession incriminating documents or things, and 4. plaintiff must show a real possibility that the defendant may destroy such material before the discovery process can work. [4] The question on this de novo application is whether that is still so, having regard to the evidence as it now stands. [5] It is common ground that complete and candid disclosure is essential.

A failure in that regard is one of the two mainarguments now raised by the Defendants. [6] The second is that there was no persuasive evidence of a real possibility that the Defendants may destroy evidence had theorder not been given. The standard for that conclusion has been discussed in cases such as Capitanescu v. Universal Weld Overlays Inc.(1996), 2 A.R. 85 (QB), at para 22:. It is almost impossible for an applicant to produce direct proof that a defendant will destroy the material.

Generally, courts have inferreda risk of destruction when it is shown that the defendant has been acting dishonestly, for example where matter has been acquired insuspicious circumstances, or where the defendant has knowingly violated the applicant’s rights. Facts [7] Mustang provides helicopter charter services in western Canada and in the United States of America. [8] In 2003, in order to acquire market share in the seismic industry, Mustang purchased the assets of a company known asAirborne Energy Solutions Ltd.

Mustang also hired a select number of Airborne’s employees including the Defendant Jim Freake(“Freake”). Freake had been in charge of all of Airborne’s seismic operations operating out of Red Deer, Alberta. Mustang made Freakeits seismic marketing director and later its operations manager and marketing director. The uncontradicted affidavit evidence is thatFreake was given “almost complete authority” to run Mustang’s business affairs based out of Red Deer. The defendants Alin Cote,Douglas Paris and Kenneth Bryan Bennett (hereinafter “Cote”, “Paris”, Bennett”) were hired by Mustang in 2003 and 2004.

Cote wasdirector of maintenance and in that capacity had signing authority over Mustang’s bank accounts in Alberta and was responsible formaintenance and servicing operations. It is not contradicted that he had access to training memos, safety system manuals, maintenancemanuals and inspection reports. Paris was Mustang’s purchaser, store manager, pilot and operation equipment manager. In that capacity,he was responsible for the purchase of aircraft and aircraft components and parts, as well as flying aircraft when required. Bennett wasMustang’s Information, Technology and Quality Assurance Manager.

He was responsible for maintaining Mustang’s computer systems,maintaining customer data and intercorporate communication, managing passwords for access to databases and related duties. [9] In May 2010, Mustang’s owners appointed a third person as President, which event caused Freake to give notice of hisresignation effective in August 2010. After some negotiations, Freake in fact remained with Mustang through to May 31, 2011 when heleft their employment. The Defendants Cote, Paris and Bennett gave notice of their resignations in September 2011. All begun work withHeli Source soon after.

It is uncontradicted that Heli Source met with Cote on three occasions before his resignation and that he and Parishad invested funds in Heli Source. [10] The Defendant Heli Source Ltd. (“Heli Source”) was incorporated July 27, 2011. Although Freake was not then named as ashareholder or director in the incorporating documents, the records show that he was a director by September 27, 2011, some sixty days

later. [ 11 ] The Defendant 873094 Alberta Ltd. ( “ 873094 ” ) is a company wholly owned by the Defendant Freake. [ 12 ] The essential complaint by the Plaintiff is that Freake, upon his departure from Mustang, wrongfully raided Mustang ’ s key employees and customers for the benefit of Heli Source, a competing business in which he soon became involved. [ 13 ] The Anton Pillar order was based upon allegations that the Defendants or some of them were in possession of Mustang ’ s confidential information, that such information had been wrongly taken from Mustang, that there was persuasive evidence that the Defendants had in their possession incriminating documents and that there was real possibility that the Defendants or some of them may destroy such material if an Anton Pillar order was not put into place. [ 14 ] It is alleged in the uncontradicted affidavit that Freake took to his home office Mustang ’ s seismic client files and that he copied Mustang ’ s electronic records onto his home computer.

It is further alleged, uncontradicted, that the return of that material was demanded in November 2011 and that no response was ever received to those demands. Issues 1. The Defendants allege that the affidavit in support of the order contains a number of misleading or false statements as well as a number of material omissions. 2. The Defendants Freake and 873094 allege that the evidence does not show a real possibility that these Defendants may destroy relevant materials had the order not been given.

Alleged Mis-statements [ 15 ] The allegations of mis-statement or less than full disclosure include the following: 1. That the affidavit left the impression that Freake was the only employee that had contact with Mustang ’ s seismic customers when in fact Freake ’ s successor in the job had contact with those customers while being trained, as did a pilot. However, Freake had been the operations manager and marketing director until he resigned. The nature of that contact is much different than that of a pilot or a trainee.

No contrary evidence has been adduced that anyone other than Freake had contact with customers for marketing purposes. Incidental contact with a customer for purposes of flying the helicopter does not, within the context of the complaint in the affidavit, create a significant misrepresentation. 2. That the affidavit alleged that Mustang had not done any work for or earned any revenue from former seismic customers since Freake left his job; whereas on cross-examination, it appears that such work had been done.

If eventually proven, that fact will go to the quantum of damages; but it does not at this stage undermine the basis for the Anton Pillar order. The affidavit makes a case that damage to Mustang was very serious whether or not loss of precise revenue can be shown at this stage. 3. That Heli Source was incorporated by Freake which Defendants say in their brief is false. The Defendants reference incorporation documents which were put to the deponent on cross-examination although he could not identify them.

Given that Freake became a shareholder and director a mere sixty days after incorporation, and absent any contrary evidence, it may well be inferred that he played a role in the incorporation of the company. As well, an email exhibited to the affidavit and dated June 13, 2011 shows Freake using a Heli Source email account (jim@helisource.net). In any event, who in fact incorporated Heli Source in the first instance is hardly material to any issue in the action. 4.

That Freake had requested a cash-flow analysis on certain of Mustang ’ s helicopters when in fact they were helicopters owned by 873094, a company owned by Freake which leased the helicopters to Mustang. I see no misrepresentation there. Whether the machines are operationally Mustang ’ s by virtue of ownership or leasehold interest matters not in the context of this claim.

5. That the affidavit said that Freake requested a cash-flow analysis on those machines when in fact he wanted to do a cash-flowanalysis. The latter is apparent and fully disclosed by Exhibit P to the affidavit. There is no misrepresentation. At most, there is amisinterpretation but with no impact. There are other allegations of mis-statements in the table prepared by and appearing in one of the Defence briefs. In my view, these are ofeven lesser import.

For example, in answer to the affidavit allegation that in the period after Freake left the company, there were manyhours of cell-phone communications between him and other Defendants still employed by Mustang and on their cell-phones, theDefendants muse that those might have been for social or personal reasons. It takes more than musing to create a misrepresentation. [16] The second group of Defendants led by Heli Source raise similar arguments.

It is said the affidavit wrongly alleged that the Plaintiff had lost all of its Canadian seismic customers while in cross-examination, thedeponent acknowledged that he knew of only three former customers who had crossed over. A review of other parts of the affidavit,however, provide detail, to the extent of the deponent’s knowledge, of the names of customers who now are doing business with HeliSource and deposes that Mustang had not received any orders from its Canadian customers since Freake’s departure. The affidavit mustbe read as a whole.

This group of Defendants complained that the affidavit did not mention that when the new president was named for Mustang, whichevent led to Freake’s departure, that person had been living in Red Deer for three years and so knew Mustang’s employees. I see noparticular relevance to that omission. These Defendants argue that the affidavit, while alleging that the hard drives on their computers have been erased, failed to mention thatthe same data would have been on the company’s main server and would have been backed up. These Defendants, however, filed noticeto support that assertion.

It is an assumption based upon past practice. In any event, that allegation in the affidavit, well-supported byExhibit EE to that affidavit, is made to satisfy the fourth part of the Celanese test, that is, proof of a real possibility that the Defendantsmay destroy evidence if the order is not made. Exhibit EE is quoted later in these reasons.

That some of the Defendants engaged in the erasure of relevant emails and that one Defendant encouraged others to do the same is notcontradicted at this stage. [17] There are several other complaints by these Defendants about alleged mis-statements which, in my view, are no moreeffective. [18] A mis-statement or a non-statement must bear a modest level of relevance and materiality. The cases speak of full and fairdisclosure of material facts, Agracity Ltd. v.

Skinner, 2009 SKQB 362 , 2009 CarswellSask 612, at para. 107. [19] For example, there are complaints that the deponent had some of his dates wrong as to when the individual Defendantsresigned or when they were last employed. The date the employee resigns is relevant but a mis-statement as to the exact date is hardlymaterial in this case. In another instance, they say that the deponent’s allegation that certain material now in Heli Source’s hands wasconfidential – i.e., maintenance and procedural manuals – was not in fact confidential because it had been provided by the company tocustomers.

However, provision of such material to a customer is much different from a former employee wrongfully taking it with himfor use by a competitor in which he has an interest. [20] In cases of alleged non-disclosure on ex parte applications, there is broad discretion in the reviewing judge whether the orderwill be set aside. The authorities reject the existence of a rigid rule concerning the effect of non-disclosure. Alberta Treasury Branchesv. Leahy, 2000 ABQB 575, at para. 187. Risk of Destruction of Material

[ 21 ] The uncontradicted allegation in the affidavit is that the hard drives on the computers used by the Defendants Cote, Paris and Bennett, including all correspondence in their Mustang email accounts, had been deliberately deleted. [ 22 ] Perhaps the most persuasive evidence in this respect is an unexplained copy of an email (Exhibit EE) from Bennett (remembering that he was the information technology manager) to Paris on September 23, 2011 which said: good evening Dug. were you able to delete your email on your mustang account. i just finished mine how was your departure...i said good bye to francis and jim (new dom) and told francis to tell tim i quit hahahaha i know chicken shit. if you need help i still am an administrator and can help clean emails at least. bry see u on Monday [ 23 ] Until otherwise explained, it appears to be an admission that Bennett erased emails on his company account and was offering to assist Paris to do the same.

In fact, he reminds Paris that he is still an administrator which suggests that he still has access to the hard drive in order to erase emails “ at least ” . This is some 14 days after he had resigned from Mustang. [ 24 ] I conclude that this is persuasive evidence of a real possibility of the destruction of material before it can be produced in the course of the litigation. Freake and 873094 argue that they should not be tainted with this evidence. However the irresistible inference is that both were involved. By September 27, 2011, Freake was a shareholder and director of Heli Source.

These Defendants Cote, Paris and Bennett became employees of Heli Source. As observed earlier, on June 13, 2011, according to an unexplained email communication appended to the affidavit, Freake was using the Heli Source email address (jim@helisource.net). It would require an excessive level of naivet é to conclude that Freake and 873094 were not complicit in the destruction of this evidence. Conclusion [ 25 ] In the result, having considered all of the evidence as it is now presented, I am satisfied that the order should stand.

I would make the same order on the present state of the evidence. [ 26 ] The application is dismissed. [ 27 ] The Plaintiff is entitled to its costs of this motion. Heard on the 16 th day of April, 2012. Dated at the City of Calgary, Alberta this 23 rd day of April, 2012. T.F. McMahon J.C.Q.B.A. Appearances:

D. Robb Beeman Clay Jacobson Heenan Blaikie LLP for the Plaintiff Timothy P. Chick James A. Bancroft, Q.C. Davis LLP for the Defendants, Heli Source Ltd., Alin Cote, Douglas Paris and Kenneth Bryan Bennett Grant Vogeli Bob H. Graham Burnet, Duckworth & Palmer LLP for the Defendants, Jim Freake and 873094 Alberta Ltd.