Swartout v. Quinncorp Holdings Inc., 2012 ABQB 610

Court of Queen ’ s Bench of Alberta Citation: Swartout v. Quinncorp Holdings Inc., 2012 ABQB 610 Date: 20121002 Docket: 1101 09221 Registry: Calgary Between: Hank Swartout and Jack Bray Plaintiffs - and - Quinncorp Holdings Inc., and 268981 Alberta Ltd. Defendants _______________________________________________________ Reasons for Judgment of J.L.

Mason, Master in Chambers _______________________________________________________ Introduction [ 1 ] In 1998, the plaintiffs Jack Bray and Hank Swartout entered into a Joint Venture Agreement with the defendant, 268981 Alberta Ltd. for the development of a southwest Calgary neighbourhood known as Aspen Estates. The defendant, Quinncorp Holdings Inc. amalgamated with 268981 in 2001. The new entity carried on as Quinncorp Holdings Inc. [ 2 ] Under the Joint Venture Agreement, Quinncorp was to develop the neighbourhood in phases, using funds provided by investors including Mr. Bray and Mr. Swartout.

Quinncorp’s expenses and a management fee were to come off the top. The net profits were to be distributed 70% to the investors and 30% to Quinncorp, at the conclusion of each phase. The development is at or near completion.

[ 3 ] Mr. Bray and Mr. Swartout commenced this action in 2011, alleging that they had not received all the net profits to which they are entitled under the Joint Venture Agreement. Based on lot sale and phase completion information provided by Quinncorp in 2010, they allege they are owed at least $2.65 million. They seek return of their initial contributions of $450,000.00 each, payment of the net profits owing under the Joint Venture Agreement, and an accounting of all revenues, expenses and profits for all phases. [ 4 ] Quinncorp’s defence alleges that repayment of initial contributions is not due.

It has since re-paid Mr. Bray his initial contribution. Quinncorp says net profit distributions have been properly made as phases were completed and that Mr. Bray and Mr. Swartout have been overpaid approximately $392,000.00, due to net profit distributions made prior to the conclusion of phases, based on estimates only. Quinncorp further alleges that it is not required under the Joint Venture Agreement to report or account directly to Mr. Bray and Mr. Swartout.

Rather, the Joint Venture Agreement names an individual to whom Quinncorp must report, Daryl Gilbert, and Quinncorp alleges it has done so. [ 5 ] Jim Quinn was questioned as corporate representative of Quinncorp. Some of the undertakings he gave relate to source documents behind

summary information that has been produced by Quinncorp to date, relating to the calculation of the net profits and distributions. Quinncorp is also facing production requests from the plaintiffs relating to other source documents. [ 6 ] Quinncorp asserts that it is premature to produce source documents, either by way of undertaking or in its production. It submits that entitlement to an accounting must first be established at trial.

It further suggests that the production should be delayed as its accountant, KPMG is going to be preparing a report on the underlying revenues and expenses of the Joint Venture Agreement. Quinncorp also resists production on the basis of difficulty. [ 7 ] At Mr. Quinn’s questioning, realtime reporting was utilized, generating a live transcript. The transcript was also streamed to a computer in the conference room next door, where it was observed by Mr. Bray’s US counsel and one of Mr. Bray’s staff.

Counsel for Quinncorp asserts this violates the general rule that only the parties and counsel of record have the right to attend questioning. Counsel for Mr. Bray and Mr. Swartout submits it does not. [ 8 ] The following issues were presented to the court by Quinncorp for advice and direction: Is Quinncorp entitled to defer production of source documents? Is Mr. Bray entitled to have his US counsel and a staff member view a realtime transcript at future questioning sessions?

Is Quinncorp entitled to defer production of source documents? [ 9 ] Quinncorp’s initial submission is that the plaintiffs are trying to use the rules of disclosure to obtain accounting relief that can only be granted after liability to account is established at trial. It submits that it is only if Quinncorp is required to account to the plaintiffs that the underlying source documents supporting the net profits paid should be produced. [ 10 ] The parties agree that several provisions of the Joint Venture Agreement are relevant to this issue. [ 11 ] The Joint Venture Agreement provides in paragraph 3, in part: 3.

The parties agree that the management of the Joint Venture shall be conducted by the Developer who shall be responsible for the over all completion of the Development and finalization of the sale of all the Lots to home builders and or other members of the public. The duties of the Developer shall be performed with due diligence and shall include all of the services that a land developer would normally

provide for the full, final and proper completion of the Development and without limiting the generality of the foregoing these shall bedeemed to include: ... e. provide proper accounting systems, records, and documentation of all income and expenses; ... g. conduct monthly progress meetings with Daryl Gilbert who is the designated representative of the [investors]; [12] Paragraph 12 states that: The [investors] [agree] to appoint Daryl Gilbert who shall be authorized to conduct and represent the affairs of the [investors] withrespect to the Joint Venture and [Quinncorp] shall not be required to deal with any other [individual investors]. [13] “Net Profit” is defined at paragraph 9: 9. “Net Profit” shall mean the Net Profit (“pre-tax”) available for distribution to the Joint Venture Partners resulting from the sale of theLots after deducting all costs and third party disbursements relating to the Development including interest and financing costs, theManagement Fee, and GST payable if any, and repayment of the [investors’] capital. [14] Quinncorp relies on Wahpeton Canvas Co.

Inc. v. Inland Plastics Ltd., (SK KB), [1991] 5 W.W.R. 107(Sask. Q.B.); Mardynalka v. Kurian Construction Ltd. v. Kurian Construction Ltd., (MB CA), [1986] 5 W.W.R.507 (Man. C.A.) and MacDonald Estate v. Martin (1987), (MB KB), 51 Man. R. (2d) 53 (Q.B.) in support of itsposition that entitlement to an accounting must first be established at trial, before any production of source documents is required. [15] These cases emphasize the general rule that there must be full discovery on all issues put to the court for resolution at trial.

Ifliability and remedy are easily severable, however, it may be appropriate to defer postponement of discovery on the remedy until liabilityhas been established. The cases also demonstrate that courts are more inclined to defer production where the parties are competitors andthe disclosure of the documents may be used to the detriment of the business interests of the party resisting disclosure. [16] In Wahpeton Canvas Co. Inc. v. Inland Plastics Ltd., the plaintiff sued for patent infringement and sought an accounting anddamages.

The defendant refused production and disclosure of sales and profits records on the basis it was premature to do so untilliability for patent infringement was established. The defendant also asserted that it would be prejudiced if required to produce therecords prior to determination of liability, as the parties were competitors. [17] The Saskatchewan Court of Queen’s Bench held that the action involved a two stage process of first determining whetherthere was infringement, and if so, determining the loss to the plaintiff through an accounting.

The Court deferred the production of thesales and profits records as they were relevant only to damages, and further, their prior production may give the applicant a businessadvantage. [18] The circumstances here are different from those in Wahpeton Canvas Co. Inc. v. Inland Plastics Ltd.. The parties are notcompetitors. Moreover, the records sought by these plaintiffs are not solely relevant to the accounting relief sought. The records are alsorelevant to the plaintiffs’ claim that Quinncorp has not paid the full extent of net profits to which they say they are entitled under theJoint Venture Agreement.

[ 19 ] The Joint Venture Agreement is clear that the plaintiffs are entitled to net profits. The defendants do not dispute this. They concede that they must substantiate their distributions of net profits. It is Quinncorp’s calculation methodology that is at the heart of this dispute - the plaintiffs say they were shorted, while the defendants say they were overpaid. Mr. Quinn admits in his affidavit that there have been difficulties in calculating net profits because the phases were not distinct and not completed on distinct dates.

He also notes that allocation of overhead items as costs under the Joint Venture Agreement is subject to ongoing discussions. [ 20 ] Source documents showing costs and revenues are plainly relevant and material, and necessary to the resolution of the net profits issue at trial [1] . There will be overlap in terms of the production required for the net profits issue and the documentation that will be involved in the event that accounting relief is ordered at trial, but that does not warrant deferral of production of these documents.

Rather, it demonstrates that the requisite disclosure is not neatly severable as between liability and remedy. [ 21 ] In Mardynalka v. Kurian Construction Ltd. , the plaintiff and the defendant were parties to a joint venture for the purpose of cutting timber on Crown land. The plaintiff commenced an action seeking an accounting. The defendant did not deny there was a joint venture, but denied that a certain timber license was an asset of the venture. The plaintiff obtained an order permitting extensive discovery and production on the disputed license.

The majority of the Court of Appeal of Manitoba reversed the order, reasoning that until it is determined that the disputed license was an asset of the joint venture, the production of records relating to the accounting for that license should be deferred. It was possible to deal separately with the questions of liability and damages. It noted that the action before it was not a case where the accounting itself was in issue.

Rather, the lawsuit concerned the right to an accounting and only if that right were established would the disputed records be needed. [ 22 ] As noted, the issues of liability and remedy are not neatly separated in this litigation. Source documents relating to Quinncorp’s calculation of the net profits are necessary to resolve this issue at trial. [ 23 ] In MacDonald Estate v. Martin , several companies amalgamated to form the defendant company.

The plaintiff claimed entitlement to shares in the defendant company as an appropriate measure of the value of the plaintiff’s holdings in one of the amalgamating companies. The plaintiff was seeking 17 years’ worth of financial statements from the defendant company, but could not explain how production of these voluminous documents would assist in determining the issues at trial, particularly in view of the fact that it was already in possession of other documents from which the issue could be determined.

The Manitoba Court of Queen’s Bench denied the production as it was not persuaded that the financial statements were necessary to prove liability. It also noted that the defendant would potentially be prejudiced because the financial statements encompassed an exposition of many of its unrelated financial dealings. [ 24 ] Again, this case is distinguishable from the facts here. The documents sought are needed for resolution of the issue as to whether Quinncorp paid the plaintiffs the full extent of net profits under the Joint Venture Agreement.

While Quinncorp suggests that some of the documents also relate to other projects, it is likely that they can be redacted, and if not, they will in any event be subject to an undertaking by the plaintiffs not to use them for collateral purposes: Rule 5.33. [ 25 ] Quinncorp also asserts that the plaintiffs’ representative under the Joint Venture Agreement, Mr. Gilbert, has agreed to the proposal that Quinncorp’s accountant, KPMG, review and substantiate Quinncorp’s distribution of net profits to the plaintiffs.

Quinncorp submits that this agreement binds the plaintiffs and prevents them from seeking production of the source documents until KPMG’s report is complete, pursuant to paragraph 12 of the Joint Venture Agreement, quoted above. [ 26 ] In my view, paragraph 12 of the Joint Venture Agreement does not constitute a contracting out of the production requirements of the Rules of Court in the event that a dispute arises between the parties to the Joint Venture Agreement. Mr.

Gilbert is not named a trustee or otherwise stated in clear language to be the only individual entitled to exercise the investors’ legal rights in respect of the Joint Venture Agreement. Relevance and materiality govern the production of documents in the litigation, not this paragraph of the Joint Venture Agreement.

Moreover, while it is possible that a trial judge may ultimately find that the plaintiffs are not entitled to receive an accounting from Quinncorp, it will still need to be determined whether the full extent of net profits payable under the Joint Venture Agreement was distributed to them. [ 27 ] Quinncorp further suggests that the resolution of this litigation would be more timely and cost effective within the meaning of Rules 1.2 and 1.4, if the plaintiffs’ document requests were held in abeyance pending this review by KPMG.

[ 28 ] Mr. Quinn testified on cross-examination that there are no time lines for the receipt of KPMG’s report and he has no idea when it will be completed. The terms of review do not in the plaintiffs’ view encompass all of the areas of concern they have identified. Further, KPMG was retained by Quinncorp prior to this litigation to conduct a fulsome review to address the plaintiffs ’ concerns.

The resulting report was limited to reviewing only one area of concern (the allocation of overhead costs) and did not assist in resolution. [ 29 ] Quinncorp is asking the plaintiffs to wait for production until its accountant has opined on a critical issue in the litigation.

With respect, the plaintiffs are entitled at this stage of the proceedings to access source documents for their own review and review by whatever expert they decide to engage. [ 30 ] In all the circumstances, it would be inconsistent with Rules 1.2 and 1.4 to delay production of these documents. [ 31 ] Quinncorp’s final submission is that it would be unduly onerous for Mr. Quinn to respond to his undertakings relating to source documents, within the meaning of Rule 5.25(3).

Quinncorp also suggests that the production requirements for these documents must be modified, as the difficulty of producing them is disproportionate to their likely benefit, pursuant to Rule 5.3(1). [ 32 ] A party seeking to modify or limit another party’s rights under the Rules faces an onerous test: Trimay Wear Plate Ltd. v.

Way , 2008 ABQB 700 , 456 A.R. 376 at paragraph 27 . [ 33 ] Quinncorp says that it is unduly onerous or difficult to produce the requested documents because it has only one accounting staff person and the source documentation would need to be extracted from multiple files in multiple locations. Further, the lot sales documentation alone, Mr. Quinn deposes, constitutes thousands of pages. [ 34 ] Alberta courts have recognized that the process of responding to undertakings takes time and money.

At a minimum, the party giving the undertaking will have to devote some management resources to ensuring that the undertakings have been met: see for example, Keephills Aggregate Company Limited v. Riverview Properties Inc ., 2008 ABQB 540 at paragraph 15 . The fact that it will take time is not a sufficient excuse for not responding.

The costs of responding to undertakings and further necessary production will be addressed in the normal course, at the conclusion of the proceedings or on earlier application. [ 35 ] In any event, counsel for the plaintiffs confirmed at the hearing that she was not seeking “every scrap” of source documentation as suggested by counsel for Quinncorp. She confirmed that in some cases,

summary information would suffice, and further that she was not seeking sales documentation for all 300 lots in the development, but rather, only those specific lots mentioned in the undertakings. [ 36 ] The issue at the heart of this lawsuit is whether the plaintiffs have received what they are entitled to under the Joint Venture Agreement. The parties take very different views; the plaintiffs say they are owed at least $2.65 million, while the defendants say they have been overpaid by $392,000.00 [2] . In the circumstances, the plaintiffs are entitled to more than

summary information. Source documents are relevant and material to the issue of whether Quinncorp properly paid the plaintiffs and necessary for the resolution of this issue at trial. I am not persuaded that Mr.

Quinn’s responses to undertakings relating to source documentation of revenues and expenses should be deferred, nor that there should be a modification of the production requirements in regard to such documents. [ 37 ] Counsel for Quinncorp confirmed at the hearing that in the event the court reached this conclusion, his clients would attend to the undertaking responses and the request for further production of source documents within a reasonable period of time. To the extent that the plaintiffs are dissatisfied with these efforts, they can make the appropriate application to the court. Is Mr.

Bray entitled to have his US counsel and a staff member view a realtime transcript at future questioning sessions? [ 38 ] Counsel for the plaintiffs advised that Mr. Bray’s US counsel and one of Mr. Bray’s accounting staff would be attending Mr.

Quinn’s questioning. Counsel for the defendants objected. [ 39 ] Realtime transcripts were generated during the questioning. Counsel for Quinncorp realized that the transcript was also streamed to a computer in the conference room next door to where the questioning was taking place. Mr. Bray’s US counsel and one of Mr. Bray’s accounting staff were present in that conference room and viewed the transcript as it was generated concurrently with the questioning.

Counsel objected, but agreed to continue the proceedings and have the issue determined by the court in regard to future questioning in this action. [ 40 ] Austec Electronic Systems Ltd. v. Mark IV Industries Limited and Vapor Canada Inc , 2001 ABQB 99 addresses the question of who may attend questioning. [ 41 ] In that case, Mark IV Industries Limited wanted its corporate counsel from Ontario, Lynn Bevan, to attend questioning. Ms. Bevan was not counsel of record in the action, but Mark IV and its counsel of record in Alberta wanted to have Ms. Bevan’s assistance during questioning.

It was not intended that she conduct any questioning, but only assist the local counsel. The affidavit in support indicated that Ms. Bevan was of assistance and not disruptive in a previous questioning where she was permitted to attend. Justice Burrows accepted local counsel’s submissions that Ms. Bevan’s assistance was valuable and efficient because of her familiarity with the materials relevant to the action and her knowledge of the case acquired through her function of acting as a lawyer for Mark IV. [ 42 ] Austec Electronic Systems Ltd. filed an affidavit indicating that its officer found Ms.

Bevan’s presence distracting, by making notes and passing them to questioning counsel, interrupting the proceedings to have discussions with counsel, having ongoing discussions with representatives of Mark IV during questioning, and making facial responses to the officer’s answers. [ 43 ] Justice Burrows held that only the parties to the action and their counsel of record have the right to be present at questioning. Other persons can be present by consent or with leave of the court.

He further stated that his role was not to judge the reasonableness of Austec’s refusal to consent, but rather to judge whether Mark IV’s reasons for wanting Ms. Bevan to participate were sufficient to justify deviation from the normal rule. He referred to the particular circumstances of the case and the securement of the ends of justice as the guiding principles in making the decision. [ 44 ] He concluded at paragraph 14 that a deviation was not justified, given that the anticipated benefits of Ms. Bevan’s attendance enured to Mark IV alone. [ 45 ] Counsel for Mr. Bray and Mr.

Swartout submits that since the realtime software does not permit communication or interaction between those in the questioning room and those observing, the presence of others in a separate room watching a live transcript is not tantamount to attendance at the examination. Counsel emphasizes that the concerns identified with having additional attendees at questioning - disruption, distraction and delay - do not arise where the attendees are passively observing the transcript: see for example, Foundation Group Mergers & Acquisitions Ltd. v. Norterra Inc. , 1999 ABQB 442 .

There is no suggestion that improper communication violating the rules of ethical practice was occurring. [ 46 ] The arrangement put in place does not allow the observers in the next room to communicate or interact with those in the questioning room. The transcript remains confidential and is not broadcast to the public at large, but only to individuals who would be provided with a copy of the transcript in any event. Passively observing a realtime transcript is not substantially different from receiving a copy of an expedited transcript the morning following the questioning and conferencing at that time.

Provided that the attendees do not interrupt the questioning, communicate with those in the questioning room during questioning (for example, through the use of smart phones), or cause delays in the proceedings through extended or additional breaks, such observation does not amount to “attendance” at the questioning in my view. Conclusion [ 47 ] The production of source documents by Quinncorp shall not be postponed. The proposed non-litigant attendees may passively observe a realtime transcript of future questioning sessions.

[ 48 ] If the parties cannot agree on costs, they may approach me within 30 days of the date of this memorandum. Heard on the 17 th day of September, 2012. Dated at the City of Calgary, Alberta this 2 nd day of October, 2012. J.L. Mason M.C.C.Q.B.A. Appearances: Timothy C. Platnich Caron & Partners LLP for the Defendants Stacy Petriuk Jensen Shawa Solomon Duguid Hawkes LLP for the Plaintiffs [1] This is not to say that every source document need be produced.

The type and extent of source documents to be produced must be considered in the context of the particular undertakings refused or taken under advisement. [2] Counsel for Quinncorp submitted at the hearing that with the passage of time and ongoing completion of the development, more money may be owing to the plaintiffs. However, there is still an issue between the parties as to how net profits are calculated.