Envacon Inc v, 2017 ABQB 623

Court of Queen’s Bench of Alberta Citation: Envacon Inc v 829693 Alberta Ltd, 2017 ABQB 623 Date: 20171019 Docket: 1103 06556 Registry: Edmonton Between: Envacon Inc. Plaintiff/Applicant - and - 829693 Alberta Ltd. Defendant/Plaintiff by Counterclaim/Respondent - and - Envacon Inc., Kieran Bozman, William Bell and Allan Bazin Defendants by Counterclaim - and – Dr. Jonathan M. Tyler, Wilhelmina K. Tyler and 1791480 Alberta Ltd. Third Party Defendants _______________________________________________________ Memorandum of Decision

of the Honourable Associate Chief Justice J.D. Rooke _______________________________________________________ Introduction and Executive

Summary [ 1 ] This decision is about the failure of a litigant to produce records relevant to litigation. I find the behaviour of the principals behind the Defendant, and related corporations involved, as being in the nature of a hide the document “shell game,” [1] including, if not hiding, failure to search out the location of and produce such records.

Note that “where a corporation is involved in allegations of contempt, there is no doubt someone responsible for it is equally liable to ensure the Court’s commands are met”: Kent v Martin , 2012 ABQB 467 (Tilleman J.) at para 25 . [ 2 ] More specifically, this decision is about an application, filed May 3, 2016, by Envacon Inc. (Envacon) for an Order declaring 829693 Alberta Ltd. (829) to be in civil contempt and, alternatively, in effect, found guilty of spoliation, for failing to comply with the substance of Court Orders dated December 16, 2013, April 10, 2014 and March 20, 2015 (the Court Orders).

These Court Orders relate to the production of financial records of 829, Tyler Research Instruments Corporation (TRIC), and Tyler Research Corporation (TRC) (the Tyler Corporations). Specifically and primarily (as largely captured in the Court’s Order of March 20, 2015), the unconsolidated [2] financial statements of 829, TRIC and TRC for the years ending 2006 - 2010 (financial records).

It is not challenged that these financial records have never been produced by 829, the excuse being that they do not exist, or cannot be located or reproduced by them, or obtained from third parties. [ 3 ] The remedy sought is the striking of the Statement of Defence and Counterclaim of 829. [ 4 ] I do not need to make a specific finding as to spoliation, [3] as that relates to an intentional act of destruction of relevant evidence when litigation is ongoing or contemplated, and the proof is not clear here (transcript of the hearing, page 16, line 5 to page 17, line 8 - hereinafter styled as: TR 16/25 – 17/8).

However, on this record, I do find 829 in contempt for the failure to follow the substance of the Court Orders, which provides an appropriate remedy. [ 5 ] In the result, after a thorough review of the written and oral arguments of the parties, I find that 829 is in contempt and the Order should be granted so declaring, and holding that the remedy of striking 829’s pleadings is appropriate, but with 829 having one last chance to purge its contempt.

Thus, the pleadings (Statement of Defence and Counterclaim) of 829 will be struck, effective January 15, 2018, unless, by that time, 829 has provided Envacon’s Counsel with all the financial records as herein delineated.

The striking will be completed by the written Certification of Envacon’s Counsel to the Clerk of the Court that all the financial records have not been provided by that deadline. [ 6 ] Considering all that follows, and referencing the Envacon Brief at para 87, costs will follow in favour of Envacon against 829 on a solicitor and client, full indemnity basis, for all steps taken in Envacon pursuing the financial records to this point in time.

There will be a deduction from such solicitor-client costs against 829, in recognition of 829 successfully applying to have some parts of the Bozman Affidavit redacted, as may be negotiated by the parties or determined by the Court. To the extent that 829’s pleadings are struck and the action is ended, ordinary costs, in accordance with the Alberta Rules of Court , Alta Reg 124/2010, will apply for all other steps. [ 7 ] The reasons that I have come to these conclusions follow. The Parties [ 8 ] I do not intend to repeat in this Decision all of the facts that are on the record.

However, it may make the Decision more clear if the parties involved are identified and the essence of the matter is defined. [ 9 ] The record reflects that the principals behind and controllers of the actions of the Tyler Corporations are Dr. Jonathan Tyler

(Dr.) and Ms. Wilhelmina Tyler (Ms.) (the Tylers). Both are the sole directors and shareholders of 829 and TRIC, which are Alberta corporations; Dr. is the sole director and president of TRC, and Ms. is the primary attorney and secretary of TRC, a Pennsylvania, U.S.A, corporation, extra-provincially registered in Alberta, and a solely owned subsidiary of TRIC.

Statutory Records Requirements [ 10 ] Statutory records requirements for Alberta corporations (829 and TRIC) include: - maintaining at its “records office”, “records”, including (unconsolidated) financial statements and (consolidated) financial statements of any subsidiary: ss 21(1), 21(8), 155 (1) and 157(1) of the Alberta Business Corporations Act , RSA 2000, c B-9 ( ABCA ); and - for Alberta corporations and Alberta extra-provincially registered corporations (TRC) (see para 18 of the Envacon Brief), a separate (unconsolidated) financial statement in its T2 Corporation Income Tax Return filed with the Canada Revenue Agency (CRA): CRA – RC4088(

E) General Index of Financial Information (GIFI). TRC has similar obligations in the United States (see paras 15 and 16 of the Envacon Brief, and references therein). [ 11 ] It is pursuant to these legislated requirements that the Tyler Corporations were directed by the Court Orders to provide this information relevant to the issues in the pleadings.

The Underlying Dispute and Findings [ 12 ] While the technical details of the facts and disputes that have led to the subject litigation are on the record, in essence, the action arises out of an agreement in 2007 by Envacon to allow the Tyler Corporations and the Tylers to use a computer server owned by Envacon, to store Tyler records, separating by a partition, Tyler records from Envacon records. In 2011 the Tylers purchased their own server and transferred all the Tyler information from the Envacon server to the Tyler server. A dispute arose between the parties as to the transfer of some of the Tyler records.

The Tylers alleged that Envacon was guilty of some impropriety, but, I find, on the record, that the Tylers and the Tyler Corporations were provided with all the Tyler records, and had a full opportunity to independently verify that before Envacon discontinued the use of, and thus, destroyed the access to, its server. Moreover, I find untimely complaints and inconsistent and contradictory responses by Ms.

Tyler concerning the production of the financial records. [ 13 ] The affidavit of Kieran Bozman, President of Envacon, sworn April 28, 2016 and filed May 3, 2016 (Bozman Affidavit), provided in para 30, with detailed allegations that followed therein and in Exhibit Q, the following statement, which I accept as accurate: Since the commencement of the within action, Ms.

Tyler has undertaken a deliberate and intentional strategy and course of conduct designed to confuse and frustrate the production of the financial records and financial statements of 829, TRIC and TRC ordered by this Honourable Court... which when taken as a whole, lack any reasonable credibility and exhibit, inter alia , Ms. Tyler’s willful disregard and breach of her duty to act honestly and in good faith.... [ 14 ] I also find, as alleged in para 30(

b) and 32 of the Bozman Affidavit (with references therein adduced – see also paras 7-9 of the Envacon Brief) that: 32. Ms. Tyler would be expected to maintain proper financial records as required by law. 30(

b) Notwithstanding that Ms. Tyler is a corporate lawyer, sophisticated director and financial records expert, her responses [in the litigation] indicate a lack of knowledge with respect to compliance with applicable corporate tax and tax regulation applicable to 829, TRC and TRIC, including the requirement that each corporation must prepare and file separate annual financial statements, retain their tax records and maintain separate general ledgers. [Emphasis added.]

[ 15 ] While struck from the Bozman Affidavit, in an earlier proceeding, as an opinion not appropriate for an affidavit, on the whole of the record, I find the substance of paras 33 and 34 thereof, as being accurate, namely: 33. ... both Ms. Tyler and Dr.

Tyler underst[oo]d [or should have understood] their duties owed to each of the Tyler Corporations to ensure compliance with applicable law, including the respective corporate statutes applicable to those corporations ... including the preparation of financial statements ... and to maintain copies of the financial records of those corporations. 34. 829 and TRIC are subject to the Alberta Business Corporations Act , pursuant to which all corporations are required to prepare separate annual financial statements, and the regulations thereto, which provide the minimum contents to be included in the annual financial statements of each corporation .

Further, every corporation must include a separate non-consolidated financial statement in its tax return filed with the CRA and [in such cases, access to filings of] the corporation’s non-consolidated financial statements for that tax year. [Emphasis added.] Contempt Rules and Findings [ 16 ] It is trite that contempt is regulated by Rule 10.52 of the Alberta Rules of Court . [ 17 ] The case law sets out four elements [4] of proof required for contempt, and, in that regard, Counsel for Envacon argued, and I find, that Envacon has proved, on the applicable standard of beyond a reasonable doubt, that: (1) the Court Orders require the production of the unconsolidated financial information, that 829 had (2) notice of the Court Orders, and that 829 has been (3) guilty, through its directors, of an intentional act of failure to act that constitutes a breach of the Court Orders; and, on the applicable standard of a balance of probability, (4) without adequate excuse: Schitthelm v Kelemen , 2013 ABQB 42 (Yamauchi J.) at para 40 , relying on Koerner v Capital Health Authority , 2011 ABQB 191 (Shelley J.) at para 43 , aff’d 2011 ABCA 289 , leave to appeal refused, 34573 (April 26, 2012).

Intention to disobey a court order is not required: Michel v Lafrentz , 1998 ABCA 231 at para 21 ; Broda v Broda, 2004 ABCA 72 . Argument of 829 [ 18 ] Before ending the matter with my conclusion above, there are two elements which I need to review that are challenged by 829. The first two elements seem incontrovertible (see references to the evidence, as discussed at paras 44-51 of the Envacon Brief). However, while not challenging the existence of the Court Orders or notice, Counsel for 829 argued, contrary to the third element, that there was no failure to comply with the Court Orders.

As to the fourth element, the question is only whether there is an adequate excuse by 829 for any failure to comply.

Review of Compliance [ 19 ] As to compliance with the Orders, I can make a number of findings based on Envacon’s initial arguments in its brief, in face of 829’s arguments in its brief that there was compliance with the Court Orders, a subject on which Envacon did not directly engage, in reply. [ 20 ] As to the consent Court Order of Justice Ross of December 16, 2013, and the further similar, clarifying Court Order of Justice Ross of April 10, 2014, each read in light of my subsequent ruling (Court Order of March 20, 2015) that “financial statements” meant unconsolidated financial statements (not consolidated financial statements which were produced), even many months after that clarification, these have never been provided.

[21] As to my Order of March 20, 2015, that ordered production of unconsolidated financial statements, they have still not beenproduced. As to the requests to the Canada Revenue Agency (CRA) and United States Internal Revenue Service (IRS), directed by paras2 and 3 of my March 20, 2015 Order, I find that these requests were inadequately made (complete lack of particularity – merely goingthrough the motions - as discussed herein), and never followed up to the real substantive goal which was to get the information. Adequate Excuse [22] I now turn to adequate excuse.

If, as alleged by 829, in less than forthright, but rather contradictory statements, that theunconsolidated financial statements had never been created or were lost, in face of statutory requirements, the obligation is to create orrecreate them, not merely to play a shell game. This goes to the substance of the contempt, namely never taking the Court Ordersseriously. In this vein, it is important to recognize that contempt lies if there is “a lack of diligence and commitment to fulfilling a courtorder ... [that is] significant ... a substantial non-compliance...”: Kent at para 27.

As to diligence, see also: Michel at paras 21, 24. On thesame points and where actions are “designed to obstruct the course of justice by thwarting or attempting to thwart a Court order” – asituation which I find is manifestly the case at Bar, see: W(

S) v T(K), 2005 ABQB 298 (Lee J.) at para 16-19; Litterst v Horrey (1995),1996 ABCA 13 , 178 AR 216 at para 14, 37 Alta LR (3d) 74 (CA). See also: Berube v Wingrowich, 1999 ABQB 547 at para 21and 1999 ABQB 698 at para 28 (Veit J.). Here I find that the efforts of the 829 officers were, at best, merely going through the motions(see reference to the lack of particularity in Mr.

Parker’s letter to the Winnipeg Taxation Centre, and failure to follow up, lack of fulldetail, and the conclusion, which I support, that “It’s someone going through the motions and they’re not really trying to get [financial]records”, required by the Court - TR 9 -, and 12-13, in general, and TR 9/29 – 30 in particular); at the worst obstructionist; and, in themiddle, not in compliance with the substance and clear intent of the Court Orders, namely to get the information, none of which weretruly best efforts or due diligence. [23] As to onus, once the actus reus of contempt is proven beyond a reasonable doubt, the contemnor may respond, on a balance ofprobabilities, with evidence and argument intended to try to demonstrate justification: FIC Real Estate Fund Ltd v Lennie, 2014 ABQB105 (Graesser J.) at paras 78-79.

It is clear that “where someone is perceived as playing games with court process and there is a history of difficulties getting ... production of records, ... and full compliance with orders, the record may make it much more difficult...” to meetthe onus: FIC at para 89. [24] Thus, in the end, remembering the proper standard of proof at law, the determination of reasonable excuse is “a discretionaryremedy in civil proceedings, keeping in mind the underlying rationale for the remedy: ensure compliance with orders and promoterespect for the proceedings”: FIC at para 90. [25] Counsel for Envacon addressed the issue of absence of adequate excuse in great detail in the Envacon brief (paras 52-74).

Ingeneral, I accept those submissions, and rather than copy them herein, I shall summarize some (by reference to paragraph numbers of theEnvacon Brief) and make some comments thereon (in brackets): - 54. Financial statements were never prepared except in consolidated format – this is clearly in breach of both the ABCA and theCRA requirements – (this is specifically important to the underlying litigation because one cannot isolate the financial informationrelative to specific corporations) - 55 - 57.

The Orders of December 16, 2013 and April 10, 2014 are clear (or where made clear by my Order of March 20, 2015) thatit was unconsolidated financial statements, not consolidated financial statements, that were to be produced - 58 - 61. The excuse of unable to locate is disingenuous if the information was never prepared – furthermore there were numerouslocations to look - 61 - 62.

Allegations of deletion were first raised in March 2015, over a year after agreements and Orders to produce theunconsolidated financial statements were made, when there was specific evidence, as early as 2011, of Tyler having the informationgoing back to 2006 - 63 - 65. 829 is unclear in its allegations as to whether physical records were misplaced, shredded or thrown out (spoliation), nolonger kept, or whether ever possessed

- 65 - 66. Foreign law does not apply to records required to be maintained in Canada - 67 - 68. 829 has produced few documents from CRA, and none from IRS, and proper authorization may not have been provided toIRS (nor was there any evidence of follow-up, demonstrating a lack of serious diligence) - 69.

To the extent that 829 destroyed tax returns, there is no evidence provided of CRA permission to do so, which is required - 70 - 72 With all the locations for financial records, where 829 has certified their previous existence, it is implausible that therehave been no records produced (see also para 86 of the Envacon Brief, which I accept) – again, showing no signs of serious diligence - 73 - 74 – Where there is evidence perceived (which I do) to be game playing with the Court process (the shell game referenced atthe top), and there is a history of delays and impasse, including “inconsistent, contradictory, misleading and implausible responses andexcuses” in getting records, it is difficult to give credibility to a reasonable excuse, and I don’t. [26] In conclusion, I don’t find a reasonable excuse and thus determine that the Respondents are in contempt of court.

Remedy [27] The remedy for contempt is in the discretion of the Court: r 10.53.

Relevant factors in law, applicable to the facts at Bar,include: - deliberate (and, I would add, continual) defiance (found here), as opposed to inadvertent failure (not found here); - the relevance and importance of facilitating the necessary discovery process in litigation (very significant here), rather thanpunishment (not the focus here); - whether there have been any real, meaningful, attempts to purge the contempt (essentially none, token efforts at best;obstructionist at worst – a further brief right to purge the contempt will be given); - the entire context of the history of the litigation (I won’t go into that whole history – it is on the record, but it includes delay inresponding (see below), being contradictory in the evidence, not being forthright), etc.; and - the degree of the culpability and defiance of the contemnor (significant – see para 85 of the Envacon Brief, which I accept),including: o an admission of the breach (none); o an apology to the opposite party or the Court (none); o single breach or ongoing pattern (consistent and ongoing behaviour – see submission at TR 25/7 – 10, which I accept); o private parties only, or public (private only); o the need for general and specific deterrence (former very important and latter means that the litigation process would be thwarted);and o conduct of continuing and general pattern of delay and uncooperativeness in solving the lack of information problem, in face ofseveral orders and opportunities or directions to obtain solutions (see the arguments in para 84 of the Envacon Brief, which I accept).

See: Mella v 336239 Alberta Ltd, 2016 ABCA 226 at para 34 referencing with approval, Alberta Dental Assn v Unrau, 2001 ABQB315 (Veit J.) at para 20; Demb v Valhalla Group Ltd., 2016 ABCA 172 at para 35; Re McDonald Estate, 2013 ABQB 602 (Mahoney J.)at para 28; Precision Forest Industries Ltd v Cox, 2013 ABQB 524 (Lee J.) at para 55; and my decision in Point on the BowDevelopment Ltd v William Kelly & Sons Plumbing Contractors Ltd, 2006 ABQB 775 at paras 24, 99. [28] Striking pleadings can be an appropriate remedy: Point at paras 99, 101, relying, inter alia, on Hover v Metropolitan LifeInsurance Co, 1999 ABCA 123 at paras 12 and Kin Franchising Ltd v Donco Ltd (1993), 1993 ABCA 7 , 7 Alta LR (3d) 313at 317 (CA).

Striking pleadings is a serious remedy that should only be exercised in the most serious cases and in that vein, I agree withmy colleague, Lee J., in W(

S) at paras 19, 42 that: Determining whether or not to strike out pleadings involves the exercise of a significant degree of discretion, and is largely fact based.... ... there are two circumstances in which it may be appropriate to strike out pleadings: (1) where the breach of a Court order prevents theother party from defending [or, I would add, prosecuting] an action; or (2) where the breach constitutes a flouting or flaunting of a

judicial order, or demonstrates a persistent failure to obey.... Parties cannot be given infinite chances to modify their behaviour; at some point, a final solution must be imposed...” See also Bains Engineering Corp v 734560 Alberta Ltd , 2004 ABQB 780 (Clark J.) at para 22 , aff’d 2005 ABCA 187 , dealing with a “general pattern of delay and ... a lack of cooperation in the litigation process...” [ 29 ] The remedy that is necessary is the production of the information, so as to determine the litigation on its merits, not punishment.

However, there is much to be said for the argument of Envacon (in para 88 of its Brief) that 829 will likely never comply and cannot be given infinite chances to modify its behaviour. Moreover, if the information is not produced, the Plaintiff will be effectively thwarted from proceeding with the litigation on the merits. 829 responded (reply supplementary brief, paras 2 and 20) that “a proportional remedy in the circumstances would be to direct that 829 cause further requests to be made ... to attempt to obtain the records sought”.

In face of this record and the clear fact that the unconsolidated financial statements have not been produced, with all the time available to the Respondent to produce the information, including the too lengthy time waiting for this Decision, 829 could have done so, but failed to do so, showing a complete lack of diligence or respect for the substance of the Court Orders.

Nevertheless, on this same principle, 829 will be given a further relatively short time to remedy the situation, or a final solution will follow, with 829 losing its right to defend and counterclaim. [ 30 ] In the result, I do not need to look further to alternative remedies (on which the parties submitted further briefs, at the Court’s request, in late November and December 2016), by giving 829 one last time to purge contempt, before striking pleadings.

Conclusion [ 31 ] 829 is found in contempt and its pleadings will be struck, if it does not produce all directed unconsolidated financial information by January 15, 2018 (to happen on Counsel for Envacon so certifying to the Clerk of the Court). Envacon will have solicitor and client (full indemnity costs) on all court related actions relating to obtaining the financial records, with off-setting of costs to 829 for successfully having parts of the Bozman Affidavit redacted, as Counsel may agree, or the Court may set.

If the 829 pleadings are struck, costs of the other steps in the litigation will be granted to Envacon in accordance with the Alberta Rules of Court . Heard on the 23rd day of November 2016 (last written submission filed December 19, 2016). Dated at the City of Edmonton, Alberta this 19 th day of October 2017. J.D. Rooke A.C.J.C.Q.B.A. Appearances: Brian Summers, Q.C. and Justine T. Lee Dentons Canada LLP for the Plaintiff/Applicant Jeremiah J. Kowalchuk Field LLP for the Defendant/Respondent