222 & 223 Baseline Road Inc v World Health Edmonton Inc, 2021 ABQB 22

Court of Queen’s Bench of Alberta Citation: 222 & 223 Baseline Road Inc v World Health Edmonton Inc, 2021 ABQB 22 Date: 20210108 Docket: 1903 13032 Registry: Edmonton Between: 222 & 223 Baseline Road Inc Plaintiff - and - World Health Edmonton Inc, David Hardy, Blake MacDonald, World Health North LP, International Fitness Holdings Inc, ABC Ltd, XYZ LP, John Doe and Jane Doe Defendants _______________________________________________________ Reasons for Decision of L.R.

Birkett , Master, Court of Queen's Bench of Alberta _______________________________________________________ [ 1 ] What are the consequences of inadvertently disclosing an irrelevant document in a draft affidavit of records? [ 2 ] In commencing this lawsuit, the plaintiff relied on information gained from a document inadvertently produced by the defendants in another action. Counsel for the defendants says that is improper and the statement of claim must be struck.

Counsel for the plaintiff says use of the information is justified to protect the client’s rights. [ 3 ] There are other issues to discuss as well regarding the pleadings, production of documents, the trial of the actions and security for costs. [ 4 ] My analysis involves a review of the Law Society of Alberta Code of Conduct, the Alberta Rules of Court and caselaw. [ 5 ] My conclusion is that the statement of claim need not be struck. The documents inadvertently produced in the other action are relevant and material to the issues plead in this action and must be produced by the defendants.

The two actions will be tried together. There will be no order for security for costs.

[ 6 ] I will provide a factual background to set out the relationship between the parties, the inadvertent disclosure and the genesis of this action. [ 7 ] I will describe the nature of the applications before me and the positions of the parties. [ 8 ] I will distill the issues to be resolved, provide an analysis and set out my conclusions.

Factual Background The Lease Action [ 9 ] The plaintiff is the owner of the Baseline Village shopping centre in Sherwood Park Alberta and was the landlord pursuant to a commercial lease agreement with World Health Edmonton Inc, as tenant, and International Fitness Holdings Inc, as indemnifier. [ 10 ] After the landlord was unwilling to address concerns raised by World Health over continuous construction in front of the fitness club, World Health withheld payment of the rent.

The landlord terminated the lease for failure to pay rent and on November 20, 2017 filed a claim in Action No. 1703 22745 against the tenant and the indemnifier for breach of the lease, seeking payment of the monies owing (the Lease Action). [ 11 ] The defendants filed a statement of defence alleging the landlord was in breach of the lease agreement, not the tenant. The plaintiff applied unsuccessfully for

summary judgment and the Lease Action is proceeding toward trial. [ 12 ] The plaintiff provided their affidavit of records, sworn December 17, 2018. [ 13 ] On February 15, 2019, the defendants in the Lease Action provided their unsworn affidavit of records and producible records. Counsel advised that as the deponent, Mr. Hardy, was currently out of the country, a sworn copy would be provided in advance of the scheduled questioning and there may be a few additional records to be included at the time of swearing. On February 19, 2019, counsel for the defendants provided an updated unsigned affidavit of records to include one additional record. [ 14 ]

Schedule 1 of the defendants’ unsworn affidavit of records lists the relevant and material records under the defendants’ control for which there is no objection to produce. The first document entered on the list is an Asset Purchase Agreement between World Health Edmonton Inc., David Hardy, Blake MacDonald and World Health North LP dated March 29, 2018. The second entry is a WHE Lease Status/Conditions

Summary and the third entry is a Bill of Sale and Assignment Agreement between World Health North LP and World Health Edmonton Inc. dated April 30, 2018. These documents comprise the first 319 pages of the defendants’ disclosure. [ 15 ] On June 5, 2019, the day before the scheduled questioning, counsel for the defendants advised he would be having Mr. Hardy swear the affidavit of records the following morning. He further advised that “In reviewing the file I see that several records were referenced in the draft affidavit that are not producible records.

This includes the 2018 Asset Purchase Agreement… The sworn affidavit will delete reference to the records identified above and I ask that you destroy those records inadvertently provided to you and confirm same.” [ 16 ] On June 6, 2019, at the start of questioning of Mr. Hardy, Counsel discussed the inappropriately produced documents.

Counsel for the defendants had confirmed with his client that “in fact, they shouldn’t have been produced as part of that document production in this action.” Counsel for the plaintiff confirmed he had reviewed the documents and the pleadings “And I can concur with your position on them. And for that reason, I will pluck them out and return them to you now.” [ 17 ] During the questioning, David Hardy deposed that he continued as President but was no longer the CEO of World Health Edmonton Inc as it is an inactive company and does not operate World Health gym locations throughout the city.

The Second Action [ 18 ] Counsel for the plaintiff reviewed the defendants’ affidavit of records and documents in preparation for the upcoming questioning of Mr. Hardy. He found the disposal of the tenants’ assets pursuant to the Asset Purchase Agreement, a mere four months after the Lease Action was filed, to be suspicious. [ 19 ] On May 26, 2019, from online public media sources, counsel for the plaintiff confirmed the sale of World Health Edmonton. A copy of an

article from the Edmonton Journal dated May 14, 2018 entitled “Calgary company buys World Health Edmonton” is attached to the affidavit in support of the plaintiff’s application for disclosure. The

article states that Calgary’s International Fitness Holdings Inc bought World Health Edmonton to put “it in a better position to compete against national and international firms”. The cost of the deal was not disclosed. [ 20 ] Counsel for the plaintiff then conducted corporate searches which showed Calgary’s International Fitness Holdings Inc was the General Partner of World Health North LP, a limited partnership formed March 23, 2018.

The Certificate of Limited Partnership stated the partnership would carry on business under the firm name “World Health North LP” for the purpose of operating fitness clubs in the city of Edmonton and surrounding areas. [ 21 ] With the knowledge gained from a review of the Asset Purchase Agreement disclosed by the defendants in the Lease Action, confirmed in public media sources and corporate searches, and bolstered by Mr.

Hardy’s evidence that World Health Edmonton Inc was inactive and no longer operating gym locations, the plaintiff commenced this second action. [ 22 ] The statement of claim filed June 21, 2019 mirrors the statement of claim filed in the Lease Action with the addition of World

Health North LP and the principals of World Health Edmonton Inc, David Hardy and Blake MacDonald as defendants. [ 23 ] This second action claims that in late March or early April 2018, World Health Edmonton Inc and its principals caused all the assets of World Health Edmonton to be transferred to World Health North LP for no or insufficient consideration and with the intent to delay, hinder or defraud creditors and others of their just and lawful actions, suits, debts and damages against World Health Edmonton Inc. [ 24 ] Specifically, it is alleged that the defendants transferred assets to prevent the plaintiff from collecting on any judgment in the Lease Action and have thereby acted in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of the plaintiff. [ 25 ] The plaintiff pleads and relies upon the Statute of Elizabeth , 13 Eliz. 1, c.5 in that the transfer of assets was a fraudulent conveyance. [ 26 ] In the alternative, the plaintiff pleads and relies upon the Fraudulent Preferences Act , RSA 2000, c.

F-24 in that the transfer of assets was a fraudulent preference. [ 27 ] In the further alternative, by sheltering the assets of World Health Edmonton Inc from judgment enforcement in the Lease Action, the defendants have been unjustly enriched, with a corresponding deprivation to the plaintiff and with no juristic reason for the enrichment. [ 28 ] The remedy sought in the second action included the remedy sought in the Lease Action, as well as a declaration that the transfer of World Health Edmonton Inc assets to World Health North LP is oppressive and unfairly prejudicial to the plaintiff, that it is a fraudulent conveyance, or in the alternative a fraudulent preference.

Additionally, the plaintiff sought an order directing World Health North LP and International Fitness Holdings Inc to hold the transferred assets in trust for any judgment enforcement by the plaintiff in this second action and in the Lease Action. [ 29 ] The plaintiff produced its affidavit of records in the second action.

The affidavit of records is identical to the affidavit of records produced by the plaintiff in the Lease Action, with the addition of the corporate and tradename searches. [ 30 ] The defendants have produced their affidavit of records but have refused to include the Asset Purchase Agreement between World Health Edmonton Inc and World Health North LP dated March 29, 2018 and the other documents produced inadvertently in the Lease Action. [ 31 ] Having set out the factual background, I will describe the applications before me, the grounds upon which the applications are brought and the positions of the parties.

The Applications [ 32 ] In its Amended Application, the plaintiff seeks a further and better affidavit of records from the defendants and that this action be tried at the same time or immediately after the related Lease Action. Relevant and material records under the control of the defendants have been omitted from its affidavit of records, including the Asset Purchase Agreement.

The two actions have a common question of facts and arise from the same transaction and the series of occurrences. [ 33 ] In response to the application for a further and better affidavit of records, the defendants apply for an order striking the plaintiff’s statement of claim, or for an order for security for costs. [ 34 ] The defendants allege this second action is a duplicative action concerning the exact same lease, the exact same alleged tenant default and the exact same amounts claimed to be owing.

The record production of the plaintiff in this action comprises the exact same records as was produced by the plaintiff in the Lease Action, with the addition of the searches obtainable from public sources. [ 35 ] The defendants submit the duplicative action is merely an attempt by the plaintiff to improperly obtain prejudgment disclosure and a transparent attempt to obtain prejudgment relief as against the defendants . This second action is improper and deserving of sanction; it is not an action brought in good faith but is a repetition of the Lease Action and, as such, it should be struck.

In the alternative, security for costs should be ordered as a means by which the court may control its processes, particularly where those processes are being used for improper purposes. [ 36 ] The plaintiff submits that the second action is not duplicative of the Lease Action as it deals with events and defendants which were not known to the plaintiff at the time the Lease Action was commenced. The claim for fraudulent conveyance is not premature and therefore the action is not an improper claim for prejudgment relief.

The action is not defective and therefore security for costs is not warranted. [ 37 ] The plaintiff provides the affidavit of Nancy Jarnevic filed March 9, 2020 in support of its application for the production of records. Ms. Jarnevic was questioned on her affidavit on March 12, 2020.

The transcript of questioning and the exhibits entered were filed and available for this application. [ 38 ] The plaintiff provides the affidavits of Oraska Tam in response to the application to dismiss the statement of claim. [ 39 ] Underlying the grounds set out in the application to strike this action, is the defendants’ position that it is completely improper for plaintiff’s counsel to be relying upon a record that was inadvertently disclosed , which was created after the material time and which is completely unrelated to the contractual relationship under the lease.

The Asset Purchase Agreement does not exist to the plaintiff; their Counsel cannot and must not make use of it.

[ 40 ] Counsel for the plaintiff says that may be so for a lawyer who erroneously comes into possession of a privileged communication. No privilege has been claimed over these records, rather the claim is that the documents are not relevant. It was not obvious that the Asset Purchase Agreement was inadvertently disclosed at the time he reviewed the documents.

Counsel submits that failure to act on the information he learned from the inadvertent disclosure would involve the sacrifice of his client’s rights. [ 41 ] Having considered the facts, the nature of the applications and the grounds upon which they are brought, I have identified the issues that require further analysis. Rule 3.68 [ 42 ] The defendants’ application to strike the plaintiff’s statement of claim falls under rule 3.68 of the Alberta Rules of Court . The court may order that all or any part of a claim be struck out or that a commencement document or pleading be set aside.

The conditions for the order include that a commencement document or pleading discloses no reasonable claim, is frivolous, irrelevant or improper , or constitutes an abuse of process. 3.68

(1) If the circumstances warrant and a condition under subrule (2) applies, the Court may order one or more of the following: (

a) that all or any part of a claim or defence be struck out; (

b) that a commencement document or pleading be amended or set aside; (

c) that judgment or an order be entered; (

d) that an action, an application or a proceeding be stayed.

(2) The conditions for the order are one or more of the following: (

a) the Court has no jurisdiction; (

b) a commencement document or pleading discloses no reasonable claim or defence to a claim; (

c) a commencement document or pleading is frivolous, irrelevant or improper; (

d) a commencement document or pleading constitutes an abuse of process; (

e) an irregularity in a commencement document or pleading is so prejudicial to the claim that it is sufficient to defeat the claim.

(3) No evidence may be submitted on an application made on the basis of the condition set out in subrule (2)(b). The Issues [ 43 ] The conditions for an order to strike out or set aside a statement of claim frame the arguments made by Counsel and can be used to identify the following three issues. [ 44 ] Issue 1. Does the statement of claim disclose a reasonable claim or does it merely seek disclosure and remedies prior to judgment in the Lease Action? [ 45 ] Issue 2.

Is the statement of claim improper because it is based on facts gained from inadvertent disclosure of records that were not relevant in the Lease Action? [ 46 ] Issue 3. Does the statement of claim constitute an abuse of process because this second action is duplicative of the Lease Action? [ 47 ] Once the defendants’ application to strike the plaintiff’s statement of claim is decided, the other relief sought for disclosure, trial of the actions, and security for costs fall into place. These are identified as 3 further issues. [ 48 ] Issue 4.

Must the defendants disclose the Asset Purchase Agreement and related documents as being relevant and material to the action? [ 49 ] Issue 5. Should the Lease Action and this action be tried at the same time? [ 50 ] Issue 6. Should the plaintiff be required to post security for costs? [ 51 ] I will address the first three issues identified then turn to the other remedies sought. Issue 1.

Does the statement of claim disclose a reasonable claim or does it merely seek disclosure and remedies prior to judgment in the Lease Action? [ 52 ] Whether a claim should be struck pursuant to r 3.68, “essentially comes down to a determination of whether the pleadings reveal a reasonable cause of action.” If the statement of claim discloses a reasonable claim, there is a serious point of law to be considered and “it is difficult to conceive of how such a claim might be considered scandalous, frivolous, vexatious, embarrassing or an

abuse of process.” See Decock v Alberta, 2000 ABCA 122 at paragraphs 61-63, citing Cerny v Canadian Industries Ltd, (AB CA), [1972] 6 W.W.R. 88 (Alta. S.C.A.D.) at 95 [Decock]. [53] The test for striking out pleadings is set out by the Supreme Court of Canada in R v Imperial Tobacco Canada Limited, 2011SCC 42 at paras 17-21.

At paragraph 17, the Court summarizes the test as: “A claim will only be struck if it is plain and obvious,assuming the facts pleaded to be true, that the pleading discloses no reasonable cause of action… the claim has no reasonable prospect ofsuccess”. [54] The defendants submit this action does not disclose a reasonable separate cause of action from the Lease Action.

It is aduplicative action and merely an attempt by the plaintiff to improperly obtain prejudgment disclosure and to obtain prejudgment relief asagainst the defendants. [55] Counsel for the defendants points out that the plaintiff’s officer, Nancy Jarnevic acknowledged during cross examination onher affidavit that this action was started as an attempt to obtain prejudgment relief: “As I understand it, we are asking for the assets to beheld. So we’re not asking for compensation through the second action.

We’re just asking that the assets not be sold again or moved againuntil the first action has been resolved by the courts.” [56] Counsel for the defendants submits this does not support a separate claim, but rather confirms the plaintiff’s attempt atobtaining prejudgment relief such as a preservation order under rule 6.25 or an attachment order under s. 17 of the Civil Enforcement Act,RSA 2000, c. C-15.

He submits that if the facts and grounds exist, the proper process would be to bring these applications in the LeaseAction. [57] Counsel for the plaintiff says he is not seeking prejudgment relief; he has commenced this separate action against thedefendants for a fraudulent conveyance intended to prevent collection on any judgment the plaintiff may obtain. Further the granting of ajudgment is not a requirement for the purposes of enforcing against property where a fraudulent conveyance is alleged.

He relies on rule9.24, and in particular, rule 9.24(3), which provides for fraudulent preferences and fraudulent conveyances: 9.24(1) If a judgment creditor claims to be entitled to relief under the Fraudulent Preferences Act or under the Fraudulent ConveyancesStatute, 13 Eliz. I,

Chapter 5 (U.K.), on application by the judgment creditor, the Court may order property or part of property to be soldto pay the amount to be collected under a writ of enforcement.

(2) Notice of the application must be served on (

a) the judgment debtor, and (

b) the person to whom it is alleged the property was conveyed.

(3) If a transfer or conveyance is made to defeat, defraud or hinder the rights of a judgment creditor, the judgment creditor, for thepurpose of obtaining an order under subrule (1), need not have obtained judgment at the time of the impugned transfer or conveyance. [58] Counsel for the plaintiff argues that the purpose of the Fraudulent Conveyances Statute, 13 Eliz. I,

Chapter 5 (U.K.),commonly referred to as the Statute of Elizabeth, is to strike down conveyances which are made for the purpose of defrauding creditors.Claims for fraudulent conveyance may be made by “creditors and others”. The plaintiff need not have been granted judgment to havestanding as a creditor, rather, the plaintiff is entitled to make a claim for fraudulent conveyance notwithstanding that the underlyingaction is still pending.

See Proprietary Industries Inc v Workum, 2005 ABQB 610 [Proprietary Industries] at paragraphs 13, 15 and 16. [59] Further, because the plaintiff is seeking judgment for liquidated damages in the Lease Action, the damages amount to a“debt” as contemplated by the Statute of Elizabeth, the plaintiff has standing as a “creditor” and is entitled to bring a claim for fraudulentconveyance. This action is not an abuse of process merely because judgment has not yet been granted. See Krumm v McKay, 2003ABQB 437 paragraphs 28 through 30. [60] I agree with the submissions of counsel for the plaintiff.

It is proper and prudent for the plaintiff to commence this action atthis time. [61] In Proprietary Industries, Justice Kent quotes from Krumm v McKay in finding that a plaintiff does not need to be a judgmentcreditor before availing itself of either the Statute of Elizabeth or the Fraudulent Preferences Act.

At paragraph 15, Kent J states: “In fact,given the risk of the property in question be transferred again beyond the reach of the creditor before the creditor obtained judgment, itmakes more sense to interpret the Act broadly… PPI has pled the Act … and is entitled to make its claim even though it does not yethave judgment against Mr. Workum.” [62] Similarly, at paragraph 16, Kent J states: “With respect to the Fraudulent Preferences Act, … an

interpretation which gives abroad meaning to the word “creditor” accords with the general commercial understanding of the term. Moreover, as stated above,requiring PPI to wait until its claim against Mr. Workum is perfected would give a hollow remedy to PPI if Ms. Workum chose totransfer the property in such a manner that would defeat PPI’s claim against her.” [63] The statement of claim filed in this action discloses a reasonable claim by the plaintiff against the defendants.Notwithstanding the acknowledgement of Ms.

Jarnevic during cross-examination, this action is not merely an attempt to obtainprejudgment relief or prejudgment disclosure. [64] This action is against a defendant, World Health North LP, that did not exist at the time the Lease Action was filed. Thestatement of claim alleges a fraudulent transfer of assets from World Health Edmonton Inc and its principals, David Hardy and BlakeMacDonald that occurred after the Lease Action was filed. [65] The pleadings fall within those contemplated by rule 9.24(3). A judgment creditor need not have obtained judgment at the

time of the impugned transfer or conveyance to seek relief where a transfer or conveyance is made to defeat, defraud or hinder the rights of a judgment creditor. [ 66 ] The courts have allowed judgment creditors and others to plead their claim under the Fraudulent Preferences Act or under the Fraudulent Conveyances Statute , 13 Eliz. I,

Chapter 5 (U.K.) prior to judgment, while the underlying action is still pending. See Krumm v McKay and Proprietary Industries . [ 67 ] In the prayer of relief, paragraph 19 of the statement of claim, the plaintiff does seek an order directing the defendants to hold the transferred assets in trust for any judgment enforcement by the plaintiff in this action and in the Lease Action. This is the reference to which Ms. Jarnevic responded that: “ We’re just asking that the assets not be sold again or moved again until the first action has been resolved by the courts.” An application for such an order, or indeed under rule 9.24, rule 6.25 or

section 17 of the Civil Enforcement Act , would constitute prejudgment relief, however, to focus on that claim ignores the rest of the pleadings. [ 68 ] Pursuant to rule 3.68(3), no evidence may be considered on an application to strike based on the condition that the pleadings disclose no reasonable claim. It is obvious from the facts set out in paragraphs 9 through 13 of the statement of claim, that the plaintiff pleads and relies upon the Statute of Elizabeth , 13 Eliz. 1, c.5 in claiming that the transfer of assets was a fraudulent conveyance; the Fraudulent Preferences Act , RSA 2000, c.

F-24 in claiming that the transfer of assets was a fraudulent preference; and the doctrine of unjust enrichment in claiming that the assets were sheltered from judgment enforcement. The caselaw supports these pleadings as giving rise to a reasonable claim. [ 69 ] In addition to seeking an order directing the transferred assets be held in trust, the plaintiff seeks a declaration that the transfer of World Health Edmonton Inc assets to World Health North LP is oppressive and unfairly prejudicial to the plaintiff, that it is a fraudulent conveyance, or in the alternative a fraudulent preference.

I find these pleadings to also give rise to a reasonable claim. [ 70 ] Issue 1: Does the statement of claim disclose a reasonable claim or does it merely seek disclosure and remedies prior to judgment in the Lease Action? [ 71 ] Answer 1: The statement of claim does disclose a reasonable claim. It is not plain and obvious that this action merely seeks disclosure and remedies prior to judgment in the Lease Action.

The defendants have not met the burden of showing the action has no reasonable prospect of success. [ 72 ] Where the statement of claim discloses a reasonable claim “it is difficult to conceive of how such a claim might be considered scandalous, frivolous, vexatious, embarrassing or an abuse of process” ( Decock ).

However, rule 3.68 does provide for the striking of claims that are “frivolous, irrelevant or improper”. [ 73 ] Counsel for the defendants protests that it is completely improper for the plaintiff to be relying on the knowledge gained from a record that was inadvertently disclosed regarding the transfer of assets from World Health Edmonton Inc to World Health North LP. It is this transfer of assets that is alleged to be fraudulent, therefore, the statement of claim is also improper and ought to be struck. Issue 2.

Is the statement of claim improper because it is based on facts gained from inadvertent disclosure of records that were not relevant in the Lease Action? [ 74 ] Counsel for the defendants cites the Law Society of Alberta Code of Conduct [the Code ] rule 7.2-13 regarding inadvertent communications: A lawyer who comes into possession of a privileged communication of an opposing party must not make any use of it and must immediately advise the opposing lawyer or opposing party. [ 75 ] The commentary sets out that lawyers may receive privileged communications from opposing counsel through inadvertence; immediately upon realizing that the communication is a privileged communication, the lawyer shall not continue to read the communication, but shall return it or destroy it, without copies having been made.

Knowledge that a communication is not intended for the lawyer receiving it will be imputed if, under the circumstances, it would have been unreasonable for the lawyer to come to any other conclusion. The Code says this rule does not otherwise address the legal duties of a lawyer who has inadvertently or inappropriately received privileged communications or the remedies available to the party who seeks to assert privilege over the communications. [ 76 ] Counsel for the plaintiff argues rule 7.2-13 applies to a lawyer who comes into possession of a privileged communication, not irrelevant documents.

He cites the Code rule 7.2-3 in justifying his use of the information to protect his client. Rule 7.2-3 states: A lawyer must avoid sharp practice and must not take advantage of or act without fair warning upon slips, irregularities or mistakes on the part of other lawyers not going to the merits or involving the sacrifice of a client’s rights. [ 77 ] The commentary says this rule is directed at sharp practice. It becomes operative when two elements are present: an obvious mistake by opposing counsel, and a benefit flowing from that mistake to which the lawyer’s client is clearly not entitled.

An act or omission by another lawyer that appears questionable but that may have involved conscious exercise of judgment is not a mistake of the kind contemplated by this rule. A client has no legal entitlement to a benefit created solely through error.

The examples given relate to clerical or arithmetical error, such that it would be improper for a lawyer to knowingly proceed, for example, on an incorrect statement of adjustments or a transfer that misdescribes the property. [ 78 ] Counsel for the plaintiff says it was not obvious, nor could it be imputed, that the listing and provision of the Asset Purchase Agreement and other documents was inadvertent or unintended rather than a conscious exercise of judgment on the part of Counsel for the defendants. [ 79 ] Once advised he had received these documents inadvertently, Counsel for the plaintiff returned them.

However, he had read

them and later provided details from the Asset Purchase Agreement to Ms. Tam for the purpose of her affidavit. [ 80 ] Counsel for the plaintiff says he had no choice but to act on the information. As a result of the disclosure of the Asset Purchase Agreement on February 15, 2019, the discoverability principle was triggered and the clock on the two-year limitation period to bring a fraudulent conveyance action started running. By the time a judgment is reached in the Lease Action, any action for fraudulent transfer or conveyance would be time-barred.

Counsel for the defendants tried to assure Counsel for the plaintiff, during the application, that he would not later raise the limitation defence based on the timing of the inadvertent disclosure. [ 81 ] Regardless of the concerns of Counsel for the plaintiff, Counsel for the defendants reiterates that the Asset Purchase Agreement does not exist to the plaintiff; the information cannot be used. The statement of claim that flowed from the inadvertent disclosure is improper and should be struck.

Counsel for the defendants submits that the plaintiff had no independent knowledge of the impugned transaction. [ 82 ] Ms. Jarnevic deposed in her affidavit that she is aware of the transaction concerning the defendants as reported in the Edmonton Journal online article. On questioning, Ms. Jarnevic confirmed that she is unaware of the details of the transaction, how much was paid, or what consideration World Health Edmonton Inc received as a consequence of the transaction. Further, Ms.

Jarnevic had not personally reviewed the Asset Purchase Agreement described in her affidavit; any information she had was information that was relayed to her by plaintiff’s Counsel. [ 83 ] Ms. Oraska Tam, a senior asset manager responsible for managing the Baseline Village Mall, swore affidavits on behalf of the plaintiff in opposition to the defendants’ application to strike the statement of claim.

It is deposed that the plaintiff commenced this action for fraudulent conveyance after learning that World Health Edmonton Inc sold all of its assets to World Health North LP, rather than to International Fitness Holdings Inc as reported in the Edmonton Journal online article. A copy of the Certificate of Limited Partnership for World Health North LP is attached as an exhibit to the affidavit.

Also attached as an exhibit is the portion of the transcript of the questioning of David Hardy where he admits that World Health Edmonton Inc is an inactive company and that it no longer operates World Health locations throughout the Edmonton area. [ 84 ] The Tam affidavit provides further specific details taken from the Asset Purchase Agreement itself. Ms. Tam acknowledges that those details are based on information received from plaintiff’s Counsel. On behalf of the plaintiff, Ms.

Tam states “I believe that the sale of the World Health Edmonton Inc assets was not an arm’s length transaction and that it is intended to frustrate and defeat the plaintiff’s ability to enforce a judgment in its favour in the related Action No 1703 22745.” [ 85 ] Counsel for the defendant referred to caselaw regarding inappropriate use of inadvertently disclosed documents in arguing that the principles enunciated should apply to this situation.

It is improper for the plaintiff to rely on information disclosed in the Asset Purchase Agreement inadvertently provided with the defendants’ draft affidavit of records. [ 86 ] Counsel for the plaintiff seeks to distinguish the cases on the basis they deal with confidential or privileged information or obviously mistaken disclosure. [ 87 ] Unlike the cases cited by the defendants, where disclosure was clearly made in error, the document in question was provided by Mr.

Hardy to his Counsel, reviewed by Counsel, numbered, described, and listed as the first producible document in the draft affidavit of records. [ 88 ] Counsel for the plaintiff submits that it was not until the eve of questioning that the defendants' Counsel decided the Asset Purchase Agreement should not be disclosed based on relevancy. The decision to produce it was consciously made rather than a mistake and the defendants are now attempting to resile from that decision. Meanwhile, the plaintiff’s rights have been affected and this lawsuit had to be commenced.

Preventing reliance by Counsel for the plaintiff on the Asset Purchase Agreement would involve a sacrifice of the plaintiff’s rights, which is a clear exception under the relevant

section of the Code. [ 89 ] I agree with Counsel for the defendants. The disclosure of the Asset Purchase Agreement was inadvertent. It is not a relevant document producible in the Lease Action and its contents cannot be acted upon. Considering the Code of Conduct and the following caselaw, it would be improper for Counsel for the plaintiff to use the information he obtained from the draft affidavit of records to sue the defendants. [ 90 ] The plaintiff has no proprietary right to the information that was inadvertently disclosed to their Counsel .

See Anderson Exploration Ltd v Pan-Alberta Gas Ltd , 1998 ABQB 455 at paragraphs 9 , 12 and 13. [ 91 ] In Firemaster Oilfield Services Ltd v Safety Boss (Canada)

(1993) Ltd , 2000 ABQB 932 , a lawyer obtained copies of documents and a discovery transcript without permission. In limiting their use, Justice R. P. Marceau had this to say in paragraphs 19, 20, 22 and 23, referring to the Anderson case and the decision of Viet, J in Miller v Miller , 2000 ABQB 12 : Madam Justice Romaine considered a situation analogous to this in Anderson Exploration Ltd. v. Pan-Alberta Gas … In that case Nova Corporation inadvertently delivered a binder of highly confidential documents to a law firm that represented parties adverse in interest to a Nova subsidiary in litigation.

The documents were ordered returned to Nova. If ever it was thought to be the law of Alberta that some doctrine of “finders - keepers” applies to negligently or mistakenly lost confidential documents, that case made the contrary clear.

The documents should not have been looked at and should have been returned.… Even though it is arguable that there is privilege attached to the documents obtained, I agree with Veit, J. that even if the Statement of Principle in the Code of Conduct relates to “privileged communications”, the obligation to deal with other lawyers honourably and with integrity can only lead one to the conclusion by analogy, particularly in light of the Code’s commentary, that there is no right to retain improperly obtained documents.… Simply put, it does not require reference to the Code of Conduct to realize that to keep wrongly obtained documents and try to find a legal

way to do so was improper conduct. It was a positive misconduct. [ 92 ] Counsel for the defendants refers to Aviaco International Leasing Inc v Boeing Canada Inc , 2000 Can LII 22777 (ON SC), wherein the Court relied on the fact that disclosure was clearly in error, not on the fact that the information was privileged, to order the return and destruction of the information. The Court also admonished counsel for relying on the mistakenly produced records in a later application to attempt to compel further disclosure, calling this an abuse of process and sharp practice.

Quoting from paragraphs 9 through 13: All of the defendants now seek to expunge from the record of these proceedings every reference to these two letters on the principal ground that their use by counsel for the plaintiffs is an abuse of the process of this Court. I agree that this relief should be granted. The conduct of plaintiffs’ counsel with respect to these letters is, in my view, both improper and unacceptable under their duties and obligations as officers of this court.

It is also inconsistent with the obligations placed on counsel by rule 14 of the Rules of Professional Conduct, commentary 4 of which states, in part: The lawyer should avoid sharp practice, and should not take advantage of or act without fair warning upon slips, irregularities or mistakes on the part of other lawyers not going to the merits or involving the sacrifice of the client’s rights.

Clearly both letters were sent to plaintiffs’ counsel in error.… They then should have returned the letters without keeping any copies of them or, if they reasonably thought that there was an issue as to whether they were entitled to retain the letters, then they ought to have taken immediate steps to seek a ruling from the court on that issue. Instead, plaintiffs’ counsel have placed the letters into the public record of these proceedings and purport to use the letters as the basis for obtaining production of the standstill agreement - an issue that I will turn to shortly.

That behavior is not only wrong, it is unprofessional. As Rose J. said more than 100 years ago in Backhouse v. Bright (1889), 13 P.R. 117 (Ont. Div. Ct.) : To build up a client’s case on the slips of an opponent, is not the duty of a professional man. [ 93 ] Notwithstanding the case law and the position taken by the defendants, I am not prepared to admonish Counsel for the plaintiff - or to strike his client’s pleadings as being improper. It was not obvious these documents were not meant to be seen until recalled as being irrelevant. They were not recalled as being confidential or privileged.

Counsel was placed between a rock and a hard place. Having discovered certain details in the Asset Purchase Agreement, it was clear the plaintiff had a cause of action attributable to the conduct of the defendants and the two-year limitation clock began to tick. Counsel for the plaintiff was able to obtain information from other sources to issue the statement of claim. [ 94 ] Although the impetus for conducting online and corporate searches may have been the inadvertent disclosure, the information obtained from these public records was sufficient, without relying on the details in the Asset Purchase Agreement.

The statement of facts relied on in the statement of claim contains facts disclosed in the media and corporate registry documents. There was a sale of the assets of World Health Edmonton Inc to World Health North LP within months of the plaintiff commencing the Lease Action. A partnership was formed between International Fitness Holdings Inc and World Health North LP for the purpose of operating fitness clubs in Edmonton and the surrounding area. Mr.

Hardy confirmed World Health Edmonton Inc was inactive and no longer operating gym locations in Edmonton. [ 95 ] As I have already concluded, the statement of claim discloses a reasonable cause of action.

It is not improper for the plaintiff to claim that the sale of assets was intended to prevent the plaintiff from collecting on a judgment in the Lease Action or was otherwise a fraudulent transaction. [ 96 ] Issue 2: Is the statement of claim improper because it is based on facts gained from inadvertent disclosure of records that were not relevant in the Lease Action? [ 97 ] Answer 2: The statement of claim is not improper because it is not be based on facts gained solely from inadvertent disclosure of records that were not relevant in the Lease Action.

The statement of facts relied on in the pleadings can be found in information from the public sources and the defendants’ questioning. [ 98 ] The defendants have not met the burden of showing the statement of claim is improper. The circumstances surrounding the use of the inadvertent disclosure of the irrelevant documents do not warrant an order pursuant to rule 3.68 that the pleadings be struck out. [ 99 ] Counsel for the defendants maintains that the duplicative nature of this second action is an abuse of process. Issue 3.

Does the statement of claim constitute an abuse of process because this second action is duplicative of the Lease Action? [ 100 ] The defendants allege this second action is a duplicative action concerning the same lease, the same alleged tenant default and the same amounts claimed to be owing as claimed in the Lease Action.

The record production of the plaintiff in this action comprises the same records as were produced by the plaintiff in the Lease Action, with the addition of the searches obtainable from public sources. [ 101 ] The defendants submit the duplicative action is improper and deserving of sanction; it is not an action brought in good faith but is a repetition of the Lease Action and, as such, it should be struck.

In the alternative, security for costs should be ordered as a means by which the court may control its processes, particularly where those processes are being used for improper purposes. [ 102 ] In other words, the defendants ask that this duplicative action be struck pursuant to rule 3.68 as it constitutes an abuse of process.

[ 103 ] The plaintiff submits that the second action is not duplicative of the Lease Action. It deals with events and defendants which were not known to the plaintiff at the time the Lease Action was commenced. The claim for fraudulent conveyance, prior to judgment in the Lease Action, is not premature or improperly plead in this second action. The action is not defective or an abuse of process and therefore security for costs is not warranted. [ 104 ] I have already found that this action discloses a reasonable separate cause of action from the Lease Action.

I have pointed out that, if the statement of claim discloses a reasonable claim “it is difficult to conceive of how such a claim might be considered scandalous, frivolous, vexatious, embarrassing or an abuse of process” ( Decock ). However, rule 3.68 does provide for the striking of pleadings that “constitute an abuse of process”. This could include filing duplicative claims. [ 105 ] Counsel for the defendants is correct in that there is duplication of pleadings, remedies sought and records produced by the plaintiff in this action when compared to the Lease Action.

However, to focus on the duplication ignores the necessity of repeating much from the statement of facts relied upon in the Lease Action as background to the subsequent claim for fraudulent transfer or conveyance of assets from World Health Edmonton Inc to World Health North LP. It also ignores the reality that the material records relevant to the transfer of assets are in the possession of the defendants, not the plaintiff. [ 106 ] Counsel for the defendants provided two cases to justify the posting of security for costs for abuse of process.

In the case of Dykun v Odishaw , 2000 ABQB 548 , the allegations in plaintiff’s statement of claim were “similar to allegations made in three previous actions filed by the plaintiff”. In the case of Liu v Tangirala , 2005 ABQB 246 , the plaintiff had made “numerous and duplicate applications”. [ 107 ] Counsel for the plaintiff argues that notwithstanding that actions involve similar facts, documentation and parties, the plaintiff is entitled to sue the defendants more than once where wrongful acts give rise to separate causes of action.

See Weatherford Canada Partnership v Addie , 2013 ABQB 25 at paragraphs 21 through 23. [ 108 ] The plaintiff here is not precluded from suing the same defendants twice, first for an alleged breach of the lease agreement and secondly, for a subsequent alleged fraudulent transfer of their assets. [ 109 ] I agree with Counsel for the plaintiff. The defendants have not met the burden of showing the statement of claim is duplicative and therefore an abuse of process.

The circumstances surrounding the duplicated portions of the pleadings do not warrant an order pursuant to rule 3.68 that the pleadings be struck out. [ 110 ] Issue 3. Does the statement of claim constitute an abuse of process because this second action is duplicative of the Lease Action? [ 111 ] Answer 3: The statement of claim does not constitute an abuse of process because the second action is not just a duplication of the Lease Action. [ 112 ] The defendants have not met the high threshold for the striking of the statement of claim as against them.

This action represents a different and new reasonable cause of action against the defendants from that which was pled in the Lease Action; the plaintiff did not improperly rely on inadvertently disclosed irrelevant documents; and the duplication of pleadings is not an abuse of process. Issue 4.

Must the defendants disclose the Asset Purchase Agreement and related documents as being relevant and material to the action? [ 113 ] The plaintiff brought its application pursuant to rule 5.6(1)(b): an affidavit of records must disclose all records that are relevant and material to the issues in the action, and are or have been under the party’s control.

Additionally, the plaintiff relies on rule 3.72 for an order that the Lease Action and this action be tried at the same time as they have common questions of fact and arise out of the same transaction or series of occurrences. [ 114 ] Counsel for the defendants does not disagree that the Asset Purchase Agreement and related documents are relevant to a claim for fraudulent transfer or conveyance in relation to the transfer of assets from World Health Edmonton Inc to World Health North LP.

The disagreement is with the timing of these allegations and the action in which they are plead. [ 115 ] Answer 4: The defendants must disclose the Asset Purchase Agreement and related documents as being relevant and material to this action. Issue 5.

Should the Lease Action and this action be tried at the same time? [ 116 ] The plaintiff relies on rule 3.72 for an order that the Lease Action and this action be tried at the same time as they have common questions of fact and arise out of the same transaction or series of occurrences. [ 117 ] Counsel for the defendants cannot disagree with the two actions being tried at the same time when his position is that this second action is duplicative. The defendants emphasize that this action shares common questions of fact and arises out of the same transactions as the Lease Action. [ 118 ] Issue 5.

Should the Lease Action and this action be tried at the same time? [ 119 ] Answer 5: Yes. I agree with the plaintiff that the actions should be tried at the same time as they have common questions of fact and arise out of the same transactions and series of occurrences.

Issue 6. Should the plaintiff be required to post security for costs? [ 120 ] The defendants seek security for costs, in the alternative to striking the claim, as a discretionary remedy to control the court process from being used for improper purposes. [ 121 ] The defendants cite Dykun v Odishaw , 2000 ABQB 548 and Liu v Tangirala , 2005 ABQB 246 in support of their position. The plaintiffs in those cases had brought numerous duplicative actions or applications to relitigate issues which had been fully decided by the court or otherwise sought relief the plaintiff was not entitled to.

In each case the court ordered significant costs be paid prior to the plaintiff being allowed to either commence any further action or continue with the action already commenced. [ 122 ] The plaintiff responds that the claim for security for costs must fail if the defendants fail to show that the second action was improperly initiated. Furthermore, the plaintiff points out that it has assets in Alberta in the form of the multimillion-dollar shopping centre in Sherwood Park. [ 123 ] I agree with the plaintiff that the nature of this action does not attract costs as a way for the court to control its processes.

The defendants have not made out, and did not argue, the requirements of either s 254 of the Business Corporations Act , RSA 2000, c. B-9 or rule 4.22 of the Alberta Rules of Court for an order that the plaintiff provide security for costs based on an inability to pay or an inability to enforce against assets in Alberta. [ 124 ] Issue 6. Should the plaintiff be required to post security for costs? [ 125 ] Answer 6: No, an order that the plaintiff post security for costs is not warranted. [ 126 ] Having identified and analyzed the issues between the parties, I am able to summarize my conclusions.

Conclusion and Costs [ 127 ] So, what are the consequences of inadvertently disclosing an irrelevant document in a draft affidavit of records? In this case, there were no real consequences to either the defendants or the plaintiff arising from the inadvertent disclosure. [ 128 ] The plaintiff has no proprietary right to the information that was inadvertently disclosed. However, the plaintiff was able to get the information elsewhere to commence this action. The defendants have the right to recall the documents inadvertently disclosed in the affidavit of records in the other action.

However, the defendants now must disclose those same documents in this action. [ 129 ] The impact of the inadvertent disclosure and other issues regarding the striking of pleadings, the production of documents, the trial of the actions and security for costs have been discussed. [ 130 ] In

summary: the statement of claim will not be struck. The documents inadvertently produced in the Lease Action are relevant and material to the issues plead in this action and must be produced by the defendants. The two actions will be tried together.

There will be no order for security for costs. [ 131 ] The defendants’ applications for an order striking the plaintiff’s statement of claim, or alternatively, for an order for security for costs are dismissed. [ 132 ] The plaintiff’s application for an order that the defendants provide a further and better affidavit of records and produce all relevant and material records in its possession and control, including the Asset Purchase Agreement between World Health Edmonton Inc and World Health North LP dated March 19, 2018 previously produced in Action No 1703 22745 is granted. [ 133 ] The plaintiff’s application for an order that the within Action No 1903 13032 be tried at the same time or immediately after the related Action No 1703 22745 is granted. [ 134 ] The plaintiff shall have its costs for the applications and the cross applications, heard concurrently as a half-day Masters’ Special requiring briefs.

If Counsel cannot agree on a bill of costs, they may provide written arguments for my consideration. Heard on the 30 th day of November, 2020. Dated at the City of Edmonton, Alberta this 8 th day of January, 2021. L.R. Birkett M.C.Q.B.A. Appearances:

Kember Handzic Emery Jamieson LLP for the Plaintiff Kenneth W. Fitz McLennan Ross LLP for the Defendants