Boone v. Medusa Medical Technologies Inc., 2011 NSSC 492

SUPREME COURT OF NOVA SCOTIA Citation: Boone v. Medusa Medical Technologies Inc., 2011 NSSC 492 Date: 20111028 Docket: Hfx No. 352947 Registry: Halifax Between: Peter Boone and Loren Bough Applicants/Respondents v. Medusa Medical Technologies Inc. Respondent/Applicant LIBRARY HEADING Judge : The Honourable Justice Allan P. Boudreau Heard: October 25, 2011, in Halifax, Nova Scotia Oral Decision: October 28, 2011 Written Decision: January 11, 2012 Subject: Civil Procedure - Applications versus Actions - Motions to Convert - Nova Scotia Civil Procedure Rule 6 .

Summary: The Applicants, Peter Boone (“Boone”) and Loren Bough (“Bough”) hold some $2.5 million dollars worth of debentures issued by the Respondent, Medusa Medical Technologies Inc. The debentures have matured and Medusa has failed to pay the

principal and interest amounts owing. Boone and Bough are taking steps to attempt to secure payment of their debentures by means of an application to this Court. Medusa says that Boone and Bough’s attempt to enforce their debentures at this time and in this manner constitutes breaches of the agreements governing the debentures and that therefore the application cannot proceed under the present circumstances. Medusa further claims that the alleged breach by Boone and Bough has caused it to suffer damages and it wants to counterclaim against Boone and Bough.

In fact, Medusa has commenced a separate action against Boone and Bough, alleging breach of contract and resulting economic losses. Medusa has now moved to have the Boone and Bough application to enforce their debentures converted into an action. The intent being that once that occurs this proceeding and the separate action for damages commenced by Medusa will be consolidated into one action with Boone and Bough as plaintiffs and Medusa as defendant and plaintiff by counterclaim. Boone and Bough vigorously oppose the motion by Medusa to convert their initial application into an action.

Issue: Factors for the Court to consider on a Motion to Convert. Result: Dismissed the Motion of Medusa to convert as it had failed to satisfy the Court, on a balance of probabilities, that an application was not appropriate. Costs awarded to Respondents. THIS INFORMATION SHEET DOES NOT FORM PART OF THE COURT'S DECISION. QUOTES MUST BE FROM THE DECISION, NOT THIS LIBRARY SHEET . SUPREME COURT OF NOVA SCOTIA Citation: Boone v. Medusa Medical Technologies Inc., 2011 NSSC 492 Date: 20111028 Docket: Hfx No. 352947 Registry: Halifax Between: Peter Boone and Loren Bough Applicants/Respondents v.

Medusa Medical Technologies Inc. Respondent/Applicant

Judge: The Honourable Justice Allan P. Boudreau. Heard: October 25, 2011, in Halifax, Nova Scotia Written Decision: January 10, 2012 Counsel: Alexander Cobb, for the Applicants/Respondents Roderick (Rory) H. Rogers, Q.C., for the Respondent/Applicant By the Court : INTRODUCTION [ 1 ] The Applicants, Peter Boone (“Boone”) and Loren Bough (“Bough”) hold some $2.5 million dollars worth of debentures issued by the Respondent, Medusa Medical Technologies Incorporated.

The debentures have matured and Medusa has failed to pay the principal and interest amounts owing. [ 2 ] Boone and Bough are taking steps to attempt to secure payment of their debentures by means of an application to this Court.

Medusa says that Boone and Bough’s attempt to enforce their debentures at this time and in this manner constitutes breaches of the agreements governing the debentures and that therefore the application cannot proceed under the present circumstances. [ 3 ] Medusa further claims that the alleged breach by Boone and Bough has caused it to suffer damages and it wants to counterclaim against Boone and Bough.

In fact, Medusa has commenced a separate action against Boone and Bough, alleging breach of contract and resulting economic losses. [ 4 ] Medusa has now moved to have the Boone and Bough application to enforce their debentures converted into an action. The intent being that once that occurs, this proceeding and the separate action for damages commenced by Medusa will be consolidated into one action with Boone and Bough as plaintiffs and Medusa as defendant and plaintiff by counterclaim. Boone and Bough vigorously oppose the motion by Medusa to convert their initial application into an action.

BACKGROUND [ 5 ] Medusa is a body corporate registered pursuant to the laws of the Province of the Nova Scotia and it is in the business of creating and developing software and other technology solutions for the healthcare industry. [ 6 ] Mr. Boone is a resident of London, England and he holds a PHD in economics from Harvard University and he has been lecturer at the London School of Economics and an investment banker and he is presently the Chair of a charity based in the U.K. called Effective Intervention. Mr.

Bough is a resident of Big Sky, Montana, USA. [ 7 ] In 2006, Medusa issued certain secured debentures with a maturity date of June 30, 2010. This maturity date was subsequently extended to January 14, 2011, by agreement of the parties. Mr. Boone and Mr. Bough hold 2006 debentures in the

principal amounts of $1,500,000.00 and $500,000.00 respectively. [ 8 ] In 2008, Medusa issued further debentures with a maturity date of January 31, 2012. Mr. Boone and Mr. Bough hold 2008 debentures in a principal amounts of $375,000.00 and $125,000.00 respectively. [ 9 ] January 14, 2011, being the extended maturity date for the 2006 debentures, has come and gone and Boone and Bough have not been paid.

Moreover, the debentures contain an acceleration clause in the event of default and Boone and Bough are seeking repayment of the 2008 debentures as well. [ 10 ] Boone and Bough have demanded payment of all of the principal and interest amounts owing under both the 2006 and 2008 debentures and these amounts remain unpaid. Medusa does not dispute that the amounts remain unpaid. [ 11 ] In an effort to secure repayment of the debts owing to them, Boone and Bough have commenced an application in this court, requesting four avenues of relief as outlined in paragraphs (a), (b), (

c) and (

d) of the Notice of Application filed on July 25, 2011. These are: (

a) a judgment for all amounts owing under the debentures; (

b) the appointment of a receiver; (

c) in the alternative , the appointment of a receiver pursuant to the Third

Schedule of the “Companies Act” by reason of alleged “oppressive” conduct on the part of Medusa; and (

d) costs. [ 12 ] Medusa has contested the Boone and Bough application, alleging that they are barred from pursuing such enforcement procedures by virtue of the clear and unambiguous language contained in the Debenture Agreements signed by the parties. Medusa says the agreements provide clear steps in the event of an alleged default. [ 13 ] Both the 2006 and 2008 Debenture Agreements contain the following clauses: 2.2 Enforcement of Security 2.2.1 Each Debentureholder shall give immediate written notice to the other Debentureholders of the following: (

a) the occurrence of an event of default or a default under any Debenture held by it or under any of its Security; or (

b) any action taken by it for any reason to accelerate payment of any indebtedness evidenced by any Debenture held by it; or (

c) its desire to commence enforcement proceedings under or in respect of any Debenture held by it or under or in respect of any of its Security.

2.2.2 No Debentureholder shall commence enforcement proceedings under or in respect of any Debenture without the express written consent of the holders of not less than Sixty percent (60%) of the then aggregate outstanding principal amount issued under the Debentures. 3. EXERCISE OF REMEDIES 3.1 Appointment of Enforcement Committee In the event one or more Debentureholders is authorized in accordance with 2.2.2 to commence proceedings to enforce its Security, which shall only occur after such Debentureholder(

s) receives the express written consent of the holders of not less than Sixty percent (60%) of the then aggregate outstanding principal amount issued under the Debentures, the Debentureholders shall, subject to applicable law and within ten (10) days following the forwarding of a Notice of Commencement of Enforcement, meet and appoint a committee (the “ Enforcement Committee ”) to supervise, direct and carry out the security enforcement proceedings, which actions may include directing the sale of the assets and undertaking of the Company as a going concern, the appointment of a receiver, receiver and manager or a receiver-manager (herein referred to as the “Receiver” ) under the Debentures and the Security, the instruction of such Receiver and/or the exercise of any other rights or remedies provided for under the Debentures and/or Security.

The Debentureholders shall appoint one member of the Enforcement Committee as the secretary of the Enforcement Committee and shall set the initial time and place for the first meeting of the Enforcement Committee, which first meeting shall be held no later than seven (7) days following the appointment of the Enforcement Committee. The Enforcement Committee shall be compromised of not more than five (5) persons and shall include one nominee appointed by CICI, one nominee appointed by InNOVAcorp, one nominee appointed by TVC, one nominee appointed by Boone and one nominee appointed by Bough.

Each Debentureholder covenants and agrees to respect and comply with decisions of the Enforcement Committee and to use its best efforts to cause its nominee to the Enforcement Committee to attend at all meetings of the Enforcement Committee. [ 14 ] Medusa alleges that Boone and Bough do not have the expressed written consent of the holders of at least 60% of the aggregate outstanding principal amount of debentures; and that, therefore, Boone and Bough are contractually barred from taking any enforcement action.

Medusa has stated that, to the contrary, 66% of the holders of the aggregate outstanding principal amount of debentures have agreed to extend the maturity date of their debentures and that these are not yet due. [ 15 ] Medusa further alleges that even if Boone and Bough were not barred from taking enforcement steps in the present circumstances, then such enforcement steps would have to be in accordance with

section 3 of the Debenture Agreements, “Exercise of Remedies”, and in particular clause 3.1, which I have just read, which mandates any enforcement to be effected by way of the “Enforcement Committee”. [ 16 ] Boone and Bough contest Medusa’s

interpretation of the pertinent clauses of the Debenture Agreements and say that they are not barred from taking steps to secure repayment of their past due debentures by way of an application to this court. [ 17 ] Boone and Bough further allege that the conduct of Medusa with regard to repayment of their debentures amounts to “oppression” and they seek a remedy pursuant to the Third

Schedule of the “ Companies Act ”. While Boone and Bough have made an allegation of “oppression” by Medusa, they have not provided any details of this allegation to this point in time; although it should be noted that affidavits have not yet been filed in the initial application of Boone and Bough.

That application was preempted by Medusa’s “Motion to Convert” it into an action pursuant to the Nova Scotia Civil Procedure Rules . [ 18 ] Medusa has also commenced a separate action against Boone and Bough, alleging that their initial application is an attempt at enforcement in violation or in breach of clauses 2.2.2 and 3.1 of the Debenture Agreements. Medusa claims it has suffered or that it will suffer damages or losses because of contracts it may have lost due to the enforcement application of Boone and Bough.

It is alleged that some of the contracts bid on by Medusa contain a clause requiring Medusa to warranty that it is not being sued for alleged claims by third parties. [ 19 ] It is important to note that Medusa indicates that it may be up to a year before it can ascertain if it has in fact suffered such losses and before any losses could begin to be quantified.

[ 20 ] I would summarize the position of the parties as follows.

SUMMARY OF THE POSITIONS OF THE PARTIES [ 21 ] Boone and Bough maintain that their application should be allowed to continue because converting it to an action will protract proceedings indefinitely, denying them their right to a timely determination of their claim. [ 22 ] They maintain that their application is basically one of interpreting the contract documents. They also maintain that the Third

Schedule of the “Companies Act ” contemplates claims of “oppression” being commenced by application in order to achieve a just and timely determination.

They also maintain that by combining their application with an as yet undeterminable and speculative claim by Medusa will deny them their right to a timely determination on the question of repayment of their debentures. [ 23 ] They see their application as basically an issue of simply determining liability for and enforceability of their debentures, which decision could be determinative of all of the proceedings between the parties. [ 24 ] Medusa, on the other hand, maintains that Boone and Bough’s application is more complicated then might initially appear.

They say that Boone and Bough intend to lead “extrinsic” evidence on the meaning and

interpretation of the Debenture Agreements. It says this will involve countless and yet unascertained witnesses. Medusa also maintains that the claim of “oppression” is, at present, a moving target without details and will likely further render the proceedings complex and, by nature, more protracted than professed by Boone and Bough. [ 25 ] Moreover, Medusa maintains that if the matter continues as an application, it will not be able to advance a counterclaim in that proceeding and it will be forced to continue with its separate action for damages for the alleged breach of the Debenture Agreements.

It says this will entail two separate proceedings with many of the same issues, witnesses and evidence, and possible conflicting decisions. [ 26 ] Medusa maintains that there should only be one proceeding, namely an action with a claim from Boone and Bough, with a defence and counterclaim by Medusa.

AUTHORITIES AND ANALYSIS [ 27 ] The governing authority for Medusa’s motion to convert the within application to an action is found in Nova Scotia Civil Procedure Rule 6, which provides as follows: Choice of proceeding 6.01 A person may choose to start an action or an application as the person is satisfied would be appropriate, unless legislation under which the proceeding is started requires only one kind of proceeding. Converting action or application 6.02

(1) A judge may order that a proceeding started as an action be converted to an application or that a proceeding started as an application be converted to an action.

(2) A party who proposes that a claim be determined by an action, rather than an application, has the burden of satisfying the judge that an application should be converted to an action, or an action should not be converted to an application.

(3) An application is presumed to be preferable to an action if either of the following is established: (

a) substantive rights asserted by a party will be eroded in the time it will take to bring an action to trial, and the erosion will be significantly lessened if the dispute is resolved by application; (

b) the court is requested to hold several hearings in one proceeding, such as with some proceedings for corporate reorganization.

(4) An action is presumed to be preferable to an application, if the presumption in favour of an application does not apply and either of the following is established: (

a) a party has, and wishes to exercise, a right to trial by jury and it is unreasonable to deprive the party of that right; (

b) it is unreasonable to require a party to disclose information about witnesses early in the proceeding, such as information about a witness that may be withheld if the witness is to be called only to impeach credibility.

(5) On a motion to convert a proceeding, factors in favour of an application include each of the following: (

a) the parties can quickly ascertain who their important witnesses will be; (

b) the parties can be ready to be heard in months, rather than years; (

c) the hearing is of predictable length and content; (

d) the evidence is such that credibility can satisfactorily be assessed by considering the whole of the evidence to be presented at the hearing, including affidavit evidence, permitted direct testimony, and cross-examination.

(6) The relative cost and delay of an action or an application are circumstances to be considered by a judge who determines a motion to convert a proceeding. Evidence for converting an application 6.03

(1) A party who makes a motion to convert an application to an action must, by affidavit, provide all of the following: (

a) a description of the evidence the party would seek to introduce; (

b) the party’s position on all issues raised by the application; (

c) disclosure of all further issues the party would raise by way of either a notice of contest, if the proceeding remains an application, or a statement of defence, if the proceeding is converted to an action.

(2) Despite Rule 6.03(1), a party who wishes to withhold disclosure of evidence the party will produce only to impeach a witness need not describe the evidence, or the investigations to be undertaken to obtain the evidence. [ 28 ] Civil Procedure Rule 6.01 makes it clear that it is the initiating party who chooses the method of proceeding, ie., application or action, which it “is satisfied would be appropriate”. Rule 6.02(2) clearly places the burden of satisfying the judge that an application is not the appropriate means of proceeding on the party advancing that proposition.

Therefore, the burden of satisfying me of such proposition, on a balance of probabilities, rests with Medusa in this instance. [ 29 ] Rule 6.03 provides a list of the items of evidence which must be provided by way of affidavit on a motion to convert. While the parties have complied with this requirement, the affidavit evidence in this regard, as provided by both parties, is rather sketchy and very speculative in many aspects. There is a dearth of detail on the evidence, especially the witnesses the parties would introduce.

While Rule 6.03(1) places the burden on the moving party to provide the Court with that evidence or information in its affidavits with respect to its intended evidence; it would seem to me that the responding party must also do its best to provide the same information in its affidavit or affidavits. Otherwise, the Court only gets one portion of the entire picture. [ 30 ] Rule 6.02(3) provides a presumption in favour of an application if the court finds that either of the two things enumerated are established.

The first is a finding that substantive rights asserted by a party will be eroded in the time it will take to bring an action to trial and that an application will significantly lessen that erosion. [ 31 ] In the instant case, Boone and Bough maintain that the passage of time will significantly diminish their ability to secure payment of the amounts owing under their Debentures because it will at the same time significantly diminish Medusa’s ability to pay those Debentures. [ 32 ] Medusa has stated in the affidavit of Mr.

Glen Dexter that ongoing legal claims against it will cause the company to potentially lose contracts on which it is bidding or on which it intends to bid. I am therefore satisfied that a lengthy court battle over Boone and Bough’s claims would significantly erode their substantive rights and the ability to secure repayment of their Debentures from Medusa. As things presently stand, more Debentures will mature next year. [ 33 ] Rule 6.02(3)(

b) provides for another presumption in favour of an application if the Court will be requested to hold several hearings in one proceeding. While this Rule gives one example of such hearings, it is by no means clear what would qualify as such hearings. In the present case, it is anticipated that there will be a Motion for Directions if the matter proceeds as an Application. There may also be Motions for Production of Documents or for the ordering of discoveries of some of the parties or witnesses. But these, if they occur, should be minor. Therefore, on the face of it, I am satisfied that the presumption outlined in Rule 6.03(

b) would also apply. [ 34 ] Rule 6.03(4) provides presumptions in favour of an action if the presumptions in favour of an application outlined in Rule 6.03(3) do not apply. Although I have found that the presumptions in Rule 6.03(3) do apply, I would have no hesitation in finding that presumptions in favour of an action found in Rule 6.03(4) do not apply. [ 35 ] Notwithstanding the above, that is not the end of the analysis. Rule 6.03(5) provides other factors in favour of an application and which the Court can consider in deciding whether the presumptions favourable to an application found in Rule 6.03 should carry the day. [ 36 ] The first such factor is found in sub-clause (

a) of Rule 6.03(5). It is whether the parties can quickly ascertain who their important witnesses will be. It is noteworthy that the term (witnesses) has been qualified with the adjective, important . There are very few “key players” involved in the determination of Boone and Bough’s application.

Medusa says that the allegation of “oppression” complicates the matter to such an extent that it is not possible to determine who the parties’ witnesses will be because we have no details of this allegation. [ 37 ] As I stated, there are very few important or “key players” involved in both issues raised by Boone and Bough’s application. I am satisfied the important witnesses can be quickly ascertained. Moreover, the Third

Schedule of the “Companies Act” , provides for commencing allegations of “oppression” by means of an application. Although the latter is not determinative or binding on the Court, I

am not satisfied that, at this stage of the proceedings, an application is not appropriate for an allegation of “oppression”. [ 38 ] Sub-clause (

b) of Rule 6.03(5) asks whether the parties can be ready to be heard in months rather than years. There is very little doubt but that Boone and Bough’s initial application can be heard in months rather than years. The issue that will necessarily drag the proceedings to years is the intended counterclaim by Medusa for as yet undeterminable, possible or potential economic losses allegedly caused by Boone and Bough’s enforcement application. [ 39 ] Medusa maintains that if Boone and Bough’s application is not converted to an action, it will be forced to continue with its separate action for those alleged damages.

On the other hand, the Boone and Bough application can be heard in months and is potentially determinative of both proceedings on the question of possible liability on the part of Boone and Bough.

If it is not, then Medusa can continue with a separate action for damages, which, according to Medusa’s evidence, will not be ready to proceed in any meaningful way for a year and I would presume substantially longer than that. [ 40 ] This is a prime case for determining any possibility of liability on the part of Boone and Bough at the earliest possible stage and that can best be accomplished in an application which may decide that issue. [ 41 ] Medusa raises the possibility of conflicting decisions on the question of the legality of Boone and Bough’s application if separate proceedings are maintained.

In my view, that is very unlikely because there would be a strong argument that “issue estoppel” would prevail. In fact, the most likely parties who would possibly want to re-litigate that issue would be Boone and Bough and they have acknowledged in these proceedings that “issue estoppel” would apply to any subsequent proceedings questioning the legality of their enforcement application. [ 42 ] While the possibility of discoveries has been raised, that would require the permission of the court and the need for those is not apparent at this time. In any case, they would probably be minimal.

I am satisfied the parties can be ready in months. [ 43 ] Another factor enumerated in Rule 6.03(5) is clause (c), which asks whether the hearing is of predictable length. Contrary to what some of the parties have alluded to in this motion, I am of the view that the hearing should be predictable. It would appear at this stage that the hearing could proceed primarily by way of affidavit evidence and cross examinations. The issues are very straight forward. With appropriate directions, the hearing should be of predictable length. [ 44 ] Sub-clause (

d) of Rule 6.03(5) raises the question of credibility and whether it can be satisfactorily assessed in an application, which would proceed primarily by way of affidavit evidence and cross examination and possibly limited direct testimony. In my view, the application of Boone and Bough is primarily document driven and it will require a minimum assessment of credibility.

If there are such issues, I am satisfied that they can be satisfactorily assessed in the context of the initial application as that proceeding is envisaged at this time. [ 45 ] Rule 6.03(6) provides other circumstances to be considered by the Court in a motion such as this one. These are the relative costs and delay associated with the two different modes of proceeding.

There can be no question that an action as intended by Medusa will significantly increase the costs of determining the initial issue in these proceedings; which issue is “the legality” of Boone and Bough’s enforcement application. [ 46 ] On the other hand, the issue of damages or economic losses allegedly suffered by Medusa, as a result of Boone and Bough’s enforcement application, will be much more time consuming and costly then the application to determine the legality of Boone and Bough’s initial application.

This issue will of necessity cause extensive delays in finalizing an action involving such a counterclaim. CONCLUSION [ 47 ] In conclusion, I have considered all of the evidence presented, the applicable Civil Procedure Rules , the jurisprudence referred to me and the able and helpful submissions by counsel for the parties and I am not satisfied that the initial application of Boone and Bough should be converted to an action at this time.

[ 48 ] The moving party, Medusa, has failed to meet its burden of proving such a proposition on a balance of probabilities. The motion of Medusa is therefore dismissed. [ 49 ] Having said that, court proceedings are a live and fluid thing. It is not always possible to predict, with any degree of certainty, how future events may unfold. However, court directions after a motion for such can go a long way to make future events more predictable and more certain.

That certainly appears to be the case in these proceedings. [ 50 ] If matters should unfold in a direction which indicates that an application is no longer appropriate, I believe it is always open to a party to bring forth a new motion to convert an application which has gone awry into an action. COSTS [ 51 ] Boone and Bough shall have their costs on this motion on a party and party basis.

If the parties cannot agree on such costs, which I strongly urge them to attempt, I will entertain written submissions from Boone and Bough and Medusa on or before November 18, and December 2, 2011, respectively. [ 52 ] I will grant an Order accordingly, prepared by counsel for Boone and Bough and consented as to form by counsel for Medusa. Boudreau, J.