) ) Todd Family Holdings Inc. v. Future, 2013 ONSC 2461

CITATION : Todd Family Holdings Inc. v. Gardiner, 2013 ONSC 2461 COURT FILE NO.: 76234-11 DATE: 20130426 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: ) ) Todd Family Holdings Inc. and Future Image Holdings Corporation Plaintiffs – and – Roy John William Gardiner, Barefoot Science Technologies Inc., Dayl Marie Armstrong, Barefoot Science Holdings Inc., Barefoot Science Direct Inc., Barefoot Science Group Marketing Inc., and Advanced Barefoot Technologies Inc.

Defendants ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Harishanker Nesathurai and Christopher Statham, for the Plaintiffs Jonathan Rosenstein, for the Defendants ) ) ) HEARD: April 5, 2013 rULING ON MOTIONS bOSWELL J. [ 1 ] This action is set for trial during the spring sittings, commencing May 13, 2013. On April 5, 2013, I heard two motions. The first, brought by the defendants, was to strike out the plaintiffs’ pleadings for failure to comply with a production order made by Glass J. on June 26, 2012 (the “production order”). The second, brought by the plaintiffs, was for leave to revive a motion for

summary judgment on part of the claim. [ 2 ] The parties filed substantial materials for use on the motions. A

summary of the evidentiary record is attached as Appendix “A”. [ 3 ] For the reasons that follow, both motions are dismissed. Overview of the Action [ 4 ] Counsel advised me that there are presently four consolidated proceedings heading for trial during the spring civil trial sittings. I was not provided with the pleadings anywhere in the voluminous motion materials. I understand that at the centre of the lawsuit is a dispute over who has the right to exploit certain patents for shoe insoles.

The patents are registered to one or another of the corporate defendants who, collectively, comprised the Barefoot Science Group of companies. The Barefoot Science Group included Barefoot Science Holdings Inc. (“BSHI”) and a number of its wholly-owned subsidiaries. [ 5 ] Lance Todd is the president of the plaintiff, Future Image Holdings Inc. (“FIHI”) and the trustee of the plaintiff, Todd Family Trust. On behalf of the plaintiffs, he invested more than $1.5 million into the Barefoot Science Group of companies. The parent company, BSHI, is bankrupt.

Perhaps its most significant assets – held directly or indirectly through a subsidiary – are the insole patents. [ 6 ] FIHI purports to be a secured creditor of BSHI by virtue of a General Security Agreement (“GSA”) granted by BSHI in favour of FIHI on May 12, 2005 in the amount of $1,000,000.00. The collateral covered by the GSA includes all intellectual property owned by BSHI or any of its subsidiary companies, including the insole patents. [ 7 ] The individual defendant, Roy Gardiner, is the principal of the Barefoot Science Group. The other individual defendant, Dayl Armstrong, is his spouse.

The legal proceedings between the parties began with a Mareva injunction application brought by the plaintiffs to prevent the individual defendants from dealing with their personal assets or those of the Barefoot Science Group of companies. A rather sweeping Mareva injunction was granted by Sosna J. on July 24, 2009, along with a certificate of pending litigation

over the individual defendants’ personal residence. [ 8 ] The individual defendants sought to vary the terms of the Mareva injunction, but their motion was denied by Mullins J. on April 14, 2011. [ 9 ] At one point the plaintiffs sought, and obtained, an order finding one or more of the individual defendants in contempt of the injunction.

Having been bound for almost four years by a comprehensive injunction and having been found to be in breach of its terms on at least one occasion, the defendants are not surprisingly motivated to ensure that the plaintiffs are called upon to strictly comply with any order affecting them. One such order was made on June 26, 2012 and it is that order – the production order - that gives rise to the principal interlocutory dispute now before the court. [ 10 ] I will examine the parties’ respective motions in turn, beginning with the defendants’ motion to strike.

THE MOTION TO STRIKE The Production Order [ 11 ] The plaintiff, FIHI, has enforced its security interest in the insole patents and has been utilizing the patents to produce and market the Barefoot insole in an effort to recover the amounts outstanding to it. The plaintiffs incorporated a company to do so, naming it Barefoot Science Products and Services Inc. (“BSP”).

There is a dispute between the parties as to whether FIHI has exceeded its authority, whether it has claimed a priority interest in the patents to which it is not justly entitled, and whether it has fully accounted for profits it has made through its exploitation of the patents. Any such profits will naturally reduce the balance owed by the Barefoot Science Group to the plaintiffs. [ 12 ] On June 12, 2012, Glass J. made the production order in favour of the defendants. The order provided, in part as follows: (

a) Lance Todd and FIHI were to produce, on or before August 30, 2012, an accounting of all of the revenues and net profits of BSP and any other numbered companies authorized by FIHI to market the insoles; (

b) Lance Todd and FIHI were to produce any documents, on or before August 30, 2012, that generally accepted accounting principles deem necessary to prepare the accounting referenced in the preceding paragraph; and, (

c) Lance Todd and FIHI were to direct their accountants to provide to the defendants the completed accounting, any draft accounting, copies of their working papers, and instructions they were provided to prepare the accounting, and any backup documents, to the extent any such documents were in the accountants’ possession, control or power. [ 13 ] The production order also included an enforcement provision. Specifically, if the accounting and supporting documents were not provided by August 30, 2012, Justice Glass ordered that the court shall, amongst other things: (

a) Appoint a receiver to take possession of all of the accounting documents; and, (

b) Strike out the plaintiffs’ claims and their defence to the defendants’ counterclaim. Efforts to Comply [ 14 ] There is no doubt that the plaintiffs did not comply with the terms of the production order by August 30, 2012. Indeed, they had provided nothing required by the order as of that date. On August 31, 2012 they provided two notice to reader financial statements for BSP for fiscal years ending July 31, 2010 and July 31, 2011.

The material delivered was grossly deficient in terms of what the order demanded. [ 15 ] The defendants brought a motion to appoint a receiver and to strike the plaintiffs’ pleadings. The motion was originally scheduled for September 14, 2012. It was adjourned to October 2, 2012 to permit the plaintiffs additional time to produce further documentation and evidence of compliance.

On September 21, 2012, Lance Todd provided further information by way of an affidavit and production of a USB memory stick with additional documentation in electronic form. [ 16 ] On October 2, 2012, Glass J. further adjourned the defendants’ motion to permit the plaintiffs to obtain and file an affidavit from their bookkeeper, Marilyn Rath. Ms. Rath’s affidavit was sworn October 17, 2012 and it provided additional information. Further electronic documents were provided on another USB memory stick. Ms. Rath was cross-examined on her affidavit on December 21, 2012. [ 17 ] Prior to the cross-examination of Ms.

Rath, the plaintiffs retained new counsel. Their new counsel, in turn, retained a new accountant, Anthony Finucci, to ensure that the Glass J. order was complied with. By the time the argument of the motion proceeded on April 5, 2012, substantial additional disclosure had been provided. Some ten days before the motion proceeded, Mr. Finucci produced a brief

summary of the plaintiffs’ revenues realized and expenses incurred since they began to market products utilizing the subject patents. Backup documents delivered in support filled four large volumes of material that were filed on the motion. [ 18 ] The question remains, does the disclosure, as provided, satisfy the requirements of the production order? Positions of the Parties [ 19 ] The defendants assert that the plaintiffs have failed to comply with the production order in many respects.

Their forensic accountant has identified numerous areas of deficiencies, principally focussed on the failure of the plaintiffs to produce backup documents to support their accounting, as required in paragraph 2 of the order. In an affidavit sworn November 5, 2012, the defendants’ accountant, Lawrence Rosen, deposed that:

(

a) The backup documents for sales revenue between June 1, 2009 and July 31, 2011 remain largely unsupported by the necessary invoices and banking records; (

b) Sales to Home Shopping Network have mainly not been supported; (

c) Over 90% of the backup expense invoices are still missing; and, (

d) Over 90% of the Account 69800 “uncategorized expenses” remains unsupported. [ 20 ] The defendants maintain that the deficiencies identified by Mr. Rosen persist and that the plaintiffs, now almost a year after the production order was made, have failed to comply with it. [ 21 ] The plaintiffs submit that the order has been complied with. They acknowledge that the records are not perfect, but say that they have produced everything they are capable of producing. Discussion [ 22 ] There is reason to be concerned about compliance for a number of reasons, which include the following: (

a) The first “attempt” at compliance was embarrassingly weak. In no way could counsel, or the plaintiffs for that matter, have reasonably thought that they were even close to complying with the order when they sent over two notice to reader financial statements, with no supporting documentation or working papers from their accountants; (

b) The explanation given for the weak first response is not comforting. What I am able to discern from more recent disclosure is that the plaintiffs have reported revenues from the sale of insoles utilizing the patents of almost $1 million since they began to enforce their security. The plaintiffs filed an affidavit from their bookkeeper, Marilyn Rath, in which she noted that the plaintiffs did not even utilize a proper bookkeeping program for the first two years after they began to sell insoles using the patented technology.

A major part of the delay in compliance with the order appears to be due to the fact that she had to establish Quickbooks accounts, and then enter two years’ worth of data. It is remarkable that the plaintiffs, knowing that they were enforcing their security, knowing that they were involved in litigation concerning the collateral, and knowing that they were going to have to account for their sales, would not have had impeccable bookkeeping practices from the outset; (

c) The plaintiffs had Ms. Rath sign an affidavit, as I have noted. It is dated October 17, 2012. In the affidavit she stated, at paragraph 13, that she believes the only information missing during her preparation of the Quickbooks files is some documentation from TD Bank relating to wire transfers, bank drafts and cheques. But during her cross-examination on the affidavit, she said that she did not write the affidavit and was never comfortable with paragraph 13. To paraphrase her, she never did feel comfortable that the TD documents were the only information missing because of, amongst other things, the very unorganized state of the plaintiffs’ books; and, (

d) The defendants filed two affidavits from their forensic accountant who reviewed the materials provided by the plaintiffs as and when they came in. Mr. Rosen has outlined numerous deficiencies in the materials and I accept that such deficiencies have existed and may persist to date. [ 23 ] An order striking a pleading is discretionary in nature. The discretion must be exercised carefully and with restraint because the result is profound when pleadings are struck.

It means the end of one party’s participation in the action, and quite possibly the end of the action itself, without a determination on the merits. [ 24 ] The defendants assert that the court’s usual discretion is fettered in this instance, given the specific wording of the production order.

Paragraph 4 of the order provided for enforcement provisions that Justice Glass said shall be imposed in the event of non- compliance. [ 25 ] Interpreting the production order as entirely fettering the court’s discretion on the matter of striking pleadings, would seem to me to be contrary to the court’s primary obligation, which is to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits: Rule 1.04 of the Rules of Civil Procedure . [ 26 ] The defendants made extensive reference in their factum to the Court of Appeal’s recent decision in 1196158 Ontario Inc. v. 6274013 Canada Ltd ., 2012 ONCA 544 , [2012] O.J.

No. 3877. That case involved an appeal of an order made at a status hearing dismissing an action for delay. The defendants argue that the principles discussed in the case are apposite; that there comes a point in time when a litigant must be held accountable for non-compliance with deadlines, notwithstanding the severe consequences that may flow from such accountability. [ 27 ] In 1196158 Ontario , Sharpe J.A. discussed the need for courts to balance two fundamental principles. Firstly, that civil actions should be, wherever possible, decided on their merits.

Secondly, that the rules of procedure (as well as court orders) should be respected and enforced, lest their aims be undermined and their effectiveness gutted. The balancing of these principles was performed at paragraph 19 of the decision, where Sharpe J.A. said as follows: Time lines prescribed by the Rules of Civil Procedure or imposed by judicial orders should be complied with. Failure to enforce rules and orders undermines public confidence in the capacity of the justice system to process disputes fairly and efficiently. On the other hand, procedural rules are the servants of justice not its master.

We must allow some latitude for unexpected and unusual contingencies that make it difficult or impossible for a party to comply. We should strive to avoid a purely formalistic and mechanical application of time lines that would penalize parties for technical non-compliance and frustrate the fundamental goal of resolving disputes on their merits. As Laskin J.A. stated in Finlay v.

Paassen , 2010 ONCA 204 , 101 O.R. (3d) 390 , at para. 14 : "the Rules and procedural orders are construed in a way that advances the interests of justice, and ordinarily permits the parties to get to the real merits of their dispute." [ 28 ] The defendants take the position that the production order was a “last chance” order, that it has not been complied with, that

no unexpected and/or unusual contingencies exist, and that, essentially, the jig is now up. [29] I do not agree that the production order was a classic “last chance” order. But nothing turns on that issue. There are insteadtwo reasons why I am not prepared to grant the relief requested by the defendants. [30] First, I am not satisfied that the plaintiffs have failed to comply with the order. I am satisfied that their initial attempts atcompliance fell well short. I am further satisfied that their record-keeping has been well short of acceptable in the circumstances.

But, atthe very least, they have been making earnest attempts to comply. This is not a case where they are wilfully refusing to comply, or wherethey are being inattentive or negligent. Their record-keeping has been poor and they may not be in a position to completely support allof the figures in their accounting. That will ultimately be their risk at trial. [31] Given the extent of materials the plaintiffs have produced, I am satisfied that there has been, if not perfect compliance, at leastsubstantial compliance with the letter and intent of the production order.

In light of the plaintiffs’ efforts, and the material disclosed, theintegrity of the order, and public confidence in the administration of justice generally, will not be brought into question if the plaintiffs’pleadings are not struck at this point. [32] Viewed from another perspective, the onus is on the moving party to demonstrate that the plaintiffs have failed to complywith the production order and that their pleadings ought to be struck in the result.

I am not satisfied, particularly in view of the materialsdelivered in the four volume supplemental responding record delivered just prior to the argument of the motions, that the defendants havemet that onus. [33] Second, I am of the view that it is appropriate to take a purposive approach to the question of compliance. The purpose of theorder is at least twofold. First, in terms of the debtor-creditor relationship between the parties, the defendants are entitled to know whatrevenues the plaintiffs have generated from the collateral (the patents) in reduction of their debt.

Second, as a matter of trial fairness, andin accordance with the rules governing documentary discovery, the defendants are entitled to disclosure of relevant documents bearing onthe issues raised in the litigation, insofar as those documents are in the possession, control or power of the plaintiffs. [34] I am satisfied that the productions made by the defendants meet the purposes for which the disclosure was ordered. That isnot to say that the plaintiffs’ position is not open to challenge.

I have every expectation that the defendants will mount a vigorouschallenge to the accuracy and reliability of the accounting provided. Where documents are incomplete or insufficient, negativeinferences may be drawn or negative conclusions reached by the trial judge. The defendants now have, however, sufficientdocumentation from the plaintiffs that they are able to prepare for trial and for an informed challenge to the plaintiffs’ position. [35] The defendants’ counsel urged me not to look at the issue as one better left to the trial judge. But there are two separate issuesin play.

The first is whether production has been sufficient to meet the requirements of the production order. The second is whether theproduction is sufficient to support the plaintiffs’ litigation position. I am satisfied, for reasons I have expressed, that the first issue isresolved in the plaintiffs’ favour. The second issue is yet to be resolved and is clearly a matter for the trial judge. [36] In the result, I am not prepared to strike the plaintiffs’ pleadings and the defendants’ motion is dismissed. THE MOTION FOR LEAVE [37] The plaintiffs ask for leave to revive their motion for

summary judgment. The plaintiffs sought a determination, by way ofsummary judgment, declaring that they hold a valid and subsisting security interest in the insole patents, together with a declaration thattheir security interest has priority over any similar interest in favour of Roy Gardiner and/or Dayl Armstrong. [38] The plaintiffs’ motion was originally returnable in the spring of 2012, but adjourned sine die and then the action wassubsequently listed for trial. [39] I am not prepared to give the plaintiffs leave to revive their motion at this time for the following reasons: (

a) As a practical matter, the motion cannot be accommodated prior to the trial date, which is set for about three weeks fromnow. The motion would, in my view, require more than one hour to argue and will need a special appointment date, which cannotreasonably be accommodated prior to trial; (

b) In the event that the motion could have been accommodated and adjudicated prior to the date fixed for trial, there wouldinevitably be a successful party and an unsuccessful party at the end of the motion. The prospect of an appeal would arise and an appealmay very well have the effect of derailing the trial; (

c) Rule 48.04 of the Rules of Civil Procedure provides that any party who has consented to a matter being placed on the triallist is precluded from initiating or continuing any form of motion or discovery without leave of the court. Granting leave is adiscretionary remedy, to be exercised having regard to the general principle set out in rule 1.04, the content of which I set out above: seeKernohan v. York (Municipality), . In exercising its discretion, the court will be concerned principally about trialfairness. Here, there are no concerns about trial fairness raised in relation to the argument of the

summary judgment motion; and, (

d) I am not satisfied that the hearing of the

summary judgment motion will significantly simplify or shorten the trial. It is animportant issue, but one that will take up relatively little trial time in terms of evidence. [40] In the result, the plaintiffs’ motion is dismissed. Costs [41] If the parties are unable to agree on the costs of the motion, they may address me in writing, on a 14 day turnaround. Thedefendants’ cost submissions shall be submitted by May 10, 2013 and the plaintiffs’ by May 24, 2013. Submissions should not be more

than 2 pages in length, not including any costs outline, and shall be delivered via email through my assistant at jennifer.beattie@ontario.ca . Boswell J. Released: April 26, 2013 Appendix “A” Records Reviewed 1. Defendants’ Motion Record, dated September 4, 2012; 2. Responding Motion Record of the Plaintiffs, dated September 12, 2012; 3. Supplemental Responding Motion Record, dated September 21, 2012; 4. The Defendants’ Supplemental Motion, dated September 28, 2012; 5. Supplement Responding Record, dated October 1, 2012; 6. Affidavit of Marilyn Rath, sworn October 17, 2012; 7.

Second Supplemental Motion Record of the Defendants, dated December 4, 2012; 8. Transcript of the cross-examination of Marilyn Rath, dated December 21, 2012; 9. Plaintiffs’ Motion Record, dated April 5, 2013; and, 10. Plaintiffs’ Four Volume Supplemental Motion Record, dated April 5, 2013.