Date: 20061002
Docket: T-56-06
Citation: 2006
FC 1169
Toronto, Ontario, October 2,
2006
PRESENT: The Honourable Mr. Justice Campbell
BETWEEN:
HELI TECH SERVICES (CANADA) LTD. and
CORPORACION LA CAMPANA DE LA VILLA S.A.
and
PHILIP JARMAN
Plaintiffs
and
WEYERHAEUSER COMPANY LIMITED /
COMPAGNIE WEYERHAEUSER LIMITÉE and
CASCADIA FOREST PRODUCTS LTD. and
ISLAND TIMBER CONTRACTING LTD. and
TIMBERWEST FOREST CORP. and
BRASCAN TIMBERLANDS MANAGEMENT GP INC.
and
550777 B.C. LTD. OPERATING AS “R.E.M.
CONTRACTING” and
CANADIAN AIR-CRANE LIMITED and
VIH LOGGING LTD. and
INTERNATIONAL FOREST PRODUCTS LIMITED
Defendants
REASONS FOR ORDER AND ORDER
CAMPBELL J.
[1]
In the present action, the Plaintiffs (Heli
Tech, La Campana, and Jarman) are suing substantial forest industry companies
for infringing a patent claiming protection for an innovative method of logging
by helicopter. Given that the Defendants’ estimated costs of litigation are at
least $750,000, the Defendants brought a motion for security for costs before
Prothonotary Lafrenière.
[2]
The Prothonotary found that the Defendants had
discharged their evidentiary burden under Rule 416(1)(a) of the Federal
Court Rules with respect to La Campana and Jarman, and under Rule 416(1)(b)
with respect to Heli Tech. In addition, the finding was made that the
Plaintiffs had discharged their burden under Rule 417 to prove their claim has
merit, with the result that, in order to avoid the posting of security, the
Plaintiffs were required to prove, on a balance of probabilities, that each of
them are impecunious. These findings are not contested.
[3]
The Prothonotary found that the Plaintiffs had
not proved their impecuniosities, and, accordingly, made an order in the
Defendants’ favour. In the present Appeal from the Prothonotary’s order, the
Plaintiffs argue that the Prothonotary erred in principle and in a
misapprehension of fact. For the reasons which follow, I do not agree.
A. Legal
considerations before the Prothonotary
1. The rationale behind the introduction of impecuniosity
under Rule 417
[4]
The jurisprudence supports the Rule in providing
access to justice even though a litigant might be required to pay security for
costs but is unable to do so:
Justices of this
court have stated that care should be taken in exercising a power to order
security for costs to ensure that the order does not deprive an appellant of
his right to appeal (Phoenix Transportation Consultants Ltd. v. Pacific
Freightways Ltd., [1989] B.C.J. No. 2189);
…‘the general
rule is that poverty is no bar to a litigant’. The power to require security
for costs ought not to be used so as to bar even the poorest man from the
courts…(Kropp v. Swaneset Bay Golf Course Ltd., [1997] B.C.J. No. 593
quoting from the leading English decision Pearson v. Naydler, [1977] 3
All E.R. 531 at para.16; and
There can be no
question that an injustice would result if a meritorious claim were prevented
from reaching trial because of the poverty of a plaintiff. If the consequence
of an order for costs would be to destroy such a claim no order should be
made. Injustice would be even more manifest if the impoverishment of plaintiff
were caused by the very acts of which plaintiff complains in the action (John
Wink Ltd. v. Sico Inc., [1987] O.J. No. 5).
2. The meaning of impecuniosity
[5]
A line of authority places a heavy onus of proof
on any party seeking to avoid posting security for costs on the basis of
impecuniosity.
[6]
In Fortyn v. Canada (T.D.), [2000] 4 F.C.
184 at paras. 19-20, Justice Lemieux found that Rule 417 codifies common law
principles:
As to impecuniosity, Teitlebaum J. in Ferguson v. Arctic
Transportation Ltd. et al. (1996), 118 F.T.R. 154 (F.C.T.D.), stated at
paragraphs 17-18 [page 158]:
After verifying the facts as to the plaintiff’s financial situation,
I am satisfied there is no merit to the allegation that the plaintiff is
impecunious. The New Shorter Oxford English Dictionary on Historical
Principles (Oxford: Clarendon Press, 1993) defines the word “impecunious” as “in
need of money, poor, penniless”. The American [193] Heritage Dictionary
defines the word “impecunious” as “lacking money – penniless”. The word
“impecunious” is an adjective to denote someone who is “poor” or “impoverished”
or “needy”.
In Ontario, this concept was explained by the High Court in Smith
Bus Lines Ltd. v. Bank of Montreal (1987), 61 O.R. (2d) 688 in the
following terms at pages 704-705:
….The corporate plaintiff wishing to be allowed to proceed with its
action, without either showing sufficient assets or putting up security, must
first show “impecuniosity” meaning not only that it does not have sufficient
assets itself but also that it cannot raise the security for costs from its
shareholders and associates, partly because the courts do not want a successful
defendant to be effectively deprived of costs where, for example, wealthy
shareholders have decided to carry on business and litigation through a shell
corporation. To go the impecuniosity route the plaintiff must establish by
evidence that it cannot raise security for costs because, if a private company,
its shareholders have not sufficient assets. As expressed by Reid J. in John
Wink Ltd. v. Sico Inc. (1987), 57 O.R. (2d) 705 at p. 709, 15 C.P.C. (2d)
187: “If an order for security stops a plaintiff in its tracks it has disposed
of the suit.” To raise impecuniosity there must be evidence that if
security is required the suit will be stopped – because the amount of the
security is not only not possessed by the plaintiff but is not available to it…
[Emphasis added]
[7]
Other cases in this line of authority are as
follows:
….the plaintiff
must demonstrate that it and its shareholders cannot sell assets, borrow or
otherwise raise the funds to post security: Shadows v. Travelers Canada Corp.
(1990), 40 C.P.C. (2d) 118 (Ont. H.C.J.) (Guirmag Investments v. Milan,
[1999] O.J. No 3262 at para.2);
….the
enquiry about available security should go beyond the plaintiff, and should
include the creditors or shareholders, or whoever else is pressing for and
might benefit from the suit (Sylvester Import &
Export Enterprises Ltd. V. Re/Max Real Estate Ltd., [1993] A.J. No.
91); and
However,
the court should consider not only whether the plaintiff company can provide
security out of its own resources to continue the litigation, but also whether
it can raise the amount needed from its directors, shareholders or other
backers or interested persons. As this is likely to be peculiarly within
the knowledge of the plaintiff company, it is for the plaintiff to satisfy the
court that it would be prevented by an order for security from continuing the
litigation (see Flender Werft AG v Aegean Maritime Ltd [1990] 2 Lloyd's Rep
27). In that case Saville J. applied by way of analogy the approach adopted in
another context, that of payment into court as a condition of leave to defend.
In M V Yorke Motors (a firm) v Edwards [1982] 1 All ER 1024 at 1028, [1982] 1
WLR 444 at 449, 450 Lord Diplock approved the remarks of Brandon LJ in the
Court of Appeal:
“The
fact that the man has no capital of his own does not mean that he cannot raise
any capital; he may have friends, he may have business associates, he may have
relatives, all of whom can help him in his hour of need” (Keary Development v. Tarmac Construction, [1995] 3 All E.R. 534).
[Emphasis
added]
[8]
As to the evidence required to prove
impecuniosity, a high standard is expected; frank and full disclosure is
required. That is, the onus must be discharged with “robust particularity”, so
that “there be no unanswered material questions (Morton v. Canada (Attorney General) (2005), 75 O.R. (3d) 63 (S.C.J.) at para.32).
B. The
Plaintiffs’ corporate structure
[9]
Heli Tech is an Alberta corporation, Jarman is the inventor of the Standing Stem Harvesting
System (the Harvesting System) patented in 1988 (the Harvesting Patent), and La
Campana is a corporation duly organized and existing under the laws of Costa Rica. La Campana is a family owned
corporation owned by Jarman, his wife and children.
[10]
On the evidence supplied by the Plaintiffs,
Jarman assigned all his rights, title and interest in the Harvesting Patent to
a trust, Boaz International (Boaz) in February 1999, and were subsequently
assigned from Boaz to La Campana in May 2002 which is presently the registered
owner of the Harvesting Patent. In May 2002, La Campana licensed the
Harvesting Patent to Heli Tech.
[11]
James King (King), the president of Heli Tech,
formed the corporation in 1997 for the purpose of developing the Harvesting
System, patenting it, and purchasing the exclusive licence to the system. King
has supplied substantial financial backing to Heli Tech’s activities. On the
evidence, each of Heli Tech, King, Jarman, and La Campana has over the years
worked hard to advance the Harvesting System as a viable commercial product.
[12]
Heli Tech is owned by three shareholders:
seventy per cent is owned by Parcatamm Financial, a family trust beneficially
owned by King’s wife and two children; twenty per is owned by Ed Johnson who
was an employee of Heli Tech; and ten per cent of Heli Tech is owned by the Alberta company 570410 BC.
C. The
decision under review
[13]
The arguments and evidence before the
Prothonotary were extensive and related to the Plaintiffs, Heli Tech’s
shareholders, and the financial backers of the Harvesting System and the
present litigation. In the result, the Prothonotary’s specific reasons for
granting the motion for security for costs are as follows:
However, in
order to benefit from the provisions of Rule 417, the Plaintiffs were also
required to establish impecuniosity on a balance of probabilities. I am not
satisfied that they have done so. In my view, the Plaintiffs have failed to
make full and frank disclosure of their income, expenses, assets and debts, and
have also concealed the true relationship between them, and the identity of
other persons or entities backing this litigation. On the evidence before me,
I can only conclude that the Plaintiff, Heli Tech, is simply a corporate shell
used as a vehicle to funnel profits or monies to undisclosed principals, and
designed to avoid liability for the Defendants’ costs.
To repeat, the
onus was on the Plaintiffs to establish their impecuniosity. Yet, no evidence
was adduced to demonstrate that the Plaintiff, Corporacion La Campana de la
Villa S.A. (La Campana) is “in need of money, poor, penniless”. To the
contrary, La Campana appears to be a company with substantial assets since it
was able to borrow approximately $600,000 from the Plaintiff, Heli Tech,
between March 2003 and May 2005. Moreover, it is unclear whether those loans were
ever repaid by La Campana, and if so, what exactly Heli Tech did with the
funds.
Moreover,
although the Plaintiff, Philip Jarman, claims that he was only added as party
[sic] because, as the patentee, he was required to be named as a plaintiff under
section 55(3) of the Patent Act, the evidence before me suggests
otherwise. Mr. Jarman admitted in cross-examination that he was able to raise
$200,000 to fund the present litigation. Such behind-the-scene fundraising is
at odds with Mr. Jarman’s professed role as a nominal plaintiff. Moreover, Mr.
Jarman’s success in obtaining funds from one source is indicative that there
are other potential sources of financing.
Although the
Court ultimately retains the discretion to refuse security for costs, the Plaintiffs
have failed to establish that this is a proper case to exercise my discretion
in their favour.
(Decision,
pp.3-4)
[14]
The
Prothonotary ordered security for costs in the
aggregate amount of $90,000 up to the end of discoveries with liberty to apply
for more as the litigation progresses, costs on the motion in the sum of
$21,500, and a stay of the present action until the Plaintiffs post the
security for costs and pay the costs of the motion. The security for costs and
motion costs are the subject matter of the present Appeal. The Prothonotary also made an
order amending the pleadings which was also included in the present Appeal, but
was abandoned by Counsel for the Plaintiffs during the course of the hearing.
D. The
standard of review
[15]
A high degree of deference is to be paid to a
Prothonotary’s order.
[16]
In Trevor Nicholas Construction Co. v. Canada (Minister of Public Works), [2006] F.C.J. No. 861 at para.3, Justice Phelan examines when a
court should disturb a discretionary decision of a Prothonotary ordering the
posting of security for costs:
Canada v.
Aqua-Gem Investments Ltd. (C.A.), [1993] 2 F.C. 425; [1993] F.C.J. No.
103 (QL) holds that discretionary orders of prothonotaries ought not to be
disturbed on appeal to a judge unless (a) they are clearly wrong, in the sense
that the exercise of discretion by the prothonotary was based upon a wrong
principle or upon a misapprehension of facts, or (b) they raise questions vital
to the final issue of the case.
Prothonotary
Lafrenière’s decision is a discretionary one. The issue of security for costs
does not itself raise a question vital to the final issues of the case. The
finding as to impecuniosity deals with the issue of whether an order for costs
would effectively end the litigation.
The prothonotary
properly considered the law; that Rule 416 sets out the criteria for security
for costs and places the burden of proof on the party seeking the order. There
is no issue here that the Defendant established the necessary criteria under
the Rule. The Plaintiff has three cost orders totalling $14,239.54 in favour
of the Defendant which remain unpaid.
The prothonotary
then properly considered the law under Rule 417; that the onus shifted to the
Plaintiff to establish that a security order should be refused on the grounds
that the Plaintiff is impecunious and that the case has some merit.
The
prothonotary, for the purposes of the motion, accepted that the case had
merit. The Plaintiff should not have interpreted this anything other than the
fact that the Prothonotary believed that the motion could be decided on the
issue of impecuniosity without having to engage in a debate about the merits of
the case.
In deciding that
the Plaintiff had not established impecuniosity, Prothonotary Lafrenière was
not satisfied with the nature and quality of the evidence concerning the
corporation’s financial condition. He had serious questions about the state of
the financial records, the intermingling of the director’s and the company’s
funds and the manner in which the funds were disbursed. He also dismissed the
contention that the Defendant had delayed in bringing the security for costs
motion. In the end he refused to exercise his discretion in the Plaintiff’s
favour.
It is my
conclusion that Prothonotary Lafrenière did not
misapprehend the facts. The Plaintiff is arguing that the interpretation and
conclusions from those facts are wrong. I cannot find any error but, more
importantly, those interpretations and conclusions were within Prothonotary
Lafrenière’s discretion.
[Emphasis added]
[17]
With respect to reviewing findings of fact in an
appeal such as this, in Housen v. Nikolaisen, [2002] 2 S.C.R. 235 at
paras.1 and 23, the Supreme Court of Canada states the standard of review:
A proposition that should be
unnecessary to state is that a court of appeal should not interfere with a
trial judge's reasons unless there is a palpable and overriding error. The
same proposition is sometimes stated as prohibiting an appellate court from
reviewing a trial judge's decision if there was some evidence upon which he or
she could have relied to reach that conclusion.
[…]
If there is no palpable and
overriding error with respect to the underlying facts that the trial judge
relies on to draw the inference, then it is only where the inference-drawing
process itself is palpably in error that an appellate court can interfere with
the factual conclusion. The appellate court is not free to interfere
with a factual conclusion that it disagrees with where such disagreement stems
from a difference of opinion over the weight to be assigned to the underlying
facts. As we discuss below, it is our respectful view that our
colleague's finding that the trial judge erred by imputing knowledge of the
hazard to the municipality in this case is an example of this type of
impermissible interference with the factual inference drawn by the trial judge.
[Emphasis added]
E. Application
of the standard of review to the decision under appeal
[18]
The issue of security for costs is not vital to
the action. Therefore, I agree with Counsel for the “Island Defendants”
(Island Timberlands, Brascan, and Weyerhaeuser) that the issue in the present
Appeal is as follows:
Was it open to
the Prothonotary to draw the inference that the plaintiffs had not established
on a balance of probabilities that they were impecunious; that is, that they
and the persons who through them have a stake in the outcome of the litigation
were all penniless, poor, impoverished and needy and could not contribute or
raise additional funds?
(Responding
Motion Record of the Island Defendants, p.9)
Only if the answer
to the question is “no”, will I exercise my discretion to consider the
Defendants’ motion. I do not so find.
[19]
It is evident from the decision that the
Prothonotary was not impressed with the evidence presented by the Plaintiffs on
the motion, which, on my examination of the evidence, is an opinion he was
entitled to reach.
[20]
Prothonotary Lafrenière is an experienced
Prothonotary, and it is clear to me that he was alive to the line of authority
quoted above in rendering his decision. While the Prothonotary’s reasons are
brief, in my opinion they reflect a firm understanding of the factors to be
taken into consideration in reaching a decision on the motion for security for
costs. That is, the decision reflects a concern for the function and financial
means of each Plaintiff, as well as the existence of and financial means of
shareholders or backers of the Plaintiffs.
[21]
It is admitted that the creation of the
interrelationships between the Plaintiffs is part of a legitimate tax avoidance
strategy to advance the Harvesting System. On the evidence, Heli Tech is
presently a “shell” in that, except for holding licence rights to the
Harvesting Patent, it has no assets. In my opinion, the finding made by the
Prothonotary with respect to Heli Tech is consistent with these facts and is,
therefore, a finding well within his discretion to make.
[22]
The Prothonotary’s conclusion that La Campana
and Jarmen are not nominal litigants is, in my opinion, a conclusion that he
was entitled to reach given the evidence of the course of conduct of each in
supporting the activities and interests of Heli Tech.
[23]
It is agreed that the Prothonotary was not
correct in his statement of the direction of the flow of the funds between La
Campana and Heli Tech. However, I find that this error of fact does not
constitute a palpable and overriding error capable of upsetting the decision.
[24]
The Plaintiffs, King, and Johnson, argue that
they just do not have sufficient resources to post security. However, there is
evidence on the record that they do have means, and that potential backers
exist that do have means. Therefore, I find it was within the Prothonotary’s
discretion to give no weight to the arguments advanced, and to find that the
Plaintiffs have not discharged the evidentiary burden upon them to prove
impecuniosity as it is defined in the case authority cited above.
[25]
Counsel for the Plaintiffs argues that the
Prothonotary should have exercised his discretion under s.50(1)(b) of the Federal
Courts Act not to stay the present proceedings. The decision reached by
the Prothonotary not to accede to this request was clearly within his
discretionary authority, and I find no error in principle and no misapprehension
of fact in the exercise of this discretion.
ORDER
THIS COURT ORDERS that for the
reasons provided, this Appeal is dismissed. On the present motion, costs are
awarded in the cause.
“Douglas R. Campbell”
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