Her Majesty the Queen v. Thomas Fritz, [1993] 1 CTC 370, 93 DTC 5132

Reed, J.:—The defendant brings a motion to strike the plaintiff's claim for want of prosecution.

The defendant obtained a decision from the Tax Court on July 24, 1984, agreeing with the defendant's position that he should be allowed to write off certain bad debts for income tax purposes as a business investment loss. The plaintiff filed an appeal of that decision with this Court (by way of trial de novo). The appropriate pre-trial steps were taken to pursue that appeal, including discovery, up to August 23, 1985. Then, from August 23, 1985 to December 3,1991, a period of over six years, virtually nothing was done, apart from some minor correspondence between the plaintiff and the defendant in 1987 to pursue the claim. On December 3, 1991, the plaintiff served a trial record on the defendant's solicitor. The solicitor states that he wondered whether this had been served in error but he did retrieve the file from dead storage. Nothing further was done, as far as the defendant is concerned, during another 18 months, that is until April 14, 1992. At that time the plaintiff sent a letter to counsel for the defendant stating that she planned to proceed to trial. That letter was returned because the defendant's solicitor had by that time moved. A second letter was sent on June 29, 1992.

On August 12, 1992, the plaintiff sent two copies of a joint application for a time and place for trial to counsel for the defendant. Counsel wrote on August 18, 1992, indicating that he had now received the letters of April 14 and June 29, 1992. In late August or by at least mid-September, the then solicitor of record for the defendant, Mr. McNair, transferred the file to Mr. Adamson. The former was on the eve of leaving the country, perhaps for a holiday. Mr. McNair advised Mr. Adamson that the file had been treated by the defendant as an abandoned file. On October 8, 1992, counsel for the plaintiff wrote seeking agreement to the factual issues in dispute and seeking agreement for a trial date sometime in 1993. Mr. Adamson responded by expressing concern about the delay which has occurred in the prosecution of the appeal and seeking some indication of the amount of interest which his client would now be required to pay on the taxes allegedly owed if the plaintiff were successful. Further discussions ensued. On November 26, 1992, counsel for the plaintiff sent Mr. Adamson another draft of a joint application for a time and place for trial. On December 7, 1992, Mr. Adamson advised counsel for the plaintiff that he was not prepared to consent to a joint application and that he was preparing an application to ask the Court to dismiss the plaintiff's action because of the delay which had occurred. On December 9, 1992, before that application was filed, the plaintiff served and filed a unilateral application seeking an order fixing a trial date.

Counsel for the defendant argues that in cases where actions are dismissed for want of prosecution, applicants are required to demonstrate that: (1) the delay is inordinate; (2) that there is no reasonable explanation for the delay; and (3) the delay has caused prejudice to the defendant. There can be no doubt that the delay is inordinate. This is not a complex case. It involves a tax assessment of approximately $16,000. The issues are not complex. Indeed, the pre-trial proceedings were essentially complete by August of 1985. The plaintiff has not attempted to put forward any explanation to justify the delay. It is absolutely clear that it is without justification.

Insofar as prejudice is concerned, the defendant notes that while the tax alleged owed by him amounts to approximately $16,000, the interest thereon which the Department claims and which by statute it would be entitled to collect, is approximately $47,000. In addition, the defendant points out that memories have now faded and this fact alone will create prejudice to him in defending the action. For example, one of the defendant's potential witnesses, a Mr. Read, who was manager of the Bank of Montreal, Walkerton branch in 1979 is now 75 years of age and appears to be in poor health. He does not remember the loan write-off transaction. Evidence of the bank's approach to this transaction is important for the characterization of that transaction. Also, the passage of time has meant that the bank no longer has documentary evidence which could be shown to Mr. Read to refresh his memory.

In addition, the defendant has changed his position since 1985 so that he cannot now be returned to the position he would have been in had the plaintiff prosecuted the appeal with dispatch. Initially, he and his wife were the only shareholders of Fritz Concrete Ltd.. In planning for retirement, the decision was made to sell shares of that company to the employees. Some were sold in 1987 (22 to three employees). More were sold in December 1991 (21 shares). These shares were valued without any reference to a potential liability arising should the amounts which had been written off by the taxpayer be found to have been improperly characterized as bad debts. It is no longer possible to reverse, on the books of the company, the write-offs claimed without affecting the interests of the new shareholders (employees) who purchased shares without reference to that liability.

Counsel for the plaintiff argues that none of these considerations constitute prejudice because: (1) if the plaintiff is correct in her assessment of the defendant's tax liability, the defendant had the use of the $16,000 during all the years in question and therefore paying interest thereon is not prejudice; (2) the failed memories are not important because the case is largely dependent upon documentary evidence and Mr. Read, for example, is not a key witness; (3) the position of the non employee-shareholders is the defendant's own fault in that when selling the shares a contingent liability should have been factored into the sale price.

I do not find these responses convincing. There is considerable difference between being assessed taxes payable of approximately $16,000 plus interest from 1985 to 1987 and being asked to pay not only that amount but all the accumulated interest for the next eight years. The fact that the defendant "had the use of the $16,000” for those eight years is no answer to the prejudice which arises.

With respect to the faded memories argument, I accept counsel for the plaintiff's argument that the Court is not entitled to assume that because there has been delay, that fact alone creates prejudice. In this case, however, there is specific affidavit evidence which attests to the fact that faded memories potentially (I agree not with certainty) prejudice the defendant's defence.

Insofar as the position of the new employee-shareholders is concerned, while a prudent and completely informed person would have subtracted from the sale price of the shares an amount attributable to any contingent liability which might result from a reversal of the bad debts in issue, it is not surprising that that was not done. The defendant considered the litigation to have been abandoned. He had a Tax Court decision in his favour. As a result of the inaction of the plaintiff, he simply forgot that this was an issue. That reaction is entirely credible and I do not think the plaintiff can now argue that the prejudice which would arise to the defendant, as a result of a successful appeal by the plaintiff, does not arise as a result of the plaintiff's delay in prosecuting that action.

In my view, then, the defendant has proven all the elements required to justify the granting of a dismissal of the plaintiff's action because of delay in prosecution.

The plaintiff, however, points out that Rule 440 of the Federal Court Rules states:

440(1) If the defendant does not, within three months after the close of pleadings, receive notice of trial or have knowledge of an application for an order fixing the date for trial, he may, before notice of trial or of an application for an order fixing the date for trial, apply to the Court to dismiss the action for want of prosecution; and on the hearing of such application, the Court may order the action to be dismissed accordingly, or make such other order on such terms as seem just.

(2) No application may be made under this Rule unless the applicant is of the view that the plaintiff is not prosecuting the action with due despatch and, save in exceptional circumstances, unless, at least two weeks before service of the notice of motion, the applicant has served notice in writing on the plaintiff that, unless the plaintiff takes the necessary steps to bring the action on for trial, such an application will be made.

[Emphasis added.]

Counsel for the plaintiff argues that an order for dismissal on the ground of want of prosecution can only be issued when there is want of prosecution at the very time the application is brought. Counsel argues that at the time the present application was brought, whatever may have occurred in the past, the plaintiff was prosecuting the action. An application for a unilateral setting of a trial date had been filed before counsel for the defendant filed his application for dismissal; counsel for the defendant knew at that time that the plaintiff was intending to now prosecute the action and, therefore, an order pursuant to Rule 440 does not lie. The decisions in Federal Commerce & Navigation Co. v. Rae Import Corp., [1988] F.C.A. 3012-01 and McGregor v. The Queen (1988), 20 F.T.R. 122 are relied upon.

I should first of all note that insofar as Rule 440(2) is concerned, the two week notice required is dispensed with “in exceptional circumstances". The jurisprudence indicates that exceptional circumstances include extensive delay, such as occurred in this case. Thus, no objection could have been made had an application been made by the defendant at any time prior to receiving notice of an application for an order fixing the date for trial on the ground that a two week notice was not given.

Counsel for the defendant argues that I should rely on Rule 6 and treat the application for dismissal as having been properly filed. That is, I should dispense with the requirement that it has to be filed before notice of the unilateral application for a trial date since the plaintiff had actual notice of the defendant's intention to bring the motion before that time. Rule 6 states:

The Court may, in special circumstances and subject to such conditions as it considers appropriate, by order, dispense with compliance with any Rule where it is necessary in the interests of justice.

I am not convinced that I am entitled to use Rule 6 in that way. I find counsel for the plaintiff's argument, that to do so is essentially to use Rule 6 to amend the rules, convincing. On reading Rule 440, it seems to me that it is intended that applications for dismissal for want of prosecution are to be entertained when, at the time, there is in fact no active prosecution being undertaken. In the present case although, there had been excessive inordinate and unjustifiable delay, at the time of the filing of the application the plaintiff was prosecuting the claim.

The defendant asks in his notice of motion, however, not only for an order dismissing the action for want of prosecution but alternatively for an order staying the plaintiff's action or "such other order as seems just”. On reflection, I think this is an appropriate case on which an order should issue pursuant to section 50 of the Federal Court Act staying the plaintiff's action:

50.(1) The Court may, in its discretion, stay proceedings in any cause or matter,

(a) on the ground that the claim is being proceeded with in another court or jurisdiction; or

(b) where for any other reason it is in the interest of justice that the proceedings be stayed.

Accordingly, an order staying the plaintiff's action will issue.

Application granted.