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.
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”
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-56-06
STYLE OF CAUSE: HELI TECH SERVICES (CANADA) LTD. ET AL v. WEYERHAEUSER COMPANY LIMITED/COMPAGNIE WEYERHAEUSER LIMITEÉ ET AL
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: September 25-26, 2006
APPEARANCES:
|
Mr. Derek C. Creighton
|
|
|
Mr. J. Kevin Wright
Mr. Mark S. Oulton
Mr. Mark Fancourt-Smith
Ms. Li Jeen Broshko |
Island Timberlands GP Ltd., Brascan Timberlands Management GP Ltd., Weyerhaeuser Company Ltd.
FOR THE DEFENDANTS Cascadia Forest Prodcuts Ltd., Timberwest Forest Corp., International Forest Products Limited
FOR THE DEFENDANTS Canadian Air Crane Limited
FOR THE DEFENDANTS VIH Logging Ltd. |
SOLICITORS OF RECORD:
|
Access Law Group Vancouver, British Columbia
|
|
|
Davis and Company LLP Vancouver, British Columbia
Hunter Voith Vancouver, British Columbia
Fasken Martineau DuMoulin LLP Vancouver, British Columbia
Church and Company Vancouver, British Columbia |
FOR THE DEFENDANTS as above
FOR THE DEFENDANTS as above
FOR THE DEFENDANTS as above |