COURT OF APPEAL FOR ONTARIO

DATE: 20210330 DOCKET: M52214, M52240

van Rensburg J.A. (Motions Judge)

BETWEEN

Shaver-Kudell Manufacturing Inc. Plaintiff (Respondent/Responding Party on M52214/ Moving Party on M52240)

and

Knight Manufacturing Inc., Lucy Shaver, Dusko Ballmer and Alexander Knecht Defendants (Appellant / Moving Party on M52214/ Responding Party on M52240)

Counsel: Ian Klaiman, for the appellant Charles Hammond, for the respondent

Heard: March 11, 2021 by video conference

REASONS FOR DECISION

I Introduction

[1] The appellant, Alexander Knecht, is an undischarged bankrupt. He moved for an extension of time to file a notice of appeal from the order of M. Smith J. (the “motion judge”), dated December 9, 2020. That order declared that his debts and liabilities in certain proceedings with the respondent, Shaver-Kudell Manufacturing Inc. (“Shaver-Kudell”), would survive his discharge from bankruptcy. It also lifted the stay of proceedings to permit Shaver-Kudell to continue proceedings against him. Knecht required an extension of time as a result of an administrative issue that arose when he tried to file his notice of appeal.

[2] Shaver-Kudell opposed the motion primarily on the basis that there is no right to appeal without leave under s. 193 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). Shaver-Kudell also argued that the extension should be refused because the appeal is lacking in merit.

[3] Knecht asserted that he had the right to appeal and, in the alternative, sought leave to appeal under s. 193 (e) of the BIA. He argued that he had met the test for an extension of time. At the conclusion of the oral hearing of the motion I granted the requested extension, with reasons to follow. These are my reasons.

[4] These are also my reasons in respect of Shaver-Kudell’s cross-motion for security for costs. For the reasons that follow, that motion is dismissed.

II Relevant Facts

[5] The parties were involved in litigation in the Superior Court (the “Action”). On August 7, 2018, following a trial on liability, R. Smith J. concluded, among other things, that Knecht and other defendants committed a breach of confidence and misappropriated Shaver-Kudell’s trade secrets. He awarded costs against the defendants for a prior summary judgment and costs of the trial (a total of $390,521).

[6] The Action was scheduled to continue with a trial on the issue of damages in April 2020. In the interim, on March 2, 2020, Knecht filed a Notice of Intention to Make a Proposal under s. 50.4(1) of the BIA. The proposal was refused by his creditors, and he was assigned into bankruptcy on April 27, 2020. Pursuant to s. 69(1) of the BIA, all proceedings against Knecht are stayed during the bankruptcy.

[7] Shaver-Kudell brought a motion for an order declaring that Knecht’s discharge from bankruptcy would not release any debts or liabilities arising from its claims against him in the Action, including any outstanding or future costs awards. Shaver-Kudell relied on s. 178(1)(e) of the BIA, which provides that an order of discharge does not release the bankrupt from “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation...”. Shaver-Kudell also sought an order under s. 69.4 of the BIA lifting the stay.

[8] The motion judge found that R. Smith J.’s findings in the trial on liability pointed to Knecht’s “deceitful and dishonest conduct which engages section 178(1)(e)”. Knecht participated in a scheme to copy Shaver-Kudell’s trade secrets and make unauthorized use of this property for his financial gain. In this way, he had obtained property by false pretences. Accordingly, the motion judge found that Knecht’s debts arising from claims in the Action—including the outstanding costs award—would survive his bankruptcy discharge.

[9] Having found that Knecht’s debts and liabilities in the Action would not be released by his bankruptcy discharge, the motion judge determined that Shaver-Kudell would be prejudiced if it could not proceed to judgment against Knecht regarding damages. On this basis, the motion judge also declared that the stay under s. 69(1) of the BIA would no longer operate with respect to the Action.

[10] Knecht served his notice of appeal of the motion judge’s order on December 17, 2020. Assuming that the order under appeal was an order under the BIA, Knecht’s counsel attempted to file the notice of appeal with the Registrar of the court appealed from, the Superior Court in Ottawa, in accordance with the Bankruptcy and Insolvency General Rules, C.R.C., c. 368, r. 31(1). The Ottawa court refused to accept the filing because there was no bankruptcy court file number. While attempting to sort out this administrative problem, Knecht’s counsel tried to file the notice of appeal directly in this court. However, because more than ten days had passed from the date of service of the notice of appeal, an extension of time was required.

III The Extension of Time Motion

[11] The test for an extension of time is whether it is in the interests of justice that the extension be granted. Relevant factors include: whether there was a bona fide intention to appeal during the appeal period; the length of and explanation for the delay; prejudice to the opposing party; and the merits of the proposed appeal. The enumerated factors are not exhaustive and may vary in importance depending on the circumstances. The overriding consideration is whether the justice of the case requires an extension: Denomme v. McArthur, 2013 ONCA 694 (In Chambers), at para. 7.

[12] As I have indicated, the motion for an extension was opposed by Shaver-Kudell primarily on the basis that there is no appeal as of right. I turn to consider this issue first.

Does the appellant have the right to appeal the motion judge’s order?

(1) The governing appeal route

[13] If the motion judge’s order was made under the BIA, the appeal route would be governed by s. 193 of the BIA, which provides for appeals as of right in some cases and requires leave to appeal in others. Section 193 provides as follows:

193 Unless otherwise expressly provided, an appeal lies to the Court of Appeal from any order or decision of a judge of the court in the following cases: (a) If the point at issue involves future rights; (b) If the order or decision is likely to affect other cases of a similar nature in the bankruptcy proceedings; (c) If the property involved in the appeal exceeds in value ten thousand dollars; (d) From the grant of or refusal to grant a discharge if the aggregate unpaid claims of creditors exceed five hundred dollars; and (e) In any other case by leave of a judge of the Court of Appeal.

[14] The proper appeal route is under s. 193 where the order sought to be appealed is granted in reliance on jurisdiction under the BIA: Business Development Bank of Canada v. Astoria Organic Matters Ltd., 2019 ONCA 269, 69 C.B.R. (6th) 13, at para. 21. If the motion judge’s order was not made in reliance on jurisdiction under the BIA, it would be appealable to this court under s. 6(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[15] The question of jurisdiction arises in this case because the motion judge’s order has two components: the declaration under s. 178(1)(e) of the BIA and the lift-stay order. The lift-stay order could only be made under s. 69.4 of the BIA. By contrast, declaratory orders under s. 178(1) do not engage the exercise of a power under the BIA. They are made in the exercise of the court’s general jurisdiction: see e.g. Water Matrix Inc. v. Carnevale, 2018 ONSC 6436, 65 C.B.R. (6th) 109, at para. 22; Beneficial Finance Co. v. Durward (1961), 2 C.B.R. (N.S.) 173 (Ont. Co. Ct.), at para. 14; and Graves v. Hughes, 2001 NSSC 68, 25 C.B.R. (4th) 255, at paras. 3-12. As such, orders declaring that a debt or liability survives a bankruptcy discharge typically are appealed directly to the Court of Appeal, without leave under the BIA: see e.g. Gray (Re), 2014 ONCA 236, 119 O.R. (3d) 710; Korea Data Systems (USA), Inc. v. Aamazing Tehnologies Inc., 2015 ONCA 465, 126 O.R. (3d) 81; H.Y. Louie Co. Limited v. Bowick, 2015 BCCA 256, 25 C.B.R. (6th) 221; and Lawyers’ Professional Indemnity Company v. Rodriguez, 2018 ONCA 171, 139 O.R. (3d) 641, leave to appeal refused, [2018] S.C.C.A. No. 128.

[16] The determination of whether a debt survives bankruptcy can also be made in bankruptcy proceedings and not in a separate civil action, particularly where the moving party also seeks leave to commence or continue an action against the bankrupt: see Re McKee (1997), 47 C.B.R. (3d) 70 (Alta. Bankruptcy Registrar), where such a declaration was made while bankruptcy proceedings were pending, but prior to the discharge hearing. See also Re Mariyanayagam (1998), 10 C.B.R. (4th) 105 (Ont. Gen. Div.), at para. 4; Re Bissonette, 2006 CarswellOnt 7023 (Bankruptcy Registrar), at para. 3; Re Di Paola (2006), 84 O.R. (3d) 554 (C.A., In Chambers), at para. 5; Re Berger, 2010 ONSC 4376, 70 C.B.R. (5th) 225, (Bankruptcy Registrar), at para. 2.

[17] This court has previously considered the question of jurisdiction where the order under appeal was made only partly in reliance on jurisdiction under the BIA. In Dal Bianco v. Deem Management Services Limited, 2020 ONCA 585, 82 C.B.R. (6th) 161, part of the order under appeal (indeed the substantive issue on the appeal) would have been appealable directly to this court under the Construction Act, R.S.O. 1990, c. C.30, but the order was made in an application for directions in a receivership. This court held that the substance of the order was in proceedings authorized by the BIA: “it responded to a motion for the court’s directions brought under s. 249 of the [BIA] to help the receiver distribute the remaining funds in the receivership”. Because the BIA was a source of jurisdiction for the court’s order, the appeal route was under s. 193: at para. 12. See also Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508, 70 C.B.R. (6th) 181, at para. 129 (where jurisdiction for an appeal from an order approving a receiver’s sale of assets, of which a vesting order was a component, was under the BIA).

[18] Applying these authorities, I conclude that the appeal route for the motion judge’s order is under s. 193 of the BIA. The order was made on a motion during the currency of Knecht’s bankruptcy, and, as part of the order the motion judge lifted the stay under s. 69(1) of the BIA to permit the Action to continue against the bankrupt.

[19] I turn now to consider whether there is an appeal as of right of the order or whether leave to appeal is required.

(2) Does a right to appeal lie under s. 193?

[20] Knecht submits that he has a right to appeal the motion judge’s order under ss. 193 (a), (b) and (c). I agree that the order is appealable under s. 193 (c). While it is unnecessary to consider other provisions of s. 193, I suggest that the order is also appealable under s. 193 (a).

[21] Section 193(c) provides for a right of appeal “if the property involved in the appeal exceeds in value ten thousand dollars”. I recognize that the scope of that provision is a matter of debate among appellate courts. In 2403177 Ontario Inc. v. Bending Lake Iron Group Ltd., 2016 ONCA 225, 35 C.B.R. (6th) 102 (In Chambers), Brown J.A. construed s. 193 (c) narrowly, and held that it would not provide a right of appeal from orders that (i) are procedural in nature; (ii) do not bring into play the value of the debtor’s property; or (iii) do not result in a gain or loss (in the sense of involving some element of a final determination of the economic interests of a claimant in the debtor): at paras. 53, 61. This approach has been followed by a number of decisions of this court, but has been called into question in the decisions of some other appellate courts: see e.g., MNP Ltd. v. Wilkes, 2020 SKCA 66, 80 C.B.R. (6th) 1, interpreting s. 193 (c) as applying when, on the evidence, there is at least $10,000 “at stake” in the appeal: at para. 63.

[22] I am satisfied that, irrespective of the approach taken, the motion judge’s order falls within s. 193(c). In the circumstances of this case, I would follow the approach taken by Nordheimer J.A. in Royal Bank of Canada v. Bodanis, 2020 ONCA 185, 78 C.B.R. (6th) 165 (In Chambers). He distinguished cases like Bending Lake that involved proposed appeals of orders made in receivership proceedings, and he determined that an appeal of bankruptcy orders in two proceedings where the debts relied on exceeded $10,000 fell under s. 193(c). Nordheimer J.A. explained that s. 193 (c) “clearly applies… where the appellant’s entire property ha[s] been taken out of their control and placed into the hands of a Trustee in Bankruptcy, who has the right to dispose of that property and distribute it among the creditors, without further court intervention”: at para. 9.

[23] Similarly, the debts and liabilities that will survive Knecht’s discharge under the motion judge’s order exceed $10,000. And the effect of the order under appeal is that Knecht’s property exceeding $10,000 in value will be subject to Shaver-Kudell’s enforcement of its judgment in the Action, including the costs order already made, following his discharge from bankruptcy.

[24] In short, the property involved in the appeal of the motion judge’s declaration under s. 178 exceeds in value $10,000. Since the lift-stay provision is part of the motion judge’s order and dependent on that declaration, the entire order is subject to appeal as of right under s. 193(c).

[25] The conclusion that s. 193(c) applies can also be reached by applying the approach in Bending Lake. The motion judge’s order is not procedural in nature, it brings into play the value of Knecht’s property that will or will not be available to satisfy Shaver-Kudell’s claims as his creditor, and it makes a final determination of Shaver-Kudell’s economic interests, resulting in a gain to that party in excess of $10,000.

[26] I am also of the view that the order under appeal falls within the scope of s. 193 (a) of the BIA. Section 193 (a) provides for a right of appeal “if the point at issue involves future rights”. Future rights have been described as “rights which could not at the present time be asserted but which will come into existence at a future time”: Elias v. Hutchison, 1981 ABCA 31, 121 D.L.R. (3d) 95, at para. 28, cited with approval in Ravelston Corp., Re (2005), 24 C.B.R. (5th) 256, (Ont. C.A.), at para. 19. The pertinent question is whether the rights engaged in the appeal are future rights or presently existing rights that are exercisable in the future: Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617 (In Chambers), at para. 16.

[27] Shaver-Kudell submits that its rights arose as soon as R. Smith J. determined the liability issues in the Action. All of the circumstances were present such that s. 178, by operation of law, would ensure that the debts and liabilities arising therefrom would survive Knecht’s bankruptcy discharge. This is a question of present rights that can be exercised in the future.

[28] I disagree. While s. 178 operates as a matter of law, it is necessary for a creditor to obtain a court declaration that a debt survives bankruptcy: Canada (Attorney General) v. Bourassa (Trustee of), 2002 ABCA 205, 312 A.R. 19, at para. 5. Shaver-Kudell did not obtain the s. 178 declaration until December 2020.

[29] In my view, the motion judge’s order involves the future rights of both parties: Knecht’s right to be discharged from the debts and liabilities arising out of the judgments in the Action and Shaver-Kudell’s right, as a creditor of the bankrupt, to enforce the judgments following his discharge from bankruptcy.

[30] While Shaver-Kudell is able to continue proceedings against Knecht, it does not have a present right to enforce the judgment of R. Smith J. against Knecht. This right is suspended by the bankruptcy and will be eliminated by the discharge, absent the order declaring its survival. In light of the motion judge’s order, this right will arise in the future, upon Knecht’s discharge. As lower courts have noted, “[a] creditor’s right of action for a debt not released by the debtor’s discharge arises upon the discharge of the debtor”: Lang v. Soyatt (1988), 68 C.B.R. (N.S.) 201, (Ont. Sup. Ct.), at para. 13; Re Wilson (1930), 11 C.B.R. 425 (Ont. Sup. Ct.). See also Re Cameron, 2002 ABCA 183, 37 C.B.R. (4th) 78 (In Chambers), at paras. 5-6.

Extension of Time

[31] Apart from arguing the jurisdiction point, Shaver-Kudell asserted that the extension of time should be refused because the appeal lacks merit. Shaver-Kudell did not dispute that Knecht formed a bona fide intention to appeal within the relevant timeframe, nor did it oppose the requested extension on the basis of the length of or explanation for the delay in filing the notice of appeal.

[32] Turning to the merits of the appeal, the question is only whether there is “so little merit in the proposed appeal that the appellant should be denied [his] important right of appeal”: 40 Park Lane Circle v. Aiello, 2019 ONCA 451 (In Chambers), at para. 8. It is sufficient to say that the appeal has at least an arguable chance of success.

[33] Among other things, the appeal raises legitimate questions about the interpretation of “obtaining property by false pretences” within s. 178(1)(e), and whether the test under that provision was properly applied in the circumstances in this case. In finding that Knecht’s conduct fell within s. 178(1)(e), the motion judge declined to adopt the Criminal Code definition of false pretences, which he found would amount to a requirement of fraudulent misrepresentation. As Knecht points out, there are cases that follow the definition of false pretences in the Criminal Code, or at least suggest that there must be a finding of fraud or an actionable misrepresentation (which were not present in this case): see e.g. H.Y. Louie Co. v. Bowick, 2015 BCCA 363, 28 C.B.R. (6th) 1; Celanese Canada Inc. v. Murray Demolition Corp., [2010] O.J. No. 6347 (S.C.), at para. 22; and Toronto Dominion Bank v. Cushing, 2007 BCSC 1581, 37 C.B.R. (5th) 60.

[34] For these reasons the motion to extend time to file the notice of appeal was granted.

IV Motion for Security for Costs

[35] An order for security for costs may be made under r. 61.06(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, where (a) there is good reason to believe that the appeal is frivolous and vexatious and that the appellant has insufficient assets in Ontario to pay the costs of the appeal; (b) an order for security for costs could be made against the appellant under r. 56.01; or (c) for other good reason. Rule 61.06(1) is permissive, not mandatory. In determining whether an order should be made for security for costs, the “overarching principle to be applied to all the circumstances is the justness of the order sought”: Yaiguaje v. Chevron Corporation, 2017 ONCA 827, 138 O.R. (3d) 1, at para. 19.

[36] Shaver-Kudell moves for security for costs of the appeal under r. 61.06(1)(c). It argues that security under this provision is warranted because the appeal has little merit and it will be difficult to recover costs of the appeal from Knecht, who is bankrupt. Shaver-Kudell points to the unpaid costs award of almost $400,000, that has been outstanding since 2019, and contends that Knecht should not be able to “litigate with impunity” where the reasonable inference is that someone else is paying the costs of his appeal.

[37] In response to the motion, Knecht asserts that his appeal has merit. He has not paid the outstanding costs because he is bankrupt, and if he is successful in his appeal he will be discharged from Shaver-Kudell’s claims. Knecht contends that he is impecunious and unable to pay security for costs; he has provided copies of the Creditor’s Package in his bankruptcy and information about his earnings and expenses. His assets are vested in the trustee, and although he is working and earning income, any surplus income he earns will vest in the trustee.

[38] To grant security for costs under r. 61.06(1)(c), the “other good reason” must be compelling. Resort is to this provision when the respondent has been unable to obtain security under the other two categories, and security for costs under r. 61.06(1)(c) should not be made routinely: Combined Air Mechanical Services Inc. v. Flesch, 2010 ONCA 633, 268 O.A.C. 172 (In Chambers), at para. 8. Security for costs has been awarded under this provision where an appeal has a low prospect of success and the appellant has the ability to pay costs, but it would be nearly impossible to collect such costs: Perron v. Perron, 2011 ONCA 776, 286 O.A.C. 178 (In Chambers), at para. 23; Henderson v. Wright, 2016 ONCA 89, 345 O.A.C. 231 (In Chambers), at para. 27. Other examples include circumstances where there has been a finding that the appellant committed fraud, particularly if coupled with a finding that the appellant took steps to put his assets out of the reach of his creditors: York University v. Markicevic, 2017 ONCA 651 (In Chambers), at para. 58.

[39] This is not such a case. I have determined that Knecht has a right of appeal, and that the appeal is of arguable merit. Furthermore, there has not been any finding that Knecht committed fraud or tried to put his assets out of reach of his creditors. His failure to pay the outstanding costs order of R. Smith J. is not (as in some cases) evidence of intransigence or contempt for orders of the court. Knecht is bankrupt and but for the order under appeal, his debts and liabilities in the Action, including the outstanding costs order, will not survive his discharge from bankruptcy.

[40] In these circumstances, Shaver-Kudell has not met the test for security for costs and its motion is dismissed.

V Disposition

[41] For these reasons, Knecht’s motion for an extension of time was granted and Shaver-Kudell’s motion for security for costs is dismissed. If the parties are unable to agree on the costs of the motions, they may provide their written submissions not exceeding three pages each (and filed electronically at coa.e-file@ontario.ca), within ten days of these reasons.

“K. van Rensburg J.A.”