Court File and Parties

COURT FILE NO.: CV-14-497239 DATE: 20160705 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 3Genius Corporation, Plaintiff / Moving Party AND: Locationary Inc., Grant Ritchie and Sergejs Marin, Defendants / Responding Parties

BEFORE: Justice Edward P. Belobaba

COUNSEL: David Vaillancourt for the Moving Party Bruce Stratton and Sangeetha Punniyamoorthy for the Responding Parties Monique Jilesen for non-party Apple Inc.

HEARD: June 15, 2016

rule 45.02 motion

[1] It is well-recognized that an order for the interim preservation of property pending judgment is “a limited exception to the law’s deep-seated aversion to providing a plaintiff with execution before trial.” 1 It therefore follows that Rule 45.02, which allows a court to order that a “specific fund” be paid into court pending trial, is an “extreme” 2 remedy that must be “exercised with caution.” 3

[2] The court has adopted a three-part test in deciding a Rule 45.02 request: (i) does the plaintiff claim a right to a specific fund? (ii) is there a serious issue to be tried regarding the plaintiff’s claim to that fund? and (iii) does the balance of convenience favour granting the relief sought by the plaintiff? 4

[3] The threshold question of “specific fund” actually asks two sub-questions: one, is there a reasonably identifiable fund, and two, is the plaintiff claiming a legal right to the fund or just making a claim in damages? 5 If the latter, then no order under Rule 45.02 will be made. 6

[4] On the unusual facts in this case, I agree with the plaintiff that there is a fund that is reasonably identifiable. Nonetheless, the plaintiff’s motion under Rule 45.02 must be dismissed because the claim is, in essence, a claim for damages. If I am wrong on this point, I would still dismiss the motion because the balance of convenience does not favour the plaintiff.

Background

[5] This action arises out of an intellectual property dispute between two brothers, Arlen and Grant Ritchie. The plaintiff company, 3Genius (owned by Arlen) says that the defendant company, Locationary (owned by Grant) misappropriated the plaintiff’s software to develop its own product and then sold the product to Apple for a significant amount of money. [7]

[6] The defendants [8] deny any such misappropriation and say that the plaintiff has been fully compensated for the very limited uses that were made of its technology.

[7] The matter is proceeding to trial. 9

The holdback amounts

[8] The Apple transaction in question closed in 2013. The plaintiff says that the bulk of the purchase price was paid to the defendants on closing but certain amounts were held back by Apple based on the provisions in the sale agreements. The holdback amounts are now due and owing.

[9] The plaintiff brings this motion under Rule 45.02 for an order that Apple pay these holdback amounts into court pending the outcome of the trial. The plaintiff says it is “concerned” that any holdback amount paid to Locationary will be immediately paid out to shareholders. The plaintiff is also “concerned” that Grant now works for Apple, resides in California and is thus beyond the reach of Ontario litigation. Apple is not a party to this motion but has advised counsel that they will await and abide by this court’s decision.

Analysis

[10] The case law on “specific fund” is not easily reconciled. Some judges conflate the two sub-questions in the specific fund requirement blurring the analysis; others seem more preoccupied with the serious issue or balance of convenience requirements and give short shrift to the threshold “specific fund” requirement. Also, any attempt to reconcile the case law is complicated by the fact that many of the decisions turn on whether the claim to the specific fund was a “proprietary claim” – a requirement that was rejected in 2012 by the Court of Appeal in Sadie Moranis. 10 The Court made clear that the plaintiff’s claim to the specific fund does not have to be a proprietary claim. 11

[11] In my view, it makes sense to restate the threshold “specific fund” requirement post- Sadie Moranis by focusing on each of the two sub-questions. I believe that the case law to date can be best understood as saying two things about this threshold requirement: one, there must be a reasonably identifiable fund of money; 12 and two, the plaintiff must be claiming a legal right to that fund and not just making a claim for damages. 13

[12] It is only after the two-part threshold requirement has been satisfied that one goes on to consider the second and the third requirements, ‘serious issue to be tried’ and ‘balance of convenience.’

[13] I will now turn to the facts herein.

(1) A reasonably identifiable fund

[14] The first part of the “specific fund” requirement can be satisfied if the plaintiff shows that a specified and differentiated sum of money exists under the control of the defendant or a third party. The money in question does not have to be physically separated or segregated from other monies. It does not have to be bound in a rubber band and secured in a safety deposit box, or hidden under a mattress. Most 45.02 claims are for funds that are “sitting in” a bank account. But modern banking does not keep actual funds in a bank account or even trust account. The account holder’s right to the monies in her bank account is based on related and supporting documentation. To accord with modern banking practices, it is enough if the specified amount is sufficiently differentiated by a book-keeping entry or line-item description in an accounting ledger or other related financial documentation. The key requirement is not actual or physical segregation but a sufficient differentiation.

[15] A claim to an amount that remains undifferentiated and will simply be paid out of the defendant’s or third party’s corporate bank account is not a specific fund. As Brown J., (as he then was) noted in Deol v. Morcan Financial, 14 which involved a disputed claim for unpaid finder’s fees:

What the plaintiff really seeks is an order compelling the defendants to put to one side general corporate funds to stand as security for a judgment which the plaintiff hopes to secure at trial. That sort of execution before judgment is not available under Rule 45.02.

[16] It is important to understand, however, that a specific fund can sometimes be found in a defendant’s or third party’s general corporate funds. This will happen when the claimed fund is, or is likely to be, differentiated by a book-keeping entry or line-item description in a financial ledger. The point is not that the monies are not co-mingled or inter-mingled because they always are - whether in trust accounts or general bank accounts. The question is whether the claimed fund is reasonably identifiable (i.e. differentiated) by a book-keeping entry or other line-item descriptor.

[17] In my view, this is the best explanation for the case law that has found specific funds in trust accounts, 15 bank accounts, 16 and even in general corporate funds if the fund being claimed from general corporate funds has been differentiated as an undisputed amount that is owing or payable. 17

[18] On the evidence before me, I am satisfied that there is a reasonably identifiable fund of money – namely the payments that Apple has held back and is now ready to pay out to the defendants. The holdback amounts are specified and undisputed, and they are due and owing. They may well be sitting in Apple’s general corporate account but if so, they are no doubt differentiated by book-keeping entries showing the monies as “payables” owing to the two defendants. Further, in recent emails to counsel, Apple’s legal counsel has explicitly confirmed both the existence of the holdback funds and the fact that “the holdback monies will not be paid pending the Court’s disposition of [this] motion.” All of this taken together is more than enough for the plaintiff to clear the ‘reasonably identifiable’ hurdle.

[19] The defendant Grant Ritchie submits that the holdback owing to him is a retained employment payment that is owing to him because he stayed on as an Apple employee for the required period of time. Grant can make use of this point when he argues that the plaintiff cannot claim a legal right to these monies, or cannot show that there is a serious issue to be tried in its claim to these particular funds, but he cannot deny that the funds in question are reasonably identifiable.

[20] The plaintiff has therefore satisfied the first part of the “specific fund” requirement. But, in my view, the plaintiff has not satisfied the second part of the requirement.

(2) The claim is really a damages claim

[21] Rather than dealing with the claims against the two defendants separately, and addressing Grant’s submission that the plaintiff has no legal right to his employment-related payment, I will focus on the broader proposition that applies to the plaintiff’s claim against both of the defendants.

[22] The plaintiff’s claim, in essence, is a claim for damages. The case law is clear that “a claim for damages is entirely different than a claim for relief involving a special fund ear-marked for the litigation.” 18 As the Court of Appeal noted in Sadie Moranis, the Rule 45.02 remedy is not available where the claim is a claim for damages. And this is so, “ even if a specific fund is identifiable in the factual matrix of the litigation, because a claim for damages is not a claim to a legal right to that fund.” 19

[23] The plaintiff’s claim is primarily a claim for some $30 million in damages – against Grant for breach of fiduciary duty, and against Locationary for knowing receipt, knowing assistance and inducing the alleged breach of fiduciary duty. The plaintiff also claims an accounting of the net profits [20] earned by the defendants from the entire Apple transaction (not just the net profits from the much smaller holdback amounts) and the right to trace the monies received by the defendants from the entire Apple transaction into any property acquired with these monies (and not just properties acquired with the monies from the holdback amounts).

[24] Neither the accounting nor tracing claims are claims alleging a right to the actual holdback amounts. The two remedies are directed at the net profits made or properties acquired with the sales transaction proceeds, not just the holdback amounts. It is important to note, as did Master Muir in Retrocom Investment 21, “that the statement of claim does not seek a declaration that the defendant is holding any specific fund for the benefit of the plaintiff.” 22

[25] There is certainly no such claim or assertion as against the defendant Grant Ritchie. However, there is (arguably) such a claim as against Locationary – the statement of claim asks for a mandatory order requiring Locationary to pay into court “any further payments made to Locationary arising from the Apple Transaction.” Read literally, however, this claim is triggered after the holdback amount has been paid out to Locationary not before; and, in any event, this is a stand-alone claim that is overshadowed, indeed overwhelmed, by the balance of the claim, which is, in essence, a claim for some $30 million in damages.

[26] I therefore find that the plaintiff has not satisfied the second part of the “specific fund” requirement in showing that it is claiming a legal right to the fund in question Rather, it is making a claim for damages for breach of fiduciary duty. The Rule 45.02 remedy is therefore not available.

(3) Balance of convenience

[27] If I am wrong in the analysis set out above, I would still have dismissed this motion on the balance of convenience requirement. In doing so, I acknowledge that the defendants have also advanced compelling submissions that the plaintiff has failed to clear the second requirement, a serious issue to be tried. However, I prefer to focus on the balance of convenience requirement because it can be explained more succinctly.

[28] The balance of convenience does not favour the plaintiff. There is no evidence that either of the defendants intends to flee the jurisdiction or otherwise dissipate monies in an effort to avoid real or potential creditors. Grant is a senior Apple employee who lives in California. He is not beyond the reach of Ontario litigation or the reciprocal enforcement of judgments. Locationary is based here in Ontario. And there is no evidence that the company intends to do anything on the facts herein that is in any way unusual, improper or unfair.

[29] Granting the relief requested and requiring that the holdback amounts owing by Apple to these defendants be paid into court pending trial would be tantamount to execution before judgment. It would fly in the face of “ the law’s deep-seated aversion to providing a plaintiff with execution before trial.” 23

[30] There is no good reason on the facts herein to exercise the “extreme” Rule 45.02 remedy. The matter should be decided on the merits and on a level playing field – and this should be done at trial.

Disposition

[31] The plaintiff’s motion is dismissed with costs.

[32] The holdback amounts may be paid to the defendants.

[33] The question of costs was discussed with counsel at the hearing of the motion. I have since been advised that the defendants would prefer to make further submissions. If costs cannot be resolved by the parties, I would be pleased to receive brief written submissions from the defendants within 10 days and from the plaintiff within 10 days thereafter.

[34] I thank counsel for their assistance.

Belobaba J. Date: July 5, 2016

[1] Sadie Moranis Realty Corp. v. 1667038 Ontario Inc. 2012 ONCA 475, [2012] O.J. No. 3029 (C.A.) at para. 17. [2] Stearns v Scocchia at para. 22. [3] American Axle & Manufacturing Inc. v. Durable Release Coaters Ltd. (2007), 86 O.R. (3d) 53 (S.C.J.) at para. 22. [4] Sadie Moranis, supra, note 1, at para. 18. [5] Ibid., at para. 19. I note that the Court of Appeal uses the phrase “readily identifiable fund” but the case law up to this point has used the phrase “reasonably identifiable fund”: see for example, Rotin v. Lechcier-Kimel, (1985) 3 C.P.C. (2d) 15 (H.C.J.) at 18; and American Axle, supra, note 3, at para. 27. In my view, there is no significant difference between “readily” and “reasonably” at least not for the purposes of a Rule 45.02 analysis. [6] Ibid., at para. 21. Also see the analysis in Retrocom Investment Management Inc. v. Davies Smith Developments Inc., [2014] O.J. No. 4938 and the discussion below. [7] The sales price was not made public and the defendants have asked that the price remain confidential. [8] The third defendant, Sergejs Marin, is not involved in this motion. [9] A motion for summary judgment brought by the defendants was dismissed in 3Genius Corp. v. Locationary Inc. et al, 2015 ONSC 1439 (S.C.J.). [10] Sadie Moranis, supra, note 1. [11] Ibid., at para. 27. Some decisions and legal texts published after the Court of Appeal’s decision in Sadie Moranis continue to refer to “a proprietary claim” requirement (see, for example, 2329131 Ontario Ltd. v. Carlyle Development Corp., 2014 ONSC 1882 at para. 8) or continue to misstate Sadie Moranis as requiring a proprietary claim: see Watson and McGowan, Ontario Civil Practice 2016 (2015) at 1015. [12] Miller v. Carley, [2006] O.J. No. 1813 at para. 19; Sadie Moranis, supra, note 1, at para. 21. [13] As an aside, I agree with Goudge J.A.’s comment in Sadie Moranis, supra, note 1, at para. 19, that adding “earmarked for the litigation” is not “a helpful descriptor.” [14] Deol v Morcan Financial Inc., [2001] O.J. No. 5371 (S.C.J.) [15] See, for example, Direct TV Inc. v. Gillott, (2007), 84 O.R. (3d) 595 (S.C.J.) [16] Miller v. Carley, [2006] O.J. No. 1813 (S.C.J.) and the comment at para. 19 that if the funds had not been dispersed and were still in the hands of the Ontario Lottery and Gaming Corporation (and sitting in their bank account) that they would constitute a specific fund. [17] Conn v Twenty Two Degree Energy Corp., 2010 ONSC 3599, [2010] O.J. No. 2745 (S.C.J.). And see Retrocom Investment, supra, note 6, and the cases discussed therein at para. 11. [18] Stearns, supra, note 2, at para. 17. [19] Sadie Moranis, supra, note 1, at para. 21. [20] Waddams, Law of Damages (Looseleaf ed.) at 5.840. [21] Retrocom Investment, supra, note 6, [22] Ibid., at para. 9. [23] Sadie Moranis, supra, note 1, at para. 17.