Engels v. Richard Killen & Associates Ltd. [[[2002 ONSC 49496](https://www.canlii.org/en/on/onsc/doc/2002/2002canlii49496/2002canlii49496.html)], 60 O.R. (3d) 572]

69 O.R. (3d) 183

[2004] O.J. No. 62

Docket No. C39690

Court of Appeal for Ontario

Rosenberg, Goudge and Cronk JJ.A.

January 13, 2004

Bankruptcy and insolvency -- Property of bankrupt -- Client list -- Non-solicitation -- Trustee in bankruptcy selling insurance brokerage business of bankrupt -- Purchaser seeking that court impose term that bankrupt not solicit his former customers -- Common law obligation on vendor of business not to solicit former clients not applying when sale of business by trustee in bankruptcy. [page184]

NOTE: The catchlines above refer to the judgment of Wilson J. of the Superior Court of Justice. An appeal of this judgment to the Court of Appeal for Ontario (Rosenberg, Goudge, and Cronk JJ.A.) was dismissed on January 13, 2004. The endorsement of the court was as follows:

David A. Zuber, for appellant. Shelley Brown, for respondent Klaas Engels. Miles O'Reilly, Q.C., for respondent Richard Killen & Associates Ltd., the Trustee of the Estate of Klaas, a bankrupt.

[1] BY THE COURT: -- The appellant raises two grounds of appeal from the decision of the motions judge dated July 23, 2002. First, it argues that the motions judge erred in declaring that the respondent Engels is entitled to solicit the business of his former clients. Second, it submits that the motions judge erred in holding that the appellant's conduct precluded it from seeking equitable relief concerning Engels' former book of business. The second issue does not arise unless the appellant is successful in its assertion that Engels is precluded from soliciting the business of his former clients. After hearing the appellant's submissions on the first issue, we concluded that this ground of appeal could not succeed in the circumstances of this case. Accordingly, we did not call on the respondent and indicated that the appeal was dismissed for reasons to follow. These are those reasons.

A. Background

[2] The respondent Engels is an insurance broker. In October 1994, to resolve various financial difficulties that he was then experiencing, Engels merged his insurance brokerage firm, known as J. M. Dixon Insurance Brokers Inc. (the "Dixon Business"), with the appellant firm, also an insurance brokerage concern. The facts regarding this merger and the subsequent dealings between the parties are detailed in the reasons of the motions judge and need not be repeated here. The following facts are relevant to this appeal.

[3] Engels entered into a brokerage agreement with the appellant on October 31, 1994. Under that agreement, the legal and equitable interest in the Dixon Business was transferred to the appellant until October 31, 2001, following which it was to revert to Engels, and Engels agreed to serve as an independent insurance broker with the appellant. In return, the appellant loaned funds to Engels to ease his financial difficulties. It subsequently lent additional funds to Engels for the same purpose.

[4] No express non-solicitation of clients clause, applicable upon Engels' departure from the appellant firm or upon the reversion to Engels of the Dixon Business, was contained in the brokerage agreement. [page185]

[5] In March 1997, Engels petitioned himself into bankruptcy. He was discharged from bankruptcy in January 1998. He continued to work as an insurance broker with the appellant firm but relations between the parties deteriorated. Engels had not repaid the appellant the funds previously lent to him. Engels claimed that, as a result, certain of his brokerage commissions were wrongly withheld by the appellant. Litigation between Engels and the appellant ensued. The outstanding commissions were subsequently paid and the appellant's claims were dismissed in mid-June 2000.

[6] The following month, without prior notice to or the knowledge of Engels, the appellant arranged for the bankruptcy to be re-opened, the respondent Richard Killen & Associates Ltd. was appointed as the new trustee in bankruptcy, and at least one further meeting of creditors was held. As well, an offer from the appellant to purchase the Dixon Business was accepted by the new trustee in bankruptcy.

[7] The bill of sale between the trustee and the appellant, dated July 24, 2000, provided for the purchase of the Dixon Business on an "as is, where is" basis. It also stipulated that the trustee made "no representation whatever as to quantity or quality". The bill of sale makes no express reference to non-solicitation by Engels of the clients forming part of the asset sold thereunder or to any right, exclusive or otherwise, of the purchaser to solicit such clients.

[8] When Engels learned of these events, he commenced proceedings to have the appointment of the trustee and the sale to the appellant of Engels' interest in the Dixon Business set aside. Fractious litigation between the parties, including the trustee, followed. In December 2000, the appellant made an offer to settle that litigation, which was accepted by Engels. Subsequently, a consent order dated February 5, 2001 was granted by Farley J. of the Superior Court of Justice by which Engels' interest in the Dixon Business was declared to be vested in the trustee in bankruptcy as of December 20, 1997 and the transfer to the appellant by the trustee of Engels' interest was declared to be "valid and enforceable according to the terms of the Bill of Sale dated July 24, 2000" (the "Consent Order"). The Consent Order makes no reference to solicitation of the clients comprising the Dixon Business.

[9] Engels subsequently sought unsuccessfully to set aside the Consent Order. In addition, an appeal brought by him from the Consent Order was dismissed for delay on consent. Thereafter, in September 2001, Engels brought a motion in which he sought to obtain an order confirming his ability to compete with the appellant for the business of his former clients. That motion was heard [page186] by the motions judge in July 2002, resulting in the decision now under appeal.

B. The Client Solicitation Argument

[10] The appellant makes two arguments in support of its submission that the motions judge erred in concluding that Engels was entitled to a declaration that he could solicit his former clients. First, it argues that the real value of the Dixon Business was the right to solicit renewal and new insurance business from the clients comprising that "book of business". For that reason, standard industry practice contemplates that the sale of a book of business like the Dixon Business would be conditional on a non-solicitation covenant by the former principal of the sold brokerage concern. Accordingly, the appellant argues that, properly understood, the agreement of purchase and sale between the appellant and the trustee in bankruptcy included an implied term that the appellant would be entitled to solicit the pre-bankruptcy clients of the Dixon Business free from any competing solicitation of those clients by Engels. Essentially, the appellant contends that a non-solicitation clause, binding on Engels, should be read into the agreement with the trustee.

[11] Second, and in any event, the appellant argues that the Consent Order is determinative of the issue of whether Engels may solicit clients of the Dixon Business.

[12] In our view, both of these arguments must fail, for several reasons.

[13] First, as we have already mentioned, neither the bill of sale from the trustee or the Consent Order mention solicitation of clients in any way. As a result of its purchase from the trustee of Engels' interest in the Dixon Business, the appellant acquired the right to solicit the renewal and other future business of the clients comprising the Dixon Business. What it now seeks is exclusivity, that is, the right to engage in such solicitation without any competing solicitation by Engels for the business of the same clients. However, that objective or expectation was not expressly recorded in its dealings with the trustee, nor was it incorporated as a term of the settlement of the litigation to which Engels ultimately agreed, leading to the Consent Order.

[14] Second, and importantly, as the motions judge discussed in her reasons, there is a considerable body of jurisprudence supporting the proposition that in an involuntary alienation of assets in a bankruptcy, there is no common law implied obligation on the part of the bankrupt not to compete and solicit former clients. While we agree with counsel for the appellant that this proposition may not [page187] be absolute, a matter we need not decide in this proceeding, we conclude that it does apply here given the terms of the bill of sale and of the Consent Order relied upon by the appellant, and the history of the dealings between the parties leading up to the appellant's purchase of Engels' interest in the Dixon Business and the Consent Order.

[15] An involuntary alienation of assets occurred in this case when the appellant arranged, without Engels' knowledge or direct participation, to purchase Engels' interest in the Dixon Business from the trustee in bankruptcy. The Consent Order does not alter the fundamental legal character of that transaction as an involuntary alienation of assets, or enlarge its terms. Nor, in our view, does the Consent Order in any way constitute a voluntary agreement by Engels not to solicit his former clients.

[16] For these reasons, we reject the appellant's contention that a non-solicitation clause should be read into either the bill of sale from the trustee or the Consent Order. In our view, the motions judge was correct to conclude that Engels is entitled to a declaration that he can solicit the former clients of the Dixon Business.

C. Disposition

[17] As the appellant's second ground of appeal arises only if it is concluded that Engels is not entitled to solicit his former clients, a conclusion we reject, it is unnecessary to address it.

[18] Accordingly, the appeal is dismissed. The respondent Engels is entitled to his costs of the appeal on a partial indemnity basis, which we fix in the amount of $4,000 inclusive of disbursements and Goods and Services Tax. We make no award of costs concerning the respondent trustee in bankruptcy.