TNG Acquisition (Re), 2013 ONSC 3098

CITATION: TNG Acquisition (Re), 2013 ONSC 3098

COURT FILE NO.: 31-OR-207514-T

DATE: 20130528

SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

IN THE MATER OF THE BANKRUPTCY AND INSOLVENCY ACT, R.S.C. 1985, c. B-3, AS AMENDED

AND IN THE MATTER OF THE BANKRUPTCY OF TNG ACQUISITIONO INC. OF THE CITY OF MISSISSAUGA, IN THE PROVINCE OF ONTARIO

BEFORE: C.L. CAMPBELL J.

COUNSEL: John A. MacDonald, for Tech Data Canada Corporation David S. Ward, for Trustee, A. Farber & Partners Michael McGraw, for Prowis Inc. Robert J. Morris, for R. Holmes

HEARD: March 5, 2013

ENDORSEMENT

[1] The Trustee of Nex (formerly TNG Acquisitions) seeks an Order pursuant to s. 164 of the BIA directing the former Chief Restructuring Officer (CRO) of Nex, (Prowis), and the respondent Tech Data (the primary secured creditor of Nex) to produce documents over which Prowis and Tech Data claim privilege.

[2] A factual background is necessary to support the claims of solicitor and client privilege by Prowis and that of litigation privilege by Tech Data in respect of its dealings with Prowis.

[3] The relationship between Tech Data and Prowis to Nex during the months prior to the appointment of the Bankruptcy Trustee is at the heart of this dispute.

[4] Nex initiated the first of its two CCAA proceedings on August 10, 2006. In the first Plan was approved and sanctioned by Court Order in December 2006 which, among other things, provided for Tech Data to operate various business functions of Nex and to become its operating lender.

[5] By September 2007 relations between Nex and Tech Data had deteriorated with Tech Data having made a written demand for payment by Nex of all monies owing by Nex under its Loan Agreement with Tech Data.

The Facts

[6] The relevant facts for the purposes of the motion in regard to the production of the 132 documents that Tech Data claims privilege over have been agreed to by Tech Data and the Trustee.

[7] Tech Data was a secured creditor of Nex pursuant to a December 29, 2006 Loan Agreement. On September 21, 2007, Tech Data made written demand for repayment of all monies owing by Nex to Tech Data under the Loan Agreement.

[8] By Statement of Claim issued September 27, 2007, Nex issued a lawsuit against Tech Data and certain other defendants.

[9] On September 28, 2007, Tech Data executed an Indemnity Agreement with Prowis in contemplation of Prowis being appointed CRO in an anticipated Nex CCAA filing.

[10] By Order of this Court dated October 2, 2007 Prowis was appointed as Nex CRO in the initial order of the second CCAA proceeding.

[11] The Trustee of Nex later assumed carriage of the Action against Tech Data that is now scheduled for trial in December 2013.

[12] On December 15, 2011, the Trustee delivered a request pursuant to Section 164 of the Bankruptcy and Insolvency Act, RSC 1985, Chapter B-3 on Prowis for production of documents in connection with the Next action against Tech Data.

[13] Prowis asserted a claim for litigation privilege over certain of the documents sought from Prowis (a) with respect to issues regarding Brains II, and (b) Tech Data claims privilege over documents which are in the possession of Prowis and listed in the Further Supplemental Report to the Court submitted by the Trustee.

[14] The Documents are asserted to have been prepared in contemplation of litigation and for the dominant purpose of litigation.

Issues

[15] The sole issue on this motion with respect to Tech Data is whether the litigation privilege attaching to the Documents was dissolved as a result of the contemplation and creation of the Indemnity Agreement with Prowis, and/or the October 2007 Order naming Prowis as CRO.

[16] Prowis, for its part, claims solicitor-client and or litigation privilege with respect to documents relating to litigation between the Trustee and an asset purchaser Brains II and it leaves to TechData to make the case for privilege with respect to the Tech Data documents.

The Role of Prowis Inc.

[17] By Order in the second CCAA proceeding dated October 2, 2007, Prowis was appointed CRO of Nex, with the power and authority to carry out the business and management functions of Nex, although it was understood that the mandate was to liquidate the assets for the benefit of the creditors.

[18] Between September 19, 2007 and October 2, 2007, prior to the granting of the Initial Order, Prowis acted in an advisory capacity to Tech Data in the latter’s capacity as a secured creditor of Nex.

[19] After the initial order Nex’s two divisions were sold, the product division to Soft Choice Corporation and the service division to a company referred as Brains II.

[20] The CCAA proceeding was then terminated and Nex moved into bankruptcy to permit distributions to be made more effectively and efficiently. Litigation ensued between the Trustee and Brains II with an appeal by Brains II of the Trustees disallowance of its claim in Nex’s bankruptcy. That process has been ongoing.

The Brains II Documents

[21] There are two classes of documents which the Trustee seeks from Prowis. The first are documents over which Prowis claims solicitor/client privilege and relate to the sale of Nex assets to Brains II which has been in litigation with the Trustee over the price and set-off from the price of the assets. These documents originated during the period that Prowis was CRO of Nex.

[22] The documents that are sought by the Trustee on this motion in part relate to the ongoing litigation that the Trustee has assumed against Tech Data and the ongoing dispute with Brains II.

[23] Prowis has resisted the Trustee’s request for documents in the possession of Prowis relating to Brains II on the basis of both solicitor and client privilege and litigation privilege. Prowis, among other things, is concerned that it could yet become embroiled in the remaining disputes between the Trustee and Brains II.

[24] It is to be noted that Brains II purchased a significant part of the Nex assets pursuant to Court Order. The issues relating to alleged misrepresentation and allocation of purchase costs as between the Trustee and Brains II have been before this Court on a number of occasions.

[25] The claim by Prowis for solicitor and client or litigation privilege is only in respect of a small portion of the documents that have already been turned over to the Trustee.

[26] In order to better understand the role of Prowis at various times during that period in issue as between it and the Trustee, counsel for Prowis provided a large folder of the representative documents for my review. On review they are in fact between solicitor and client and do relate to issues in respect of the sale of assets to Brains II.

The Tech Data Documents

[27] The second class of documents are those in the possession of Prowis over which Tech Data claims litigation or common interest privilege based on its contractual relationship to Prowis at the time the documents were created. The documents in this category arose during the period before Prowis was appointed CRO.

[28] In this case Prowis was engaged by Tech Data without the opposition of Nex or other creditors to oversee the sale of the assets of Nex on a timely, cost efficient and expeditious basis.

[29] As noted above, prior to its appointment, on October 2, 2007 Prowis acted as a consultant to Tech Data in respect of the latter’s role as the most significant creditor of Nex.

[30] On the issuance of the Bankruptcy Order dated April 8, 2008 the CRO was discharged in the CCAA proceeding and its conduct approved.

[31] A CRO is a creature of Court Order, the authority of which derives from the CCAA but the scope of duties and obligations of the CRO are to be found in the Court Order of its appointment.

[32] While there is no precise information before the court, it is reasonable to presume that the demand by Tech Data on its loan and the subsequent action commenced by Nex against Tech Data on September 27, 2007 led to the appointment of Prowis as CRO.

[33] From the information available it would appear that Nex did not take any active steps in advancing the litigation against Tech Data during the currency of Prowis as CRO nor was Prowis authorized to take carriage of the action.

[34] Prowis asserts that the documents to which it objects to produce to the Trustee are either subject to solicitor client privilege or litigation privilege in respect of a potential involvement in litigation between the Trustee and Brains II or are in respect of communications that predate its appointment as CRO when it was a consultant to Tech Data and to which Tech Data also objects to production.

[35] A provision in the Discharge Order provided for Prowis to assist the Trustee during the bankruptcy on the basis that its fees for doing so would be paid by the Trustee.

[36] The Trustee seeks production from Prowis under section 164 (1) of the BIA which reads as follows:

“Where a person has, or is believed or suspected to have, in his possession or power any of the property of the bankrupt, or any book, document or paper of any kind relating in whole or in part to the bankrupt, his dealings or property, or showing that he is indebted to the bankrupt, he may be required by the trustee to produce the book, document or paper for the information of the trustee, or to deliver to him any property of the bankrupt in his possession.”

[37] The position of the Trustee is that the documents sought to be withheld “actually belonged to Nex and cannot be the property of Prowis or Tech Data.” Tech Data disputes that the documents in issue were in any way those of Nex.

[38] The Trustee further asserts “however, even if it can be said that all of the documents belongs solely to Prowis or to Tech Data as a result of its retention of Prowis as its consultant, this does not shield the documents from production. The Trustee asserts that a party subject to a request under section 164 is required to produce any and all documents relating to the bankrupt even if those documents belong to a third party. It is irrelevant in the Trustee’s view that the documents might have been created for the use of Tech Data.”

[39] The Trustee claims that Prowis is required to produce any and all pre-CCAA filing documents dated from September 1, 2007 to October 2, 2007 that belong to or relate in whole or in part to Nex, its dealings, or its property.

[40] In my view the position of the Trustee vastly overstates the powers available to it under s. 164 of the BIA if it is being suggested that the section can be applied to override legitimate claims either solicitor client privilege or of litigation privilege.

[41] I am not aware of any decision under s. 164 (1) that supports the proposition if the Trustee is advancing the suggestion of override of privilege for the documents it seeks.

[42] If the suggestion is that correspondence as between Tech Data and Prowis that simply “relates” to Nex is to be produced I am not satisfied that such documentation would fall within s.164(1). Assuming that they could be within s.164(1) the issue is then are they covered by privilege.

[43] However, I do not take the position of the Trustee to be that s. 164 (1) must override any privilege.

[44] Rather, as I understand it, the Trustee urges that Prowis in its role as CRO is not in a position to claim any privilege and that on the facts before the Court on this motion neither solicitor client, nor litigation privilege arise.

[45] The position of the Trustee is that in choosing to accept a Court appointment and to act as CRO Prowis assumed solicitor/client privilege fiduciary obligations to creditors and to the Court. It is urged that both the CRO and the Trustee have a mandate to maximize realizations and that in the circumstances Prowis ought to make the documents available rather than shield them from its successor.

Solicitor and Client Privilege

[46] I accept that a CRO is an officer of the court (see Houlden and Morawetz 2013 Annotated Bankruptcy and Insolvency Act p. 1201).

[47] I do not except as urged by counsel for the Trustee that the CRO is not entitled to assert a solicitor client privilege with respect to advice it received from its counsel with respect to dealings with a creditor when Prowis may be subject to a claim by a creditor against it.

[48] There is a difference in the nature of the duties of a CRO whose duties are circumscribed by the Court Order of its appointment and that of a Trustee which is governed by the provisions of the BIA. A trustee in bankruptcy has vested in it the assets of the bankrupt. A CRO does not assume title of the bankrupt assets.

[49] Here the CRO has more limited mandate before the bankruptcy and a specific limited duty following its discharge.

[50] I have reviewed the documents over which solicitor client privilege is claimed by Prowis and am satisfied that they fall into the category of solicitor client privilege for the purpose of Prowis carrying out its limited duties.

[51] Given the specific role of the CRO in facilitating the sale of assets to Brains II the privilege is that of Prowis not of the bankrupt Nex.

[52] There may be in addition a litigation or common interest litigation privilege that arises if as and when there are specific issues in which both the CRO and the trustee are engaged. If this turns out to be the case that matter can be addressed on a document by document basis.

[53] The facts here can easily be distinguished from a case of Re-Beetown (2003) 2003 CanLII 32918 (ON SC), 67 O.R. (3rd) 511 (Ont. S. C. J.) 511 relied on by counsel for the Trustee.

[54] The privilege here is not that of the bankrupt Nex it is that of Prowis. If Prowis’ conduct as a Court Officer becomes in issue in litigation as between the Trustee and Brains II it may be that the question of privilege in that context may have to be revisited but it has not yet occurred.

Tech Data Litigation Claim

[55] The doctrine of litigation privilege protects from disclosure, communications and documents created in contemplation of litigation, and for the dominant purpose litigation.[^1] The doctrine guarantees the efficacy of the adversarial litigation process by creating a “zone of privacy” in regard to pending or apprehended litigation.[^2] This “zone of privacy” extends beyond communications between solicitor and client and captures communications to and from third parties when the communications are made in contemplation of litigation and for the dominant purpose of litigation.[^3] Litigation privilege lasts for as long as the litigation giving rise to it remains pending.[^4]

[56] As a result of the above, the Trustee has the onus of establishing that the litigation privilege attaching to the documents sought from Prowis should be dissolved. Tech Data submits that the litigation privilege attaching to the documents has not been dissolved because the Trustee’s arguments in support of such a conclusion are not supported by law.

[57] In its motion to obtain the documents, the Trustee argues that Tech Data and Prowis shared a common interest privilege that was dissolved as a result of Tech Data’s knowledge that Prowis would be appointed CRO and would gain management responsibility over Nex and/or the fact that Prowis became CRO and gained management responsibility over Nex pursuant to the October 2007 Order.

[58] The documents over which Tech Data claims privilege are those between Tech Data and Prowis as its consultant that arose during a period between September 27, 2007 and October 2, 2007 during which Tech Data had become a defendant in an action commenced by Nex and the appointment on an unopposed basis of Prowis as CRO of Nex.

[59] The Trustee argues that Tech Data and Prowis shared a common interest privilege that was dissolved as a result of Tech Data’s knowledge that Prowis would be appointed CRO and would gain management responsibility over Nex as evidenced by the fact that Prowis became CRO and gained management responsibility over Nex.

[60] The position of Tech Data is set out in paragraph 10 of the Factum on its behalf which asserts that Prowis was privy to the documents in question for the dominant purpose of providing its expertise and services as a consultant to inform Tech Data and its legal counsel of Tech Data’s legal options, and potential liabilities in regard to the contemplated litigation as against Nex. As a result of this relationship it is urged that neither the Indemnity Agreement, the Loan Document nor the October 2007 Order place Prowis in a position where its interests are adverse to that of Tech Data.

[61] As I understand the situation, during its currency as CRO, Prowis had neither authority nor responsibility in respect of the litigation as between Nex and Tech Data. I accept the submission on behalf of Tech Data that Prowis did not assume responsibility for the legal proceedings involving Nex since Nex maintained control of its property including the litigation.

[62] This situation is to be distinguished from a bankruptcy in which he Trustee is authorized (as here) to continue a debtor’s legal proceedings. Accordingly Prowis did not assume Nex’s role in its litigation against Tech Data and was not adverse in the interest to Tech Data.

[63] The submission on behalf of the Trustee assumes that on its appointment as CRO Prowis automatically became adverse in interest in all matters regarding Tech Data. I do not find this to be the case.

[64] Tech Data was and remains the largest creditor of Nex and is now being sued by the Trustee of Nex on behalf of the remaining creditors. It would indeed be strange if the privilege that existed between Tech Data and Prowis (for the purpose of possible litigation between Nex and Tech Data) were to be dissolved simply because Prowis was appointed for the benefit and on behalf of all creditors to dispose of assets.

[65] I accept the description of common interest privilege as an aspect of litigation privilege that may be lost where parties that once shared a common interest privilege became adverse in interest.

[66] In Buttes Gas & Oil Co. v. Hammer (No. 3), Lord Denning describes common interest litigation privilege in the following terms:

There is a privilege which may be called a ‘common interest’ privilege. This is a privilege in aid of anticipated litigation in which several persons have a common interest. It often happens in litigation that a plaintiff or defendant has other persons standing alongside him who have the selfsame interest as he and who have consulted lawyers on the selfsame points as he but who have not been made parties to the action. Maybe for economy or for simplicity or what you will. All exchange counsels’ opinions. All collect information for the purpose of litigation. All make copies. All await the outcome with the same anxious anticipation because it affects each as much as it does the others. Instances come readily to mind. Owners of adjoining houses complain of a nuisance which affects them both equally. Both take legal advice. Both exchange relevant documents. But only one is a plaintiff. An author writes a book and gets it published. It is said to contain a libel or to be an infringement of copyright. Both author and publisher take legal advice. Both exchange documents. But only one is made a defendant.

In all such cases I think the courts should, for the purposes of discovery, treat all persons interested as if they were partners in a single firm or departments in a single company. Each can avail himself of the privilege in aid of litigation. Each can collect information for the use of his or the other’s legal adviser. Each can hold originals and each can make copies. And so forth. All are the subject of the privilege in aid of anticipated litigation, even though it should transpire that, when the litigation is afterwards commenced, only one of them is made a party to it. No matter that one has the originals and the other has the copies. All are privileged.[^5]

[67] I am not satisfied that the common interest litigation privilege as between Tech Data and Prowis has been dissolved. The documents in issue regarding Tech Data remain covered by the privilege.

[68] The motion of the Trustee under s.164(1) for production of documents from Prowis is therefore dismissed.

[69] There is also a significant issue as between Prowis and the trustee with respect to the time and cost of the documentary production to date. The issue of cost of production has been adjourned pending the decision on this motion.

[70] I am aware that there are other issues with respect to why and how this matter has come before the court that I leave those to be dealt with on the remaining issue of the costs associated with the documentary production and the claims of privilege.

[71] The costs of this motion could be addressed on the hearing with respect to the costs of the documentary production.

C.L. CAMPBELL J.

Date: May 28, 2013

[^1]: Blank v. Canada (Minister of Justice), 2006 SCC 39, [2006] 2 S.C.R. 319 at para. 60 [^2]: Ibid, at para. 34 [^3]: Ibid, at paras. 27 - 28 [^4]: Ibid, at para. 36 [^5]: [1980] 3 All E.R. 475, p. 483-484 (C.A.).