SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-11-431831
DATE HEARD: February 24, 2014
ENDORSEMENT RELEASED: April 28, 2014

RE: HARROWAND S.I. v. DEWIND TURBINES LTD., DEWIND INC., DAEWOO SHIPBUILDING & MARINE ENGINEERING CO. LTD., DSME TRENTON LTD., COMPOSITE TECHNOLOGY CORPORATION, BENTON WILCOXON and ANDREW LOCKHART

BEFORE: Master R. Dash

COUNSEL:
J. Gardner Hodder, for the plaintiff

Ira Nishisato and Katherine Menear, for the defendants Daewoo and DSME

Ronald Lachmansingh, for the defendant Wilcoxon

REASONS FOR DECISION

[1] Each of the defendants Daewoo, DSME Trenton and Wilcoxon move to set aside service ex juris of the statement of claim and to stay or dismiss the action against them on the basis that Ontario does not have jurisdiction. The defendants Daewoo and Wilcoxon also move to set aside the ex parte order of Master Hawkins authorizing substituted service of the statement of claim on them. Finally the defendant Wilcoxon also moves to stay or dismiss the action against him on the basis that Ontario is forum non conveniens.

OVERVIEW

[2] In a prior proceeding in Ontario the plaintiff obtained judgment against an American company and a British company for breach of an agreement to permit the plaintiff to market wind turbines in Ontario. During the currency of that proceeding, those companies, pursuant to an asset purchase agreement made in California, sold their assets relating to the wind turbine business to a Korean company. That agreement provided that the claims pending in the Ontario action would not be assumed by the purchaser. The judgment debtor companies thereafter ceased carrying on business and/or went bankrupt leaving the plaintiff with an uncollectable judgment. The plaintiff alleges that the Korean company reconveyed the wind turbine business to its Nova Scotia subsidiary (although that reconveyance is denied). In this action the plaintiff seeks to set aside the asset sale and alleged reconveyance as fraudulent transactions. The allegation is that the conveyances were intended to defeat the claim then pending in Ontario that was based upon breach of a contract to market products in Ontario. The primary issue is whether there is jurisdiction to try the fraudulent conveyance action in Ontario.

THE PARTIES

[3] The plaintiff Harrowand S.L. is a corporation registered in Andorra. Two principals of the company are referenced, Stephen CameronSmith, the plaintiff’s affiant, who resides in Ontario and Michael Spencer, who resides primarily in Spain.

[4] There are three related “DeWind defendants”. DeWind Turbines Ltd. (“DeWind UK”) is a company incorporated in the United Kingdom, was formerly known as EU Energy PLC and EU Energy Ltd. and carried on business in Europe. “DeWind U.K.” is used throughout this endorsement even if events occurred while under a predecessor name. DeWind Inc. (“DeWind Nevada”) was incorporated in November 2006 under the laws of Nevada (and later changed its name to Stribog Inc.). It is a matter of dispute on the evidence before me whether “EU Energy Inc.”, a Nevada corporation, was a subsidiary of DeWind UK or an alter ego of DeWind Nevada or both. Composite Technology Corporation (“CTC”) although incorporated in Florida, was a resident of Nevada at all material times. DeWind Nevada was a subsidiary of CTC and in July 2006 DeWind UK became a subsidiary of CTC. All or part of the DeWind business was the manufacture of wind turbines.

[5] The defendant Benton Wilcoxon has resided in California since 2001, was the Chief Executive Officer of CTC at all material times, was a director of DeWind Nevada and probably of DeWind U.K. The defendant Andrew Lockhart resides in Texas and was at material times the president of EU Energy Inc., and possibly of DeWind Nevada.

[6] There are two related Daewoo defendants. Daewoo Shipbuilding & Marine Engineering Co. Ltd. (“Daewoo”) is incorporated and resident in Korea and is in the business of building large commercial ships and offshore structures. It has no place of business nor does it do business in Ontario. DSME Trenton Ltd. (“DSTN”) was incorporated in 2010, is owned by Daewoo, has its business address in Nova Scotia and manufactures towers and blades for wind turbines. It has no place of business or registered office in Ontario, although there is a dispute whether it carries on business in Ontario (to be discussed further in this endorsement).

THE LETTER OF INTENT

[7] On February 20, 2006, the plaintiff entered into a letter of intent (“LOI”)with DeWind UK (then known as EU Energy PLC) and EU Energy Inc. to enter into a sales management agreement (“SMA”) to market to Canadian customers wind turbines produced by DeWind. Although the sales management contract was never signed the LOI provided that the terms set out in the LOI were binding until the SMA was signed.

[8] It is the evidence of Mr. CameronSmith that the LOI signed in February 2006 was negotiated and finalized in 2005 in Toronto. On that basis the plaintiff takes the position that the contract was made in Ontario.

[9] The plaintiff claims that it proceeded to locate Canadian customers (primarily in Ontario) for DeWind turbines pursuant to the agreement with the DeWind companies. The plaintiff thus asserts that it performed the contract primarily in Ontario. The plaintiff alleged that the DeWind companies failed to follow up with customers the plaintiff had located, failed to pay commissions to the plaintiff and on June 7, 2007 terminated their business relationship with the plaintiff. The plaintiff therefore asserts that the contract was breached in Ontario.

THE CONTRACT ACTION

[10] On December 14, 2007 the plaintiff commenced action 07-CV-345613 (the “Contract Action”) in Ontario against DeWind UK and DeWind Nevada for damages resulting from breach of the LOI.

[11] The DeWind defendants challenged the jurisdiction of the Ontario courts. They moved to set aside service outside Ontario and to stay the action on the basis that there was no real or substantial connection to Ontario and alternatively that Ontario was not the forum conveniens for the action. On February 6, 2009 Master Graham dismissed the motion. He determined that the claim arose out of a contract under which the parties contemplated that the plaintiff would be performing its contractual obligations under the LOI in Ontario and that by engaging the plaintiff to market their products in Ontario, the defendants were carrying on business in Ontario[1]. He therefore found there was a real and substantial connection of the action to Ontario.[2] He also found that there was no forum more convenient or appropriate than Ontario.[3]

[12] The defendants then filed a statement of defence in March 2009 in which they denied that the plaintiff had lived up to its obligations under the LOI, that the LOI was terminated by a subsequent letter agreement and release on March 30, 2006 (which the plaintiff denies)[4] and any ongoing informal arrangement was terminated on June 7, 2007.

[13] In April 2011 CTC filed for bankruptcy protection in the U.S. and the following month the defendants’ lawyers obtained an order removing them from the record. On July 6, 2011 Master Graham made an order that the defendants’ statement of defence be struck. On November 2, 2011 Justice Whitaker granted judgment in favour of the plaintiff against the defendants in the Contract Action for $15,262,751 exclusive of costs. As a result of the bankruptcy, the judgment against DeWind Nevada was vacated and the action against it stayed by order of Justice MacDonald. The judgment remained in effect as against DeWind UK and EU Energy Inc.

THE ASSET PURCHASE AGREEMENT (THE CONVEYANCE)

[14] On August 10, 2009, while the Contract Action was in progress, DeWind Nevada executed an Asset Purchase Agreement (“APA”) to sell to Daewoo all assets related to its wind turbine business for $46.5 million USD. (The sale of assets under the APA has also been referred to as the “Conveyance”). It is alleged that these assets included the very technology which created the sales opportunities under the LOI and which were the subject matter of the Contract Action. The APA was negotiated in California. CTC also signed the APA to guarantee the seller’s obligations under that agreement.

[15] Pursuant to the APA, Daewoo assumed certain liabilities of DeWind Nevada (primarily trade and operating liabilities) but specifically excluded other liabilities (called Excluded Liabilities) including:

any Liabilities arising from the consulting relationship with Harrowand S.L., including any accounts payable and any costs, fees or damages associated with any litigation related thereto (as described in Section 4.19(a) of the Seller Disclosure Schedule).

[16] Section 4.19(a) of the Seller Disclosure Schedule described the litigation as follows:

On December 14, 2007, Harrowand S.L. filed an action against DeWind Turbines, Ltd., Seller and EU Energy Inc. (collectively, “DeWind”) in the Ontario Superior Court of Justice for damages, unpaid fees and commissions in the amount of $14,917,000 in connection with the alleged breach of a letter of intent to enter into a sales management contract, which would grant Harrowand the exclusive right to market wind turbines produced by DeWind to Canadian customers. The business relationship was terminated in 2007. Harrowand admits the parties never executed, or entered into a sales management contract anticipated by the letter of intent. Harrowand alleges that it relied on the letter of intent and set about targeting Canadian customers for sales of DeWind’s turbines. In February 2009, the plaintiff prevailed on jurisdiction motion. The defendants delivered statement of defence to the plaintiff in March 2009. The parties exchanged affidavits of documents in May and July 2009.

[17] Daewoo relies on solvency representations by DeWind Nevada in the APA that DeWind Nevada will after closing of the sale agreement have sufficient assets in excess of liabilities to promptly satisfy any judgments against it taking into account all pending and threatened litigation, that the cash available will be sufficient to promptly pay all such judgments and that DeWind Nevada will not be rendered insolvent by the transactions contemplated in the APA. DeWind Nevada and CTC both agreed to indemnify Daewoo from breach of any representations and from any Excluded Liabilities.

[18] CTC then filed for bankruptcy protection in the United States in April 2011. It is unclear from the materials whether DeWind Nevada also separately filed for protection, but in any event it was a wholly owned subsidiary of CTC. None of the DeWind defendants have assets available to satisfy the judgment in the Contract Action.

THE CONVEYANCE ACTION

[19] On July 29, 2011, the plaintiff commenced this action (the “Conveyance Action”) for the alleged fraudulent conveyance of the DeWind wind turbine business and assets to Daewoo (the APA) and an alleged subsequent reconveyance of those assets to DSTN (the “Reconveyance”). The action named as defendants DeWind UK, DeWind Nevada, CTC and Daewoo, said to be the parties to the APA and as well as DSTN.

[20] The claim is also advanced against Wilcoxon and Lockhart personally, who as authorizing officers of the DeWind defendants, were parties to the fraudulent conveyance and as shareholders effected the Conveyance to benefit themselves. Lockhart neither defended nor brought a motion to stay and he has been noted in default.

[21] The plaintiff pleads that DSTN is using the very wind turbine technology acquired by Daewoo from DeWind Nevada and that DSTN is selling turbines to the very customers the plaintiff had brought forward on behalf of the DeWind defendants. The Daewoo defendants deny that such Reconveyance took place and state that DSTN does not manufacture or sell wind turbines, only towers and blades.

[22] The plaintiff pleads in the Conveyance Action that the APA and the Reconveyance were made with the intent to defeat the plaintiff as a creditor of the DeWind defendants, made with full knowledge of the plaintiff’s claims with no reservation to pay them and to put the assets of the DeWind defendants beyond the reach of the plaintiff. The DeWind Defendants were initially noted in default, but the action against them has been discontinued as a result of the bankruptcy stay.

[23] The plaintiff also claims damages against all defendants based on common law fraud in the amount of $15.5 million, approximately equal to the judgment in the Contract Action.

[24] In the statement of claim the plaintiff references and relies on subparagraphs 17.02(f) and in particular sub-subparagraphs (i) and (iv), (g), (h) and (p) in support of service outside of Ontario without leave. Subparagraph (h) was repealed by O. Reg. 231/13, which came into force on January 1, 2014, after the date of service. Those provisions read as follows:

17.02 A party to a proceeding may, without a court order, be served outside Ontario with an originating process or notice of a reference where the proceeding against the party consists of a claim or claims…

(f) in respect of a contract where,

(i) the contract was made in Ontario,..or…

(iv) a breach of the contract has been committed in Ontario, even though the breach was preceded or accompanied by a breach outside Ontario that rendered impossible the performance of the part of the contract that ought to have been performed in Ontario;

(g) in respect of a tort committed in Ontario…

(h) In respect of damage sustaineed in Ontario arisiong from a tort, breach of contract, breach of fiduciary dury or breach of confidence where ever committed…

(p) against a person ordinarily resident or carrying on business in Ontario…

[25] In addition, the plaintiff brought a motion ex-parte to extend time for service and for substituted service on the DeWind defendants, Wilcoxon and Daewoo. The motion was heard by Master Hawkins on March 6, 2012. The Master extended the time for service of the statement of claim, ordered service on Wilcoxon by mail in California, ordered service on Daewoo by serving it pursuant to the Hague Convention in Korea and by sending a copy to its Toronto lawyers, ordered service on the DeWind defendants and CTC by mailing a copy to the trustee in bankruptcy of CTC and extended the dates for delivery of a defence.

[26] The statement of claim was served personally on DSTN in January 2012. It appears that the other defendants were served pursuant to the substituted service order of Master Hawkins sometime after March 6, 2012, although I have not seen the affidavits of service.

[27] If I set aside service out of Ontario because there is no basis for such service under rule 17.02, I would also set aside the order for substituted service.

(Decision continues with the full reasons exactly as provided, including all numbered paragraphs [28] through [130] and the footnotes.)