ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

KRISTINA ZAKHARY PROFESSIONAL CORPORATION and DR. KRISTINA ZAKHARY

Judgment Creditors

• and -

AGE-LESS DERMAL THERAPY INC.

Judgment Debtor

Bryan Fromstein for the Judgment Creditors

Arthur Zeilikman and Dennis Onsyannikov

for the Judgment Debtor

HEARD: August 26, 2015

F.L. Myers J.

REASONS FOR decision

Background

[1] The judgment creditors appeal from the order of Master Pope dated June 11, 2015. The Master dismissed the judgment creditors’ motion for an order compelling Joyce Palmer, an officer and director of the judgment debtor, to attend an examination in aid of execution of the debtor and for other relief set out in the notice of motion dated March 30, 2015.

[2] Decisions of a master are entitled to a high degree of deference. The decision will be interfered with only if the Master made an error of law, exercised her discretion on the wrong principles, or misapprehended the evidence such that there is a palpable and overriding error. Zeitoun v. Economical Insurance Group, 2014 ONCA 415 at para. 40.

[3] In this case, the Master’s decision turned simply upon a principle of law rather than a fact-based exercise of her discretion. In my respectful view, the Master applied a principle that was no longer good law and that did not apply on the facts in any event. For the reasons set out below, the appeal is allowed.

The Facts

[4] As found by the Master, the parties reached a settlement of this litigation. Under their agreement, the judgment debtor agreed to pay the judgment creditors $90,000 in monthly installments and costs of $40,000. The costs award was confirmed by a certificate of assessment obtained on consent. In the event of default, the judgment creditors were entitled to judgment in the amount of $145,000.

[5] The judgment debtor made monthly payments until September, 2014 when Joyce Palmer, on behalf of the judgment debtor, advised that it would make no further payments due to financial hardship. The judgment debtor consented to an examination in aid of execution under the certificate of assessment. Joyce Palmer was the representative of the judgment debtor whom the parties agreed would be examined on behalf of the corporation. The parties agreed that the examination would be held on March 17, 2015. The judgment creditors served a notice of examination on January 19, 2015.

[6] Almost two years before then, in February, 2013, the judgment creditors had learned that the judgment debtor was no longer purporting to operate its business. Rather, the same people were carrying on the same business at the same location under a new name (and with a new doctor replacing the principal judgment creditor). At that time however, the judgment debtor was staying current on its monthly payments so there was no reason for the judgment creditors to sue. However, after the judgment debtor defaulted in October, 2014, the judgment creditors became concerned that they might face an argument that the limitation period commenced when they learned of the possible fraudulent, non-arm’s length asset flip in February, 2013. Accordingly, there was some urgency for the judgment creditors to commence litigation before February, 2015.

[7] Therefore, four days after they served their notice of examination for the examination in aid of execution of Joyce Palmer on behalf of the judgment debtor, the judgment creditors commenced a new action against the judgment debtor, Joyce Palmer, the other officers and directors of the judgment debtor, and the new transferee of the business. The new action challenges the transfer of assets from the judgment debtor to the new transferee. The challenge is based upon alleged breaches of the Bulk Sales Act, R.S.O. 1990, c.B.14, the Assignments and Preferences Act, R.S.O 1990, c.A.33, the Fraudulent Conveyances Act, R.S.O. 1990, c.F.29 and the oppression remedy under the Business Corporations Act, R.S.O. 1990, c.B.16.

[8] At paragraph 20 of her decision, the Master held that there is a long-standing principle that where a judgment creditor commences a new action against a person whom it proposes to examine in aid of execution, then the purpose of the examination in aid of execution has been exhausted and all the rights of the judgment creditor to examine the witness are merged in the new action. That is, the judgment creditor loses the right to conduct an examination in aid of execution of a person whom it is already suing in a related matter. While the Master makes findings concerning the unfairness of the proposed examination in aid of execution, she is clear at paragraph 22 of her reasons that her decision was based on a simple legal question of entitlement. She wrote that:

As the [judgment creditors] have commenced another action that covers the same matters upon which the plaintiffs would be entitled to question on an examination in aid of execution as set out in subrule 60.18(2), [their] rights are merged in the new action and they are not entitled to conduct an examination in aid of execution.

The Law

Enforcing Attendance at an Examination in Aid of Execution

[9] Rule 60.18 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, governs examinations in aid of execution.[^1] It provides, in part:

Examination of Debtor

(2) A creditor may examine the debtor in relation to,

(a) the reason for nonpayment or non-performance of the order;

(b) the debtor’s income and property;

(c) the debts owed to and by the debtor;

(d) the disposal the debtor has made of any property either before or after the making of the order;

(e) the debtor’s present, past and future means to satisfy the order;

(f) whether the debtor intends to obey the order or has any reason for not doing so; and

(g) any other matter pertinent to the enforcement of the order.

(3) An officer or director of a corporate debtor, or, in the case of a debtor that is a partnership or sole proprietorship, a partner or sole proprietor against whom the order may be enforced, may be examined on behalf of the debtor in relation to the matters set out in subrule (2).

Examination of Person other than Debtor

(6) Where any difficulty arises concerning the enforcement of an order, the court may,

(a) make an order for the examination of any person who the court is satisfied may have knowledge of the matters set out in subrule (2); and

(b) make such order for the examination of any other person as is just. R.R.O. 1990, Reg. 194, r. 60.18 (6).

[10] At paragraph 18 of her decision, the Master held that Rule 60.18(2) is discretionary and that the judgment creditors did not have an automatic right to conduct an examination under that Rule. With respect, I do not believe that this is correct. The rule expresses a prima facie entitlement of a creditor under a court order to conduct an examination in aid of execution on the judgment debtor. No court intervention or other discretion is involved when a creditor delivers a notice of examination to invoke its entitlement to examine. It does so as of right. See AGB Halifax Enterprises Inc. v. Wood Street Development, Inc., 1996 CarswellOnt 4215(CA) at para. 2. If a judgment debtor fails to attend an examination in aid of execution after service upon her of a notice of examination, the judgment debtor may be held in contempt of court. Cellupica v. Di Giulio, 2010 ONSC 5839. It is not a discretionary process.

[11] Having said that however, the remedy for failure to attend a judgment debtor examination is discretionary. The remedy is provided by Rule 34.15 which applies to examinations in aid of execution pursuant to Rule 34.01(e). Rule 34.15 provides that where a person “fails to attend at the time and place fixed for an examination in the notice of examination” the court may grant a variety of relief including, “such other order as is just.” The judgment creditors referred to rule 34.15 in their notice of motion before the Master. However, they argued the motion as if the order which they sought to compel the attendance of Joyce Palmer was being made under rule 60.18(2). But that Rule just sets out the prima facie right to examine. It does not provide the terms under which the court may order attendance. The decision before the Master of whether to compel Ms Palmer to attend for examination was to be made under Rule 34.15. Thus, while I respectfully have a different view of the interpretation of rule 60.18(2) than the Master, nothing turns on this given that the relief that was sought before her was plainly discretionary in any event under rule 34.15.

Examination of a Corporate Judgment Debtor

[12] The judgment debtor is a corporation. It has no corporeal existence. It only acts and speaks through human beings - principally its directors and officers. Rule 60.18(3) sets out the entitlement of a judgment creditor to examine an officer or director of the judgment debtor on behalf of the corporation. Once again, this is a prima facie matter of entitlement rather than discretion. Joyce Palmer was to be examined by the judgment creditors in this case in her capacity as a representative of the judgment debtor. She was not a third-party or a stranger to the litigation. Rather, she was the embodiment of the judgment debtor and was answerable for its failure to meet its court ordered payment obligations.

[13] As noted by the Court of Appeal in AGB Halifax, supra, a judgment creditor is entitled to a broad examination of its judgment debtor on matters relevant to the enforcement of the judgment debt. A judgment debtor who breaches an enforceable order of the court is accountable for its wrongdoing. The examination of a judgment debtor in aid of execution is often the first rung on a ladder of increasingly intrusive and aggressive enforcement steps by which judgment debtors are required to account transparently for their failure to obey an order of the court.

Examination of Third-Parties in Aid of Execution

[14] If a judgment creditor is unable to obtain satisfaction through the examination of the judgment debtor, Rule 60.18(6) authorizes the court to order an examination of “any other person.” In referring to “any other person” the Rule is referring to someone other than the judgment debtor.

[15] There is a long line of old cases that say that the purpose of the examination in aid of execution of a third-party under rule 60.18(6) is to afford a judgment creditor an opportunity to confirm or allay its suspicions before embarking upon a lawsuit against the third-party. See, for example, Chote v. Rowan et al., 1943 CarswellOnt 159 at para. 3.

[16] If the purpose of an examination is solely to obtain facts in order to decide whether to sue a third-party, then, once a lawsuit is commenced against the third-party, the purpose of the rule is spent. However, in Canadian Imperial Bank of Commerce v. Sutton, 1981 CarswellOnt 365 (C.A.) the Court of Appeal held that the purpose of the predecessor of rule 60.18(6) was not limited to determining whether the judgment creditor wishes to sue the third-party whom it proposes to examine in aid of execution. At paragraph 8 of the Court’s reasons Lacourciere J.A. wrote:

We are all of the opinion that the clear and unambiguous words of Rule 591 must be interpreted without the limitations argued for by the appellant. Caution, however, should be exercised by a judge before whom an application is made so that persons who are strangers to the litigation are not unduly harassed by examinations. The relatives of a judgment debtor or a stranger should not be ordered to be examined unless the judgment creditor has exhausted all means available before resorting to an application of this kind. [Emphasis added]

[17] All of the cases referred to by the Master involved motions to examine a third-party rather than the debtor. That is, they were all motions under rule 60.18(6) and its predecessors. They were all infused with the pre-Sutton law that limited the purpose of that subrule to considering whether the judgment creditor wished to start a lawsuit against a third-party witness. Since the decision in Sutton, however, the purpose of rule 60.18(6) is not viewed as being so limited. However, the Court of Appeal also clearly cautioned in Sutton that strangers to the litigation were to be protected from being dragged into litigation unless the judgment creditor had exhausted all means of obtaining satisfaction available to it.

[18] None of this has any relevancy to an examination of the judgment debtor as personified by a member of its board of directors. Joyce Palmer is not a third-party stranger to the lawsuit. She was a member of the judgment debtor’s board of directors. She was the person who conveyed the judgment debtor’s default to the judgment creditors. The judgment creditors are entitled to obtain information from the judgment debtor under rule 60.18(2). They are entitled to know the reason for the judgment debtor’s non-performance of its court ordered obligation. They are entitled to know if the judgment debtor disposed of any assets in the last several years. They are entitled to look for other assets that may be owned by the judgment debtor that may be unrelated to the transfer of its business assets in or around February, 2013. They are entitled to explore the judgment debtor’s solvency now and at the time of any asset dispositions. They are entitled to know about the transferee of any assets of the judgment debtor. Is the transferee a non-arm’s-length party, for example?

[19] A judgment creditor’s entitlement to information under Rule 60.18(2) is not conditional upon or solely for the purpose of deciding whether to commence future proceedings. That limitation, prior to being overruled or limited in Sutton, supra, applied to examinations of third-parties after an examination of the judgment debtor has already proven unsatisfactory. The parties are not at that point yet. Here, the judgment creditors seek to exercise their prima facie entitlement to examine the judgment debtor in the person of its director and officer Joyce Palmer.

Analysis

[20] It follows that in my respectful view, the Master was led into error by argument concerning case law that did not apply to the facts before her. First, Sutton has rendered obsolete the notion that the sole purpose of Rule 60.18(6) is to determine whether to sue a third-party. The prior cases that provide that the right to examine is spent and merge in a new action can no longer be viewed as a definitive rule. Rather, under Sutton, the court is to consider all of the relevant circumstances including the circumstances of a proposed third-party witness in the exercise of its discretion under Rule 60.18(6). Moreover, and of greater significance, Rule 60.18(6) simply does not apply to this case. Joyce Palmer was to be examined on behalf of the judgment debtor under Rules 60.18(2) and (3) and not as a third-party or stranger to the litigation under Rule 60.18(6). In my respectful view, it was an error of law to hold that the judgment creditors’ entitlement to examine Ms Palmer on behalf of the judgment creditor was either spent or merged in the new action.

[21] However, that does not end the matter. As noted above, the decision of whether to compel Joyce Palmer to attend under Rule 34.15 is discretionary. The Master noted that she had discretion but she did not purport to be exercising a discretionary power in making her decision. Rather she simply ruled that as a matter of law the judgment creditors had lost their entitlement to examine Ms Palmer when they commenced the new action. However, there is commentary in the Master’s reasons that would suggest that had she considered the matter from a discretionary point of view, she may have declined to exercise her discretion. I refer, in particular, to the discussion in paragraphs 19 and 21 of the decision below concerning fairness. The Master expressed concern that by proceeding with litigation against Joyce Palmer, before having conducted the examination in aid of execution of the judgment debtor, the judgment creditors “would essentially have two examinations for discovery or two examinations in aid of execution.” The Master found this to be unfair.

[22] The Master also expressed a concern that the co-defendants in the new action would not have standing to attend at Joyce Palmer’s examination in aid of execution. The Master found this too to be unfair to the co-defendants. Overall, the Master was concerned about the creation of a multiplicity of proceedings and providing an “unfair advantage to the [judgment creditors] by allowing them to conduct two examinations on the same matters in issue.”

[23] I am not sure that I understand the Master’s concerns. Had the judgment creditors proceeded “correctly” (as alleged by the judgment debtor), they would have conducted an examination in aid of execution of Joyce Palmer on behalf of the judgment debtor first. If the judgment creditors then sued Joyce Palmer and others, the judgment creditors, as plaintiffs, would be entitled to conduct examinations for discovery of Joyce Palmer and the other defendants. That is, there would be two examinations of Joyce Palmer and the co-defendants would have had no standing or involvement in the prior examination in aid of execution. That is the very situation which the Master characterized as unfair below. Yet it happens in either case.

[24] It seems to me that the Master’s characterization of the process as unfair is infused with concerns for strangers to this litigation. Had Joyce Palmer been a stranger to this case, she could not be examined in aid of execution without an order of the court. At that hearing, the court would consider all of the circumstances of the prior and future litigation in order to protect the proposed witness from harassment. Even in that case however, the judgment debtor could be examined in any event through a director or officer. If a lawsuit then commenced against Joyce Palmer, there still would have been an examination in aid of execution of the judgment debtor and there will be an examination for discovery of Joyce Palmer.

[25] The fact that there are two examinations of Joyce Palmer is caused by the fact that she is not a stranger to this litigation. The two examinations will overlap; but they are not the same. In the examination in aid of execution, she is the representative of the judgment debtor obliged to provide the information set out in Rule 60.18(2) as broadly interpreted and applied. She is not there to provide information concerning her own assets except as may be relevant to issues concerning the judgment debtor under Rule 60.18(2). In the new litigation, she will be examined for discovery as a party with all that that entails. The court’s concern to protect the positions of strangers to litigation from harassment and multiplicity is not implicated in this situation.

[26] Counsel for the judgment debtor stresses that the judgment creditors want to use information to be gained in the examination of aid of execution against the defendants in the new litigation. But the judgment debtor is the party that argued that obtaining information concerning possible new litigation is the very purpose of an examination in aid of execution. It cannot, at the same time, complain that the judgment creditors are doing just that. Rather, the only objection that the judgment debtor has is that the judgment creditors commenced the new litigation before holding the examination in aid of execution. Counsel submits that it is inappropriate for the judgment creditors to have commenced litigation if they do not yet have particulars to support the serious allegations that they have made against all of the defendants in the new action. However, if there is impropriety or insufficient pleadings in the new action, that is a matter to be dealt with in that litigation. I have no doubt that counsel and the court will ensure that the defendants in the new litigation are treated in accordance with the Rules of Civil Procedure and all applicable law.

[27] It follows therefore, that to the extent that the Master was exercising discretion in assessing unfairness to Joyce Palmer or the defendants in the new litigation, she was proceeding on wrong principles by treating Joyce Palmer as a stranger to this litigation and by assuming that the defendants in the other litigation had rights in this litigation. Accordingly, in my view, the Master’s decision to refrain from ordering Joyce Palmer to attend for examination in aid of execution must be set aside.

[28] The judgment debtor submits that in the event that the court sets aside the order of the Master, it should follow the example of Master Clark in Chitel v. Rothbart et al., 1987 CarswellOnt 429. In that case, to protect a witness from duplication of proceedings, the Master found that the examination in aid of execution should exclude any questions referring to the issues in the new action. However, four days later, in Chitel v. Rothbart, 1987 CarswellOnt 430, the Master was asked to settle his order. The Master realized that there was significant overlap in the two actions and found that an order preventing questions that dealt with all of the issues in the new action “would render useless any examination in aid of execution.” Accordingly, he chose a much more limited mechanism applicable in the case before him.

[29] In my respectful view, there is no concern about the multiplicity of proceedings here. The judgment creditors have an order of the court which they seek to enforce. At the same time, they are suing for alleged asset stripping or conduct which, if proven true, would be a most serious violation of a number of statutes and could amount to contempt of court under rule 60.18(5). The lawsuits are related, but they proceed independently. While it might have been preferable for the judgment creditors to have waited for the completion of the examination in aid of execution prior to commencing the new litigation, the reduction of the limitation period in Ontario from six years to two years requires parties who know that they have a right to sue to proceed quickly. While I do not countenance the commencement of a lawsuit or the making of serious allegations that a plaintiff cannot support, if such happens, the defendants have their remedies in those lawsuits. This is not a ground to deny a judgment creditor of its prima facie entitlement to examine its judgment debtor in aid of execution as the first step in holding accountable the judgment debtor, those who control it, and anyone who acts in concert with it, to avoid court imposed obligations.

[30] In accordance with section 134(1) of the Courts Of Justice Act, R.S.O. 1990, c C.43, an order will go requiring Joyce Palmer to attend forthwith for examination in aid of execution on behalf of the judgment debtor in terms of paragraphs a, b, and c on page 2 of the judgment creditors’ notice of motion dated March 30, 2015 that is found at tab 3 of their Appeal Record. The examination shall take place prior to the hearing of the motion for particulars in the new action. For clarity I note that the fact that a question may be relevant to issues or property that are the subject matter of the judgment creditors’ new action is not a proper basis for the judgment debtor to decline to answer relevant questions on the examination in aid of execution.

Costs

[31] As the appeal is allowed and the order below has been set aside, I must deal with costs both here and below. The Master had ordered that costs in the amount of $2,500 be paid by the judgment creditors to the judgment debtor. Counsel for the judgment debtor agreed that in the event that the order below was set aside, costs of $2,500 should be ordered paid by the judgment debtor to the judgment creditors.

[32] The judgment debtor submitted that in the event that the judgment creditors were successful, there should be no order as to costs because the matter in issue is novel. However, it submitted that in the event that it succeeded or if an order was made limiting the scope of the examination in aid of execution (as was the case in Chitel v. Rothbart, supra) then it should be entitled to costs. Apparently, novelty wears off quickly when one is successful.

[33] The fixing of costs is a discretionary decision under section 131 of the Courts of Justice Act. That discretion is generally to be exercised in accordance with the factors listed in Rule 57.01 of the Rules of Civil Procedure. These include the principle of indemnity for the successful party (57.01(1) (0.a)), the expectations of the unsuccessful party (57.01(1) (0.b)), the amount claimed and recovered (57.01(1)(a)), and the complexity of the issues (57.01(1)(c)). Overall, the court is required to consider what is “fair and reasonable” in fixing costs, and is to do so with a view to balancing compensation of the successful party with the goal of fostering access to justice: Boucher v Public Accountants Council (Ontario), 2004 14579 (ON CA), (2004), 71 O.R. (3d) 291, at paras 26, 37.

[34] In my view, the issues in the appeal turned on the application of existing law as set out by the Court of Appeal. The respondent reasonably ought to have expected to bear costs on a partial indemnity basis in the event that it was unsuccessful. Accordingly, the judgment debtor shall pay costs of the appeal of $5,500. Including costs below, the judgment debtor shall pay to the judgment creditors jointly and severally aggregate costs of $8,000 all-in forthwith.

F.L. Myers, J.

DATE: August 31, 2015

ONTARIO
SUPERIOR COURT OF JUSTICE

B E T W E E N:

KRISTINA ZAKHARY PROFESSIONAL CORPORATION and DR. KRISTINA ZAKHARY

Judgment Creditors

• and -

AGE-LESS DERMAL THERAPY INC.

Judgment Debtor

REASONS FOR DECISION

F.L. MYERS J.

Released: August 31, 2015

[^1]: There is no issue that judgment debtor was subject to enforcement proceedings under Rule 60 in respect of the outstanding certificate of assessment. See Rules 60.02 (2) and 60.18 (1)