COURT FILE NO.: 12-55087

DATE: 2015/12/18

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: TREATS INTERNATIONAL FRANCHISE CORPORATION and TREATS INTERNATIONAL DEVELOPMENT CORPORATION, Plaintiffs

AND:

2247383 ONTARIO INC., ANAND SHUKLA and ANILKUMAR PATEL, Defendants

AND;

2247383 ONTARIO INC., ANAND SHUKLA and ANILKUMAR PATEL, Plaintiffs by Counterclaim

AND:

TREATS INTERNATIONAL FRANCHISE CORPORATION, TREATS INTERNATIONAL DEVELOPMENT CORPORATION, MICHAEL CROTTY, RYAN GIBSON and DOUG LIPPAY, Defendants to Counterclaim

BEFORE: Valin J.

COUNSEL: Michael Kleinman, for the Defendants, Plaintiffs by Counterclaim

Martin Diegel, for the Plaintiffs, Defendants to Counterclaim

Kenneth Page, for the Trustee in Bankruptcy of the Defendant Anilkumar Patel

HEARD: November 25, 2011.

ENDORSEMENT

[1] The plaintiff corporations (TIFC and TIDC) carry on business in the specialty food service franchise sector. TIFC grants franchises for its coffee and baked goods concept commonly known as “Treats”. TIDC grants subleases of store locations where a Treats outlet is operated by a franchisee.

[2] The defendants Shukla and Patel reside in the City of Toronto. They incorporated the defendant corporation. On July 23, 2010, they entered into (a) a franchise agreement with TIFC for a store location in the Toronto Dominion Centre in Toronto, and (b) a sublease with TIDC for that location. They assigned those agreements to the defendant corporation the same day, and took possession of the store location.

[3] The defendants operated the store until July 20, 2012, when they abandoned the premises and claimed rescission under the Arthur Wishart Act (Franchise Disclosure), S.O. 2000, c. 3.

[4] In this action, the plaintiff claims payment of the sum of $ 77,112.01. The vast majority of this amount is for arrears of rent and damages for breach of the franchise agreement and sublease.

[5] On November 22, 2012, the defendants filed a statement of defence and counterclaim against TIFC, TIDC, and three individuals alleged to be employees of TIFC.

[6] The defendants have brought a motion for summary judgment in which they seek an order:

(a) dismissing the plaintiff’s claim;

(b) granting judgment against the plaintiffs in the amount of $156,392 for money payable to them as a consequence of the rescission of the franchise agreement;

(c) granting a declaration that the franchise, sublease, and ancillary agreements the defendants entered into with the plaintiffs were validly rescinded by a notice of rescission delivered on July 20, 2012; and

(d) granting costs of the motion and the action on a substantial indemnity basis.

[7] The defendant Patel owned 60% of the shares in the defendant corporation. He operated the business. The defendant Shukla owns the remaining 40% of the shares. He was a silent partner.

[8] The defendant Patel made an assignment in bankruptcy on November 16, 2012, after this action was commenced and 6 days before the statement of defence and counterclaim was issued. He was discharged from bankruptcy on August 17, 2013.

[9] Section 71 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 provides that, once a bankruptcy order is made, subject to the Act and the rights of secured creditors, the bankrupt’s property passes to the trustee named in the bankruptcy order.

[10] The jurisprudence under s. 71 of the BIA has made exceptions where the bankrupt’s claim or loss is personal in nature rather than proprietary. Exceptions that are personal in nature have included claims for damages for personal injury or defamation. In those cases, the courts have held that the cause of action does not become the property of the trustee. The bankrupt is entitled to pursue claims of that nature in his/her own right. See Meisels v. Lawyers Professional Indemnity Co., 2015 ONCA 406 at para. 13.

[11] The claim advanced by the defendant Patel in the counterclaim in this action is not personal in nature. It is a claim for monies owing as a result of alleged breach of contract and statute. By virtue of s. 71 of the BIA, the claim clearly vested in the trustee in bankruptcy.

[12] In Murphy v. Stefaniak, 2007 ONCA 819 at para. 28, the Ontario Court of Appeal held that, the effect of s. 71 of the BIA is that the bankrupt ceases to have any capacity to deal with his property. The Court of Appeal also held that an action commenced by an undischarged bankrupt is a nullity.

[13] Spoliation is the intentional destruction of relevant evidence when litigation is existing or pending. See: McDougall and McGougall v. Black & Decker Canada Inc., 2008 ABCA 353 at para. 29. In his affidavit sworn on August 1, 2014, Shukla states at para. 16;

My partner Anil was the person who was operating the Treats franchise at the Premises and who was responsible for maintaining the books and records. Unfortunately my partner Anil became very scared that Treats had commenced legal proceedings against him and despite the advice of our lawyer…filed for bankruptcy on November 16, 2012. Anil was discharged from bankruptcy on August 17, 2013. As a result of such bankruptcy, Anil did not believe that it mattered whether or not he continued to maintain the financial records for the Treats franchise at the Premises and despite my best efforts to have him produce those records for me and the Franchise Anil has been unable to do so. It is my understanding that Anil has thrown out the financial records…

Patel has not filed an affidavit that explains what he did with the records or why he disposed of them.

[14] I am not convinced that anything can be done to cure a nullity. In any event, in the circumstances where Patel was the party operating the business and he has thrown out most of the records of the business during the time he operated it, I am not inclined to exercise any discretion I may have under either the BIA or the Rules of Civil Procedure to attempt to cure what occurred.

[15] Having found that the statement of defence and counterclaim is a nullity, the defendants’ motion for summary judgment is dismissed.

[16] In the event they are unable to agree on costs, counsel may arrange a teleconference with me through the trial coordinator in North Bay for directions on how the matter of costs will be argued.

The Honourable Mr. Justice G. Valin

Date Released: December 18, 2015