Court File and Parties

COURT FILE NO.: 76324/11 DATE: 20190219 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Todd Family Holdings Inc. and Future Image Holdings Corporation Plaintiffs

– and –

Roy John William Gardiner, Barefoot Science Technologies Inc., Dayl Marie Armstrong, Barefoot Science Holdings Inc., Barefoot Science Direct Inc., Barefoot Science Group Marketing Inc. and Advanced Barefoot Technologies Inc. Defendants

– and –

Lance Todd, Barefoot Science Products and Services Inc., and 2215535 Ontario Inc. Third Parties

Counsel: Gary Sugar, for the plaintiffs Bryan McLeese, for the defendants Roy John William Gardiner and Advanced Barefoot Technologies Inc.

Heard: October 29, 2018

Before: Bale J.

Reasons for Decision

[1] A motion for directions was made by the plaintiffs, at a case management conference held in October 2018. At the conclusion of the conference, I made an order giving directions, with written reasons to follow.

[2] The motion for directions arose from an order of the Court of Appeal, pursuant to which the action was sent back to this court, for an assessment of damages.

[3] This action was tried over 23 days between May and December of 2014. Written argument was submitted in January 2015, and reasons for judgment [1] were released in July 2015. Future Image Holdings Corporation (“Future”) was awarded judgment in the amount of 2,217,602.28 USD. In addition, Future was given the right to exploit certain intellectual property pledged as security for amounts invested by it in the defendants’ business, until such time as the monetary judgment was satisfied. [2]

[4] On appeal by the defendants, the judgment for 2,217,602.28 USD was set aside, and the case was remitted to this court for an assessment of damages. [3] The order of the Court of Appeal provides that the damages are to be assessed on the basis that Future is owed 1,250,640.34 USD, plus prejudgment interest of 340,910.85 USD (total 1,591.551.19 USD), less the profits generated by Future through the exploitation of the collateral since July 14, 2009 (the date upon which, by interim order, Future was given the right to do so). In addition, the Court of Appeal ordered that if the profits generated by Future exceeded 1,591,551.19 USD, the excess would be payable by Future to the defendant Gardiner.

[5] The trial judgment of 2,217,602.28 USD was calculated based upon a 1,000,000 USD loan, a payment of interest on that loan of 500,000 USD (which had apparently become “immediately due”), and a 250,000 USD share purchase, with the balance being prejudgment interest, at 5 per cent per year. The Court of Appeal overturned the trial judge’s finding that the plaintiffs were entitled to damages of 2,217,602.28 USD on two grounds.

[6] The first ground related to the proper measure of damages for deceit:

25 We agree with counsel for the appellants submission that the measure of damages for deceit requires that the injured party be placed in the position it would have been in had the misrepresentation not been made. Damages for deceit are not calculated on the assumption that the injured party is entitled to enforce the agreement entered into as a result of the misrepresentation. Consequently, Future was not entitled, as part of its damage claim for deceit, to claim the $500,000 interest payment required under the terms of the loan.

26 Future is entitled to the amount it advanced by way of loans and share purchases -- $1,250,640.34 -- the amount referred to by the trial judge, at para. 65. Future is also entitled to prejudgment interest calculated on the various advances as of the date the advances were made and according to the rates established under the Courts of Justice Act.

[7] The second ground related to the profits earned by Future in the six years it had operated the business prior to trial:

30 The respondents eventually realized on their security after Barefoot Holdings defaulted on the loan obligations. The respondents took control of the business and by the time of trial in 2015, had operated the business for some six years. It was common ground that any profits earned during that six years should be deducted from any amounts owed to the respondents.

37 The trial judge had to come to grips with the available evidence relating to the operation of the business in the six years after Todd assumed control. He could not avoid that task because he believed Todd to be a victim and because he was satisfied that Todd was destitute. Furthermore, the trial judge had to take into account the negative implications flowing from Todd's abject failure to comply with the relevant Rules and prior court orders.

38 The trial judge's conclusion that there was "absolutely no recovery" in the years that Todd operated the business reflects a failure to engage with the relevant evidence, and reliance on irrelevant considerations. The finding must be set aside.

Basis for the assessment of damages

[8] The plaintiffs’ position on this motion is that the trial judge awarded 2,217,602.28 USD in both deceit and contract, and that the decision of the Court of Appeal reducing the award to 1,250,640.34 USD applied only to the damages for deceit. I disagree with this position for the reasons expressed during the hearing of the motion, which included the following:

[9] First, the trial judgment referred to one amount of 2,217,602.28 USD, only. That amount was contained in paragraph 1 of the trial judgment. Paragraph 1 of the trial judgment was set aside by paragraph 1 of the order of the Court of Appeal.

[10] Second, under the heading “Conclusion”, in his reasons for judgment, the trial judge said the following:

79 For the foregoing reasons, the following dispositions will be made: (1) For the deceit/fraudulent misrepresentation Future Image Holdings Corporation shall have judgment against the defendants, Roy John William Gardiner, Dayl Marie Armstrong and Barefoot Science Technologies Inc. for the Canadian dollar equivalent of $2,217,602.28 USD inclusive of prejudgment interest as at February 1, 2015.

No other monetary award was made, and the Court of Appeal said:

24 Ultimately, the trial judge awarded monetary damages to Future in the amount of 2,217,602.28 USD. All of the damages were awarded for “deceit/fraudulent misrepresentation (para. 75)”. [4] The trial judge did not award damages for the respondent’ claims of lost salary and recovery of expenses. The respondents have not appealed from that aspect of the decision.

[11] Third, the assessment that the Court of Appeal ordered be heard by this court is an assessment of damages “for deceit/fraudulent misrepresentation” on the basis that Future is owed 1,250,640.34 USD, plus prejudgment interest at the court rate, less the profits earned by Future through exploitation of the collateral (para. 2 of the order). This court has no authority to do otherwise.

[12] Fourth, present counsel for the plaintiffs was retained following the signing of the order of the Court of Appeal. After being retained, he submitted to the registrar of the Court of Appeal that the reference in paragraph 2 of the court’s order to damages “for deceit/fraudulent misrepresentation” should be changed to “for the tort of deceit/fraudulent misrepresentation, for breach of contract, and pursuant to s. 248 of the Business Corporations Act (Ontario).” The registrar submitted that argument to the panel of the court that heard the appeal, and the panel declined to make the change. Plaintiffs’ counsel argues that the court did not deal with the issue because it did not give reasons for declining to make the change. For obvious reasons, I do not accept that argument.

[13] Fifth, plaintiffs’ counsel also submitted to the registrar that a paragraph should be added to the order granting judgment to Future “under its promissory note in the amount of US$2,217,602.28 (the “Debt”)”, plus pre and postjudgment interest, less profits generated through the exploitation of the collateral. Again, the hearing panel declined to do so, and again I reject the plaintiffs’ argument that the court did not deal with the argument.

[14] Sixth, the order of the Court of Appeal provides that if the profits exceed 1,250,640.34 USD, the amount of any profits in excess of that amount will be payable by Future to Gardiner. The plaintiffs argue that this paragraph of the order is “fabricated” – an odd way to characterize a final order of the Court of Appeal.

[15] Seventh, plaintiffs’ counsel argues that paragraph 4 of the trial judgment does not make sense, in the absence of a judgment on Future’s promissory note. The paragraph reads as follows:

THIS COURT DECLARES that Future Image Holdings Corporation is entitled to exclusively exploit (“Exploitation”) all of the Collateral pursuant to the Security Agreement until such time as the monetary judgment contained in the Reasons for Decision of the Honourable Justice McIsaac dated July 8, 2015 is fully satisfied including all associated interest and legal costs.

While I understand the plaintiffs’ argument, the problem is that the defendants unsuccessfully made the same argument at trial, but the trial judge sided with the plaintiffs who, at trial, had argued that there was no inconsistency between damages for fraudulent misrepresentation and enforcement of Future’s promissory note and security agreement. In siding with the plaintiffs, the trial judge held (para. 47) that enforcing the security “complements the claim for damages and had the potential to mitigate them. I see no inconsistency on their part and the doctrine of election simply does not apply in these circumstances.” The decision to allow Future to exploit the intellectual property had been made on an interlocutory motion, years before the trial, and on whatever basis damages were awarded to the plaintiffs, it was only fair that the defendants receive credit for the profits earned.

[16] Finally, if the Court of appeal had agreed that there was a judgment in contract for the sum of 2,217,602.28 USD, there would have been no point in setting aside the judgment for 2,217,602.28 USD in damages for deceit.

Additional issues

Further examinations for discovery

[17] There is no basis for any further examination of Roy Gardiner for discovery. Counsel for the plaintiffs wants to examine him on what he alleges are continuing acts of fraud, including unlawful competition. I do not see how these allegations are relevant to the accounting. In addition, counsel for the defendants does not anticipate calling Gardiner as a witness on the accounting, and counsel for the plaintiffs indicates that if Gardiner is not to be called, he does not require a further examination for discovery.

[18] The defendants request a further two days for the examination of Lance Todd for discovery, as a result of the fact that since the trial, the plaintiffs have disclosed an additional 2,000 documents. In my view, an examination of the plaintiffs for one further day will be sufficient, and will be restricted to evidence relating to the question of profits earned in the period following the trial.

Evidence admissible with respect to profits earned

[19] The evidence with respect to the profits earned prior to trial will be restricted to the evidence given at the original trial, and will be introduced by filing copies of the trial transcript, and trial exhibits. The decision of the Court of Appeal overturning the decision of the trial judge with respect to the profits earned up to the date of trial was based upon the trial judge’s failure to “come to grips” with the available evidence, and his failure to take into account the negative implications flowing from the plaintiffs’ “abject failure to comply with the relevant and prior court orders.” No reason has been given as to why, having gone to trial on the basis of the evidence then available, either party should be able to supplement the evidence to which the judge hearing the assessment will have to come to grips.

[20] A possible exception to this ruling relates to the evidence of a Mr. Pietro called by the plaintiffs to give financial evidence. Apparently, during cross-examination, the trial judge ruled that his evidence was inadmissible, because the plaintiffs had not complied with rule 53.03. Counsel for the plaintiffs argues that as a result of the decision of the Court of Appeal in Westerhof v. Gee Estate, 2015 ONCA 206, this evidence would now be admissible, and should be admitted as evidence on the accounting. If this evidence is admitted, counsel for the plaintiffs concedes that Mr. Pietro should be subject to further cross-examination. I note that the trial judge’s ruling with respect to this evidence was not appealed by the plaintiffs, nor was it the subject of any comment by the Court of Appeal.

[21] Not having had an opportunity to review the transcript of Mr. Pietro’s evidence, or the trial judge’s ruling, I am not in a position to make a ruling in relation to the admissibility of his evidence on the accounting. I will therefore leave that issue to the accounting judge.

[22] The question of the profits earned by Future since the date of the trial is a new issue, and any questions with respect to the admissibility of evidence on that question will be an issue for the accounting judge. However, it would seem clear that expert reports will be required from both sides.

[23] Counsel for the defendants asked that I approve a letter that he would like to send to customers and suppliers who may have done business with the plaintiffs. The purpose of sending the letter would be to obtain evidence relevant to the determination of profits earned by Future. Counsel for the plaintiffs opposes the sending of the letter and argues that it could harm the plaintiffs’ business. I declined to approve the letter because I do not know what effect it may have, and the defendants are not entitled to an order that would isolate them from liability, in the event that it does cause harm.

[24] At the conclusion of the motion for directions, the parties believed that they would be able to agree on a timetable for completion of the interlocutory steps required before the assessment hearing. However, if they have any difficulty doing so, or if there are any further issues requiring resolution, I may be spoken to.

[25] The costs of the hearing on October 29, 2018 are reserved to the judge presiding over the damage assessment.

Footnotes:

[1] Reported at 2015 ONSC 4432. [2] The trial judgment, as varied by the Court of Appeal, is against the defendants Roy Gardiner and Advanced Barefoot Technologies Inc., only. For the sake of simplicity, they are referred to in these reasons as the “defendants”. [3] With reasons reported at 2017 ONCA 326. [4] The reference to “para. 75” would appear to be a typographical error. I believe the reference was intended to be to paragraph 79.

Released: February 19, 2019 S.T. Bale J.