IN THE MATTER OF THE BANKRUPTCY OF GEORGI MARHASIN, OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO

COURT FILE NO.: BK-19-2567940-0031 DATE: 2020-02-24 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

DEAD END SURVIVAL, LLC Moving Party

– and –

GEORGI MARHASIN Respondent

Counsel: Jordan Goldblatt, for the Moving Party Matthew R. Harris, for the Respondent

HEARD: February 3, 2020

REASONS FOR DECISION

DIETRICH J.

[1] The moving party, Dead End Survival, LLC brings this motion for an order declaring that the respondent Georgi Marhasin (the “Bankrupt”) not be released from his indebtedness to it on his discharge from bankruptcy. The moving party asserts that the debt resulted from the Bankrupt obtaining property by false pretences and, therefore, in accordance with the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), the Bankrupt should not be released from his liability.

[2] In an action in the United States against the Bankrupt and his business Marchesini Warehouse, the moving party claimed that the Bankrupt was offering for sale and selling the moving party’s own brand of goods without authorization. It also claimed that the Bankrupt had filed trademark claims alleging that the moving party was infringing on the Bankrupt’s trademarks, when in reality the Bankrupt was infringing on the moving party’s trademarks.

[3] On October 31, 2018, the Northern District Court of Georgia, Atlanta Division granted a default judgment in the total amount of USD$2,050,149 against the Bankrupt (Dead End Survival, LLC v. Does 1 – 3, 2018 WL 6380796 (N.D. Ga. Oct. 31, 2018) (the “Georgia Judgment”). Then, on June 5, 2019, the moving party obtained an order from this court (2019 ONSC 3569, 306 A.C.W.S. (3d) 513), enforcing the Georgia Judgment in Ontario (the “Ontario Judgment”).

[4] For the reasons that follow, I find that for the purposes of the BIA, the debt arising out of the Ontario Judgment is a debt or liability resulting from obtaining property by false pretences. The result is that the Bankrupt is not released from this debt or liability on his discharge from bankruptcy.

Background Facts

[5] The moving party, a corporation incorporated in 2014 pursuant to the laws of Michigan, sells “authentic high quality survival gear” through various online retailers, including amazon.com (“Amazon”), under the name SharpSurvival.

[6] The Bankrupt is a Canadian citizen and an Ontario resident. He and a friend, Gary Leung, infringed on the moving party’s trademarks, appropriated the amazon.com listings for products and sold counterfeit goods to online customers who believed that the goods were the moving party’s products.

[7] In granting the Georgia Judgment, Justice Cohen found that the moving party had met its high burden and proved, among other things, that the Bankrupt was offering for sale the moving party’s own brand of goods without authorization and that the Bankrupt took steps to have the moving party’s customers believe that the counterfeit items that the Bankrupt was offering in fact came from the moving party. In the result, the moving party lost control of its amazon.com listings, which became associated with the Bankrupt’s counterfeit products.

[8] Justice Cohen concluded that there had been an infringement on the moving party’s trademarks under the Lanham Trade–Mark Act, § 35(a), 15 U.S.C.A. § 1117(a) (the “Lanham Act”); the Bankrupt had engaged in unfair competition under the Lanham Act; the Bankrupt had perpetrated a fraud on the US Patent and Trademark Office by attempting to register a trademark on its own counterfeit goods; the Bankrupt had tortiously interfered with the moving party’s businesses; the claims established deceptive trade practices; and the Bankrupt had been unjustly enriched under Georgia law.

[9] The damages awarded by Justice Cohen include statutory damages[^1] of USD $2,000,000 plus USD $44,760 in attorney’s fees and USD $5,389 in costs.

[10] In granting the Ontario Judgment, Justice Perell considered the affidavit evidence filed by the Bankrupt on the application before him. In his affidavit, the Bankrupt admitted that he had registered a US trademark for “SharpSurvival” and had agreed to participate in a scheme whereby replicate SharpSurvival products would be made in China and shipped to an Amazon warehouse in the US from which the counterfeit goods would be shipped to paying customers.

[11] The Bankrupt filed for bankruptcy on October 7, 2019. The Bankrupt’s Statement of Affairs lists total liabilities of $2,786,905.60, of which the Georgia Judgment represents $2,725,954.24.

Position of the Parties

[12] The moving party asserts that an order of discharge should not release the Bankrupt from the debt he incurred through the Georgia Judgment, which may be enforced in Ontario by virtue of the Ontario Judgment. It argues that the debt arose because the Bankrupt obtained property by false pretences. Specifically, the Bankrupt incurred the Georgia Judgment by selling knock-off products for profit, through Amazon, having infringed on the moving party’s trademarks.

[13] The Bankrupt asserts that the Ontario Judgment does not fall within the ambit of s. 178(1)(e) of the BIA and, therefore, should be released on the Bankrupt’s discharge from bankruptcy. He argues that the findings of fact relevant to a finding of false pretences in Ontario are not specific enough and should not be accepted as evidence necessary to establish the exception set out in s. 178 (1)(e) of the BIA.

[14] The Bankrupt further asserts that if the debt does fit within the exception, the damages should be reduced to the actual debt and not the liquidated damages recorded by this court. He argues that the debt is disproportionate to the Bankrupt’s conduct. He also asserts that neither he nor Marchesini Warehouse made a profit on the sale of the counterfeit items; his proceeds of sale were about $45,000.

[15] The Bankrupt further asserts that, while a public policy defence is not meant to bar enforcement of a judgment rendered by a foreign court, it ought to be considered in the context of releasing the Bankrupt from debt in the context of a discharge from bankruptcy. The Bankrupt submits that the public policy on bankruptcy in Canada should not support requiring a regular wage-earner to pay what are essentially punitive damages. He further submits that in a case of trademark infringement, the damages are not connected to the property; they are statutory. Accordingly, he argues, public policy considerations should apply where the damages are punitive.

Legal Principles

[16] Section 178(1)(e) of the BIA provides as follows:

178(1) An order of discharge does not release the bankrupt from …

(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim.

[17] The onus is on the moving party to show, on a balance of probabilities, that the Bankrupt should not, on his discharge from bankruptcy, be released from the debt or liability: Jerrard v. Peacock (1985), 1985 1148 (AB KB), 37 Alta. L.R. (2d) 197, at para. 39.

Analysis

Does s. 178(1)(e) of the BIA apply to the Ontario Judgment?

[18] The moving party does not seek to prove fraudulent misrepresentation for the purpose of s. 178(1)(e) of the BIA; and the parties agree that the debt or liability does not arise from an equity claim. The moving party asserts that the debt resulted from obtaining property by false pretences.

[19] In applying s. 178(e), the court must consider how the debt arose. The record supports the fact that the debt arose because of actions taken by the Bankrupt. In the Georgia Judgment, Justice Cohen found that the Bankrupt engaged in deceptive trade practices and fraud by deceitfully misrepresenting himself to be the owner of the moving party’s trademarks and by attempting to perpetrate a fraud on the U.S. Patent and Trademark Office by engaging in trademark infringement, and by tortious interference with economic relations of the moving party.

[20] In the Ontario Judgment, Justice Perell specifically references the Bankrupt’s admission in his affidavit in defence of the application to enforce the foreign judgment that the Bankrupt engaged in conduct based on false pretences. At para. 7 of the Ontario Judgment, Justice Perell states: “Although [the Bankrupt] had no stores in Georgia, it is true that he sold counterfeit goods in Georgia. On this application, he admitted that Chinese manufacturers had been hired to manufacture copies of Dead End’s products.” I disagree with the Bankrupt that these findings of fact are not specific enough to establish that the Bankrupt sold goods based on false pretences.

[21] The court must also consider the property obtained by the Bankrupt through false pretences. In Canada Mortgage and Housing Corp. v. Gray, 2014 ONCA 236, the Ontario Court of Appeal, at para. 31, states that: “[a] causal connection between the bankrupt’s wrongdoing and the creation of the debt or liability is required. It is not sufficient that the bankrupt engaged in fraud or that the debt or liability ‘arose out of’ a fraudulent scheme.”

[22] The Bankrupt argues that he and his business made no profit selling the counterfeit goods and therefore he obtained no property. In my view, the absence of a profit does not defeat the causal connection between the wrongdoing and the creation of the debt. The Bankrupt does not dispute that he sold counterfeit goods and collected proceeds. He may not have made a profit in his dealings, but this does not take away from the fact that obtained property through false pretences. The Bankrupt, in conducting himself as he did, knew that he was making and selling counterfeit items for financial gain. That conduct led to the Georgia Judgment, which was found to be enforceable in Ontario.

[23] Accordingly, I am satisfied that the Bankrupt was selling counterfeit goods, as found by Justice Perell, and that the Bankrupt received proceeds from the sale of those goods. These facts are sufficient to demonstrate that the Ontario Judgment falls within the ambit of s. 178(1)(e) of the BIA.

Are there public policy considerations?

[24] In the Ontario Judgment, Justice Perell rejected the Bankrupt’s public policy defence based on the alleged excessiveness of the statutory damages awarded in the United States for trademark infringement. At para. 31 of the Ontario Judgment, Justice Perell stated that the U.S. law about trademark infringement is not contrary to the Canadian concept of justice or basic morality. At para. 32, he cited Beals v. Saldanha, 2003 SCC 72, [2003] 3 S.C.R. 416, at paras. 71 and 75-76, and stated: “The public policy defence is narrowly construed and does not bar enforcement of a foreign judgment because the damages awarded in the foreign proceeding exceed what would have been awarded under Canadian law.” The Bankrupt did not appeal Justice Perell’s decision.

[25] Justice Perell found that the public policy defence does not bar enforcement of the Georgia Judgment in Ontario based on the quantum of the damages. I agree that the public policy defence is narrowly construed and that the U.S. law on trademark infringement is not contrary to the Canadian concept of justice and morality. The Bankrupt deposed that he had “no understanding of the world of Amazon” and relied on Mr. Leung, whom the Bankrupt said conceived of and orchestrated the trademark scheme and the Bankrupt “accepted what Mr. Leung said at face value.” However, the Bankrupt also deposed that the process by which they infringed on the moving party’s U.S. trademarks, as described to him by Mr. Leung, “appeared wrong to [him].” Nevertheless, the Bankrupt knowingly engaged in dishonest conduct that resulted in economic harm to the moving party.

[26] The economic consequences of a trademark infringement, including brand damage and interference with the moving party’s economic relations, would be difficult to quantify. In such a case, significant statutory damages are not unjust. The value of the proceeds received by the Bankrupt is not the measure of the loss of property caused to the moving party.

[27] The Bankrupt had an opportunity to defend himself against the moving party’s claim in the Northern District of Georgia, Atlanta Division, and to dispute the quantum of the damages. He failed to appear at the hearing and default judgment was awarded against him.

[28] The Bankrupt challenges the court’s approach and urges it to consider public policy considerations that would permit the debt to be discharged, or significantly reduced, on the basis that a regular wage earner should not be expected to pay what, in the Bankrupt’s view, is tantamount to punitive damages. I accept that the Bankrupt regrets his decision to engage in the conduct that led to the judgments against him. He deposed that he now works as an information technology manager for a registered charity where he earns an average salary. I nonetheless query whether an individual who knowingly participated in an international scheme founded on false pretences, designed to make substantial profits, can be fairly characterized as a “regular wage earner.” As stated by Fruman J.A. in McAteer v. Billes, 2006 ABCA 312, 397 A.R. 365, at para. 10 (citation omitted): “The bankruptcy scheme is intended to benefit honest but unfortunate debtors … In their own way courts have taken a purposive approach to interpreting s. 178(1)(e), to ensure that dishonest debtors do not benefit from their dishonesty.”

[29] In Simone v. Daley (1999), 1999 3208 (ON CA), 170 D.L.R. (4th) 215 (Ont. C.A.), at para. 27, citing Jerrard on why certain debts remain non-dischargeable under s. 178 of the BIA, the court stated:

All of the exceptions in this section [178] are based on what might be classed as an overriding social policy. In other words, they are the kind of claims which society (through legislators) considers to be of a quality which outweighs any possible benefits to society in the bankrupt being released of these obligations. …

Paragraphs (d) and (e) are morality concepts which look at conduct. Those kinds of conduct are unacceptable to society and a bankrupt will not be rewarded for such conduct by a release of liability.

[30] To permit the Bankrupt’s debt arising from his false pretences to be eradicated on a discharge from bankruptcy would offend the Canadian society’s concept of basic morality.

Disposition

[31] For the reasons given, I am satisfied, on a balance of probabilities, that the moving party has met its onus. The Ontario Judgment falls within the exception established in s. 178(1)(e) of the BIA. An order of discharge of the Bankrupt in the bankruptcy proceeding will not release the Bankrupt from the Ontario Judgment.

Costs

[32] The parties have agreed that there shall be no costs awarded on this motion.

Dietrich J.

Released: February 24, 2020

[^1]: A statutory damages award is an amount stipulated in a statute (e.g., the Lanham Act), rather than an award calculated based on the degree of harm to the plaintiff and is used for acts for which it is difficult to determine the precise loss suffered by the plaintiff.