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Trade Secret and Breach of Confidence Monetary Claim Stayed by Bankruptcy

The purpose of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (BIA) is to relieve an honest and unfortunate debtor of their debts and liabilities. A discharge from bankruptcy releases the insolvent debtor from pre-bankruptcy debts or liabilities provable in bankruptcy subject to certain exceptions.[1]

An exception to this rule is s. 178(1)(e) relating to “any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation”.[2] Where the exception applies then such debt or liability is not released, and continues to remain enforceable against the debtor after bankruptcy.[3]

A successful claim for misappropriation of trade secrets and breach of confidence was brought against the defendant.[4] The quantum of the damages and the granting of other relief was to be determined at a subsequent hearing. Before that could occur, the defendant made a proposal to its creditors under the BIA, the result of which was an automatic stay of those the proceedings. The proposal to creditors was rejected by a majority of those creditors so that the defendant was, as a result, deemed to have made an assignment into bankruptcy, continuing the stay on proceedings.[5]

The plaintiff went to Court and the motion judge ruled that claim for misappropriation of trade secrets and breach of confidence against the defendant came within the exception.

On appeal from that decision, the Ontario Court of Appeal found that a successful claim[6] against a company for misappropriating trade secrets and confidential information that subsequently made a proposal in bankruptcy was not the kind of claim that fell within the exception.[7]

The Ontario Curt of Appeal noted that to qualify for the s. 178(1)(e) exception under the BIA that the key element of the concept of false pretences was “the making of a deceitful statement – that is, a statement that is false to the knowledge of its maker (including through wilful blindness or recklessness). For s. 178(1)(e) to apply, the debt or liability to the creditor must have resulted from the bankrupt having obtained property or services by making such a statement”.[8]

The Ontario Court of Appeal noted that nature and substance of the liability of the defendant is not one that arose from such a statement. The Court noted that “[a]lthough the liability arose from morally unacceptable conduct of the appellant, that is insufficient to fit it within the exception in s. 178(1)(e) of the BIA.[9]

The motion judge had not applied the Criminal Code definition of false pretenses[10] finding that the BIA exception was focused on “wrongful and morally unacceptable conduct” and implied deceit in the defendant’s conduct in the litigation.

The Ontario Court of Appeal applied a “textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole”[11] to the exception to the BIA and found the Criminal Code definition to be helpful in that effort.[12]

The Ontario Court of Appeal found that the s. 178(1)(e) exception does not apply to ”all morally objectionable behaviour”[13] but rather requires “a deceitful statement by which the debtor obtained property or services, causing the debt or liability of the creditor to arise”.[14] That was not what had occurred in the instant case.

Having found that the exception was not applicable the Ontario Court of Appeal reviewed its discretionary power to declare that a stay was no longer operative[15] and lifted the stay to permit the action to proceed “for the purpose of quantifying any damages or accounting of profits owing” by the defendant, “establishing the identity of any property still in the possession” of the defendant “that incorporates the trade secrets, and for any forward-looking injunctive relief against” him. “Any monetary judgment shall only be a claim in bankruptcy against the bankrupt estate” of the defendant and may not be otherwise enforced against him. “Any order for the return of any equipment in the possession” of the defendant “that was made using the trade secrets, and any injunctive relief that is granted” against the defendant “restraining any future use by him of the trade secrets may be enforced against him”.

The Court of Appeal noted that “questions of whether the stay should be lifted to permit the respondent to seek any documentary or oral discovery” from the defendant, “or to enforce any future costs awards that arise from his continued participation in defending claims against him, are dependent on circumstances in the continuing action as they evolve” finding those issues would be left to a future Court to assess.[16]

In the result, the plaintiff saw important non-monetary relief such as on going injunctive relief prohibiting future use of the trade secrets and recover of property incorporating the trade secrets survived the stay of proceedings. The plaintiff, however, had to accept that the monetary claims were stayed by the BIA.

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[1] See section 178(2), Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.

[2] See section 178(1)(e), Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.

[3] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 1.

[4] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2018 ONSC 5206.

[5] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 2.

[6] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2018 ONSC 5206 where the defendant was found liable for misappropriating trade secrets and breach of confidence. Costs of $83,493 for a summary judgment motion and $307,028 for the trial were awarded.

[7] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925.

[8] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 5.

[9] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 5.

[10] See section 361(1), Criminal Code, R.S.C. 1985, c. C-46 which states “A false pretence is a representation of a matter of fact either present or past, made by words or otherwise, that is known by the person who makes it to be false and that is made with a fraudulent intent to induce the person to whom it is made to act on it“.

[11] See Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 10; Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 25.

[12] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 36.

[13] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 42.

[14] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 44.

[15] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 51; applying Fiorito v. Wiggins, 2017 ONCA 765, 415 D.L.R. (4th) 562, at para. 35, leave to appeal refused, [2017] S.C.C.A. No. 466.

[16] See Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc., 2021 ONCA 925 at para. 53.

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