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Dead End Survival, LLC v. Marhasin, 2020 ONSC 766

Will a judgement against a bankrupt for selling counterfeit goods be discharged in his bankruptcy?

The Creditor sought an order declaring that the Bankrupt not be released from his indebtedness to it on his discharge from bankruptcy. The Creditor asserted 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 (the “BIA”), the Bankrupt should not be released from his liability.

In an action commenced in the United States, the Creditor claimed that the Bankrupt was offering for sale and selling the Creditor’s own brand of goods without authorization. The American Court found that the Bankrupt took steps to have the Creditor’s customers believe that the counterfeit items that the Bankrupt was offering came from the Creditor. The American Court granted a default judgment in the total amount of USD$2,050,149 against the Bankrupt. The default judgment was subsequently domiciled such that it is enforceable in Ontario.

The Bankrupt filed for bankruptcy on October 7, 2019. The Bankrupt’s Statement of Affairs listed total liabilities of $2,786,905.60, of which the US Judgment represented $2,725,954.24.

The Creditor argued that the Bankrupt should not be released from the US Judgment because the debt arose because the Bankrupt obtained property by false pretences. The Bankrupt argued that the debt was disproportionate to the Bankrupt’s conduct—he did not make a profit on the sale of the counterfeit items. The Bankrupt also claimed that the public policy on bankruptcy in Canada should not support requiring a regular wage-earner to pay what are essentially punitive damages.

Under the BIA, 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. 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. 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.

The absence of a profit does not defeat the causal connection between the wrongdoing and the creation of the debt. The Bankrupt did 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 he 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. These facts were sufficient to demonstrate that the domiciled US Judgment fell within the ambit of s. 178(1)(e) of the BIA.

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 economic consequences of a trademark infringement, including brand damage and interference with the moving party’s economic relations, would be difficult to quantify. The value of the proceeds received by the Bankrupt is not the measure of the loss of property caused to the moving party.

The Court accepted that the Bankrupt regretted his decision to engage in the conduct that led to the judgment against him. Nonetheless, 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. 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.

As such, the domiciled judgment fell 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 judgment.

CounselJordan Goldblatt of Adair Goldblatt Bieber LLP for the Moving Party and Matthew Harris for the Respondent.

Judge: Dietrich J.

Fullcase: http://canlii.ca/t/j5ns1