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Shaver-Kudell Manufacturing Inc. v. Knight Manufacturing Inc. et al, 2020 ONSC 7635

Do claims for misappropriation of trade secrets and breach of confidence survive bankruptcy?

The Plaintiff commenced an action against the Defendants, claiming that they misappropriated its trade secrets and committed a breach of confidence. The trial judge found that the Defendants had misappropriated the Plaintiff’s trade secrets and breached their duties of confidence and good faith. The trial on the remaining issue—entitlement to damages—was to proceed in April 2020 but has since been adjourned. A new date for the continuation of the trial has yet to be scheduled.

One of the Defendants filed a Notice of Proposal to Creditors, which resulted in the Plaintiff’s action being automatically stayed as against that Defendant. The Plaintiff sought a declaration that upon any discharge from bankruptcy granted to the Defendant, he would not be released from any debts or liabilities arising from the claims of the Plaintiff against him, including any outstanding or future costs award.

The Plaintiff argued that the Defendant should not be able to escape the debt as it falls within the ambit of s. 178(1)(e) of the Bankruptcy and Insolvency Act. The Plaintiff submitted that the Defendant’s manufacturing and sale of the product, which was found to be as a result of a misappropriation of the Plaintiff’s trade secrets, constituted obtaining property by false pretences. The Plaintiff argued that to fall under the “false pretences” exception, the impugned conduct need not rise to the level of fraud.

The Defendant argued that the Plaintiff had mischaracterized its claim as being grounded in “false pretences” in an attempt to fall within the ambit of s. 178(1)(e). The Defendant suggested that in determining if a claim is based on “false pretences” within s. 178(1)(e), the Courts have adopted the Criminal Code definition of false pretences, which includes a fraudulent component. The trial judge made no findings of deceit or fraud on the part of the Defendant.

The exceptions contained in s. 178(1)(e) are morality concepts that look at conduct. These types of conduct are not acceptable to society and a bankrupt should not be rewarded with a release of liability. The onus is on the creditor who seeks to have the debt or liability survive the discharge to bring it within one of the provisions of s. 178(1)(e). The use of the word “or” in s. 178(1)(e) signifies that there are two options: either the property was obtained by “false pretences” or it was obtained by “fraudulent misrepresentation”. Only one basis of liability must be proven to engage this subsection.

The essential test for both “false pretences” and “fraudulent misrepresentation” is whether the bankrupt was “deceitful” in obtaining the property. For the “false pretences” option to be satisfied, reliance on any representation need not be shown. Rather, it must be demonstrated that the debtor obtained its property by pretences which the debtor knew to be false. A causal connection between the bankrupt’s wrongdoing and the creation of the debt or liability is required. The Court must be satisfied that the creditor is likely to be materially prejudiced by the continuance of the stay.

The trial judge made a number of findings that pointed to the Defendant’s dishonest and unlawful conduct. These findings amounted to deceitful and dishonest conduct which engaged s. 178(1)(e). The Defendant, who was the controlling mind of the corporate defendant, was able to penetrate a very unique market within a period of nine months when it took twenty years for the Plaintiff to achieve the same. The trial judge reasoned that this could only be accomplished by copying (i.e., stealing) the Plaintiff’s tooling and manufacturing process.

The Defendant willingly participated in the scheme to utilize confidential information that was not his to use. He knowingly partnered and/or employed individuals that had unlawful knowledge of trade secrets and he used this confidential information for his own financial gain and to the detriment of the Plaintiff. He was a deceitful wrongdoer and the Court held that he should be precluded from benefitting from his dishonesty.

The trial judge’s determination that the Defendant misappropriated the Plaintiff’s trade secrets and confidential information led to an award of costs, which was a debt owed. The requirement that there exists a causal connection between the Defendant’s wrongful conduct and the creation of the debts was clear and satisfied. The Plaintiff was entitled to a declaration that upon any discharge from bankruptcy granted to the Defendant, he would not be released from any debts or liabilities arising from the Plaintiff’s claims, including the costs award.

Counsel: Charles D. Hammond for the Plaintiff and Ian Klaiman of Lipman Zener & Waxman for the Defendant

Judges: Smith J.

 

Fullcase: https://canlii.ca/t/jc2q0