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Civil Litigation - Interim Preservation of Property

. CryptoStar Corp. v. 611890 Alberta Inc.

In CryptoStar Corp. v. 611890 Alberta Inc. (Div Court, 2023) the Divisional Court considers R45.02 ['Interim Preservation of Property - Specific Funds']:
[19] Rule 45.02 provides:
Where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just.
[20] The test for an interim preservation of a specific fund under r. 45.02 requires the plaintiff to establish: (i) a right to a specific fund; (ii) there is a serious issue to be tried regarding the plaintiff’s claim to the fund; and (iii) the balance of convenience favours granting the order: Sadie Moranis Realty Corporation v. 1667038 Ontario Inc., 2012 ONCA 475, at para. 18.

[21] The motion judge considered and applied the test as set out in Sadie Moranis, and considered the more recent decisions in Super A Hotels Investment and Management Group (Canada) Inc. v. 1205723 Ontario Inc., 2015 ONSC 4405 and 3Genius Corporation v. Locationary Inc., 2016 ONSC 4092.

[22] In 3Genius, Belobaba J. applied the test for preservation of a specific fund as established in Sadie Moranis and found that there was a reasonably identifiable fund of money because the funds were: (i) sufficiently differentiated by book-keeping entries showing the monies as “payable” and being held and in the possession of the respondent; and (ii) specified because pursuant to the sale agreement, the holdback amounts were “specified and undisputed” and “due and owing.”[3] Nevertheless, Justice Belobaba denied the moving party’s request for the preservation of a specific fund because its claim was, in essence, a claim for damages.

[23] In Super A Hotels, Master Muir was satisfied that the plaintiff had met the test for a legal right to a specific fund with respect to a security deposit. The deposit was required by a term of the lease agreement between the parties “to be held by the Landlord until the Tenant ha[d] completed its fixturing of the premisses...Upon completion of the fixturing...and upon successful opening of the Tenant’s business, the Landlord shall return the $200,000.00 security deposit to the Tenant.”

[24] Master Muir did not, however, view the other advance payments in the same light, observing that there was nothing in the language of the agreements that required the defendant to hold or segregate the payments pending some future event and that the language of the agreements appeared to allow the defendant to use the funds as it saw fit. Master Muir concluded that the plaintiff’s advance payments of rent and its contribution to the rezoning expenses were not “reasonably identifiable funds earmarked to this litigation” and the defendant was no longer in possession of the advance rental payments: ‘[i]n my view, the court cannot order the preservation of a fund under Rule 45.02 when the fund no longer exists.”[4]

[25] In this case, the motion judge found that CryptoStar had failed to establish a specific fund as required for the “extreme remedy” under r. 45.02. The motion judge observed that there was no clear contractual obligation for Avila to segregate or set aside – “notionally or otherwise” – the funds alleged to form the specific funds for purposes of r. 45.02. To the contrary, the understanding of the parties was that the funds, once co-mingled with other funds in Avila’s accounts, would be spent, together with other funds, on the power generation project.

[26] As in 3Genius, the motion judge found that CryptoStar’s claim is, in essence a claim for damages, based on the potential refund available under s. 2.8 of the Agreement. As the motion judge correctly noted, s. 2.8 of the Agreement contemplates the right to an amount and provides for the calculation of that amount, but does not specify that the amount, if owed, should be paid from the proceeds of the Upfront Payments. The motion judge found on the record before him that the condition precedent in s. 2.8 had not been met. Finally, on the issue of whether there was a specific fund, the motion judge found that Avila was no longer in possession of the Upfront Payments and that Avila had spent in excess of the Upfront Payments on the items necessary to generate and deliver power to CryptoStar.

[27] The motion judge was not persuaded that the second element of the test under r. 45.02 (serious issue to be tried relative to the return and preservation of the monies claimed) was met. He found that CryptoStar was only entitled to rely on s. 2.8 of the Agreement if no power was delivered. In this case, the parties agreed that Avila built power plants and delivered power.

[28] As for the balance of convenience, there was no substantive evidence before the motion judge to suggest that Avila was attempting to place assets beyond the reach of the court. The motion judge concluded: “I see nothing to justify tying up Avila’s assets at this stage nor any risk that those assts will leave Alberta between now and trial.”

[29] The motion judge applied the correct legal test under r. 45.02. I see no error in his interpretation of the agreement. The findings and conclusions of the motion judge were available to him; his reasons disclose no palpable and overriding error warranting this court’s intervention. I would not give effect to this ground of appeal.
. CryptoStar Corp. v. 611890 Alberta Inc.

In CryptoStar Corp. v. 611890 Alberta Inc. (Div Court, 2023) the Divisional Court considers R45.01 ['Interim Preservation of Property - Interim Order for Preservation or Sale']:
[32] Rule 45.01(1) provides:
The court may make an interim order for the custody or preservation of any property in question in a proceeding or relevant to an issue in a proceeding, and for that purpose may authorize entry on or into any property in the possession of a party or of a person not a party.
[33] The test for r. 45.01 is the same as the r. 45.02 test set out by the Court of Appeal for Ontario in Sadie Moranis except that under r. 45.01, the first branch of the test requires an analysis of whether the assets sought to be preserved constitute the very subject matter of the dispute: BMW Canada Inc. v. Autoport Limited, 2021 ONCA 42, at paras. 42-44.

[34] The motion judge relied on 3Genius and found that CryptoStar’s claim in respect of the Upfront Payments is, in essence, a damages claim. This was a finding available to the motion judge. I agree with Avila that the motion judge’s finding that the Schedule “C” assets – listed in CryptoStar’s reply factum – were not the genuine subject matter of the dispute necessarily follows. In addition, none of the assets listed in Schedule “C” were unique.

[35] CryptoStar’s argument that the motion judge failed to apply the second and third branches of the r. 45.01 test is without merit. The motion judge did not repeat his analysis as to whether there was a serious issue to be tried and balance of convenience. He did not need to because, as the motion judge stated, “[m]any of the same observations made in relation to Rule 45.02 apply equally to CryptoStar’s alternative request to freeze assets allegedly purchased from the ‘specific fund.’”

[36] The motion judge correctly applied the r. 45.01 test. CryptoStar has not demonstrated any palpable and overriding error of fact or mixed fact and law. I would not give effect to this ground of appeal.
. Ontario v. Madan

In Ontario v. Madan (Ont CA, 2023) the Court of Appeal, in a fraud lawsuit by the province, noted statutory remedies - including Mareva injunction and preservation orders - under the Civil Remedies Act:
[27] In October 2020, Ontario obtained an ex parte Mareva injunction and a preservation order under the Civil Remedies Act, 2001, S.O. 2001, c. 28. The appellants subsequently consented to the continuation of the Mareva injunction and the preservation order.
. Ebrahimpour v. Askari

In Ebrahimpour v. Askari (Ont CA, 2021) the Court of Appeal considered a test for interim preservation of property (SS: it's akin to an interlocutory injunction test):
[9] Finally, the application judge’s determination that the respondent satisfied the criteria for an order under rule 45.02 as set out in Sadie Moranis Realty Corporation v. 1667038 Ontario Inc., 2012 ONCA 475, at para. 18, is amply supported by the record:
• The appellants concede that the respondent claims a right to a specific fund, namely, the net sale proceeds held in trust;

• The respondent’s evidence of the parties’ agreement that the loan would be repaid, the profits shared, and his wages paid from the sale of the property raises a serious issue to be tried regarding the respondent’s claim to that fund by way of the remedies of constructive trust or equitable charge; and

• The balance of convenience favours granting the relief sought by the respondent. There is no evidence that the appellants suffered any prejudice from the monies having been held in trust or will suffer any if the monies remain in court. There is no dispute that the respondent borrowed the loaned funds from his home equity line of credit; he will suffer substantial prejudice if the funds are dissipated before the parties’ dispute is resolved.
. BMW Canada Inc. v. Autoport Limited

In BMW Canada Inc. v. Autoport Limited (Ont CA, 2021) the Court of Appeal considered an issue of interim possession of chattel property (as an evidence spoliation issue) under R45:
[18] In determining whether to grant an interim preservation order under r. 45.01, the Master referred to and purported to apply the three-part test set out in Taribo Holdings Ltd. v. Storage Access Technologies Inc., [2002] O.J. No. 3886 (S.C.), at para. 5: (1) the asset sought to be preserved constitutes the very subject matter of the dispute; (2) there is a serious issue to be tried regarding the plaintiff’s claim to that asset; and (3) the balance of convenience favours granting the relief sought by the applicant or moving party.

....

(1) The Relevant Principles

[38] The parties invited the court on this appeal to address the test for r. 45.01 motions, clarifying the role of balance of convenience and whether there is a presumption in favour of the preservation of evidence in a proceeding. As I will explain, it is inappropriate to prescribe a single test for r. 45.01 motions, including a Taribo-type test that focusses on “balance of convenience”, having regard to the variety of circumstances in which such motions can be brought. In a case such as the present, where the condition of property is at issue in the action and its preservation is sought for the purpose of inspection, the goal is to best ensure fairness in the litigation process. I will also explain why it is unnecessary to determine whether there is a presumption in all cases in favour of preserving evidence for litigation, but that r. 45.01 permits the court to address trial fairness concerns that would arise before evidence is destroyed.

(a) What is the Appropriate Test for Interim Preservation of Property in this Case?

[39] Rule 45.01 is available to parties as an interim measure during litigation. Rule 45.01(1) provides that the court may make an interim order for the custody or preservation of “any property in question in a proceeding or relevant to an issue in a proceeding”. The order is discretionary. Although the rule provides that the court “may authorize entry on or into any property in the possession of a party or of a person not a party”, and r. 45.01(2) permits the court to order the property to be sold in such manner and on such terms as are just, there are no criteria prescribed by the rule for the exercise of the court’s discretion under r. 45.01 and there is no limitation on the terms and conditions that can be imposed.

[40] Rule 45.01 is available in a wide variety of circumstances in which interim preservation of property may be sought. The court, in considering whether to make such an order and on what terms, will take into consideration the evidence on the motion and make the order that best responds to the circumstances. The only precondition for preservation or custody is that the property is “in question in a proceeding or relevant to an issue in a proceeding”. As I will explain, it is inappropriate to attempt to prescribe and apply a single test (such as that set out in Taribo or a derivation of such test) to all r. 45.01 motions.

[41] In some cases a r. 45.01 motion will seek to preserve the very property the plaintiff or applicant is pursuing in its litigation. In Taribo, for example, the litigation involved a dispute about shares that former employees of the respondent corporation had tendered in consideration for a reduction of their obligations under promissory notes. The shares were pledged and deposited with a third party. The moving parties’ motion for an interim preservation order sought what was essentially a form of injunctive relief – to prevent the corporate respondent from having the shares released from deposit to it and then converting or cancelling the shares.

[42] The motion judge in Taribo articulated and applied a three-part test requiring that: (1) the assets sought to be preserved constitute the very subject matter of the dispute; (2) there is a serious issue to be tried regarding the plaintiff’s claim to that asset; and (3) the balance of convenience favours granting the relief sought by the applicant or moving party. She relied on two cases involving r. 45.02, which provides that where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just: News Canada Marketing Inc. v. TD Evergreen, [2000] O.J. No. 3705 (S.C.); Sun v. Ho (1998), 18 C.P.C. (4th) 363 (Ont. Gen. Div.). The Taribo test has been applied in other cases involving r. 45.01 where the moving party is seeking to preserve property that it seeks to recover in the litigation: see e.g., Progressive Moulded Products Ltd. v. Great American Group, 2007 CanLII 12205 (Ont. S.C.); Meade v. Nelson Resources Limited (2005), 2005 CanLII 44818 (ON SC), 14 B.L.R. (4th) 244 (Ont. S.C.).

[43] I accept that the Taribo three-part test is appropriate where a r. 45.01 motion is brought to preserve property that the moving party is claiming in its litigation. In such cases, the moving party seeks to limit or constrain what the responding party may do with property that is in its possession, and to preserve the property for the benefit of its claim. Factors such as whether the property is unique and whether damages claimed in the alternative would be an adequate remedy are also relevant and can fit within the “balance of convenience” analysis: see Auto Enterprise Ltd. v. Oakville Motors Sales & Leasing Inc., [1995] O.J. No. 716 (Gen. Div.), at paras. 10-14. And, where an interim preservation order would “tilt the scales in favour of a plaintiff on the basis of unproven allegations” the court must exercise caution before making such an order: see Stearns v. Scocchia (2002), 27 C.P.C. (5th) 339 (Ont. S.C.) involving a motion under r. 45.02.

[44] While the Taribo test is appropriate for r. 45.01 motions where the moving party claims an interest in property, or for r. 45.02 motions where the claim is to a specific fund, it is not required to be applied or adapted for all motions for interim preservation of property. This is apparent from the wording of the rule itself. Rule 45.01(1) authorizes the court to make an order for entry into any property, including the property of third parties, for the purpose of an interim order under the rule. Likewise, r. 45.01(2) permits the court to order the sale of property. The test articulated in Taribo, even as modified by the Divisional Court, would be insufficient and would not account for the range of factors that would need to be considered where entry into property, third party interests, or sale of property arises in a r. 45.01 motion.

[45] Similarly, a Taribo-type test focussing on “serious issue to be tried” and “balance of convenience” is neither necessary nor appropriate in a case like the present, where the r. 45.01 motion sought to preserve evidence to permit inspection. In my view, the overall consideration in such motions is to make an order that is consistent with a fair litigation process. In making or refusing the order, and in establishing terms, the court should have regard to the issues in dispute in the litigation, the relevance and materiality of the property as evidence, the purpose for which interim preservation is sought and its proposed duration (whether for the entirety of the proceeding or for an interim period to permit the evidence to be documented, inspected, tested, and the like), and the benefits and harm or prejudice to the interests of each party in the litigation.

(b) Is There a Prima Facie Obligation to Preserve Evidence?

[46] The parties joined issue in the courts below and in this appeal on whether there is a prima facie obligation in all cases to preserve property that is the subject matter of litigation, or more narrowly, to preserve evidence for trial. It is unnecessary to determine that issue in this appeal. First, any attempt to delineate the scope of such a rule would be met by a range of factors, which could be characterized as exceptions to or limitations on such a rule, such as considerations of the importance of the evidence to the proceeding, the perishability of the property, the feasibility of its preservation, and the like. Second, the determination of the relatively narrow issue on the r. 45.01 motion in this case and accordingly on appeal would not turn on any such obligation or presumption. Autoport seeks interim preservation of the vehicles for a limited time and purpose, and BMW characterizes the question as simply one of cost.

[47] While it is unnecessary to determine whether there is a prima facie obligation to preserve evidence, and its scope, I do not agree with the Divisional Court’s unqualified rejection of the duty of litigants to preserve evidence, and BMW’s assertion in this court that parties must be free to deal with their property as they see fit. The principle advanced by BMW, articulated so broadly, would apply whether or not the property is evidence and whether or not its temporary preservation or pre-trial destruction would affect trial fairness.

[48] The courts have long recognized the doctrine of spoliation of evidence: see McDougall v. Black & Decker Canada Inc., 2008 ABCA 353, 302 D.L.R. (4th) 661 for a useful summary of the case law and principles. Underlying the doctrine is the trial fairness principle that parties to litigation are expected not to destroy important evidence, at least until the opposing party has had a fair opportunity to examine that evidence. The remedies are informed by considerations of trial fairness: the imposition at trial of a rebuttable presumption of fact that the missing evidence, had it been preserved, would have been unfavourable to the party who destroyed it, and other possible remedies to “level the playing field”, such as the exclusion of expert reports: see Gutbir v. University Health Network, 2010 ONSC 6752, at para. 13; McDougall, at paras. 18, 29; Stilwell v. World Kitchen Inc., 2013 ONSC 3354, 47 C.P.C. (7th) 345, at para. 55; and Endean v. Canadian Red Cross Society (1998), 1998 CanLII 6489 (BC CA), 157 D.L.R. (4th) 465 (B.C.C.A.), at para. 32, leave to appeal granted but appeal discontinued, [1998] S.C.C.A. No. 260. The debate in the cases about whether there is a standalone tort of spoliation, and whether remedies are available for negligent spoliation (the cases are summarized at paras. 19 to 22 of McDougall), does not undermine the animating principle: that the destruction of evidence can be harmful to trial fairness.

[49] Rule 45.01 permits the court to address trial fairness concerns that would arise if property constituting evidence were to be destroyed prior to its destruction, and so avoid the kind of harm in the litigation process that spoliation remedies address.


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Last modified: 22-03-23
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