B.C. – arbitral party required to repurpose prior arbitral discovery for use in court litigation – #132

In Moneywise Financial Inc., v. Key Life WCF Financial Inc., 2018 BCSC 1789, Mr. Justice Trevor C. Armstrong granted part of Plaintiff’s application for document discovery by ordering that a Defendant examine a prior arbitration document disclosure and provide Plaintiff copies of any documents in its possession to satisfy a category of documents sought by Plaintiff in later court litigation. The initial arbitration dealt with a dispute over unpaid instalments of the sale price and the subsequent court litigation concerned ownership of assets divested by a Defendant. Despite the gap in disputes and the addition of three other parties to the court litigation uninvolved in the arbitration, Armstrong J. ordered that disclosure of the arbitration bundles serve their new purpose in the court litigation.

In February 2011, Moneywise Financial Inc. (“Moneywise”), then d.b.a. Western Chartered Financial Inc., carried on the business of financial services including insurance, financial services, business advising, and private wealth management in Prince George, British Columbia. Its principal shareholder and sole director was Mr. Peter Wise. At that same time period, KL carried on the business of life insurance sales and mutual fund investments for clients under the direction of its owner, Mr. Mathew Calvert, another Defendant.

By February 20, 2011 agreement, Moneywise and Key Life WCF Financial Inc. (“KL”) agreed to the sale by Moneywise to KL of all of Moneywise’s assets (the “Agreement”) for $750,000.00 payable by equal monthly instalments of $10,416.00 over 72 months.

[12] The principal assets sold by the plaintiff to KL were described as its “book of business” including client lists, and existing insurance and investment products that resulted in “trailing and renewal income over time”. The stream of trailing in revenues to KL would continue regardless KL’s ongoing business efforts.

In March 2014, after 37 instalments, KL ceased making payments and defaulted under the Agreement. Moneywise and KL arbitrated the dispute beginning in March 2015 and an arbitrator issued an award ordering KL to pay $350,813.00 to Moneywise. Plaintiff demanded payment of that sum from KL in September 2016 and undertook court litigation which resulted in an order that KL pay that amount with post-judgment interest and costs. At the time of Armstrong J.’s decision, that sum totalled $433,000.00 and was, as he noted “enforceable as a judgment of this Court”.

Certain other facts lead to new court litigation and Armstrong J.’s involvement. In the month immediately following the Agreement, on March 15, 2011, KL and Mr. Calvert entered into a Management Agreement by which KL would provide management services to Mr. Calvert relating to his personal book of business. The Management Agreement included the following:

Notwithstanding the preceding The Company [being KL] may purchase its own book, or books of business and therefore derive its own commissions, trailering commissions, and renewal commissions, from such purchases. Therefore, it is up to the company to demonstrate which individual clients and commissionable amounts were its own by maintaining a separate relationship with those clients through a separate agent of record. Should The Client [being the defendant Matthew Calvert] be asked to become agent of record for [The Company’s] clients it is agreed that after a period of 36 months of continual service as agent of record said clients would belong to the Client.

Armstrong J. noted that, after February 2011, KL’s assets included: (i) those it owned before the Agreement; (ii) Moneywise’s former book of business including client lists and existing series of insurance and investment contracts paying Moneywise a trailing and renewal income; and, (iii) a new business acquired after March 2011 with some 40 clients.

On August 1, 2016, Mr. Calvert as president of KL gave himself notice that he was ending the Management Agreement which he and KL had signed and a notice ending KL’s tenancy.

The status of KL’s assets as of KL’s March 2014 default under the Management Agreement with Moneywise became key to the new court litigation commenced by Moneywise. The litigation was no longer about the breach of the Management Agreement or the recognition and enforcement of the arbitration award. Rather, the new litigation alleged steps taken by KL and other Defendants which Moneywise claimed thwarted its remedies against KL.

[18] The issues in this case concern whether any of the KL assets owned before or after March 2014 have been transferred to Mr. Calvert or his new business MHC with intent to delay, hinder or defraud the plaintiff of its remedies against KL as provided for in the Fraudulent Conveyance Act, R.S.B.C 1996, c. 163. The plaintiff contends that in the financial services industry, books of business are commonly bought and sold and not transferred without adequate consideration. The plaintiff says the whole of the KL business as of March 2014 including client contacts and income entitlements were wrongfully transferred to MHC by operation of the Management Agreement depriving it of the chance to realize on its claims for the unpaid purchase price.

The two (2) motions before Armstrong J. in the new court litigation addressed (a) security for costs sought by certain Defendants against Moneywise and (b) Moneywise’s own motion for document discovery against Defendants.

Armstrong J.’s reasons regarding security for costs comprise most of the decision, covering paragraphs 19-59 while the reasons regarding document discovery are more summary and cover only paragraphs 60-69. Despite this, Armstrong J.’s order on the document discovery provides more direct application to arbitration practitioners.

Moneywise’s document discovery request fell into 17 categories which it claimed had not been produced. Despite an initial list of documents and a supplementary list of documents delivered by one of Defendants, Moneywise argued that many of its demands remained unaddressed.

Much of the exchanges between Moneywise and Defendants, as sketched by Armstrong J. at paragraphs 64-68, cover litigation skirmishing familiar to most practitioners who undertake commercial litigation and need not be summarized here. In order to address all of 17 categories of Moneywise’s request, Armstrong J.’s order at paragraph delivered 25 subparagraphs, (a) to (y), in which he granted or dismissed the requests or held that some could “not be produced”.

Aside from a familiar handling of document discovery in court litigation, the reasons offer fresh guidance to parties involved in arbitration and court litigation, whether the two venues are directly related or only related by virtue of some overlap in the parties.

The reasons reveal a particular solution Armstrong J. imposed stemming from one of Defendant’s replies to Moneywise’s request for a certain category of documents (identified at paragraph 69(k) only as “paragraph 4(b)” of Moneywise’s request). While the solution might appear sensible, it likely remains uncommon. Arbitration practitioners can point to it as a useful precedent, subject to constraints such as confidentiality terms imposed on arbitration.  Regarding the limits imposed by confidentiality, see the prior ArbitrationMatters note “Québec court outlines and upholds confidentiality of what is “said, written or done during” arbitration” on SNC-Lavalin inc. v. ArcelorMittal Exploitation minière Canada, 2018 QCCS 3024.

In particular, to resist disclosure, Mr. Calvert “asserted that meaningful disclosure of KL documents was produced in the related arbitration proceedings and that all commission statements of KL had been produced”.

While the arbitration only involved two parties, Moneywise and KL. the court litigation involved both of them plus another corporation and two individuals as Defendants. Neither party to the arbitration addressed any existing or lingering obligation of confidentiality or, if they had done so, the mention did not merit inclusion in the reasons.

To solve the document disclosure request in the litigation, and advised that full disclosure had already taken place in the arbitration regarding unpaid instalment fees, Armstrong J. in the court litigation regarding alleged efforts to thwart Moneywise’s remedies, required Defendant to revisit the earlier arbitral disclosure and repurpose it for the court litigation.

At paragraph (k), Armstrong J. required Defendants to undertake the following:

k. the claimant seeks client lists acquired by KL as part of the Agreement. The defendant contends that all documents were exchanged in the arbitration process and have been disclosed. In my view, the defendant MHC and the defendant KL are obliged to produce documentation regarding the book of business and client lists that relate to the clients acquired by KL in 2011, before and after. The defendant must examine the disclosure in the arbitration and provide copies of any documents in their possession. It may be that once the defendants have assured the plaintiff that the arbitration disclosure was full and complete, no further disclosure may be required. However until there is agreement on that point, the defendants are obliged to make full disclosure of all of the documents set out in paragraph 4(b) of the plaintiff’s request.

Though only two (2) of the five (5) court litigation parties had been involved in the earlier arbitration on another dispute, the prior procedural step taken in that arbitration served as a shortcut to the court litigation. Armstrong J.’s order demonstrated a resourceful solution which reduced time, costs and formalities for the parties’ involved in both disputes and did not violate any confidentiality provisions.