5

Execution Prior to Judgment

(Appointment of an Interim Receiver)

Pursuant to the provisions of Rule 41 of the Rules of Civil Procedure, a party may bring an interlocutory motion for an order to have the court appoint a receiver or a receiver/manager on an interim basis, for the purpose of preserving or managing the assets of the opposing party so that the fruits of the lawsuit for the moving party will not be lost, transferred or dissipated in the interim.

There is a significant hill to climb on the part of any party to an action seeking to appoint an interim receiver or receiver/manager for the simple reason that such appointment is considered to be tantamount to execution prior to judgment. The prevailing case law states that such an order will be made only in the clearest of cases and/or where the right of recovery is in serious jeopardy should the appointment of an interim receiver be denied.

The appointment of a receiver pursuant to the default provisions in secured instruments such as debentures or mortgages is quite a different proposition than the appointment of an interim receiver by the court during the course of a proceeding well in advance of any date that may have been fixed for trial.

The party opposed to the motion for the appointment of an interim receiver will argue that if an interim receiver is appointed then in effect, not only has there been judgment against them but there has been execution on that judgment inasmuch as the powers of the receiver may jeopardize the ability of the Defendant or the opposing party to control its business. Further, such an order amounts to a determination in advance of a trial, of the very thing that the Defendant in his pleadings has denied.

In other words, if the relief being sought by the Plaintiff is a claim for damages based upon the wrongdoing of the Defendant, the Defendant=s assertion is that the appointment of an interim receiver prior to the trial defeats the whole point of the action and prejudices the Defendant from mounting a successful defence before all the evidence has been heard and tested.

Conversely, the moving party asserts that, at the time of the motion, sufficient evidence exists to demonstrate that should an interim receiver not be appointed, then by the time the matter reaches trial, the Plaintiff will at best obtain a hollow judgment in that the Defendant will have dissipated his assets and the Plaintiff will not be able to realize on its judgment.

In my view, this raises important questions about the actual process of litigation from the commencement of an action through to trial.

Given that supposedly 95% of actions commenced do not proceed to trial, one wonders why there is such an emphasis in the Rules with respect to trial proceedings, and the conduct of the trial itself when the emphasis should be on a more timely disposition of the dispute between the parties.

In my view, the long and torturous procedures that occur prior to a trial are so expensive and cost-driven that Courts should be less reluctant to grant orders such as the appointment of interim receivers where the Plaintiff is able to lead evidence of the Defendant attempting to delay the action, or dissipating or transferring its assets beyond the reach of the Plaintiff.

What is not in dispute is that a pre-trial order as pervasive as the appointment of an interim receiver is only sparingly granted. In the case law there is common ground as to the test that must be met to successfully have an interim receiver appointed. That test is threefold, as set out in the case of Lakeside Colony of Hutterian Brethren v. Hofer

[1993], M.J. No. 320 (Man.Q.B.), wherein Justice De Graves states as follows:

1.  The Plaintiff must establish a strong prima facie case;

2.  The Plaintiff must prove irreparable damage will likely result if the appointment is not made;

3.  The balance of convenience must favour the appointment of an interim receiver.

Therefore, the test for the appointment of an interim receiver is virtually identical to the test with respect to the obtaining of an interim injunction. However, to obtain an order for the appointment of an interim receiver the actual factual criteria are harder to establish because it is more difficult to identify or locate facts that would suggest the Defendant is dissipating or wasting assets than for other injunction relief. The facts which would lead to the granting of an order for a receiver are invariably known to the Defendant but rarely by the Plaintiff.

Given that the onus is on the applicant to demonstrate the need for the appointment of an interim receiver, where the applicant is unable to show that the respondent is wasting, mismanaging or liquidating its assets, the court will refuse to appoint such a receiver.

Indeed in the case of Sparten Drilling Ltd. v. Snowhawk Energy Inc. [1986] A.J. No. 530 (Alta. Q.B.) Judge Quigley denied the motion for the appointment of an interim receiver, with the following:

There is not sufficient evidence before me to indicate that the Defendant is wasting its assets, mismanaging its business, nor manifesting an intention to sell all or part of its assets.

Although the test for the appointment of an interim receiver may not therefore be theoretically different than the test for obtaining an injunction, in my view the difficulties in unearthing and marshaling the evidence to obtain such an order are considerable. If the Plaintiffs have a strong feeling that the Defendant is dissipating his worth to avoid the effect of an adverse judgment, the Plaintiff may be unable to demonstrate this because the Plaintiff does not have sufficient access to the day-to-day operations of the offending Defendant, to provide the proof.

As indicated, the appointment of a receiver is considered execution prior to judgment. For that reason relief is granted only where the evidence suggests it is both Ajust and convenient@. However, an interim receiver may be appointed where the court is satisfied that Aspecial circumstances@ exist, such as where the Defendant has been arranging his or her affairs in such a way that there is an appearance that the assets have been sheltered, and there is more than a substantial impediment to the ordinary methods of enforcement. In the case of Canadian Film Development Corp. v. Perlmutter, [1986] O.J. No. 2334 (H.C.J.), leave to appeal denied, [1986] O.J. No. 2316 (H.C.J.) , the court held that the Plaintiff had satisfied its onus of establishing that the circumstances were such that it would be practically difficult if not impossible to obtain any fruit of its judgment unless the equitable relief of the appointment of an interim receiver was granted.

Although this case turns on its own facts, on the leave to appeal application, which was dismissed by Hollingsworth J., the judge stated as follows at p.4:

It seems to me that in the year 1986 that it is callous and inequitable if a debtor so arranges his affairs so deviously that it, in effect, nullifies the Judgment.

The difficulty in the case law with respect to the appointment of an interim receiver is that there are few if any fact situations which are identical, or even in fact, similar. This makes it difficult to predict the success or failure of such a motion. The test is general and its application gives rise to few general conclusions.

Defendants may embark on an array of activities to dissipate their assets, shelter them from Judgment or transfer them from one company to another, each and every tactic making it very difficult for the Plaintiff to target or keep track of such activities which in turn jeopardizes the fruits of the Plaintiff=s action, should the Plaintiff be successful at trial.

For example, many of the assets of the Defendant may have been transferred to other companies or sold, which may not be known prior to judgment . The judgment is a pyrrhic victory and may lead to the necessity of subsequent proceedings to set aside such transactions as fraudulent.

If however, on discovery or on the motion for the appointment of an interim receiver, such information can be extracted or examined in advance, then it may be possible to avoid subsequent proceedings where the transfer of assets is only learned on a judgment-debtor examination.

It may be useful to bring a motion for the appointment of an interim receiver together with a motion for the production of information or documents by the Defendant.

The conundrum is that it may be both risky to bring the application and risky not to bring the application. If the application to appoint an interim receiver fails because of lack of pertinent evidence the Defendant is insulated in his actions, whereas if the action is not brought for fear of failure the same result will ensue.

It may be that the appointment of an interim receiver must await the outcome of examinations for discovery, wherein if there may be refusals to produce documentation and/or vague answers to questions that are relevant to the case. This evidence may prove sufficient for a court to determine that the Defendant is purposely avoiding production of documents and answering proper questions to delay the action or hide his activities, which activities amount to an effort to avoid meaningful judgment.

In the case of Canada (Attorney General) v. Rahey [1981], N.S.J. No. 62 (N.S.T.D.), Burchell J., at page 3, summarized his conclusion that the appointment of a receiver was warranted as follows:

It is my opinion that the byzantine complexity of the respondents= affairs constitutes a more than substantial impediment to the ordinary modes of recovery and, having regard for that fact, the large amount owing and the likelihood that a Receiver will be able to realize upon very considerable assets that would otherwise remain sheltered, I have concluded that it is entirely appropriate (which is to say, just and convenient) that a Receiver be appointed in accordance with the applicant=s request.

It would appear from Burchell J.=s summary that even to locate evidence of the Abyzantine complexity of the respondents= affairs@ is no easy task in circumstances where a Plaintiff has no fundamental access to the business activities of the Defendants. Therefore, hard work must go into the preparation of the affidavit material in support of the motion if any success in obtaining an interim order is contemplated.

The fact that the Defendant in the normal course may be wasting his assets, is exceedingly difficult to establish. In the recent case of Baskind v. Lauzen, [1998] O.J. No. 3568 (Gen. Div.), the Plaintiff had recovered a judgment against the Defendant for $300,000. The Defendant was judgment proof and owned nothing personally. The Defendant was the majority shareholder however, of a small company which held all the Plaintiff=s assets. The Defendant treated his company as an extension of himself. The company disputed it owed the Defendant anything. In granting the request for the appointment of a receiver, Pitt J. stated as follows:

What is clear is that the Plaintiff could never recover any part of his Judgment without the assistant of the court as long as Lauzen continues to organize his affairs as he has been doing.

The Plaintiff must demonstrate a substantial history of avoidance or stealth on the part of the Defendant in the conduct of the Defendant=s financial affairs in order for the appointment of a receiver to occur, and it is this very avoidance and stealth that makes exposing it so difficult and therefore makes the motion for the appointment of an interim receiver so challenging to counsel.

In the Rahey case, supra, the court, at page 2, stated as follows:

When his testimony was completed I was left with the impression that Karl Rahey (the Defendant) has contrived to filter substantial sums of money through an elaborate screen of corporate and trust arrangements erected for the purpose of defeating his creditors.

Furthermore, the court at page 3 stated as follows:

Lauzen=s failure to make even a token payment on the judgment, his willingness to engage in the silly exercise of sending his share certificate to the US, the thoroughness with which he has insulated his income and his decision to spend approximately $50,000 to appeal the Judgments, suggest that he has a fixed intention to not satisfy any part of the Judgment, and that he is capable of satisfying part of the judgement.

In the case of Gary Securities Ltd. v. Blustein [1981] O.J. No. 1328, Justice Eberle, at page 2, had stated as follows:

I have no doubt that if the money is left in the hands of the Defendant, he will ensure that none of it is available to meet any judgment given in favour of the Plaintiff at the trial.

Again, at para.7 of the same page, Eberle J., states:

I am satisfied that if the Court does not now intervene, the rent for each month and year until the trial of this action is reached may well vanish, and the Plaintiff=s rights to that money, if it should be determined that he has any, will be denied any effectiveness.

Therefore, it can be seen that the best way of obtaining an interim order for the appointment of a receiver is to show that the equities favour the Plaintiff, or in other words, that the Defendant does not come to court with clean hands.

It would appear that when the courts apply the law to the facts they are sympathetic to facts that to a reasonable individual suggest that the Defendant is being less than straightforward in the defence of the action and is more interested in defeating the Plaintiff by other means, than actually defending the case on the merits.

Lastly, the question arises as to whether or not the moving party must provide an undertaking as to damages when seeking the appointment of an interim receiver prior to trial.