Court File and Parties

COURT FILE NO.: CV-10-100673-00 DATE: 20160912

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

PROXEMA LIMITED Plaintiff/Responding Party – and – BIROCK INVESTMENTS INC., 2182537 ONTARIO LTD., operating as YORK MEDICAL GROUP, 972579 ONTARIO LTD., operating as YORK MEDICAL, YORK MEDICAL MOBILITY INC. and DR. KEN LAI Defendants/Moving Parties

COUNSEL: Arnold H. Zweig, for the Plaintiff Mark H. Arnold, for the Defendant “York Medical”

HEARD: August 3, 2016

Reasons for Decision

CHARNEY J.:

Introduction

[1] This motion is brought by the defendant York Medical Group (“York”) for security for costs against the plaintiff Proxema Ltd. (“Proxema”) under Rule 56.01 of the Rules of Civil Procedure. Pursuant to s. 67(2) of Construction Lien Act, R.S.O. 1990, c. C.30 (“CLA”), York requires leave of the court to bring this motion. Consistent with the practice in these cases, I heard both the s. 67(2) leave application and the Rule 56.01 motion together.

Facts

[2] The parties agree that York is deemed to be the owner of a commercial building (a multi-purpose medical centre) on Leslie Street in Newmarket, Ontario. Proxema was the general contractor for the construction of that building from August 2009 to June 2010.

[3] Proxema registered a claim for lien pursuant to the CLA against the title to the property on July 2, 2010, and issued a Statement of Claim against the defendants for unpaid amounts in relation to the construction contract totalling $1,210,256. Approximately half the claim relates to the balance due under the contract and the other half relates to unpaid extras. The total of all unpaid claims of all subtrades is over $1,300,000, and the total unpaid lien claims is $1,000,000.

[4] The parties agree that there is little, if any, chance of Proxema receiving any money itself if it succeeds in this litigation since any proceeds would be distributed to the subtrades. Proxema has no issue with what the subtrades are owed. The subtrades are all active companies, but are not parties to this litigation.

[5] Pursuant to the March 7, 2012 order of Boswell J., York has paid a holdback to Proxema of $175,000. That payment was made on an “interlocutory basis, without prejudice to any party’s arguments or position…” The plaintiff alleges that the defendant still owes $77,000 by way of hold back, but this is disputed by the defendant and no additional holdback claim has been made.

[6] While the litigation has been going on for many years, York examined Proxema’s representative, John DiTomaso (DiTomaso), at an examination for discovery on September 24, 2015, and discovered for the first time that Proxema had not been carrying on business or contracting work since June 2010.

[7] DiTomaso was also cross-examined on June 8, 2016, on his affidavit, dated May 12, 2016, opposing this motion for security for costs. He confirmed that he took over Proxema on February 28, 2015, becoming its sole director and shareholder and that he paid nothing for it. He confirmed that in 2015 Proxema had no viable business in process and that Proxema had no hard assets such as equipment or machinery. He acknowledged that Proxema was “basically insolvent” and that one of the reasons he took over Proxema was to continue this litigation. The evidence from the cross-examination supports the position that the litigation is being funded by the subtrades even though they are not parties to the litigation.

[8] The financial statements produced for Proxema for the years 2010 and 2013 confirm that Proxema’s liabilities exceed its assets.

[9] The parties agree that the trial of this action will take approximately 4 to 6 weeks. York takes the position that if successful its partial indemnity fees will be approximately $112,000 to $168,000 plus $40,000 for disbursements including experts and HST.

[10] Proxema takes the position that it is not a “shell corporation”. DiTomaso testified that as of November 2015 Proxema landed a project for the construction of a commercial bakery worth $600,000 and is putting forward proposals to other potential clients. He acknowledges, however, that Proxema has “no retained earnings” which he can use to borrow any funds. DiTomaso has also indicated that he and his wife have arranged their finances such that all family or personal property is in the name of his wife and all business matters and corporations are in his name. He has only about $15,000 in liquid assets and no means personally to borrow any funds to post security for costs.

Analysis

Leave to Bring an Interlocutory Step

[11] Section 67 (2) of the CLA reads as follows:

Interlocutory Steps

….Interlocutory steps, other than those provided for in this Act, shall not be taken without the consent of the court obtained upon proof that the steps are necessary or would expedite resolution of the issues in dispute.

[12] In Prasher v. D. Grant, 2014 ONSC 3576 McCarthy J. considered the circumstances in which leave to bring a motion for security for costs should be brought. He stated (at para. 12):

Where, as here, the Defendant has put forth cogent evidence upon which a court may order security for costs and where, as here, the Defendant has itself posted a form of security for costs in the nature of a bond posted in order to vacate a lien, the interlocutory step of a motion for security for costs becomes necessary. The possible availability to one party of substantive relief under the Rules coupled with the goal of promoting an even playing field in order to enhance procedural fairness combine here to make the interlocutory step proposed necessary.

[13] In Melco Construction Inc. v. Jack Frost Sparkling Springs Co. Ltd., 2011 ONSC 2197 Quinlan J. concluded that leave to bring a motion for security for costs was necessary under s. 67(2) of the CLA where the financial viability of the plaintiff is called into serious question and it is in the interests of procedural fairness to the parties. She stated:

I find that this motion for security for costs is “necessary” in the interest of doing procedural justice to both parties. Now that the defendant is aware of the precarious financial position of the plaintiff, it is appropriate to have the court adjudicate on whether the plaintiff should be ordered to provide security for costs.

[14] See also: Asphalt Plant Supply Inc. v. Aecon et al, 2012 ONSC 4977 at para. 5; European Flooring Contract Services Ltd. v. Toddglen ILofts et al., 2013 ONSC 6445 at para. 6: “where it is shown that there is good reason to believe that at a corporate plaintiff… does not have sufficient assets in Ontario to pay the defendants’ costs, the defendants have met the test of “necessity” under s. 67(2) of the Construction Lien Act.”

[15] In the present case the moving party has put forth cogent evidence upon which a court could order security for costs. The purpose of security for costs is to even the playing field by ensuring that an “insolvent plaintiff should not be given risk-free opportunities to pursue litigation” (1244034 Alberta Ltd. v. Walton International Group Inc., 2007 ABQB 197 at para. 8). In this case, the defendant raises a prima facie case that the plaintiff is an insolvent corporation that is pursuing litigation on behalf of solvent corporations that are not parties to the litigation and therefore not subject to an award of costs. Fairness requires that the court grant leave and consider the motion on its merits. In this sense, I am of the view that this step is necessary within the meaning of s. 67(2) of the CLA.

[16] Another consideration before leave is granted under s. 67(2) is whether York brought this motion promptly. Following the September 24, 2015 examination for discovery counsel for York advised counsel for Proxema that York intended to bring this motion for security for costs. Due to scheduling difficulties involving cross-motions the motion was not heard until August 3, 2016. I am satisfied that the motion was brought promptly upon learning that Proxema appeared to have insufficient assets to pay the defendant’s costs, and there has been no delay on the part of York in this regard.

[17] Leave to bring the motion for security for costs is therefore granted.

Rule 56.01 and Security for Costs

[18] Rule 56.01(1)(d) provides as follows:

56.01 (1) The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that,

(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent.

[19] The initial onus is on the defendant to demonstrate that it appears “there is good reason to believe” that the plaintiff corporation has insufficient assets in Ontario to pay the defendant’s costs: Coastline Corporation Ltd. v. Canaccord Capital Corporation, 2009 ONSC 21758, [2009] OJ No 1790 at para. 7; Sadat v. Westmore Plaza Inc., 2013 ONSC 469 at paras. 20-21; Sheridan v. Goldstone Resources Inc., 2011 ONSC 1034 at paras. 6 and 7. Cobalt Engineering v. Genivar Inc., 2011 ONSC 4929 at para. 9.

[20] A helpful summary of the applicable principles under Rule 56.01(1)(d) is set out in the case of Health Genetic Center Corp. v. Reed Business Information Ltd., 2014 ONSC 6449 at para. 4:

There is a two-step process under rule 56.01(1)(d). The initial onus is on the defendants to satisfy the court that it “appears” that there is “good reason to believe” that the corporate plaintiff has insufficient assets to satisfy a costs award. They need not go so far as to actually prove that the plaintiff has insufficient assets. If the defendants satisfy the first stage of the enquiry, the onus switches to the plaintiff to either demonstrate that it has sufficient and appropriate assets in Ontario to satisfy any order for costs or alternatively satisfy the court that an order for security for costs would be unjust, for example by demonstrating that the plaintiff is impecunious and the action is not devoid or merit.

[21] In Health Genetic Center, Master Dash describes this initial onus as a “low threshold” (para. 16).

[22] With respect to the first stage of the rule, I am satisfied that the defendant has established good reason to believe that the corporate plaintiff has insufficient assets to satisfy a costs award.

[23] Where the onus switches to the plaintiff the court must consider the following factors in examining the evidence of the sufficiency of assets (Health Genetic Center at para. 5):

(a) The court must consider critically the quality as well as the sufficiency of the assets presently held and whether they are bona fide assets of the company; (b) There must be demonstrated exigible assets. It is insufficient for the company to show that it is profitable since the focus of the rule is not on income, but rather on the nature and sufficiency of assets; (c) The court must consider the liabilities of the company as well as its assets and in particular whether the assets to which the defendant is expected to look are secured to another creditor; (d) The rule does not countenance extensive and speculative inquiries as to the future value and availability of the asset. A mere possibility that the assets may be removed at some future time is not, without more, grounds for security; (e) The failure of a plaintiff to respond to a defendant’s enquiry as to the availability of assets may raise a doubt as to the existence of assets.

[24] Taking these factors into account, the evidence confirms that Proxema is a shell-corporation with insufficient assets to satisfy any costs award if it is not successful in this litigation. DiTomaso’s statement that he is trying to make a go of Proxema by putting forward proposals to other potential clients does not demonstrate exigible assets that could be used to satisfy any costs award at the end of the litigation. There is no evidence of existing assets or future revenue that could cover a costs award.

[25] The evidence clearly demonstrates that there is an imbalance: this action is being pursued for the benefit of the subtrades, which are not parties to this litigation. Proxema owes money to the subtrades. The subtrades are using Proxema to recoup the money they hope is owed by York to Proxema. There is nothing wrong with that; it is a legitimate litigation strategy. As things stand, however, they are not liable for costs if Proxema loses, but will be entitled to costs if Proxema wins. That is the very situation that Rule 56.01(1)(d) was designed to remedy.

[26] While DiTomaso has claimed that he is impecunious, his affidavit merely demonstrates that he has arranged his personal financial affairs to ensure that his personal assets are judgment proof because they are in the name of his wife. That is not the same as impecuniosity. It also tells me nothing of the other subtrades which, the evidence indicates, are funding this litigation. The onus is on the plaintiff to show that it has no means of funding the litigation if security for costs is ordered. Based on the evidence I have reviewed on this motion, the plaintiff has failed to meet this onus.

[27] The subtrades are prepared to finance the prosecution of this action. They should also be prepared to either provide security for the costs of the defendant in the event the claim fails or to establish that security cannot be raised (Melco Construction at para. 33). In my view, the evidence of DiTomaso is not sufficient to establish that he is impecunious or that he could not continue with this action if the plaintiff was ordered to pay some reasonable amount as security for costs.

[28] This case, in effect, is an action that is being pursued for the benefit of the creditors (in this case the subtrades). I find the following statement from Design 19 Construction Ltd. v. Marks (2002), 22 C.P.C. (5th) 117, 2002 CarswellOnt 1414 (S.C.J.) to be apposite:

While that statement is fair enough in the abstract, it is one that is difficult to sustain in these circumstances where the action is being pursued expressly for the benefit of the creditors… If the creditors are prepared to take the benefit of this action, then I fail to see why they should not also have to accept the burden of it. We are, of course, only speaking of a requirement that security for costs be posted. If the plaintiff is ultimately successful, then those funds will be returned to the creditors. If the plaintiff is not, I fail to see why the creditors should be able to avoid the consequences of standing behind an unsuccessful action. I find, therefore, that the Master's conclusion that the plaintiff was impecunious in the absence of any evidence as to whether the creditors of the plaintiff were in a position to fund the payment of security for costs reflects an error in principle.

[29] In 2016637 Ont. Inc. v. Catan Canada Inc. et al, 2012 ONSC 2055 the court stated (at para. 12):

In my view, cases in which consideration should be given to requiring creditors of a plaintiff to post the security should be confined to situations where the creditors are in control of, or somehow directly connected to, the litigation, or are standing in the shoes of the plaintiff (see United General Contracting Ltd. v. Sioux Lookout (Municipality), 2011 ONSC 4691, at paras. 30-35).

[30] The evidence on this motion persuades me that this is a situation in which the subtrades are in control of and directly connected to the litigation, and the plaintiff is, at this time, a shell corporation that continues to exist primarily to pursue the litigation on behalf of the subtrades.

[31] The defendant argues that the plaintiff’s claim is bound to fail because Proxema does not have an expert engineering opinion on the issues of deficiencies, delay or extras. The defendant has obtained expert engineering reports in support of its position on these issues. Proxema recently obtained an engineering report that reviews the independence and objectivity of the defendant’s reports, but it is a paper review and the authors did not conduct an on-site review of deficiencies. The plaintiff responds that its expert report challenges the admissibility of the defendant’s expert report.

[32] In my view it is not necessary for me to assess the relative merits of the plaintiff’s case given that the plaintiff has not persuaded me that the persons actually supporting the plaintiff’s litigation are impecunious. “A detailed consideration of the merits of the plaintiff’s claim should only be undertaken at this step of the proceeding if the plaintiff is able to demonstrate its impecuniosity, and that an injustice would result if it were not allowed to proceed…”(Sterling Electrical Contractors Inc. v. 20887585 Ontario Inc., 2010 ONSC 5346 at para. 12; Estates v. Remax, 2016 ONSC 150 at para. 9)

[33] The real question in relation to security for costs is how much. Rule 56.01 requires the court to exercise its discretion taking into account such considerations as the merits of the plaintiff’s case, whether there is a counterclaim, and whether the defendant’s conduct giving rise to the claim is responsible for the plaintiff’s impecuniosity or insufficient assets. In this regard I adopt the following statement from 1244034 Alberta Ltd. which, in my view, accurately reflects the considerations that must be balanced under the Ontario rule:

[I]nsolvent plaintiffs should not be given risk-free opportunities to pursue litigation; conversely, defendants should not be able to tactically prevent a prosecution of a valid claim by obtaining a prohibitive security for costs order. The Court has to balance these competing interests. A costs order should not have a chilling effect in relation to the ardour with which a valid claim is advanced. It should impose a fair obligation on the plaintiff that would check litigation without merit. This is the balance that must be struck.

[34] In the present case there is a counterclaim. A defendant should not be given security for costs with respect to costs that will arise from its counterclaim. See: Unimac – United Management Corp. v. Metrolinx, 2015 ONSC 2372: “Where the “real driver” of the action will be the moving defendant’s counterclaim, there is authority for the proposition that the court may not only discount the award of security for costs by the estimated costs of litigating the counterclaim, but refuse the award altogether.” Even where the counterclaim is only a portion of the estimated costs of the litigation the court should discount any award of security for costs by the anticipated costs of the counterclaim, as it would be unfair for the plaintiff to pay security for costs to defend a counterclaim (Unimac at para. 50).

[35] There is a dispute with regard to how much of the case will be about the counterclaim. The plaintiff argues that 2/3 of the case is counterclaim. The defendant disputes this, and argues that if the claim disappeared then the whole action would disappear; the counterclaim is really just a re-statement of the defence.

[36] This is a question that cannot be resolved on a pre-trial motion. It will depend on a number of factors that I cannot know or predict at this stage of the proceedings. Still, the existence of the counterclaim is a factor that I must consider when assessing the appropriate amount of security for costs.

[37] In Yong Tai Construction v. Unimac Group Ltd., 2015 ONSC 4866 Healey J. dealt with this uncertainty by dividing the costs equally between the claim and counterclaim (at para. 17): “the court will have to exercise “rough justice” by apportioning the estimated costs equally between the claim and counterclaim.”

[38] In determining the quantum of security for costs the plaintiff references s. 44(1)(d) of the CLA, which permits any person to bring a motion for an order vacating a lien by paying into court or posting security in an amount equal to the total of:

(c) the full amount claimed as owing in the claim for lien; and

(d) the lesser of $50,000 or 25 per cent of the amount described in clause (c), as security for costs.

[39] This provision imposes a maximum limit of $50,000 for security for costs for a defendant to vacate a lien. The plaintiff argues that while the provision does not, on its terms, apply to a defendant’s motion for security for costs against a plaintiff under Rule 56.01(d), a court concerned with a “level playing field” should apply “by analogy” the $50,000 limit to security for costs ordered under Rule 56.01(d). What’s sauce for the goose is sauce for the gander.

[40] In his decision in Prasher, McCarthy J. appears to accept this principle and relied on s. 44(1)(d) to establish the quantum for security for costs that the plaintiff should have to pay. He stated: (at para. 17):

I am not prepared to accede to the quantum sought by the Defendants. In my view, procedural fairness dictates that an order for security for costs should be proportionate not only to the amount of the lien claim but also to the notionally off setting security posted by the Defendant when it elected to have the lien on the project property vacated. In their infinite wisdom, the drafters of the legislation in question arrived at a formula for calculating the amount of costs that must form part of the bond posted in order to obtain the order vacating the lien. I find this approach helpful to the court in determining the quantum of security to be posted by the Plaintiff. That amount should be $30,000.

[41] I find this logic persuasive. I recognize that the $50,000 maximum is not a statutory requirement under s. 56.01(d), and the legislative policy considerations under s. 44(1)(d) of the CLA are not identical to those under Rule 56.01(d). Still, in an effort to achieve “rough justice” under rule 56.01(d), and properly balance the competing interests of the insolvent plaintiff that “should not be given risk-free opportunities to pursue litigation” and the defendant that “should not be able to tactically prevent a prosecution of a valid claim by obtaining a prohibitive security for costs order” the limit prescribed by s. 44(1)(d) of the CLA is a helpful reference point. The court may take this provision into account in determining the quantum of security for costs to be ordered.

[42] If the action is as meritorious as the plaintiff claims, the subtrades supporting the litigation should be able to raise $50,000 to stand behind the litigation in the event that it is not successful. If the action is as unmeritorious as the defendant claims, I do not see why the action (excluding the counterclaim) should take 4 to 6 weeks of court time. In my view, this is an appropriate case to require the posting of security for costs by the plaintiff and I order that security for costs be paid into court in the amount of $50,000 within 45 days of this endorsement.

Costs

[43] Given this decision, the defendant is presumptively entitled to costs for this motion. If the parties cannot agree on costs, the defendant may file written submissions limited to three pages plus a costs outline and any offer to settle, within 25 days of the date of this endorsement. The plaintiff has 10 days to file responding submissions on the same terms.

Justice R.E. Charney Released: September 12, 2016