SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-08-7749-00CL
MOTION HEARD: May 17, 2012

RE: Klaus-Peter Konig v. Antonin Hobza, John Douglas Laine, Kim H. Dobson, John Anthony Chisholm also known as Jack Chisholm, TJK Enterprises Limited and 1669051 Nova Scotia Limited

BEFORE: MASTER R.A. MUIR

COUNSEL: Bryn Gray for the moving parties/defendants
Robert W. Trifts for the responding party/plaintiff

REASONS FOR DECISION

[ 1 ] The defendants bring this motion for an order requiring the plaintiff to post further security for costs pursuant to Rule 56.01(1). The plaintiff opposes.

[ 2 ] This action is ready for trial. All discovery has been completed, expert reports have been served and a pre-trial has taken place. The trial is scheduled to begin on June 4, 2012, a little over two weeks from the date this motion was argued. The trial is expected to last two to three weeks. The trial date was set by Justice Morawetz, with the agreement of all parties, on October 3, 2011.

[ 3 ] Due to the fact that this motion was scheduled for a date so close to the commencement of the pending trial, it was necessary for the court to prepare these reasons on an expedited basis so that the parties would know exactly where they stood with respect to this issue as far in advance of the trial date as possible.

BACKGROUND

[ 4 ] It appears that at some point in the late 1970’s the plaintiff became acquainted with the defendant Antonin Hobza (“Hobza”). The plaintiff alleges that in 1985 Hobza approached the plaintiff and asked him to become an investor in a new sign supply business Hobza was starting known as East West Plastics (“East West”). Hobza says it happened the other way around but nothing turns on that issue for the purposes of this motion.

[ 5 ] East West is now known as the defendant 1669051 Nova Scotia Limited. It is alleged that the plaintiff agreed to invest $100,000.00 in East West in return for a 10% interest in the company. It is alleged that the plaintiff’s interest in East West was held by Hobza and/or the defendant TJK Enterprises Limited (“TJK”), as trustees for the plaintiff. East West was to be the operating company for the business and TJK was to operate as the holding company.

[ 6 ] The plaintiff alleges that East West turned out to be a very successful business but that he was kept in the dark with respect to the operations of East West. He alleges that in the 20 years following his investment he was never advised of any shareholders’ or other meetings and was never provided with financial statements, paid dividends or interest, or received any return on his investment. In fact, he alleges that he was told that East West was not earning any profits.

[ 7 ] The plaintiff alleges that in fact East West was earning profits but that those profits were being stripped out of the business through the payment to the directors (being Hobza and the other individual defendants) of excessive salaries and bonuses and the excessive and improper reimbursement of expenses.

[ 8 ] The plaintiff’s claim is based on breach of trust, knowing assistance of a breach of trust, breach of fiduciary duty and knowing receipt of the proceeds of a trust to the detriment of a beneficiary. In addition, he seeks an accounting and damages pursuant to the oppression remedy provisions of the Companies Act , R.S.N.S. 1989, c.81 (the “NSCA”).

THE MOTION

[ 9 ] There has already been an order in this action requiring the plaintiff to post security for costs. That order was made by Justice Morawetz on October 28, 2009, based on the consent of the parties. That order required the plaintiff to post approximately $100,000.00 to stand as security for the defendants’ costs. The order also provided that the defendants were at liberty to seek a further order for security for costs if the amount posted should prove to be insufficient.

[ 10 ] The plaintiff opposes this motion on two bases. First, he argues that the defendants require leave to bring this motion under Rule 48.04, given that they consented to this matter being placed on the trial list. Rule 48.04 prohibits a party from initiating a motion in such circumstances, unless leave of the court is obtained.

[ 11 ] Second, the plaintiff argues that the provisions of the NSCA prohibit the making of an order for security for costs against a complainant in an action brought under the oppression remedy provisions of the NSCA.

LEAVE

[ 12 ] I am satisfied that it is appropriate to grant leave to the defendants under Rule 48.04 to bring this motion. The applicable test for granting leave appears to have evolved over time. At one time it was necessary for the moving party to show a substantial and unexpected change in circumstances in all cases. In my view, this is no longer the test. The court should adopt a flexible approach to the exercise of its discretion. The decision to grant leave is dependent on the nature of the leave sought and the circumstances of each particular case. See 855191 Ontario Ltd. v. Turner , 2011 ONSC 918 at paragraphs 14 and 16 and Tanner v. Clark , [1999] O.J. No. 581 (Gen. Div.) at paragraph 25 .

[ 13 ] Rule 56 contemplates that motions for security for costs may be brought any time after a defendant has delivered a statement of defence. This is not the first motion for security for costs in this action. Rather, it is a motion to increase the amount of security that has already been posted. Rule 56.07 contemplates that more than one motion for security for costs may be necessary in the event that the posted security needs to be adjusted. Rule 56.07 states that the “amount of security may be increased or decreased at any time ”. The order of Justice Morawetz expressly stated that it was being made without prejudice to the defendants’ right to seek a further order for security for costs. The plaintiff has not provided any evidence that he is in any way prejudiced by the defendants’ delay in bringing this motion. In fact, some of the delay can be attributed to the plaintiff due to his lawyer’s slow response to the defendants’ request for additional security in February, 2012. Finally, I am satisfied that there has been a change in circumstances sufficient to justify the granting of leave. Unanticipated expert fees and larger than predicted trial preparation costs have resulted in a situation where the posted security is obviously insufficient to cover the defendants’ partial indemnity costs. I am satisfied that the extent of this gap was not apparent to the defendants last October when they agreed to the trial dates. I therefore grant the defendants leave under Rule 48.04 to bring this motion.

NSCA

[ 14 ] The relevant provisions of the NSCA are found in the Third Schedule to that legislation and provide as follows:

5 (1) A complainant may apply to the court for an order under this Section.

(2) If, upon an application under subsection (1) of this Section, the court is satisfied that in respect of a company or any of its affiliates

(a) any act or omission of the company or any of its affiliates effects a result;

(b) the business or affairs of the company or any of its affiliates are or have been carried on or conducted in a manner; or

(c) the powers of the directors of the company or any of its affiliates are or have been exercised in a manner,

that it is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.

5(3) In connection with an application under this Section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,

(j) an order compensating an aggrieved person;

7(3) A complainant is not required to give security for costs in any application made or action brought or intervened in under Section 4, 5 or 6 hereof.

7(5) For the purposes of Sections 4, 5, 6 and this Section

(a) "action" means an action under the Act;

(b) "complainant" means

(i) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a company or any of its affiliates,

(ii) a director or an officer or a former director or officer of a company or of any of its affiliates,

(iia) a creditor of a company or any of its affiliates,

(iii) the Registrar, or

(iv) any other person who, in the discretion of the court, is a proper person to make an application under this Section. [1]

[ 15 ] The plaintiff argues that this proceeding is, at its core, an oppression action pursuant to section 5(1) of the Third Schedule to the NSCA . Therefore, section 7(3) of the Third Schedule to the NSCA prohibits the court from making an order for security for costs in the circumstances of this action.

[ 16 ] The evidence clearly demonstrates that at all times relevant to the issues in this action the plaintiff was a beneficial owner of a security issued by East West. There is no dispute about that. Everyone agrees that he held a 10% beneficial interest in the shares of East West. He is, therefore, a “complainant” as that term is defined in section 7(5) of the Third Schedule to the NSCA .

[ 17 ] However, the defendants argue that while the plaintiff may qualify as a complainant under the NSCA , this action is really a breach of trust and breach of fiduciary duty claim dressed up as an oppression action. The real issues in this action, the defendants submit, are separate, discrete and distinct from the oppression remedy claim. They point to the fact that the plaintiff only invokes the oppression remedy provisions of the NSCA as an alternative form of relief in his prayer for relief. The defendants submit that only two paragraphs of the statement of claim are directed to the oppression remedy head of relief. They note that none of the plaintiff’s “Issues for Trial” found in his Commercial List Trial Memorandum even mention the oppression remedy claim or the NSCA. Finally, they argue that only a small portion of the plaintiff’s expert report on Nova Scotia law from Andrew Fraser references the oppression remedy aspect of the plaintiff’s action.

[ 18 ] The parties advised the court that they were unable to locate any authority dealing with the security for costs prohibition found in the NSCA . However, the OBCA contains an identical prohibition in section 249(3) which has been the subject of judicial consideration. See Knoll v. Draxis Health Inc. , [2000] O.J. No. 1333 (Div. Ct.) ; Abdalla v. Skalin , [2004] O.J. No. 2981 (S.C.J. – Commercial List); Liu v. Daniel Executive (Canada) Holdings Corp. , [2006] O.J. No. 5048 (S.C.J. – Master) ; Uribe v. Sanchez , [2006] O.J. No. 2370 (S.C.J. – Master) ; and Wilkings v. Velocity Group Inc. , [2008] O.J. No. 1101 (Div. Ct.) .

[ 19 ] I have reviewed and considered each of these decisions. In my view, the principles applicable to the OBCA prohibition against security for costs may be summarized as follows:

(a) the prohibition does not apply if the oppression claim is merely appended to other claims or if the oppression claim is no longer in issue; [2]

(b) the prohibition will not apply where the core nature of the claim involves issues that are separate, discrete and distinctive from the oppression claims; [3]

(c) the question to be asked is “what is the real, true nature of the plaintiff’s claim?”; [4]

(d) security may be ordered for the non-oppression portions of the plaintiff’s claim where the court can reasonably determine what percentage of the action involves the oppression claim; [5]

(e) the section does not provide the court with any discretion, even in exceptional circumstances and even involving a wealthy offshore plaintiff with no assets in Canada. [6]

[ 20 ] In Knoll , Liu , Uribe and Wilkings security for costs was granted in whole or in part. In Abdalla Justice Cumming concluded that the prohibition applied and no order was made for security for costs.

[ 21 ] Knoll was decided at first instance by Maser Peppiatt. He concluded that the plaintiff’s action was “in pith and substance” an action for breach of contract. [7] As well, the Divisional Court decision in Knoll noted that the oppression remedy may no longer have been in issue at the time the motion for security for costs was heard. [8]

[ 22 ] In Liu , Master Glustein found that some of the plaintiffs were advancing claims that fell both within and outside of the oppression claim. The claims of those plaintiffs involved an action for damages relating to investments in an Ontario company and for damages relating to other investments outside of Ontario in Taiwan and Africa. For those plaintiffs he estimated that 50% of their claims were non-oppression remedy claims relating to the non-Ontario investments and ordered security for costs accordingly. One plaintiff only invested in the Ontario corporation and no security for costs was ordered payable by that plaintiff. [9]

[ 23 ] Uribe appears to have involved a claim by a creditor of an insolvent corporation against the principal of that corporation and other related corporations. The claims appear to have been based primarily in fraud. No damages pursuant to the oppression provisions of the OBCA were sought in the prayer for relief. The limited allegations in the statement of claim involving oppression related solely to the plaintiff’s position as a creditor of the insolvent debtor. Based on this, Master Dash concluded that the core of the plaintiff’s claim was not one of oppression. [10]

[ 24 ] Wilkings involved a motion by certain of the defendants in that action for an order that the corporate plaintiffs post security for costs. The motion was resisted by the corporate plaintiffs on the basis of section 249(3) of the OBCA . The judge at first instance determined that the corporate plaintiffs could not be considered “complainants” within the meaning of section 245 of the OBCA. Only the individual plaintiff could be considered to be complainant and there was no motion seeking security for costs from him (presumably because he lived in the jurisdiction). This finding, combined with the “skeletal and ephemeral” oppression allegations in the statement of claim, served as the basis for the court’s conclusion that section 249(3) of the OBCA did not apply. [11]

[ 25 ] Abdalla is the only decision provided to the court where a court refused to make any order for security for costs on the basis of section 249(3) of the OBCA . Justice Cumming found that the plaintiff’s claims in that action depended on his contractual rights based on his status as a shareholder and the defendants’ alleged oppressive conduct. Justice Cumming concluded that the core nature of those claim were oppression claims.

[ 26 ] In my view, the plaintiff’s claims in this action are fundamentally, and at their core, oppression claims. All of the claims he is making arise and flow from his status as a beneficial shareholder in East West. The essence of the plaintiff’s claim is that East West was operated in a manner that was unfair to the plaintiff as a shareholder. He alleges that the defendants improperly stripped East West of profits to which he was entitled as a shareholder. Furthermore, it is my view that his claims in this respect are sufficiently particularized in the statement of claim as oppression claims. In paragraph 1(g) of the statement of claim the plaintiff seeks compensation pursuant to the oppression remedy. Paragraph 30 of the statement of claim summarizes the defendants’ alleged conduct and states that such conduct was oppressive to the plaintiff as a shareholder of East West. Paragraphs 59 and 60 specifically invoke the provisions of the NSCA . In my view, this case is about what certain of the defendants did when they were managing East West and whether any of that conduct was damaging to the plaintiff as a shareholder. The large majority of the issues for trial identified by the plaintiff are clearly relevant to his oppression claims. A determination of whether a particular action is at its core an oppression action cannot be made on the basis of the mechanical exercise of adding up how many references to oppression can be found in the pleadings or in the evidence or whether such a claim is made as a primary claim as opposed to an alternative claim. It must be determined on the basis of a consideration of the claim as a whole.

[ 27 ] The alleged oppressive conduct remains in issue in this proceeding. In my view, it lies at the centre of this claim and constitutes the real and true nature of the plaintiff’s claim. I have therefore concluded that section 7(3) of the Third Schedule to the NSCA applies and no order for security for costs can be made.

[ 28 ] I also wish to address two further points made by counsel for the defendants. First, Mr. Gray argued that the prohibition on the making of an order for security for costs should not apply because no oppression claim is made against the defendant TJK. It is true that no such claim is made. However, this motion was brought on behalf of all of the defendants and not just TJK. Moreover, all of the defendants are represented by the same counsel. I am unable to determine from the evidence, the pleadings or the defendants’ bills of costs, whether, and to what extent, the costs of TJK can be separated from the costs of the other defendants. I would also note that the plaintiff has already posted $100,000.00 in security for costs on a consent basis. Given my conclusions on this motion, he was not required to do so, at least in respect of the claims against the defendants other than TJK. That sum is available to secure TJK’s potential claim for costs. As I discuss below, the role of the court on a motion for security for costs is to make such order as it just. For these reasons, it is my view that no further security need be posted for the costs of TJK.

[ 29 ] Second, Mr. Gray also seemed to suggest in argument that given the consent order made by Justice Morawetz, the plaintiff is not now in a position to deny the defendants’ right to further security. In my view, such an argument cannot succeed on the facts before the court on this motion. The order of Justice Morawetz was made on a consent basis after an agreement was reached among the parties. The order did not have any adjudicative aspect to it and no determination was made on the merits. See Lawyers’ Professional Indemnity Co. v. Geto Investments Ltd. , 2001 27980 (ON SC) , [2001] O.J. No. 2616 (S.C.J.) at paragraphs 11 and 12 . The defendants knew before Justice Morawetz even made his order that the plaintiff was taking the position that the NSCA prohibited the making of a security for costs order. Finally, paragraph 5 of the order makes it clear that the plaintiff was not conceding the point. For these reasons, I would not give effect to this argument.

SECURITY FOR COSTS

[ 30 ] If it were not for the prohibition on the making of an order for security for costs found in the NSCA I would have ordered that further security for costs be posted. [12]

[ 31 ] The defendants seek an order requiring the plaintiff to post further security for costs pursuant to Rule 56.01(1)(a), which 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, . . .

(a) the plaintiff or applicant is ordinarily resident outside Ontario

[ 32 ] As I have already indicated above, Rule 56.07 provides that the amount of security for costs may be varied at any time.

[ 33 ] The analysis the court is to engage in when determining a motion for security for costs is summarized in Websports Technologies Inc. v. Cryptologic Inc ., [2003] O.J. No. 5455 (S.C.J. – Master) . At paragraphs 6 and 7 of that decision Master Haberman makes the following observations which I find to be applicable to this motion:

6 The law in this area is fairly clear. Both counsel agree that the court is required to follow a 2-step process when dealing with a Rule 56.01 motion. The initial onus is on the moving party, to demonstrate that the responding party appears to fit within one of the subrules of 56.01(1) (see Hallum v. Canadian Memorial Chiropractic College (1978), 1989 4354 (ON SC) , 70 O.R. (2d) 119 ). The moving party is not required to go so far as to prove that the situation, in fact, meets the criteria of the subsection. They need only demonstrate that there is good reason to believe that that is the case ( see Warren Industrial Feldspar C. Ltd. V. Union Carbide Canada Ltd. et al. , 1986 2683 (ON SC) , [1986] O.J. No. 2364 ).

7 If that is accomplished, the onus shifts to the responding party. They can either demonstrate that they are impecunious and then ask the court to make such order as is just in the circumstances or prove that they do have sufficient assets to respond to a cost order. It is agreed that that onus only arises after the moving party has satisfied the first part of the test.

[ 34 ] Ultimately, it is the role of the court on a motion such as this to make the order that is just in the circumstances. See Hallum at page 123.

[ 35 ] If I were to have applied the analysis set out above, I would have come to the conclusion that security for costs should be ordered pursuant to Rule 56.01(1). At the first stage of the analysis under Rule 56.01(1), the onus is on the defendants to demonstrate that it appears that one or more of the factors under Rule 56.01(1) have been established. I am satisfied that the defendants have met this onus under Rule 56.01(1)(a). The plaintiff lives in Germany. He is ordinarily resident outside of Ontario. I am therefore satisfied that the defendants have met the onus of demonstrating that it appears that at least one of the factors under Rule 56.01(1) exists.

[ 36 ] As a result of this finding, the analysis now moves to the second stage, an assessment by the court of what order is just in the circumstances of this case. At this stage of the analysis, the onus shifts to the plaintiff to demonstrate why an order for security for costs should not be made. See Websports Technologies at paragraph 7.

[ 37 ] The plaintiff has not met this onus. There is no affidavit evidence from the plaintiff himself. There is no evidence that would demonstrate that such an order should not be made or that any such order would result in a hardship to the plaintiff. There is no indication that the making of a further order for security for costs in the amount requested by the defendants would prevent the plaintiff from continuing with this action.

[ 38 ] The merits are usually relevant on a motion for security for costs as the court is required to make such order as is just. However, where impecuniosity has not been shown, a responding party must satisfy the court that his claim has a good chance of success. See Zeitoun v. Economical Insurance Group , 2008 20996 (ON SCDC) , [2008] O.J. No. 1771 (Div. Ct.) at paragraphs 49 and 50 ; affirmed, [2009] ONCA 415 (C.A.). The burden on a plaintiff who is not impecunious is a high one. See Cigar500.com Inc. v. Ashton Distributors Inc. , 2009 46451 (ON SC) , [2009] O.J. No. 3680 (S.C.J.) at paragraph 69 .

[ 39 ] Again, the plaintiff has not satisfied this requirement. He has filed very little evidence in response to this motion. He is obliged to put forward some evidence in support of his claim. See Smith Bus Lines Ltd. v. Bank of Montreal , 1987 4190 (ON SC) , [1987] O.J. No. 1197 (H.C.) at paragraph 42 . What evidence has been filed, largely by the defendants, leads the court to conclude that there may be merit to both sides of this dispute. It cannot be said with any certainty that the plaintiff has a good chance of success.

[ 40 ] In addition, the plaintiff has not filed any evidence challenging the quantum of security for costs sought by the defendants. There is no evidence of what the plaintiff’s costs have been. It is not the role of the court to examine a bill of costs in detail to determine the appropriate amount to be posted. See Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP , [2011] O.J. No. 3838 (S.C.J. – Master) at paragraph 18 . The plaintiff’s counsel did point out certain questionable claims in the defendants’ draft bills of costs but those were minor in nature. Overall, it is my view that the defendants’ draft bills of costs appear fair and reasonable in the circumstances of this action. A small deduction is appropriate for the items questioned by the plaintiff. In the circumstances, had I possessed the discretion to do so, I would have ordered a further posting of security for costs in the amount of $140,000.00 by May 28, 2012.

COSTS

[ 41 ] The plaintiff has been successful on this motion and is entitled to costs. He has succeeded on the basis of the chief argument advanced on his behalf, namely the security for costs prohibition in section 7(3) of the Third Schedule to the NSCA . However, he was not successful on the leave aspect of this motion, which did occupy a significant portion of time, both for preparation and during argument. In my view, he should not have opposed the request for leave.

[ 42 ] The plaintiff seeks substantial indemnity costs in the amount of $8,725.13. His partial indemnity costs are approximately $7,500.00. The defendants’ partial indemnity costs are approximately $5,500.00. I see no evidence of the kind of reprehensible conduct on part of the defendants necessary to justify a costs award on an elevated scale. See Clarington (Municipality) v. Blue Circle Canada Inc. , 2009 ONCA 722 at paragraph 40 . A partial indemnity costs order is appropriate in the circumstances of this motion. I have reviewed both costs outlines. In my view, the defendants’ costs outline is more appropriate in the circumstances of this motion (along with a deduction from that amount to allow for the plaintiff’s lack of success on the leave portion of this motion). I am therefore ordering that the defendants pay the plaintiff’s costs of this motion on a partial indemnity basis fixed in the amount of $3,500.00, inclusive of HST and disbursements, payable within 30 days.

ORDER

[ 43 ] I therefore order as follows:

(a) the defendants’ motion is dismissed; and,

(b) the defendants shall pay the plaintiff’s costs of this motion on a partial indemnity basis fixed in the amount of $3,500.00, inclusive of HST and disbursements, payable within 30 days.

Master R.A. Muir

DATE: May 18, 2012