SUPERIOR COURT OF JUSTICE – ONTARIO

COURT FILE NO.: 00-1433 (Hamilton)
DATE: 2012/07/24

RE: Future Health Inc. operating as Trauma Services as continued by its Trustee in Bankruptcy, Scott, Picheilli & Graci Ltd. (Plaintiff) v. The Economical Mutual Insurance Company (Defendant)

BEFORE: The Honourable Mr. Justice R.A. Lococo

COUNSEL:
Lou Ferro, for the Plaintiff
Lee Samis, for the Defendant

HEARD: July 9 & 10, 2012 (in Hamilton)

E N D O R S E M E N T

I. Introduction

[1] Future Health Inc., through its Trustee in Bankruptcy, Scott, Pichelli & Graci Ltd., has brought an action against The Economical Mutual Insurance Company. In the motion before me, Economical sought security for costs given Future Health’s bankrupt status.

[2] Future Health provided health care services to patients injured in motor vehicle accidents. The patients were covered by automobile insurance policies issued by Economical and other insurance companies. These policies provided medical and rehabilitation benefits under the Statutory Accident Benefits Schedule[^1] and predecessor regulations.

[3] According to Future Health, commencing in 1996, Economical conspired with a number of other individuals and entities, including the Insurance Crime Prevention Bureau (ICPB), to wrongfully interfere with Future Health’s business, leading to its demise. Future Health went into bankruptcy in December 1998. The Trustee in Bankruptcy commenced an action for damages against Economical, ICPB and a number of other parties in June 2000. The action has since been discontinued against all other parties, leaving Economical as the only Defendant. There is also a companion action by the same Plaintiff against State Farm, another insurer. Both actions have been jointly subject to case management since 2005.

[4] In the motion before me, the parties agreed that the court has the authority under subrule 56.01(1) of the Rules of Civil Procedure[^2] to “make such order for security for costs as is just” on the basis that there appears to be good reason to believe that Future Health has insufficient assets in Ontario to pay the costs of Economical.[^3]

[5] Future Health’s position was that it would not be just to order security for costs. According to Future Health, the relevant factors supporting this conclusion were Future Health’s impecuniosity (or alternatively, the resulting financial hardship) as well as the strong merits of its case. Future Health also argued that Economical’s substantial delay in seeking security for costs in an action commenced 12 years ago militates against granting the requested order.

[6] Economical’s position was that it would be just to require a substantial amount for security for costs given the significant costs it has already incurred and will be incurring as the action proceeds. According to Economical, Future Health has not met the required onus of demonstrating either impecuniosity (or financial hardship) or the merits of its case. Economical also denied that there was any delay on its part that would justify refusal of the requested order, with Future Health being on notice since at least 2005 of its intention to seek security for costs.

[7] The issues to be determined are therefore as follows:

(a) Impecuniosity/financial hardship – Has Future Health met the required onus of establishing impecuniosity or financial hardship?

(b) Merits of case – Has Future Health met the required onus of establishing the merits of the case?

(c) Delay – Should the requested order be refused on the basis of delay by Economical in seeking security for costs?

(d) Quantum – What is the appropriate amount for security for costs?

[8] I will deal with each of these issues in turn.

III. Impecuniosity/Financial Hardship

[9] In their submissions, counsel for both parties referred to the decision of the Divisional Court in Zeitoun v. Economical Insurance Group[^4] as the leading case in Ontario relating to security for costs. In that case, the court stated that rule 56.01 “does not create a prima facie right to security for costs, but rather triggers the inquiry” as to whether an order for security for costs would be just.[^5] As the Court went on to indicate, impecuniosity of the plaintiff may be a relevant factor in making this determination:

Provided that the plaintiff is able to show that the claim is not clearly devoid of merit, impecuniosity may be a persuasive factor in tipping the scales in favour of no order for security. Where a plaintiff seeks to rely on impecuniosity, however, the onus falls on him to show it.[^6]

[10] The Court also indicated that were the plaintiff is not able to demonstrate impecuniosity on the balance of probabilities, “a closer scrutiny of the merits of the case is warranted”. In these circumstances, “a legitimate factor in deciding whether or not it would be just to require security for costs is whether the claim has a good chance of success.”[^7] This court recently took a consistent approach to consideration of these issues in Georgian Windpower Corp. v. Stelco Inc.[^8]

[11] In order to establish impecuniosity, a plaintiff corporation must establish that: (a) it cannot fund security for costs from its own resources, and (ii) it cannot raise the required amount from those who will “reap the reward of the litigation” if the plaintiff is successful, in this case the creditors and shareholders of Future Health.[^9] In this action, certain of the damages claimed on behalf of Future Health (for example, damages for breach of contract) would inure to the benefit of Future Health’s creditors, while other damages claimed (for example, for bad faith and punitive damages) would benefit Future Health and its shareholders.

[12] In this case, I agree with Economical that Future Health has not met the required onus of demonstrating impecuniosity. The affidavit evidence of Peter Pichelli, on behalf of the Trustee in Bankruptcy, did not indicate any genuine attempt to raise funds from the creditors of Future Health. According to the Statement of Affairs prepared in connection with the bankruptcy filing of Future Health in December 1998, the creditors included Bank of Montreal (with an unsecured claim estimated at $75,000), Toronto Hospital, Western Division ($50,011) and a number of professional firms and governmental departments, including Revenue Canada (now called Canada Revenue Agency) ($270,595). With respect to the latter creditor, I agree with Economical that Mr. Pichelli’s evidence on cross-examination that in his experience Canada Revenue Agency does not make a practice of funding security for costs was not sufficient to address this issue, especially given that there were a number of creditors from whom funding could have been sought.

[13] I also consider the evidence relied on by Future Health to establish the inability of its shareholders to fund security for costs to be insufficient to meet the required onus. The information relating to the financial capacity of Ellen Heldon (Future Health’s sole shareholder, according to the Plaintiff) came from the evidence of Mr. Pichelli as well as the evidence of Caryn Pushka, a case manager/administrator with Future Health at the relevant time. That information was based principally on oral conversations with Ms. Heldon without further documentary investigation by the affiants. No satisfactory explanation was provided for the fact that an affidavit from Ms. Heldon was not provided. Clearly, the fact that the affiants did not have direct knowledge of Ms. Heldon’s finances had the effect of shielding Ms. Heldon from cross-examination on that subject.

[14] An affidavit from Ms. Heldon may also have shed some light on the apparent uncertainty relating to the identity of Future Health’s shareholders. The Official Receiver’s Report prepared in connection with Future Health’s bankruptcy included a sworn statement by Ms. Heldon dated February 24, 1999, in which she confirmed that the shareholders of Future Health were Ms. Heldon as to 50%, Louis Desmarais as to 25% and A.R. Upton as to 25% (Upton also being listed in the Statement of Affairs as an unsecured creditor in the amount of $10,000). This information was not consistent with the information provided in the affidavits of Mr. Pichelli and Ms. Pushka that Ms. Heldon was the sole shareholder, and that the proposed transfers to the other two prospective shareholders in 1996 were not completed. If Future Health had other shareholders (as Ms. Heldon indicated in her sworn statement three years later), they may have provided a further source of funding for security for costs.

[15] In reaching the conclusion that the Plaintiff has not met the required onus relating to impecuniosity, I have also taking into account the fact that on a similar motion for security for costs in the companion action, the Plaintiff similarly resisted this request on the basis of impecuniosity, including the inability of Ms. Heldon or other benefiting parties to provide the necessary funds.[^10] When the court nonetheless ordered security for costs totaling $350,000, the Plaintiff paid into court the required amounts. In his submissions before me, Plaintiff’s counsel stipulated (with the agreement of Defendant’s counsel) that the source of funds in that case was a charge against the matrimonial home of Ms. Heldon and her husband Mr. Ferro, which is owned by their daughter.

[16] Plaintiff’s counsel also took that position that even if Future Health had not met the required onus to establish impecuniosity, the evidence before me established “financial hardship”, which together with a finding that the claim is not clearly devoid of merit was sufficient to support the conclusion that it would be unjust to make an order for security for costs. To support this proposition, he relied on the decision of Mr. Justice Gans of this court in Stojanovic v. Bulut,[^11] in which the court declined to overturn the decision of Master Dash to decline to order security for costs after finding financial hardship on the part of the plaintiff but not impecuniosity.

[17] In my view, however, the Stojanovic decision is clearly distinguishable from the case before me. In declining to overturn Master Dash’s decision, the Mr. Justice Gans noted as follows:

[T]here was substantial evidence received under oath, supported by documents, as to the plaintiff's financial circumstances, more than adequate for the Master to conclude that it would be difficult if not impossible for the plaintiff to post security for cost, even over time.[^12]

[18] This stands in marked contrast to the present case, where I have found that there was insufficient evidence relating to the inability to fund security for costs by the parties that stood to benefit from the litigation.

[19] As well, I do not agree that the Stojanovic decision supports the view that the lower standard of proof relating to the merits of the case (that is, that the claim is not clearly devoid of merit) is applicable in circumstances in which impecuniosity is not established. In this regard, I note Master Dash reviewed the affidavit evidence before him as to the facts underlying the plaintiff’s action and found it had a “good chance of success,”[^13] thereby meeting the higher standard that applies if the plaintiff is not able to establish impecuniosity. On appeal, Mr. Justice Gans declined to interfere with Master Dash’s findings relating to the merits of the action.[^14]

IV. Merits of case

[20] Since Future Health has not satisfied the onus of establishing impecuniosity, the next issue to consider is whether Future Health has established that its action has a good chance of success on the merits. After reviewing the evidence before me, I have concluded that Future Health has not met the required onus on this issue.

[21] In reaching this conclusion, I am not in any way passing judgment on the plausibility or otherwise of the allegations made by Future Health in its pleadings. However, on the evidence before me on this motion, the facts pleaded in the Statement of Claim and the Reply remain allegations only.

[22] According to the Statement of Claim, a central event in Future Health’s case related to a meeting of representatives of the insurance companies participating in the Insurance Crime Prevention Bureau that occurred in the North York offices of Economical on June 7, 1996. A few days earlier, a settlement between Future Health and Economical had been completed under which Economical paid $669,000 to Future Health, being substantially all of the amounts Future Health had billed to Economical for treatment plans and medical treatment of insured patients. According to Future Health, as a result of the conspiracy agreed to at the subsequent meeting in Economical’s offices and the wrongful acts that followed, Future Health’s business was destroyed, leading to its bankruptcy.

[23] The difficulty from the standpoint of Future Health was that there was no evidence before the court on this motion as to what occurred at the ICPB meeting, nor was there sufficient evidence of any causal connection between what may have happened and Future Health’s financial difficulties.

[24] As evidence of the causal connection, Future Health pointed to passages from the cross-examination of Mr. Pichelli on his affidavits, where he testified in July 2012 about financial statements he examined in 1998 and 1999 relating to the two years prior to the bankruptcy (which occurred in December 1998) as well as the books and records of the company for the three to six months prior to December 1998. On his cross-examination, Mr. Pichelli was testifying about these matters from memory without producing the financial statements or books and records in question. Later in cross-examination, after referring to something that occurred in the spring of 1996, Mr. Pichetti stated that when he reviewed Future Health’s books and records, “within the six months prior”, there was a sudden drop in Future Health’s cash flow, and that it “didn’t take a rocket scientist to figure out that was it. The company was bankrupt.” In response to further questions, he clarified that the six month period he was referring to was the period prior to his first involvement with Future Health in December 1998, not the period prior to the relevant events in 1996.

[25] In these circumstances, I fail to see how this passage was of any assistance to Future Health in establishing a causal connection between the alleged wrongful acts of Economical and Future Health’s financial difficulties.

[26] Plaintiff’s counsel also referred me to the title and description of various documents included in the long list of document set out in the Plaintiff’s Affidavit of Documents, cross-referencing them events which occurred in 1996, including the failure of financing by outside parties allegedly resulting from Economical’s wrongful acts. However, the documents themselves were not put before the court, and except for the alleged coincidence of certain dates, there was nothing before the court upon which any meaningful conclusions could be drawn as to any causal connection between alleged wrongful acts and loss to Future Health.

[27] For the foregoing reasons, I have concluded that Future Health has not established that it has a good chance of success in its action.

V. Delay

[28] Future Health also resisted the requested relief based on Economical’s substantial delay in seeking security for costs in an action commenced over 12 years ago. In this regard, he relied on various authorities, including the decision of this court in Susin v. Genstar Development Co., a Division of Imasco Enterprises Inc.[^15] In that case, the motion for security for costs was brought by the defendant shortly before the date scheduled for trial, and the court found that the defendant had not explained why the motion had not been brought earlier or why it was reasonable that it be brought then.

[29] I agree with Economical that there was no delay on its part that would justify refusal of the requested order. Unlike in Susin, Economical has not waited until the eve of trial to spring a request for security for costs on the Plaintiff without notice or explanation. Although the action was commenced a long time ago, it is a complex action initially against a large number of parties. No discoveries have been held, and the defendant has not yet filed its Affidavit of Documents. Since 2005, the action has been case managed together with another equally complex companion action, and there have been a number of motions and other developments over time in both actions, including the discontinuation of this action against a number of defendants. Since at least 2005, Economical has made it clear that it would be seeking security for costs before proceeding with documentary production and discoveries given the expense involved and Future Health’s bankrupt status.

[30] On the evidence before me, this action and the companion action have taken a tortuous path to date, and without attempting to apportion blame for the delay, I am unable to fault Economical for not actually bringing this motion sooner. In my view, now is an appropriate time to deal with the issue for security for costs, before Economical is required to expend significant amounts of money with respect to the production of documents.

VI. Quantum

[31] Economical has requested that the court order security for costs in this case in the amount of $700,000, based on its estimate of partial indemnity costs for the action through to completion of the production and discovery stages. It has also estimated its actual full indemnity costs to date at $80,000, not including the costs of this motion, which it estimates to be $14,000. In support of the amount requested, Economical provided a draft bill of costs, and also noted that there were 80 bankers boxes of Economical documents that needed to be reviewed. As well, on the assumption that the other 10 insurers involved in the alleged conspiracy would have a similar volume of material that would need to be reviewed, Economical extrapolated the relevant material into 880 bankers boxes of documents that would required review by counsel.

[32] Given the scope of the allegations contained in the pleadings, I have no doubt that it will be time-consuming and expensive for Economical’s counsel to proceed through the production and discovery stage of this action. However, I agree with Future Health that it would not be appropriate to order the full amount of security for costs requested by Economical based on the speculative estimates before the court on this motion. Plaintiff’s counsel suggested that a staged approach to ordering security for costs would be appropriate, and Defendant’s counsel did not disagree in principle. The difficulty, however, is coming up with a workable formula.

[33] On the evidence before me, I have concluded that it would be appropriate to make an order requiring the Plaintiff to pay into court security for costs in two stages. The first stage is based on an estimate of partial indemnity costs incurred by Economical to date (set at $50,000). The second stage is intended to fund partial indemnity costs to be incurred through the production and discovery stage (set at $150,000). This approach is similar to the one taken by Mr. Justice Festeryga on the security for costs motion in the companion action.[^16] Should the latter amount prove to be insufficient, Economical would be free to bring a further security for costs motion at a future time.

VII. Conclusion

[34] For the reasons above, an order will issue as follows:

(a) The Plaintiff is required to pay into court as security for costs, as follows:

(i) Within 45 days of service of this order on the Plaintiff, the sum of $50,000,

(ii) Within 90 days of service of this order on the Plaintiff, an additional $150,000, and

(iii) Upon further motion of the Defendant, such additional amount as the court determines is just.

(b) Until security for costs required by this order has been paid into court, the Plaintiff may not take any step in this action except an appeal from this order.

[35] If the parties are unable to agree on costs and except as otherwise agreed between them with respect to timing, Plaintiff’s counsel shall serve and file brief written submissions (not to exceed three pages) together with a cost outline within 14 days. Defendant’s counsel will have an opportunity to respond with brief written submissions within 14 days of receipt of Plaintiff’s submissions. Plaintiffs’ counsel will have an opportunity to reply with brief written submissions within seven days of receipt of the Defendant’s submissions. Should both counsel prefer to make oral submissions, they should speak to the Trial Coordinator to arrange a date.

The Honourable Mr. Justice R.A. Lococo
DATE: July 24, 2012

COURT FILE NO.: 00-1433 (Hamilton)
DATE: 2012/07/24

SUPERIOR COURT OF JUSTICE - ONTARIO RE: Future Health Inc. v. Economical Mutual Insurance Company BEFORE: The Honourable Mr. Justice R.A. Lococo COUNSEL: Lou Ferro, for the Plaintiff Lee Samis, for the Defendant, Economical Mutual Insurance Company ENDORSEMENT Lococo J.

DATE: July 24, 2012

[^1]: O. Reg 35/10.
[^2]: R.R.O. 1990, Reg. 194.
[^3]: Ibid. clause 56.01(1) (d).
[^4]: [2008] O.J. No. 2527 (Div. Ct.), aff’d (2009), 2009 ONCA 415, 96 O.R. (3d) 639 (C.A.).
[^5]: Ibid. para. 44.
[^6]: Ibid. para. 45.
[^7]: Ibid. para. 50.
[^8]: [2012] O.J. No. 158 (S.C.) at para. 8.
[^9]: See Enescu v. Wawanesa Mutual Insurance Co., [2005] O.J. No. 4836 (Div. Ct) at para 6 and Smith Bus Lines Ltd. v. Bank of Montreal, 1987 4190 (ON SC), [1987] O.J. No. 1197 (H.C.) at para 43.
[^10]: See Future Health Inc. (c.o.b. Trauma Services) v. State Farm Mutual Automobile Insurance Co., [2006] O.J. No. 4769 (S.C.).
[^11]: 2011 ONSC 4632, [2011] O.J. No. 3543 (S.C.).
[^12]: Ibid. at para 12.
[^13]: 2011 ONSC 874, [2011] O.J. No. 840 at para. 70.
[^14]: 2011 ONSC 4632, [2011] O.J. No. 3543 (S.C.) at para. 16.
[^15]: [2001] O.J. No. 3825 (S.C.).
[^16]: Supra note 8.