SUPERIOR COURT OF JUSTICE – ONTARIO
COMMERCIAL LIST
DATE: 20120831
DOCKETS: CV-12-9778-00CL
CV-09-8295-000CL
CV-12-9777-00CL
RE: 969625 Ontario Limited and Gary Conn, Plaintiffs/Defendants to the Counterclaim
And
Magnum Gas Corp., Defendant/Plaintiff by Counterclaim
AND BETWEEN:
Magnum Gas Corp. and Pecho Pipelines Inc., Plaintiffs
And
T.W. Johnstone Company Limited, T.W. Johnstone Pipeline Inc., David Johnstone, Andrew Johnstone, Robert Moore, Robert Gilmore, James McIntosh and Jim McIntosh Petroleum Engineering Ltd., Defendants
AND BETWEEN:
Salvatore Fuda, Plaintiff
And
Jim McIntosh Petroleum Engineering Ltd. Echo Energy Canada Inc., Gary Conn, Robert Moore, Robert Gilmore and David Johnstone, Defendants
BEFORE: L. A. Pattillo J.
COUNSEL: Catherine Patterson, for the Defendants/Moving Parties, T.W. Johnstone Company Limited, T.W. Johnstone Pipeline Inc., David Johnstone, Andrew Johnstone, Gary Conn, Robert Moore and 969625 Ontario Limited, Moving Parties.
Patricia Virc, for the Plaintiffs/Respondents Salvatore Fuda, Magnum Gas Corp. and Pecho Pipelines Inc.
HEARD: August 9, 2012
ENDORSEMENT
[1] There are three motions before the court in the above actions:
In Action CV-12-9777-00CL, (the “Fuda Action”), the defendants Gary Conn (“Conn”), Robert Moore (“Moore”) and David Johnstone (“Johnstone”), move to require the plaintiff, Salvatore Fuda to post $54,500 as security for costs in the Fuda Action to cover their anticipated costs in responding to Fuda’s pending summary judgment motion.
In Action CV-09-8295-000CL, (the Magnum 1 Action), the defendants T.W. Johnstone Company Limited, T.W. Johnstone Pipeline Inc., Johnstone, Andrew Johnstone and Moore move for:
a) security for costs against the plaintiff, Magnum Gas Corp. (“Magnum”) in the amount of $184,000;
b) leave to amend their pleadings to challenge the validity of the assignment of Echo Energy Canada Inc.’s (Echo Energy”) causes of action to Magnum as pleaded against them in the Magnum Action and to plead reliance on legal advice as part of their defence that the legal proceedings they and Echo Energy commenced against Echo Energy’s major shareholders was for a valid corporate purpose.
- In Action CV-12-9778-00CL (the Magnum 2 Action), the plaintiffs, defendants by counterclaim, Conn and 969625 Ontario Limited move for the same relief as the defendants in the Magnum Action.
Security for Costs
1. Fuda Action
[2] Rule 56.01(1)(e) provides that the court may make an order for security for costs where there is good reason to believe that the action is frivolous and vexatious and that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant.
[3] The moving parties submit that the Fuda Action is frivolous and vexatious in that it is totally devoid of merit and further that Fuda has insufficient assets in Ontario to pay the costs. They seek $54,500 in security to cover their anticipated costs in responding to Fuda’s pending summary judgment motion.
[4] The Fuda Action is a claim for damages for negligent misrepresentation concerning an investment he made in Echo Energy which was in the business of supplying natural gas. In a Statement of Claim issued March 9, 2010, Fuda alleges that materials prepared by the defendant Jim McIntosh Petroleum Limited and provided by the other defendants, who were directors and/or officers in Echo Energy, in or about October 2003 concerning gas reserves were relied on by him to make “extensive investments” in Echo Energy. Fuda pleads that the representations were negligently made by the defendants and that they knew he would rely on them. He learned they were false “long after they were made.”
[5] In support of his pending summary judgment motion, Fuda filed an affidavit sworn May 11, 2012. In it, Fuda details his investment of $1.5 million in the shares of Echo Energy through a private placement in March, 2008. He alleges that the defendants failed to disclose certain information to him at the time of the investment concerning the state of Echo Energy’s relationship with its banker and the intended use of the share proceeds. No reference is made to the 2003 reserve reports pleaded in the statement of claim nor is there any mention of reliance on them.
[6] The moving defendants submit that having regard to the claim advanced by Fuda in his affidavit in support of the summary judgment motion, the claim as pleaded in the statement of claim is devoid of merit. In response, Fuda has produced a “draft” amended statement of claim which his counsel submits brings the pleading in line with the summary judgment motion as framed in Fuda’s affidavit. It refers specifically to Fuda’s $1.5 million investment in Echo Energy in March of 2008. It pleads McIntosh supplied reserve reports up to 2008 and that the bank’s position concerning the reserves and the use of proceeds of the share proceeds were never disclosed to Fuda prior to making his investment in Echo Energy. To my knowledge, the proposed amended claim has not been issued.
[7] While I expressed concerns during the argument about appropriateness of Fuda’s summary judgment motion, particularly having regard to the state of Fuda’s pleadings, I am unable to conclude at this stage of the proceeding that his claim so totally devoid of merit such that it is frivolous and vexatious.
[8] Further, Fuda has resided in Ontario for many years. In 2008, he made a major investment in Echo Energy which is the subject of his lawsuit. From the material filed, I am unable to conclude that there is good reason to believe Fuda has insufficient assets in Ontario to pay the defendants’ costs in the event his claim does not succeed.
[9] Conn, Moore and Johnstone’s motion for security for costs against Fuda is therefore dismissed.
2. Magnum 1 and Magnum 2 Actions
[10] Rule 56.01(1)(d) provides security for costs may be ordered where the plaintiff is a corporation or a nominal plaintiff, and there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant.
[11] The moving parties submit that on the evidence there is good reason to believe that Magnum has insufficient assets in Ontario to pay their costs of the action. They seek $184,000 in security.
[12] Rule 56.01(1)(d) provides for a two part test. Initially the onus is on the moving party to establish there is good reason to believe the corporation has insufficient assets to pay the costs. The burden to establish this first part is not high. The moving party must provide “some evidence” about the corporation’s current financial situation that goes beyond “mere conjecture, hunch or speculation” and establishes that there is “good reason to believe” that the corporation cannot pay the costs. Once that aspect of the test has been met, the onus shifts to the corporation to either establish it is impecunious and ask the court to make such order “as is just” or to prove it has sufficient assets. See: Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 46451 (ON SC), 99 O.R. (3d) 55 (S.C.J.) at paras. 20 - 25.
[13] There is no issue that Magnum is a corporation. Magnum is an energy company which purchased Echo Energy’s assets from its Receiver in early 2011. In submitting that there is good reason to believe that Magnum has insufficient assets to pay their costs, the moving parties have provided a newspaper article from March 2011 which indicates that Magnum paid “about $5 million for Echo”. The article notes the assets included 400 natural gas leases and about 56 producing wells. They have also done a PPSA search which shows that Magnum’s assets are subject to a General Security Agreement in favour of its bank. Conn, who was Echo Energy’s president for a period prior to the receivership, states that, based on today’s price of natural gas and Echo Energy’s operating expenses for the first nine months of 2009, “Magnum appears not to have sufficient revenue to operate given today’s gas prices.” Finally, the moving parties point to an article in the Financial Post on May 18, 2012 indicating that there are natural gas producers in survival mode and some won’t likely survive given the low gas prices.
[14] Based on the evidence put forward by the moving parties, I am unable to conclude that they have met their onus under Rule 56.01(1)(d). In my view, the allegation that Magnum has insufficient assets to pay costs is based solely on speculation. It is clear that Magnum is an operating company with substantial assets. The moving parties concerns regarding Magnum’s bank debt, cash flow and its overall current financial situation amount, in my view, to no more than mere conjecture on their part. That is not sufficient for them to discharge the onus.
[15] The moving parties submit that because Magnum has led no evidence about its assets or liabilities, the court should draw an inference that it does not have sufficient assets to meet a costs order. Magnum, however, is under no obligation to lead any evidence in respect of the first part of the test. The onus only shifts to Magnum when the moving parties establish the first part of the test: Cigar500.Com, at paras. 25 – 29.
[16] The moving parties’ motions for security for costs in the Magnum 1 and Magnum 2 Actions are therefore dismissed.
Pleading Amendments
[17] Rule 26.01 provides that, on motion, at any stage of the action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
[18] The defendants in the Magnum 1 Action seek leave to amend their statement of defence to challenge the validity of the assignment of Echo Energy’s causes of action to Magnum and to plead reliance on legal advice as part of their defence that the legal proceedings Echo Energy commenced against Echo Energy’s major shareholders was for a valid corporate purpose. They seek similar amendments to their defence to counterclaim in the Magnum 2 Action.
[19] The claims asserted in the Magnum 1 Action and by way of counterclaim in the Magnum 2 Action were originally brought by Echo Energy. As noted, Echo Energy was placed into receivership. The Receiver sold Echo Energy’s assets, including its claims in the Magnum 1 Action and the counterclaim in the Magnum 2 Action, to Magnum. A Vesting Order was issued on April 29, 2011. On October 13, 2011, Magnum obtained an order to continue both the Magnum 1 Action and the Counterclaim in the Magnum 2 Action from the Local Register of the court.
[20] There is no evidence of any prejudice to Magnum if the amendments are granted. Discoveries have not yet occurred. There is no limitation issue. Magnum submits, however, that the issue of the validity of the assignment cannot be raised or dealt with in the Actions. Rather, it submits the defendants must move to set aside the order to continue in accordance with the direction contained at the bottom of the order that a party wishing to set aside or vary it “must make a motion to do so forthwith after the order comes to the party’s attention.”
[21] There is no question the validity of an assignment can be dealt with on a motion to set aside an order to continue. However, that is not the exclusive forum to determine the issue. It may also be dealt with at the trial of the action. See: 528650 Ontario Ltd. v. Hepburn, [2003] O.T.C. 632 (S.C.J.); Gateway Financial Services Ltd. v. Hawe, [2005] 154 ACWS (3d) 108 (S.C.J.); Lasalle bank National v. Mundi, [2007] 160 A.C.W.S. (3d) 780.
[22] In my view, therefore, there is no legal or procedural impediment to the defendants raising the validity of the assignment in their defence to the Actions.
[23] During argument, counsel for Magnum withdrew its opposition to the other proposed amendment relating to reliance on legal advice.
[24] The motions to amend the statement of defence in the Magnum 1 Action and the defence to counter claim are therefore allowed as requested.
Costs
[25] The parties submitted costs outlines following the conclusion of the argument.
[26] Fuda is entitled to his costs in respect of the security for costs motion in the Fuda Action on a partial indemnity basis payable by the moving parties. In my view, Fuda’s costs as submitted are reasonable having regard to the issues. Costs to Fuda as claimed in the amount of $6,455.41 inclusive of disbursements and taxes.
[27] The parties have submitted one costs outline each in the Magnum 1 and Magnum 2 Actions covering both the security for costs motions and the pleading amendment motions.
[28] In my view, given that success was divided, a fair and reasonable order for the costs of those motions is for each side to bear their own costs. Accordingly, there will be no costs order in respect of the motions in the Magnum 1 Action and the Magnum 2 Action.
L. A. Pattillo J.
Released: August 31, 2012