Montrose Hammond & Co. et al. v. CIBC World Markets Inc. et al.
[Indexed as: Montrose Hammond & Co. v. CIBC World Markets Inc.]
112 O.R. (3d) 151
2012 ONSC 4869
Ontario Superior Court of Justice
Perell J.
August 27, 2012
Civil procedure -- Costs -- Security for costs -- Plaintiffs impecunious but their principals having assets and one of them having unencumbered home valued at $700,000 -- That principal being unemployed, owing money on line of credit and having large potential tax debt -- Master not erring in dismissing defendants' motion for order for security for costs on basis that plaintiffs were impecunious and that their claim was not meritless.
The defendants brought a motion for an order requiring the plaintiffs to post security for costs. The plaintiffs were no longer operating and did not have sufficient assets in Ontario to pay the defendants' costs. G and F, the principals of the corporate plaintiff, did have assets: F had an unencumbered home with an estimated value of $700,000 (but was unemployed, owed $90,000 on a line of credit [page152] and possibly owed the Canada Revenue Agency $260,000), and both had money in registered retirement savings plans. The motion was dismissed. The master found that the plaintiffs were impecunious, that virtually all of the principals' liquid assets would be used up in paying the plaintiffs' lawyers and that it would not be just to make an order that would require them to cash in their registered retirement savings plans, with heavy adverse tax consequences, or that would require F to sell or encumber the home she lived in. The master found that the plaintiffs might have a meritorious claim and that an injustice would result if it were prevented from reaching trial because of the plaintiffs' poverty. The defendants appealed.
Held, the appeal should be dismissed.
The master did not err in finding that the plaintiffs were impecunious, despite G and F's assets. While F's home was technically unencumbered, practically speaking, it was encumbered by F's liability for her line of credit, her potential tax indebtedness and her liability to pay the plaintiffs' lawyers. The master did not err in finding that this was not a situation where wealthy investors were using shell corporations to engage in litigation at the sole risk of the defendants. Nor did the master err in finding that the plaintiffs' claim was not meritless.
APPEAL from an order dismissing a motion for security for costs.
Cases referred to
1286342 Ontario Inc. (c.o.b. Yachtware Marine Services) v. Dennis, [2010] O.J. No. 4285, 2010 ONSC 5575 (S.C.J.) ; Crudo Creative Inc. v. Marin (2007), 2007 60834 (ON SCDC) , 90 O.R. (3d) 213, [2007] O.J. No. 5334, 234 O.A.C. 303, 164 A.C.W.S. (3d) 948, 54 C.P.C. (6th) 383 (Div. Ct.); Hallum v. Canadian Memorial Chiropractic College (1989), 1989 4354 (ON SC) , 70 O.R. (2d) 119, [1989] O.J. No. 1399, 17 A.C.W.S. (3d) 21 (H.C.J.); John Wink Ltd. v. Sico Inc. (1987), 1987 4299 (ON SC) , 57 O.R. (2d) 705, [1987] O.J. No. 5, 15 C.P.C. (2d) 187, 2 A.C.W.S. (3d) 323 (H.C.J.); Kurzela v. 526442 Ontario Ltd. (1988), 1988 4663 (ON SC) , 66 O.R. (2d) 446, [1988] O.J. No. 1884, 31 O.A.C. 303, 32 C.P.C. (2d) 276, 12 A.C.W.S. (3d) 297 (Div. Ct.); Montrose Hammond & Co. v. CIBC World Markets Inc., [2012] O.J. No. 389, 2012 ONSC 591 (S.C.J.) ; Pitkealthy v. 1059288 Ontario Inc., [2004] O.J. No. 4125, [2004] O.T.C. 871, 134 A.C.W.S. (3d) 214 (Master) ; Printing Circles Inc. v. Compass Group Canada Ltd. (2007), 2007 57095 (ON SC) , 88 O.R. (3d) 685, [2007] O.J. No. 5066, 288 D.L.R. (4th) 314, 163 A.C.W.S. (3d) 360, 43 B.L.R. (4th) 290 (S.C.J.); Smallwood v. Sparling (1983), 1983 1930 (ON SC) , 42 O.R. (2d) 53, [1983] O.J. No. 3048, 34 C.P.C. 24 at 29, 20 A.C.W.S. (2d) 55 (H.C.J.); Smith Bus Lines Ltd. v. Bank of Montreal (1987), 1987 4190 (ON SC) , 61 O.R. (2d) 688 at 690, [1987] O.J. No. 1197, 20 C.P.C. (2d) 38 at 39 (H.C.J.) [Leave to appeal refused (1987), 61 O.R. (2d) 688, [1987] O.J. No. 1197 (H.C.J.)]; Willets v. Colalillo, [2007] O.J. No. 4623, 161 A.C.W.S. (3d) 864 (Master) ; Zeitoun v. Economical Insurance Group (2009), 96 O.R. (3d) 639, [2009] O.J. No. 2003, 2009 ONCA 415 , 73 C.P.C. (6th) 8, 307 D.L.R. (4th) 218, 73 C.C.L.I. (4th) 255, 257 O.A.C. 29, affg (2008), 2008 20996 (ON SCDC) , 91 O.R. (3d) 131, [2008] O.J. No. 1771, 292 D.L.R. (4th) 313, 53 C.P.C. (6th) 308, 165 A.C.W.S. (3d) 770, 236 O.A.C. 76, 64 C.C.L.I. (4th) 52 (Div. Ct.)
Rules and regulations referred to
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 56.01(1) (d)
David E. Greenwood, for Montrose Hammond & Co. and the Raillery Fund LP. [page153]
Geoff R. Hall and Brendan O. Brammall, for CIBC World Markets Inc.
Paul Jonathan Saguil, for Belzberg Technologies Inc.
PERELL J.: -- A. Introduction
[1] From the perspective of access to justice, costs awards are ironic; they both foster and impede access to justice. They foster access to justice by indemnifying the successful party for the expense of resorting to litigation, but costs impede access to justice by imposing a financial risk in prosecuting or defending a civil claim. There is, however, no irony about an order for security for costs. Such orders have the precise purpose of obstructing access to justice by ensuring that the financial risk of prosecuting an action or an appeal is real.
[2] Pursuant to rule 56.01(1) (d) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 ], the defendant CIBC World Markets Inc. ("CIBC") sought an order that the plaintiffs, Montrose Hammond & Co. and the Raillery Fund LP, post security for costs in the amount of $219,681.06. The co-defendant Belzberg Technologies Inc. sought security in the amount of $152,311. The master dismissed both motions, apparently because of his concerns about access to justice. The master's reasons are reported as Montrose Hammond & Co. v. CIBC World Markets Inc., [2012] O.J. No. 389, 2012 ONSC 591 (S.C.J.) .
[3] CIBC and Belzberg Technologies appeal the master's order. For the reasons that follow, I dismiss the appeal.
B. Factual Background
[4] In 2008, Craig Geoffrey and Patrizia Ferrarese established Montrose Hammond & Co., which is a partnership of Hammond Capital Corporation, which is owned by Mr. Geoffrey, and Montrose Capital Corporation, which is owned by Patrizia Ferrarese.
[5] Montrose Hammond advised investors, and it managed an investment fund, known as the Raillery Fund. The Raillery Fund is a limited partnership with MH Partners Limited as its general partner. The directors, officers and shareholders of MH Partners Limited are Mr. Geoffrey and Ms. Ferrarese.
[6] In February 2008, around the time of Montrose Hammond's creation, it entered into an agreement, the Systems Interconnect Agreement, with CIBC World to obtain access to an electronic stock-trading platform that provides access to stock exchanges and equity markets in Canada and elsewhere. [page154]
[7] Belzberg Technologies Inc. is a provider of technology- based brokerage services, and Montrose Hammond allege that it was not told that much of the software utilized by CIBC World for its stock-trading platform was Belzberg Technologies' property. Montrose Hammond also alleges that it was not told that Belzberg Technologies provided technological support for CIBC World's trading platform.
[8] Montrose Hammond alleges that CIBC misrepresented the terms of the Systems Interconnect Agreement. It alleges that the agreement included terms which had not been discussed or agreed to by the parties and that were solely for the benefit of CIBC World.
[9] In June 2008, the Raillery Fund began using CIBC World for prime brokerage services and at that time the Raillery Fund signed a Client Services Agreement and a Systems Interconnect Agreement similar to the agreement that had been signed by Montrose Hammond. It is alleged that CIBC World persuaded the Raillery Fund to sign these agreements without obtaining legal advice.
[10] It is alleged that in March 2009, Montrose Hammond asked CIBC World to add an additional work station for the trading platform, and this work was performed by Belzberg Technologies. It is alleged that during the course of the installation, a Belzberg employee caused a malfunction during active trading. The result was a catastrophic error; in 90 seconds, there was unauthorized trading in 650,000 shares, which, in turn, caused trading losses of over $1 million and the Raillery Fund to exceed its capital limits. It was unable to conduct normal trading activity for six days.
[11] CIBC World refused to indemnify the plaintiffs for the consequences of the system malfunction, and it relied on the exculpatory provisions of its contracts.
[12] In July 2009, the plaintiffs sued CIBC World for breach of contract, negligence, negligent supervision, misrepresentation, loss of opportunity and loss of business reputation, and they sued Belzberg Technologies for negligence, trespass, loss of opportunity and loss of business reputation. Montrose Hammond and the Raillery Fund claimed damages in excess of $4 million. They pleaded that for a variety of reasons, the exculpatory provisions in the various contracts were unenforceable.
[13] At the time of the commencement of the lawsuit, the plaintiffs continued to be in business. However, in November 2010, shortly before the examinations for discovery, they ceased operations, and it is admitted that they have insufficient [page155] assets in Ontario to pay the costs of CIBC World and Belzberg Technologies.
[14] In light of the plaintiffs' cessation of business operations, both defendants brought motions for security for costs. To date, CIBC World's costs on a partial indemnity basis total approximately $100,000. For the remaining steps in the action, it estimates its costs on a partial indemnity basis will be approximately $115,000. To date, Belzberg Technologies' costs on a partial indemnity basis total $43,718.30. For the remaining steps in this action, it estimates its costs on a partial indemnity basis will be approximately $108,593.
[15] The plaintiffs submitted that they were impecunious and that if ordered to post security they would be unable to proceed with their action.
[16] The evidence for the motions for security for costs was that Ms. Ferrarese has an unencumbered home with an estimated value of $700,000. She has approximately $17,500 in savings, approximately $195,700 in a registered retirement savings plan and approximately $43,000 in brokerage accounts, and shares and warrants of a mining company with an undisclosed market value. She has household and personal goods and a 2001 model Audi -- with a total estimated total value of $25,000. She is unemployed and owes $90,000 on a line of credit. She may owe Canada Revenue Agency $260,000, but she is disputing this liability.
[17] Mr. Geoffrey is a lecturer at the University of Waterloo, earning $100,000 per year before taxes. In 2011, he also earned $5,000 for writing research articles. He has savings of $14,000 and approximately $145,000 in a registered retirement savings plan. He has no debt.
[18] The evidence was that the investors in the Raillery Fund LP were asked but declined to contribute to the legal fees incurred by the plaintiffs. There was no evidence about whether a financial institution would be prepared to grant a loan or a letter of credit so that the plaintiffs would be able to post security for costs.
C. The Master's Decision
[19] After making the above findings about the financial situation of the plaintiffs and of Mr. Geoffrey and Ms. Ferrarese, the master concluded that the plaintiffs did not have sufficient assets to post security for costs and that virtually all Mr. Geoffrey's and Ms. Ferrarese's liquid assets would be used up in paying the plaintiffs' lawyers. [page156]
[20] The master dismissed the defendants' suggestion that the plaintiffs post security in the form of a letter of credit because he did not know what fee a financial institution would charge and that lenders would be very concerned about Ms. Ferrarese's contingent liability to Canada Revenue Agency. He concluded that a letter of credit for the amounts requested by the defendant might be prohibitively expensive.
[21] The master felt that unless it was clear that the plaintiffs did have an arguable cause, it would not be just to make an order for security for costs which would require Mr. Geoffrey and Ms. Ferrarese to cash in their registered retirement savings plans with heavy adverse tax consequences for them, or which would require Ms. Ferrarese to sell or encumber the home in which she lived. He felt that it would not be just to require them to use their other assets to post security because those assets were required and would be depleted in paying the plaintiffs' lawyers to prosecute the action, to pay living expenses and, in the case of Ms. Ferrarese, to pay down her line of credit and perhaps her liability to the Canada Revenue Agency.
[22] He concluded that if Mr. Geoffrey and Ms. Ferrarese were required to use their liquid assets to post security for costs, they would be forced to abandon the action, which would, in his opinion, not be a just outcome. He, therefore, came to the conclusion that the plaintiffs were impecunious.
[23] The master next concluded that although he was unable to say with any degree of confidence what the outcome of the action would be, the plaintiffs might have a meritorious claim and that an injustice would result if a meritorious claim were prevented from reaching trial because of the plaintiffs' poverty.
[24] In paras. 35 to 38 of his reasons, he stated:
The upshot of all this is that I am unable to say with any degree of confidence what the outcome of this action will be.
This makes relevant the judgment of Reid J. in John Wink Ltd. v. Sico Inc. (1987), 1987 4299 (ON SC) , 57 O.R. (2d) 705. He said the following (at paragraphs 8 and 11).
There can be no question that an injustice would result if a meritorious claim were prevented from reaching trial because of the poverty of a plaintiff. If the consequence of an order for costs would be to destroy such a claim, no order should be made. Injustice would be even more manifest if the impoverishment of plaintiff were caused by the very acts of which plaintiff complains in the action.
In my respectful opinion, unless a claim is plainly devoid of merit, it should be allowed to proceed. That is the only "special circumstance" that I would require. While the adoption of this standard might allow [page157] some cases to go to trial that the trial will prove should not have proceeded, nevertheless the danger of injustice resulting from wrongly destroying claims that should have been permitted to go to trial is to my mind a greater injustice. In my experience, there are very few claims that are entirely without merit that go to and through a trial. The onus on plaintiff is therefore not to show that the claim is likely to succeed. It is merely to show that it is not almost certain to fail.
Although I am unable to predict with confidence the ultimate outcome of this action, I can say that the plaintiffs' action is far from one which is plainly devoid of merit, or almost certain to fail.
This is definitely not a situation where wealthy investors are using shell corporations to engage in litigation at the sole risk of the defendants.
[25] The master's ultimate conclusion was that it would not be just to order that the plaintiffs be required to post security for costs, and he dismissed the defendants' motions.
D. The Arguments on the Appeal
[26] Belzberg Technologies submits that the master made a palpable and overriding error in his factual conclusion that the plaintiffs were impecunious and that he erred in law or exercised his or her discretion on the wrong principles and thus as a matter of the standard of appellate review, no deference should be given to the master's decision.
[27] CIBC World submits that the master erred by concluding that the plaintiffs had established impecuniosity and with impecuniosity not having been established, the master erred by not requiring the plaintiffs to post security because they had not shown that their claim had a significant chance of success.
[28] The combined argument of CIBC World and Belzberg Technologies is that whether as a matter of making a palpable and overriding error or as a matter of misunderstanding or misapplying the law and the legal principles, the master erred by concluding that the plaintiffs were impecunious in the requisite sense, which would justify their being excused from posting security for costs.
[29] Put somewhat differently, the appellants submit that the plaintiffs did not satisfy the heavy onus on them to show impecuniosity and rather the evidence established that even accepting that Ms. Ferrarese had debts for her line of credit and her liability to Canada Revenue Agency, she had an unencumbered home worth $700,000 available as a source of collateral to post security for costs. Thus, it was not established that the plaintiffs were impecunious.
[30] Further, CIBC World and Belzberg Technologies submit that since the plaintiffs were not impecunious, the case law [page158] holds that they could only be excused from posting security for costs, if they established a strong case on the merits. However, the master's conclusion was that he could not determine the strength of the competing cases and all he could conclude was that the plaintiffs' case was not devoid of merit. Therefore, there was no justification for excusing the plaintiffs from posting security for costs.
[31] The plaintiffs' argument is that they should not be required to post security for costs because (a) they do not have the cash or other resources to do so; (b) an order requiring the plaintiffs to post security for costs would effectively end the litigation because the plaintiffs are unable to satisfy that order; (c) it would be unjust to require the plaintiffs to post security for costs as the defendants are the cause of the plaintiffs' hardship and impecuniosity; and (d) the plaintiffs' action has a reasonable chance of success and it ought to be permitted to proceed to trial for a decision on the merits.
E. Discussion
[32] Rule 56.01(1) (d) of the Rules of Civil Procedure provides that the court may order such security for costs as is just where it appears the plaintiff is a corporation or a nominal plaintiff and there is good reason to believe that it has insufficient assets in Ontario to pay the defendant's costs. It is conceded that rule 56.01(1)(d) applies to the circumstances of the case at bar.
[33] On a motion for an order for security for costs, the initial onus is on the party moving for security to show that the other party falls within one of the circumstances for which an order may be made; then, the responding party may avoid the order by showing (a) that security is unnecessary because it has sufficient exigible assets in Ontario or (b) that it should be permitted to proceed to trial despite its inability to pay costs: John Wink Ltd. v. Sico Inc. (1987), 1987 4299 (ON SC) , 57 O.R. (2d) 705, [1987] O.J. No. 5 (H.C.J.); Smith Bus Lines Ltd. v. Bank of Montreal (1987), 1987 4190 (ON SC) , 61 O.R. (2d) 688, [1987] O.J. No. 1197 (H.C.J.), leave to appeal refused (1987), 61 O.R. (2d) 688, [1987] O.J. No. 1197 (H.C.J.); Printing Circles Inc. v. Compass Group Canada Ltd. (2007), 2007 57095 (ON SC) , 88 O.R. (3d) 685, [2007] O.J. No. 5066 (S.C.J.).
[34] A party may rely on its impecuniosity as grounds to resist a motion for security for costs, particularly when the other party caused the impecuniosity. A litigant who relies on impecuniosity bears the onus of proof on this point and must do more than adduce some evidence of impecuniosity and must satisfy the court that it is genuinely impecunious with full and frank disclosure of its financial circumstances: [page159] Printing Circles Inc. v. Compass Group Canada Ltd., supra; Hallum v. Canadian Memorial Chiropractic College (1989), 1989 4354 (ON SC) , 70 O.R. (2d) 119, [1989] O.J. No. 1399 (H.C.J.); Zeitoun v. Economical Insurance Group (2008), 2008 ONCA 219 () , 91 O.R. (3d) 131, [2008] O.J. No. 1171 (Div. Ct.), affd (2009), 2009 ONCA 415 () , 96 O.R. (3d) 639, [2009] O.J. No. 2003 (C.A.).
[35] A corporate plaintiff relying on impecuniosity must show not only that it does not have sufficient assets itself but also that it cannot raise the funds for security for costs from its shareholders and associates: Printing Circles Inc. v. Compass Group Canada Ltd., supra; Crudo Creative Inc. v. Marin (2007), 2007 60834 (ON SCDC) , 90 O.R. (3d) 213, [2007] O.J. No. 5334 (Div. Ct.); Kurzela v. 526442 Ontario Ltd. (1988), 1988 4663 (ON SC) , 66 O.R. (2d) 446, [1988] O.J. No. 1884 (Div. Ct.); Smith Bus Lines Ltd. v. Bank of Montreal, supra.
[36] Where impecuniosity is shown, to avoid having to post security for costs, the plaintiff needs only to demonstrate that its claim is not plainly devoid of merit: Zeitoun v. Economical Insurance Group, supra; John Wink Ltd. v. Sico Inc., supra. Conversely, where the plaintiff fails to show that it is impecunious, then to avoid posting security, it will have to demonstrate a stronger case on the merits or some other reason to justify the court not ordering that security be posted: Willets v. Colalillo, [2007] O.J. No. 4623, 161 A.C.W.S. (3d) 864 (Master), at para. 55 .
[37] Allowing impecuniosity as a defence to a motion for security for costs is grounded on fundamental fairness and on having regard to the public policy that access to justice should be available for both the rich and the poor: Smallwood v. Sparling (1983), 1983 1930 (ON SC) , 42 O.R. (2d) 53, [1983] O.J. No. 3048 (H.C.J.); John Wink Ltd. v. Sico Inc., supra.
[38] If the plaintiff shows a real possibility of success, then the court may conclude in the circumstances of the case that justice demands that he or she not be required to post security: Willets v. Colalillo, supra, at paras. 53-54; 1286342 Ontario Inc. (c.o.b. Yachtware Marine Services) v. Dennis, [2010] O.J. No. 4285, 2010 ONSC 5575 (S.C.J.) . Other relevant factors include the nature and complexity of the plaintiff's action and the likelihood that an order to post security will impede the plaintiff from pursuing its claim: Pitkealthy v. 1059288 Ontario Inc., [2004] O.J. No. 4125, [2004] O.T.C. 871 (Master) .
[39] Notwithstanding the arguments of CIBC World and Belzberg Technologies, in my opinion, the master made no factual or legal error in applying the above principles. As I read his reasons, he properly concluded that the plaintiffs were impecunious and that their case was not devoid of merit; therefore, this [page160] was a case where it would be just to relieve the plaintiffs from having to post security for costs.
[40] While CIBC World and Belzberg Technologies are very confident in their defences, they do not suggest that the plaintiffs' case is devoid of merits, and thus their real objection to the master's decision is his conclusion that the plaintiffs were impecunious when Ms. Ferrarese had an unencumbered home worth $700,000.
[41] The problem, however, with this objection is that it misunderstands the master's reasoning.
[42] I understand the master to have reasoned that it would not be just and fair for Mr. Geoffrey and Ms. Ferrarese to sacrifice their pensions to post security for costs, and I understand him to have reasoned that although, technically speaking, Ms. Ferrarese's home was unencumbered, practically speaking, that asset was encumbered by Ms. Ferrarese's liability for her line of credit, her indebtedness to the taxman and her liability to pay the plaintiffs' lawyers to prosecute the action.
[43] To use the vernacular, Mr. Geoffrey and Ms. Ferrarese "have real skin in the game", and this is what the master meant when he said "this is definitely not a situation where wealthy investors are using shell corporations to engage in litigation at the sole risk of the defendants".
[44] The master was applying the spirit of the reasoning of Justice Reid in John Wink Ltd. v. Sico Inc., which explains why he quoted from that case. I do not see any error in the master's application of the law in the factual circumstances of this case.
F. Conclusion
[45] For the above reasons, the appeals are dismissed.
[46] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the plaintiffs' submissions within 20 days of the release of these reasons for decision followed by the defendants' submissions within a further 20 days.
Appeal dismissed.