SUPERIOR COURT OF JUSTICE - ONTARIO
COURT FILE NO.: CV-09-00380299-0000
MOTION HEARD: October 11 and December 13, 2011
RE: Montrose Hammond & Co et al
v.
CIBC World Markets Inc. et al
BEFORE: Master Thomas Hawkins
COUNSEL:
Brendan O. Brammal, for the moving defendant
CIBC World Markets Inc.
Fax No.: 416-868-0673
Paul Jonathan Saguil, for the moving defendant
Belzberg Technologies Inc.
Fax No.: 416-593-9345
David E. Greenwood, for the responding plaintiffs
Fax No.: 416-593-5437
REASONS FOR DECISION
[ 1 ] I have two parallel motions before me for security for costs. In each case the moving defendant seeks an order for security for costs from the plaintiffs under subrule 56.01(1) (d).
[ 2 ] Subrule 56.01 (1) (d) provides as follows:
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;
[ 3 ] The plaintiff The Raillery Fund LP (“Raillery”) was a hedge fund. The plaintiff Montrose Hammond & Co. (“Montrose”) managed Raillery.
[ 4 ] The defendant CIBC World Markets Inc. (“CIBC”) provided brokerage services to Raillery and Montrose consisting of an electronic trading platform with access to equities markets. The defendant Belzberg Technologies Inc. (“Belzberg”) provided trading software to Raillery and Montrose.
[ 5 ] On March 18, 2009 an incident occurred which resulted in a trading loss in excess of $1,000,000 for Raillery which ultimately resulted in both Montrose and Raillery ceasing operations in late 2010. Montrose and Raillery blame CIBC and Belzberg for their losses. They have commenced this action to recover those losses.
[ 6 ] Montrose is a general partnership of two corporations, Hammond Capital Corporation and Montrose Capital Corporation. Hammond Capital Corporation is owned by Craig Geoffrey. Montrose Capital Corporation is owned by Patrizia Ferrarese. The only business of Montrose Capital Corporation and Hammond Capital Corporation was their involvement as partners of Montrose.
[ 7 ] Raillery 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.
[ 8 ] In Superstars Mississauga Inc. v. Ambler-Courtney Ltd ., 1993 (ON SC) , [1993] O.J. No. 1871 Peppiatt M. considered whether the term “corporation” in subrule 56.01 (1) (d) applied to partnerships and limited partnerships. He said the following (at paragraphs 5 to 7).
It is necessary to consider the legal nature of a partnership, and specifically, a limited partnership. A partnership is not a person known to the law. It is simply a collective of persons, either natural or corporate, and it is they who are the owners of the partnership assets, and are responsible for the partnership’s debts. Rule 8 of the Rules of Civil Procedure governs the procedure in actions by or against partnerships in order to simplify matters, but this is procedural only, and does not alter the juridical principle to which I have referred. It follows, therefore, that when considering the application of Rule 56, where the plaintiff is a partnership, one must look to the individual partners, who are the real plaintiffs, and who will have to pay any costs which are awarded.
If all the partners were corporations, one would consider the subrules that apply to corporations; if the partners are natural individuals, one must consider the subrules applying to them, and there are rules which apply regardless of whether the plaintiff is a corporation or an individual. Now the claim of the plaintiffs in a partnership are joint in that all the plaintiffs will succeed, or all will fail, and therefore, security for costs cannot be ordered unless it can be ordered against all of them: see Willowtree Investments Inc. v. Brown (1985), 48 C.P.C. 150 (Ont. Master) at p. 155 .
The situation where the plaintiffs form a limited partnership is somewhat different. The rights and liabilities of limited partners have been radically changed by the Limited Partnerships Act, now R.S.O.1990, c. L.16 . By virtue of s.8 of that Act, it is the general partner only who controls the day-to-day business of the partnership and by s. 9, a limited partner is not liable for the obligations of the partnership, except to the extent of his contributions to it. It therefore follows, and counsel for the plaintiffs did not dispute this, that the limited partners of Mississauga Entertainment Associates cannot, in the normal course, be ordered to pay the costs of this action if it fails. In that case, the defendants will have to look to the general partner only, which is a corporation. I therefore hold that the provisions of rule 56.01, which apply to corporations, apply to a limited partnership such as this.
[ 9 ] Here one plaintiff is a partnership of corporations while the other plaintiff is a limited partnership whose general partner is a corporation. That being so, following Superstars , I conclude that here the real plaintiffs are corporations and that subrule 56.01 (1) (d) applies to the plaintiffs.
[ 10 ] On the evidence before me the plaintiffs have insufficient assets to post security in an amount that is more than a small fraction of the security which the defendants seek. The plaintiffs’ sole assets of value are two bank accounts holding approximately $38,000. The plaintiffs take the position that these funds are needed to pay their lawyers to prosecute this action. By contrast, the defendants seek security for costs in the total amount of nearly $372,000.
[ 11 ] The plaintiffs take the position that this motion should be dismissed in part because they are impecunious.
[ 12 ] In Coastline Corp . v. Canaccord Capital Corp ., 2009 (ON SC) , [2009] O.J. No. 1790, Glustein M. said the following (at paragraph 7(x)).
A corporate plaintiff who claims impecuniosity must demonstrate that it cannot raise security for costs from its shareholders and associates, i.e. it must demonstrate that its principals do not have sufficient assets. Evidence as to the personal means of the principals of the corporation is required to meet this onus. A corporate plaintiff must provide substantial evidence about the ability of its shareholders or others with an interest in the litigation to post security. A bare assertion that no funds are available will not suffice. [Citations and quotation marks omitted].
[ 13 ] The evidence before me of the personal means of the principals of the plaintiffs is as follows.
[ 14 ] Mr. Geoffrey did not earn any employment income from April 2009 to June 2011. In July 2011 he commenced employment as a lecturer with the University of Waterloo where he earns $100,000 per year before taxes. In 2011 he also earned fee income of $5,000 writing research articles. Mr. Geoffrey says that he requires all of his income to pay his living expenses and to help pay the plaintiffs’ lawyers to prosecute this action. Apart from household and personal goods with an estimated value of $5,000 Mr. Geoffrey has
a) bank accounts with a balance of approximately $14,000;
b) a registered retirement savings plan with assets of approximately $147,000; and
c) a 2002 model year car which he uses to commute to his job in Waterloo.
Mr. Geoffrey does not own any real estate. He resides with Ms. Ferrarese in her house.
[ 15 ] Ms. Ferrarese has household and personal goods, furniture, jewellery and a 2001 model year Audi with an estimated value of $25,000. She also has
a) bank accounts with a total balance of approximately $17,500;
b) a registered retirement savings plan worth approximately $195,700;
c) brokerage accounts with assets worth approximately $43,000; and
d) shares and warrants of Rockex Mining Corporation with an undisclosed market value for which she paid $1,800.
[ 16 ] Ms. Ferrarese’s main asset is her home which she values at approximately $700,000. She says that her home needs a new roof and bathroom renovations to deal with leaking water which will cost from $30,000 to $40,000.
[ 17 ] Unlike Mr. Geoffrey (who has no material current liabilities), Ms. Ferrarese has significant liabilities. She has a personal line of credit on which she owes over $88,000. She has a contingent liability to Canada Revenue Agency of over $263,000 with interest charges mounting at the rate of 9 percent per year. Canada Revenue Agency disallowed a number of tax deductions which Ms. Ferrarese claimed in tax returns which she filed prior to 2006. I have called these tax liabilities contingent liabilities because Ms. Ferrarese has filed notices of objection to Canada Revenue Agency’s reassessments of her pe-2006 tax returns. She does not indicate when she expects her tax situation to be resolved. Needless to say, unless Ms. Ferrarese is successful to a very substantial degree with her objections to Canada Revenue Agency’s reassessments, her tax liabilities will have profound adverse financial consequences for her.
[ 18 ] Finally, Ms. Ferrarese has worked only intermittently since Raillery and Montrose ceased operations in late 2010, earning some $5,000 during that time period. She is currently unemployed.
[ 19 ] Ms. Ferrarese says that she requires the cash and other assets which she has disclosed and any income which she may earn to pay her personal line of credit and her living expenses and to contribute towards paying the plaintiffs’ lawyers to continue prosecuting this action.
[ 20 ] Certainly, if the cost of prosecuting this action is anything like the $372,000 in security for costs which the defendants seek on these motions, virtually all Mr. Geoffrey’s and Ms. Ferrarese’s liquid assets and all those of Montrose and Raillery will be used up in paying the plaintiffs’ lawyers.
[ 21 ] Mr. Geoffrey and Ms. Ferrarese attempted to raise funds to prosecute this action by approaching investors in Raillery. All these investors declined to contribute to these legal expenses.
[ 22 ] The provisions of rule 56.01 direct me to make “such order for security for costs as is just”.
[ 23 ] It is clear that the plaintiffs are not utterly devoid of assets. They have some $38,000 in two bank accounts. Apart from household and personal goods, Mr. Geoffrey and Ms. Ferrarese have bank accounts with $31,500, and registered retirement savings plans with $342,700. Ms. Ferrarese has brokerage accounts with $43,000 and a home worth $700,000. However, she also has large direct and contingent liabilities.
[ 24 ] The defendants submit that these assets should be used to post security for costs in cash.
[ 25 ] Alternatively, the defendants suggest that the plaintiffs post security in the form of a letter of credit rather than cash security. Security in this form is sometimes ordered. The problem I have with this suggestion is that I do not know what fee or premium a guarantor or financial institution would charge for a letter of credit in the sum of $372,000 in force until the final disposition of this action. I suspect that many prospective guarantors and financial institutions would be very concerned about Ms. Ferrarese’s contingent liability to Canada Revenue Agency. A letter of credit in that amount in these circumstances might well be prohibitively expensive.
[ 26 ] I do not consider it just a 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 lives.
[ 27 ] It is not in the interests of justice to require a natural individual to sell or encumber those assets which could be described as necessary for life in order to post security for a corporation unless it is clear that the corporate plaintiff lacks a meritorious case. See Das v. Coles (1989), 71 O.R. (2d) 87 at paragraph 21 where Granger J. expressed a similar view.
[ 28 ] There remain the liquid assets (bank and brokerage accounts) which the plaintiffs, Mr. Geoffrey and Ms. Ferrarese possess, which I have described in paragraph [23] above. These assets could in theory be used to post some security, although not nearly the $372,000 in security which the defendants seek. In my view, it would not be just to order the plaintiffs, Mr. Geoffrey and Ms. Ferrarese to do so. I say this because they propose to use these assets to pay the plaintiffs’ lawyers to prosecute this action, to pay living expenses and, in the case of Ms. Ferrarese, to pay down her line of credit. I fully expect that the cost of prosecuting this action to the end of trial, living expenses and debt servicing will consume all of these assets. It may even be necessary to mortgage Ms. Ferrarese’s home, particularly if she is not substantially successful in her tax dispute with Canada Revenue Agency.
[ 29 ] If I made an order which in practice required the plaintiffs, Mr. Geoffrey and Ms. Ferrarese to use these liquid assets to post security for costs, they would be forced to abandon this action. That would not be a just outcome.
[ 30 ] I have therefore come to the conclusion that the plaintiffs are indeed impecunious.
[ 31 ] During argument, all counsel devoted considerable time to addressing the merits of this action. Plaintiffs’ counsel read to me passages from Belzberg’s discovery which should be particularly helpful in proving that a Belzberg employee caused the March 18, 2009 incident which led to the plaintiffs’ $1,000,000 plus trading loss. He did this by engaging in activity which was imprudent and in direct violation of Mr. Geoffrey’s instructions. The plaintiffs say that in so doing, Belzberg acted as the agent of CIBC.
[ 32 ] On this basis, the plaintiffs submit that they should not be ordered to post security for costs because Belzberg caused and both defendants are liable for the loss which destroyed the financial viability of the plaintiffs.
[ 33 ] On the other hand, Belzberg’s counsel directed me to other passages from Belzberg’s discovery which somewhat dilute the adverse affect of the evidence which plaintiffs’ counsel read to me.
[ 34 ] In addition, both defendants have raised contract-based defences which, if completely successful, will protect them from liability.
[ 35 ] 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.
[ 36 ] This makes relevant the judgment of Reid J. in John Wink Ltd . v . Sico Inc . (1987), 1987 (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 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.
[ 37 ] 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.
[ 38 ] This is definitely not a situation where wealthy investors are using shell corporations to engage in litigation at the sole risk of the defendants.
[ 39 ] The plaintiffs, Mr. Geoffrey and Ms. Ferrarese complain that they have been prejudiced because this action has moved forward too slowly, with the result that over time their assets have been seriously depleted. Mr. Geoffrey received virtually no income after the March 2009 trading loss complained of until July 2011, a period of 27 months. Ms. Ferrarese has received virtually no income from April 2009 until the present, a period of 33 months and counting. She is still unemployed. It seems to me that when it comes to delay, CIBC was the main culprit. It was necessary for the plaintiffs to bring a motion to get an affidavit of documents from CIBC.
[ 40 ] At present, examinations for discovery appear complete. There remains mediation, the pre-trial hearing, preparation for trial and trial itself estimated at 10 days. These last two steps will be the most expensive for all concerned. This reinforces my opinion that the plaintiffs, Mr. Geoffrey and Ms. Ferrarese will require all their liquid resources and maybe more just to pay the plaintiffs’ lawyers through to the end of trial.
[ 41 ] For all these reasons, I have come to the conclusion that the just order in the circumstances is an order that the plaintiffs not be required to post security for costs. These motions are therefore dismissed.
[ 42 ] The plaintiffs have been successful on these motions and are entitled to the costs of them. I fix those costs at $3,000 per motion (a total of $6,000) and order each defendant to pay such costs to the plaintiffs within 30 days.
Master Thomas Hawkins
DATE: 30-January-2012