COURT FILE AND PARTIES

COURT FILE NO.: CV-11-9381-CL
MOTION HEARD: 20121030
ENDORSEMENT RELEASED: 20121126

SUPERIOR COURT OF JUSTICE – ONTARIO

STEELBACK BREWERY INC.

Plaintiff

• and –

2184493 ONTARIO LTD. c.o.b. as DANBURY SOLUTIONS,
1416099 ONTARIO LIMITED c.o.b. as DANBURY INDUSTRIAL,
DANBURY SALES INC., DANBURY FINANCIAL SERVICES INC.,
DAVID A. ORDON, BARRY LOCKYER, JONATHAN ORDON,
DON LEE, J. DAVID RUSSELL, BARRY SKLAR

and 986866 ONTARIO LIMITED c.o.b. as DSL COMMERCIAL

Defendants

BEFORE: Master D. E. Short

COUNSEL: Scott A. Crocco Fax: 416-364-3865
For the Defendants

Philip Cho Fax: 416-306-9874
For the Plaintiff

HEARD: October 30, 2012

Reasons for Decision

I. Rule 56.01(1): Security for Costs Motion

[1] A motion seeking security for costs under Rule 56.01(1) was brought before me as a Master assigned to Commercial List motions.

[2] This is a case involving two businesses with names familiar to many in this community. Steelback was a popular beer. The Danbury name was well known in the liquidation field. Regrettably both businesses apparently encountered financial stresses.

[3] At a point in time, Steelback determined to liquidate its operations. The defendant 2184493 Ontario Ltd. c.o.b. as Danbury Solutions (“Solutions”) was prepared to offer to liquidate the specific Steelback assets under a contingent sales agreement, which included a provision guaranteeing a minimum recovery to Steelback.

[4] Unfortunately for Solutions, there were no bidders at a level that would satisfy the Danbury Solutions guarantee.

[5] A sale was completed to the highest bidder. All the physical assets of Steelback were liquidated. Danbury then elected to cease its own operations. Apparently there were then insufficient funds available in that company to pay to Steelback the total amount of the funds obtained on the sale. As well, Solutions failed to satisfy the guaranteed minimum agreement by paying the balance to Steelback.

II. The Action

[6] As a result Steelback sued Danbury and its principals and other apparently related parties for the shortfall together with related causes of action.

[7] The bulk of the defendants deny they have any potential liability asserting, inter alia , that they were not parties to the contract, etc.

[8] To the extent (if any) that proceeds of sale were generated from the Steelback assets and used to keep Danbury afloat, claims of breach of trust and fiduciary duty are asserted.

[9] Somewhat surprisingly, I am advised by counsel that at the time of the asset sales, Ontario had no statutory requirement that an auctioneer segregate proceeds from an auction in a separate trust account. The Sale of Goods Act deals with auctions at s. 56 but has no provisions relating to segregation of auction proceeds. To the extent a common law remedy may exist, s. 57(1) preserves such rights including “the law merchant” and notes that “the effect of fraud, misrepresentation, duress or coercion, mistake or other invalidating cause” continue to apply to contracts for the sale of goods.

[10] Those issues are for another day.

III. Defendants

[11] The liquidation agreement was entered between Steelback and Solutions. None of the other 9 Danbury related defendants were parties to that agreement.

[12] Danbury Solutions guaranteed that $869,000 would be provided to the Plaintiff. The gross proceeds obtained by Danbury were $818,010.94. However, it is alleged only $739,150 of that amount, was delivered to the plaintiff. It did not appear to me that there was any real dispute that Danbury Solutions is liable for the shortfall of $129,850. However, that does not end the matter. Danbury Solutions apparently now has no assets.

[13] The plaintiff therefore sought to widen its net.

[14] The plaintiff’s claim against the related corporations and the individuals relate to the proceeds of sale that have not been delivered. It is the plaintiff’s position that these sale proceeds were impressed with a trust and that one or more of the Defendants have either received the benefit of these trust funds and/or knowingly assisted in the misuse of these trust funds.

[15] The plaintiff has also claimed against an additional corporation, 986866 Ontario Limited (“DSL Commercial”) for fraudulent conveyance on the basis that 986866 is currently trading under the “Danbury” name and is a transferee of some or all of the assets of other “Danbury” defendants.

IV. The Action Thus Far

[16] The main underlying sales took place in April and September of 2010. The initial Statement of Claim claimed $154,850 and was reissued September 14, 2011. On July 27, 2012, an order adding DSL Commercial was made. The Amended Statement of Claim runs to 75 paragraphs and over 24 pages and ranges from Conversion and detinue, to oppression with excursions through various trust, agency and fiduciary principles.

[17] The Statement of Defence of all the then defendants filed in November of 2011, admits $818,010.94 was received and $740,150 paid. From my passing observation of this case, particularly in light of my partiality to mediation, I am left to wonder why the action is still extant.

V. Summary Judgment Motions

[18] Justice David Brown in his September decision George Weston Ltd. v. Domtar Inc., 2012 ONSC 5001 (“ Green Eggs & Ham ”), examines the reluctance of parties to just proceed to trial in appropriate cases. I believe proportionality should form part of that analysis.

[19] In his reasons he undertakes a careful analysis of the value of motions to strike summary judgment and considers the most efficient approaches to bringing a matter to resolution. In particular he notes the apparent reluctance of modern counsel to simply bring a matter to trial:

6 To treat motions to strike out summary judgment motions as just another type of motion which should be added to the judicial docket would ignore, in my view, the larger context within which these hitherto uncommon motions must be considered. Consequently, before addressing the specific issues raised by these motions to strike, one must take account of the larger context in which contemporary civil litigation occurs in Ontario, a context which informs the proportionality-oriented case management approach I propose for dealing with these motions to strike.

[20] He continues his analysis identifying contextual factors which inform the approach he believes ought to be adopted for dealing with such motions to strike:

7 ..... Treating the appropriateness of a summary judgment motion as a case management-type of issue flows from several factors: (i) the constrained operating environment facing the Superior Court of Justice, (ii) the flexibility of the inherent powers enjoyed by judges of this Court, (iii) the guidance offered by the Court of Appeal in the Combined Air decision [2011 ONCA 764] about when it is appropriate to resort to a summary judgment motion, and (iv) the need to approach the alternative to summary judgment motions - the civil trial - in new ways....”

[21] Justice Brown considers these factors in light of the inherent powers of this Court:

19 In the world of contemporary civil litigation, judges of the Ontario Superior Court of Justice necessarily possess the inherent power to give directions to the parties, in appropriate cases, about the conduct and completion of both the pre-hearing and hearing steps in a proceeding, so that the case receives a just, expeditious and least expensive determination on its merits and the pre-hearing and hearing steps unfold in a proportionate manner. Such inherent powers are necessary to enable the court to act effectively within its jurisdiction.

[22] His analysis also addresses in both an orthodox, and a somewhat unorthodox manner, the reluctance of many counsel to press for an actual trial in the current environment:

31 Yet the Bar, at least the Toronto Region Bar, does not appear to share that perspective. From my observations two reasons seem to influence the local Bar's preference for summary judgment motions over trials. The first reason stems from a lack of experience and familiarity with civil trials, particularly amongst members of the Bar who have practiced for less than 15 years. In a sense they have not tasted the trial process, which brings to mind the insights provided by an iconic story about the reluctance to taste something unknown.

32 Recall the Dr. Seuss story of the efforts by Sam-I-am to persuade a sceptical interlocutor about the merits of green eggs and ham....”

[ultimately] Our interlocutor then expounds at length on his new-found love for that which he previously shunned.

33 Are civil trials the legal equivalent of green eggs and ham? Is Green Eggs and Ham an allegory in which Sam-I-am represents the Bench, and the interlocutor the Bar? I will leave the finer points of literary analysis to the critics, but the story does bear a striking resemblance to the on-going dialogue between Bench and Bar regarding the respective merits of civil trials and motions.”

[23] Here all the defendants have the same counsel. All but two of them issued a motion for Summary Judgment in June of 2012 for an order dismissing the plaintiff’s claims as against them.

[24] They assert in that document inter alia :

“[12] At no time was Solutions and/or any of the corporate Defendants used by any of the Moving Defendants as an instrument of fraud or in any way as a mechanism to shield Solutions from its liability for improper activity.

[13] The Defendants allege that the claim against the Moving Defendants is an abuse of process of this Honourable Court and an improper attempt to implicate the colleagues, family members, and unrelated business interests of David Ordon (“Ordon”), the President of Solutions, in order to embarrass Ordon and to gain a tactical advantage for the purposes of this litigation.

[14] There is no genuine issue for trial with respect to the alleged claims against the Moving Defendants.”

[25] The Plaintiff now is contemplating bringing its own counter motion for judgment against at least some of the defendants. The actual issue to be tried seems in my view to be clearly defined and to be relatively expedious to try. I cannot fathom how this case would require scheduling on the long trial list. Trial dates for “normal” trials are generally available.

[26] I have considered the guidance of Justice Brown and the positions of the parties in exercising my discretion in this case.

VI. The Present Motion

[27] Here, a number of months after the “Moving Defendants” launched their motions for summary judgment, counsel for all the defendants has elected to bring this motion for security for costs.

[28] In their factum they acknowledge a portion of the costs related to the main motion were incurred prior to the launching of the present motion.

[29] The proposed Bill of Costs, submitted on a partial indemnity basis, indicates that security is being sought from costs related to “Preliminary Stage-Pleadings, Motion for Summary Judgment and Discovery”.

[30] On a full indemnity basis fees the potential fees are estimated at $32,615 plus tax for those elements. With disbursements and HST the grand total fees and disbursements sought on a partial indemnity basis totals $32,925.49, for all the Defendants.

[31] The moving parties concede that a “staged” order would be appropriate, in the event that any security is ordered at this time. They therefore seek costs for the pleadings stage and the pending motion for summary judgment. Thus it appears that the amount claimed does not include a further allowance for discoveries that may become necessary in the event the Defendants’ summary judgment motion to dismiss the action as against them is unsuccessful and the cross-examinations on the motions are inadequate to fully take the place of examinations for discovery.

VII. Insufficient Assets in Ontario

[32] The applicable Rule (with my emphasis) reads in part:

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,

(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;

(2) Subrule (1) applies with necessary modifications to a party to a garnishment, interpleader or other issue who is an active claimant and would, if a plaintiff, be liable to give security for costs.

[33] Does subrule (2) apply to moving defendants in these circumstances? I find it difficult to accept that a moving party on a motion to dismiss an action should be able to seek security from the costs of that motion from the party against which they have voluntarily elected to move.

[34] The notional proceeding in which these defendants are the “active claimants”, in my view, ought not to give rise to an entitlement for costs of a motion that party has voluntarily chosen to bring.

[35] Moreover, in this case arguably the bringing of the plaintiff within the rule 56.01(1)(d) of “insufficient assets in Ontario” flows from the apparent failure of some of the moving parties to pay funds belonging to the plaintiff to it. That is, the inability to pay apparently flows directly from a co-defendant’s default in paying a sum to which the plaintiff is admitted to have an entitlement.

[36] It seems disingenuous to assert, in effect, “you have no assets available because you don’t have the assets which our co-defendant ought to have paid you and since you don’t have them, you should post security for our costs prior to the determination of that motion.”

[37] The motion judge will be in the best position to determine such costs once the outcome of the motion is decided.

VIII. Case Law

[38] In Gamma Machinery Inc. [2012] O.J. No. 92 , I examined, the onus shifts in security for costs motions and canvassed my understanding of the case law in this area. I rely on those reasons and do not reproduce that earlier analysis here.

[39] I have considered, as well, the following cases:

Hallum v. Canadian Memorial Chiropractor College , 1989 4354 (ON SC) , 1989 Carswell Ont. 896, 70 O.R. (2d) 119 (S.C.)

Cigar500.com Inc. Ashton Distributors Inc. , 2009 46456 (Ont. S.C.J.)

Uribe v. Sanchez , 2006 19498 (Ont. S.C.J.)

Imoney Corp. v. Quebecor Communications Inc. , 2002 8338 (Ont. S.C.J.)

Malamas v. National, Bank of Greece , 2009 56745 (Ont. S.C.J.).

[40] I accept that there was no evidence filed by the plaintiff asserting that an order for security for costs would be “unjust”.

[41] However, as I noted above, I am not satisfied that these defendants are entitled to costs of their motion to dismiss in the circumstances of their case.

[42] If I am wrong in that regard, my reading of the preamble to Rule 56.01(1) is that the court retains an unfettered jurisdiction and “ may make such order for security from costs as is just …”.

[43] Here to rely upon a related company’s failure to pay proceeds obtained by it from the sale of the plaintiff’s assets as constituting a justification for the costs it now incurs as a result of that continuing failure would not be a result that was “just”.

IX. Proportionality

[44] When Ontario amended the Rules to reflect “proportionality”, the key recommendation was for an overarching principle of interpretation whereby, “the court and the parties must deal with the case in a manner that is proportionate to what is involved, the jurisprudential importance of the case and the complexity of the proceeding.”

[45] This recommendation led to the implementation of that “General Principle in subrule 1.04 (1.1) :

In applying these rules, the court shall make orders and give directions that are proportionate to the importance and complexity of the issues, and to the amount involved, in the proceeding.

[46] In Chapter 5 of his Report, entitled “The role of the courts and the parties in the conduct of civil litigation”, Lord Woolf notes:

“1. The overall aim of my Inquiry is to improve access to justice by reducing the inequalities, cost, delay and complexity of civil litigation and to introduce greater certainty as to timescales and costs. My specific objectives are:

(a) to provide appropriate and proportionate means of resolving disputes;

(b) to establish "equality of arms" between the parties involved in civil cases;

(c) to assist the parties to resolve their disputes by agreement at the earliest possible date; and

(d) to ensure that the limited resources available to the courts can be deployed in the most effective manner for the benefit of everyone involved in civil litigation.”

[47] Returning to Justice Brown’s observations in Green Eggs & Ham, I adopt his approach to the applicability of proportionality:

16 In my view the starting point for any response must be to recall first principles. As a "General Principle" Rule 1.04(1) of the Rules of Civil Procedure requires a liberal construction of the Rules "to secure the just, most expeditious and least expensive determination on its merits" of every civil case. A co-ordinate fundamental principle finds expression in Rule 1.04(1.1) which requires the making of orders and the giving of directions "that are proportionate to the importance and complexity of the issues, and to the amount involved, in the proceeding". Too often these two rules are viewed as nothing more than vague expressions of "motherhood and apple pie" sentiments. They are not. They define how litigation should be conducted and, more importantly, how courts should manage civil litigation. Whether interpreting and applying the Rules of Civil Procedure , or exercising their inherent case management powers, judges of this Court are to manage the litigation before them in such a way as to secure fair results by using fast, affordable and proportionate procedures. Further, if litigants propose to stray from these fundamental principles, judges must pull them back to the Proportionate Way, so to speak.

[48] To permit security for costs approximating 25% of the primary amount in issue, where the case could instead have been brought on for trial sooner than the motion for summary judgment can be heard, does not accord with my view of the intent of the new rule. As a consequence, I intend to pull these litigants back to what I regard as the Proportionate Way in this case.

X. Security Sought

[49] The plaintiff’s draft Bill of Costs is largely related to the costs involved with respect to the summary judgment motion.

[50] Only a small amount of about $3,500.00 is sought with respect to 16.6 hours involved with:

“PLEADINGS

Review of Statement of Claim and analysis; Preparation of Statement of Defence; Review of Amended Statement of Claim and analysis; Preparation of Statement of Defence of 986 Ontario; related conferences, correspondence and communications.”

[51] My colleague Master Glustein has held in Demessey Ltd. v. Cassels Brock LLP , (2011) 2011 ONSC 4122 , O.J. No. 3018 at para 32 :

There is no basis in law or under the Rules to prevent a party from seeking security for costs for steps in the proceeding, provided that such steps can be reasonably anticipated.

[52] However, I think it is unwise, in all but the most egregious cases, to encourage motions seeking the costs of only early steps, such as drafting a statement of defence.

[53] Fees for that type of activity may well be sought in combination with a motion seeking security for costs for production or discovery stage.

[54] Admittedly, the plaintiff sought a package here. Nevertheless, I am not satisfied that it would be appropriate to require what is virtually a token amount.

XI. Disposition

[55] In the result, the motion is dismissed without prejudice to the Defendants or any of them seeking security for costs after their summary judgment motion has been resolved.

[56] Costs are fixed at $3,250.00 payable to the plaintiff within 30 days subject to adjustment at the request of counsel if offers to settle would have any impact on either quantum or entitlement.

MASTER D.E. SHORT

DATE: November 26, 2012

DS/ R52