ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 25397/11
DATE: 2012-12-21
BETWEEN:
BUY-WISE MARKETING LTD. Plaintiff
– and –
SHOPPER’S DRUG MART INC. Defendant
Steven Shoemaker, for the Plaintiff
Hilary Book, for the Defendant
HEARD: December 6, 2012
reasons for interim order
JUSTICE E. GAREAU:
[ 1 ] The defendant brought a motion dated June 4, 2012 for an order for security for costs in the amount of $230,598.43 or, in the alternative, in an amount the court deemed just for security for costs to be paid by the plaintiff.
[ 2 ] The motion was heard on December 6, 2012.
[ 3 ] The motion is brought pursuant to Rule 56.01 of the Rules of Civil Procedure. The subsection that is applicable on the facts of this case is subsection (d) of Rule 56.01 which reads as follows:
“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.”
[ 4 ] There is no issue taken by the plaintiff that it has insufficient assets in Ontario to pay the costs of the defendant in this action, if costs were ordered by the court. This was confirmed by the evidence of the President and sole shareholder of the plaintiff corporation, Corrado Chiarello, on his examination conducted on August 27, 2012 and is admitted by the plaintiff.
[ 5 ] There is also no issue taken by the defendant that there are triable issues in this action and that the plaintiff’s claim is not “devoid of merit.”
[ 6 ] The real issue on the motion is whether on the evidence filed on the motion the court can conclude that the plaintiff is impecunious. The plaintiff takes the position that it is impecunious with a claim not devoid of merit and that therefore it should not be required to provide security for costs. The defendant takes the position that the plaintiff has not met the test to establish impecuniosity and therefore an order for security for costs should be made.
[ 7 ] This action involves a claim for breach of contract and damages flowing from the breach for lost profits. It is a large claim seeking $7.5 million dollars in damages. The allegation is that the defendant failed to supply the plaintiff’s beauty product to the number of stores agreed to thereby resulting in a breach of contract and a loss of profits. The defendant denies that a breach of contract occurred and that the plaintiff sustained losses in the amount claimed or at all.
[ 8 ] On a motion for security for costs, once the defendant establishes that the plaintiff has insufficient assets to pay the costs of the defendant, it proves a prima facie case that an order for security for costs should be made by the court. With this prima facie case being established, the onus shifts to the plaintiff to prove that it is impecunious and that the merits of the case demand that the action be permitted to proceed without security for costs.
[ 9 ] This legal principle is well established as reiterated in paragraph 1 of the case of 713484 Ontario Ltd. v. McMillan Binch , 2003 Carswell Ont. 419 (SCJ) in which Spence, J. states as follows:
“The defendants move for an order for security for costs. The plaintiffs concede that Mapleview should not be a plaintiff. The plaintiff number companies are now shell companies without assets. Accordingly, the defendants have made out a prima facie case for security for costs under Rule 56.01(d). The onus shifts to the plaintiffs to prove that they are impecunious and that the merits of the case demand that the action be permitted to proceed without security for costs. Smith Bus Lines Ltd. v. Bank of Montreal (1987) , 1987 4190 (ON SC) , 61 O.R. (2d) 688 (Ont. H.C.) , at 704 . To show impecuniosity, the plaintiffs must show that they cannot raise the security for costs from their shareholders and associates: Smith Bus Lines at 705. It is not sufficient to show that the shareholders and associates say that they are unwilling to put up the security; that might well be presumed. The decision D.E. and J.C. Hutchison Contracting Co. v. Windigo Community Development Corp. (1996), 4 C.P.C. (4 th ) 198 (Ont. Gen. Div.) at 200 quotes the following version of the test with apparent approval. “The plaintiff must establish that it and its shareholders cannot sell assets, borrow or otherwise raise the funds to post the security.”
[ 10 ] Trainor, J. in the case of Warren Industrial Feldspar Co. v. Union Carbide Canada Ltd. et al. (1986), 1986 2683 (ON SC) , 54 O.R. (2d) 213 (H.C.J.), identifies in paragraph 25 the options available to the plaintiff once the defendants have established a prima facie case for an order for security of costs:
“Once the defendants are found to be entitled to security for costs, an issue arises as to whether the plaintiff can avoid the obligation to post security. This issue was addressed by Master Clark in the R.C.V.M. Enterprises case, where it was held that the plaintiff has two options. It may lead evidence to show that it has sufficient assets in Ontario to make an order for security for costs unnecessary. Alternatively, it may rely on its own impecuniosity, lead evidence to substantiate it, and show why justice demands that it be allowed to proceed without posting security, notwithstanding its impecuniosity. This approach is similar to that taken in Smallwood v. Sparling , supra, Willowtree Investments Inc. v. Brown (1985), 48 C.P.C. 150 at 155 (Ont. Master) , and McCormack v. Newman (1983), 35 C.P.C. 298 at 301 (Ont. Master) .”
[ 11 ] What is required for the plaintiff to establish impecuniosity? The following is noted by the Ontario Divisional Court in the case of Crudo Creative Inc. v. Marin (2007), 2007 60834 (ON SCDC) , 90 O.R. (3d) 213 at paragraphs 31 , 32, and 33 of that decision.
“As noted by Sutherland, J. in Smith Bus Lines, a t para. 43, “The term “impecuniosity” does not appear in the rule; it is a term introduced as part of the judicial gloss upon the rule” relating to security for costs. On the evidence, the respondent corporation is impecunious only in the narrow and limited sense that it is inactive and without assets. However, “evidence of financial difficulties does not necessarily equate with impecuniosity” to be able to post security for costs: Han Holdings Ltd ., at para. 18.
The key question here is whether the respondent has access to assets or funds: DiPaola, Re (2006), 2006 37117 (ON CA) , 84 O.R. (3d) 554 (Ont. C.A.) [In Chambers] at para. 23 (whether assets “available to it to fund the appeal presumably, its appeal is being funded by some source outside of the company”); Rhonmont Properties Ltd. v. Yeadon Fabric Structures Ltd., [2003] O.J. No. 1883 (Ont. C.A.) at para. 5 (corporation “not impecunious in the extended sense that the shareholders and principals of the corporation are unable to fund security for costs”); Burgalia, at para. 5 quoting Superior Salmon Farms Ltd. v. Corey Feed Mills Ltd. (1991), 1991 5688 (NB KB) , 115 N.B.R. (2d) 265 (N.B.Q.B.) , at 269-70 (“Obviously someone is prepared to finance the prosecution of the action. That person or persons should also be prepared to either provide security for the costs of the defendants in the event the claim fails or to establish that security cannot be raised.”); Smith Bus Lines , at para. 43 (evidence that “amount of security is not only not possessed by the plaintiff but is not available to it.”); Han Holdings Ltd ., at para. 18 (“There was evidence…that certainly raised the possibility that Han had access to funds”); see also Kurzela v. 526442 Ontario Ltd. (1988), 1988 4663 (ON SC) , 66 O.R. (2d) 446 (Ont. Div. Ct.) , at 447-8 ; ABI Biotechnology Inc. v. Apotex Inc., 2000 27027 (MB CA) , [2000] M.J. No. 14 (Man. C.A.) at para. 45-6 ; 1056470 Ontario Inc. v. Goh (1997), 1997 12255 (ON SC) , 34 O.R. (3d) 92 (Ont. Gen. Div.) , at 95-6 .
A corporate plaintiff carries a significant burden of establishing direct and indirect impoverishment; Design 19 Construction Ltd. v. Marks [2002] O.J. No. 1091 (Ont. S.C.J.) at para. 8 . Rule 56.01(d) and its equivalents are clearly intended to place corporate plaintiffs in a more vulnerable position than plaintiffs who are individuals: 671122 Ontario Ltd. , at 67; ABI Biotechnology , at para. 34, 36, 45, 47 ; Fat Mel’s Restaurant Ltd. v. Canadian Northern Shield Insurance Co. (1993), 1993 1669 (BC CA) , 76 B.C.L.R. (2d) 231 (B.C.C.A.) at para. 27 .
[ 12 ] It appears from the jurisprudence that although the corporate plaintiff is a distinct legal entity there is an obligation of the corporate shareholders to satisfy the court that it does not have access to assets or funds before a court can consider the corporate plaintiff to be impecunious.
[ 13 ] In the case of Aviaco International Leasing Inc. v. Boeing Canada Inc. , 48 C.P.C. (4 th ) 366 (Ont. S.C.J.) , Nordheimer, J. notes the following from a Manitoba Court of Appeal decision of ABI Biotechnology Inc. v. Apotex :
“A corporate plaintiff with ‘insufficient assets’ must also establish that it cannot raise the security; that its shareholders are unable to advance funds to allow it to post security. In my view, that is not an attack on the legal persona of a corporation or a lifting of the corporate veil. To me, it reflects the court’s recognition of its duty to do what is just in the circumstances. Courts have determined that a corporate plaintiff without assets, manipulated by shareholders with assets, ought not to be able to say to the defendant, ‘Heads I win, tails you lose.’
Underlying the decisions reviewed above is the realization that the making of an order for security for costs against a corporate plaintiff without assets will not have the effect of stifling the action of its shareholders, or some of them, have the ability to provide the necessary funds. Whether or not the action proceeds when security has been ordered remains the decision of the shareholders who are manipulating the plaintiff and funding the litigation. In that sense, it is a decision not unlike the one any plaintiff or prospective litigant must face: Do the chances of success justify the expense and exposure to costs? (emphasis added).
It will be seen, therefore, that the Manitoba Court of Appeal has adopted the very same approach to this issue as the Ontario cases, that I have reviewed above, have taken.”
[ 14 ] Mr. Justice Corbett of the Ontario Superior Court in the case of Printing Circles Inc. v. Compass Group Canada Ltd. made the following observations in relation to “impecuniosity” with respect to a closely-held private corporation. In paragraph 7 of that decision, Corbett, J. observes:
“ 7. “Impecuniosity” relates to the totality of the financial circumstances of the responding party. Where, as here, the responding party is a closely-held private company, the court will require cogent evidence that both the corporation and its shareholder(s) cannot sell assets, borrow or otherwise raise the necessary funds to post the security. Evidence of impecuniosity must be set out with “robust particularity” with “full and frank” disclosure the financial circumstances of the responding party and its principal.”
[ 15 ] The aforementioned statement by Corbett, J. supports the proposition of the Ontario Divisional Court in the Crudo Creative Inc. case that “a corporate plaintiff carries a significant burden of establishing direct and indirect impoverishment.”
[ 16 ] In response to the motion for security for costs, the sole officer and shareholder of the plaintiff corporation, Corrado Chiarello, filed with the court an affidavit sworn on August 15, 2012. At paragraphs 18 and 19 of that affidavit Mr. Chiarello states as follows:
“18. As the sole officer, director and shareholder of BWM, I know this entity is impecunious and this impoverishment was caused by the very acts of which I complain of in the statement of claim.”
“19. I know and do verily believe that an order for security for costs will end the lawsuit against BWM because neither BWM, CMC nor myself personally have the ability to pay the costs deposit sought by SDM.”
[ 17 ] On August 27, 2012, Mr. Chiarello was cross-examined under oath on the contents of his affidavit sworn on August 15, 2012. The exchange between counsel for the defendant, Mr. Chiarello and counsel for the plaintiff with respect to Mr. Chiarello’s personal financial situation is found from question 70 (page 18) to question 91 inclusive (page 24) of the transcript from that cross-examination which reads as follows:
“Q. You’ve already answered the question, sir. So we’ll just move on. Who is paying the plaintiff’s legal bills?
A. Who is paying what?
Q. The plaintiff’s legal bills.
MR. SHOEMAKER: That’s a refusal. Don’t answer.
BY MS. BOOK:
Q. Are you paying the legal bills?
MR. SHOEMAKER: Don’t answer that. Whether he pays or – it’s not relevant information for you.
BY MS. BOOK:
Q. Well, you’ve made an allegation in paragraph 19 of your affidavit, sir, that you do not have the ability to pay the costs, deposits sought by Shoppers. So, I’m wondering, if you don’t have that ability, who is paying your lawyers?
MR. SHOEMAKER: Well, it’s not relevant and the numbers are far far vastly different, so those are improper questions, counsel.
BY MS. BOOK:
Q. You haven’t made an assignment in bankruptcy?
A. No.
MR. SHOEMAKER: Personally or through his businesses?
MS. BOOK: Personally.
MR. SHOEMAKER: Have you ever gone into bankruptcy?
THE DEPONENT: No.
MR. SHOEMAKER: No.
BY MS. BOOK:
Q. You’re not in bankruptcy protection of any sort right now?
A. No.
Q. You haven’t produced any of your personal tax returns in response to this motion?
MR. SHOEMAKER: No. There’s no need to. We’ve reiterated that within the affidavit.
BY MS. BOOK:
Q. Yes or no, and I’d like the witness’s answer, please. You haven’t produced any of your personal tax returns in response to this motion. You agree?
MR. SHOEMAKER: Well, it’s a refusal.
BY MS. BOOK:
Q. And you haven’t produced any of your personal bank statements in response to this motion?
MR. SHOEMAKER: That’s a refusal as well.
BY MS. BOOK:
Q. Is it fair to say, sir, that the only information you’ve provided in your affidavit about your assets is that you’re a shareholder of Buy-Wise and China Mystique?
MR. SHOEMAKER: In the affidavit, yes. He said that he’s a shareholder of Buy-Wise and China Mystique Canada, China Mystique Canada.
BY MS. BOOK:
Q. That’s the only information that you’ve provided in your affidavit about your assets, correct?
A. Well –
MR. SHOEMAKER: He also says that he can’t afford to pay personally.
THE DEPONENT: Yeah, basically you guys bankrupt me.
BY MS. BOOK:
Q. Not you personally, the company?
A. Well, not bankrupt me, but – pardon me?
Q. Not you personally.
A. Well, no, both.
Q. You just told me you’re not in bankruptcy?
A. Both, you financially drained me. I’m living with my father right now and I’m trying to get back on my feet over the last couple years.
Q. You don’t – I’ll move on to my next question. At Exhibit B, the affidavit that’s in our supplementary motion record, there’s an e-mail from myself to Mr. Shoemaker. In the second paragraph, the second sentence, or third sentence says, “As discussed, if the individuals associated with Buy-Wise are prepared to provide personal guarantees to pay any costs awarded against Buy-Wise, supported by evidence that they could actually satisfy those guarantees, I will seek instructions on accepting the guarantees and withdrawing the motion.” You see that?
MR. SHOEMAKER: You see that, eh?
THE DEPONENT: Uhm-hmm, yeah.
BY MS. BOOK:
Q. You’ve never offered to provide a personal guarantee?
MR. SHOEMAKER: We don’t believe there’s a requirement to.
BY MS. BOOK:
Q. Just answer the question yes or no, please, Mr. Chiarello.
MR. SHOEMAKER: It’s a refusal, and he couldn’t provide the personal guarantee in any event. We’ve stated that in our affidavit.
MS. BOOK: Counsel, are you giving evidence about Mr. Chiarello’s assets or can I get the information from the witness directly, please?
MR. SHOEMAKER: Well, no, you’re going to get it from the affidavit that we gave you, and it says in there he cannot provide a personal guarantee. He doesn’t have the funds. And further, it also says that he doesn’t have to provide a personal guarantee because Shoppers has never dealt with him personally, and that’s the answer to that question.
BY MS. BOOK:
Q. I understand that’s your legal position. I’m asking you factual questions, sir. Yes or no, you’ve never offered to provide a personal guarantee?
A. But you guys took all my money. I just – why would I have – like, basically, you guys – I’m busted. You guys took everything, like.
Q. You’ve provided no tax returns to support that allegation?
A. Yeah, sure, there’s tax returns. Everything’s in place, like.
Q. Where is your tax return in this motion record? Show it to me.
MR. SHOEMAKER: There’s no need for a tax return in that. We’ve already refused that.
MS. BOOK: So you’re refusing to produce a tax return?
MR. SHOEMAKER: Personally, yes, of course.
BY MS. BOOK:
Q. And you’re refusing to tell me who is paying for your legal bills?
MR. SHOEMAKER: Yes, we are.
BY MS. BOOK:
Q. And you’re refusing to give a personal guarantee to pay for any costs awarded against the plaintiff?
MR. SHOEMAKER: Well, he can’t afford it. It’s not a refusal. He just can’t afford it.
MS. BOOK: Counsel, I’d like the evidence from the witness, unless you are going to be –
MR. SHOEMAKER: Well, no, not when you’re going to badger the witness, we will not allow the witness to provide the evidence.
MS. BOOK: All right. I have your position.”
[ 18 ] It is true that documentation could have and should have been produced by Mr. Chiarello to corroborate the evidence given in his affidavit and on cross-examination that he is without assets to personally honour any order for security of costs. Mr. Chiarello could have acceded to the request of the defendant to produce details of his own personal assets and liabilities, production of his personal income tax returns and personal bank statements. This information, if produced, may have satisfied the concerns raised by the defendant concerning the sole shareholder’s financial solvency and “impecuniosity”.
[ 19 ] Notwithstanding this lack of production, the court has before it direct evidence from Corrado Chiarello as to his current personal financial situation in both his sworn affidavit on August 15, 2012 and his sworn oral evidence on cross-examination given on August 27, 2012. I have no basis not to accept Mr. Chiarello’s assertions that he does not “personally have the ability to pay the costs deposit sought by SDM” or that he is “financially drained”, living with his father and “trying to get back on my feet over the last couple of years.”
[ 20 ] Notwithstanding the very able argument of counsel for the defendant, I am satisfied on the evidence before me that the corporate plaintiff and its sole officer and shareholder, Corrado Chiarello, are impecunious and an injustice would result if this action was not allowed to proceed.
[ 21 ] Accordingly, the defendant’s motion dated June 4, 2012 for an order for security for costs is dismissed.
[ 22 ] As to costs, the party succeeding on the motion, Buy-Wise Marketing Ltd., would normally be entitled to its costs. The range of $5,000.00 to $7,500.00 was agreed by counsel to be an appropriate range for costs given the nature of this motion. Considering all the circumstances of this case, I am going to exercise my discretion to deny the plaintiff its costs on the motion. In my view, the plaintiff was obliged to produce much of the information requested during the cross-examination of Mr. Chiarello, including his personal income tax returns and personal financial information and if this information had been provided, the motion for security for costs may have been avoided. In my view, the case law makes it clear that the sole shareholder and a director cannot hide behind the corporation with respect to the personal financial disclosure required in a motion for security for costs given the obligation to satisfy the question as to whether the shareholder has access to assets or funds to satisfy a costs order that may be imposed on the corporation in the action.
[ 23 ] Therefore, although the defendant’s motion for security for costs is dismissed, it is dismissed without costs.
Justice E. Gareau
Released: December 21, 2012
COURT FILE NO.: 25397/11
DATE: 2012-12-21
ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: BUY-WISE MARKETING LTD. Plaintiff – and – SHOPPER’S DRUG MART INC. Defendant REASONS FOR INTERIM ORDER Justice E. Gareau
Released: December 21, 2012