NEWMARKET COURT FILE NO.: CV-09-092780-00

DATE: 20130311

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: CANASIA SALES CORP., Plaintiff

AND:

ELISABETH COLSON, DEVRY SMITH & FRANK LLP, WILLIAM SMITH, GEORGE FRANK, 6680593 CANADA INC., and SEYED HOSSEIN AHMADI ALAVICHE also known as EDDIE ALAVICHE, Defendants

BEFORE: THE HON. MR. JUSTICE G.M. MULLIGAN

COUNSEL: J.H. Chow, Counsel, for the Plaintiff/Responding Party

A. Lev-Farrell, Counsel, for the Moving Party/Defendants Elisabeth Colson, Devry Smith & Frank LLP, William Smith and George Frank

HEARD: February 25, 2013

RULING ON MOTION

INTRODUCTION

[1] By way of an Agreement of Purchase and Sale the plaintiff Canasia Sales Corp. (“Canasia”) sold all of its assets as a going concern to the defendant 6680593 Canada Inc. (“668”). A Promissory Note secured a portion of the purchase price and the note was guaranteed by the defendant Eddie Alaviche (“Alaviche”). The remaining defendants Elisabeth Colson, Devry Smith & Frank LLP, William Smith and George Frank (hereinafter called “Colson”) were the lawyers or law firm that acted for both Canasia and 668 in connection with the Agreement of Purchase and Sale.

[2] The transaction closed but the plaintiff was unable to realize on the Promissory Note given on closing, 668 went out of business and has not defended this action. The defendant Alaviche filed for personal bankruptcy.

[3] In January of 2009 Canasia issued a claim against Colson claiming damages based on negligence, breach of duty and breach of contract. The amount claimed against these defendants is in the order of $180,000. These defendants bring this motion for security for costs seeking the sum of $62,000 to be posted as security pursuant to the provisions of rule 56.01. Canasia opposes the motion on the basis that it is impecunious, it has a good defence on the merits and it would be unjust if it was not permitted to proceed with this action.

[4] As a preliminary matter Colson also moves for a stay of the proceedings according to s.18(1) of the Corporations Information Act R.S.O. 1990.c.C39 based on the plaintiff’s failure to file annual returns. A few days before the motion was heard, the plaintiff filed a supplementary affidavit indicating the said returns had been “mailed” to the Ministry of Finance for Ontario and the Canada Revenue Agency. No proof of “filing” was submitted.

[5] In response to the motion for security for costs the plaintiff’s two shareholders David Koo and James Koo filed affidavits. They were cross-examined on those affidavits.

HISTORY OF THE PROCEEDINGS

[6] As noted the plaintiff commenced this action in January of 2009 and these defendants filed their defence in November of 2009 after sending a Demand for Particulars.

[7] The plaintiff has not forwarded an Affidavit of Documents nor have the parties conducted discoveries. The issue of security for costs has been a live issue for over two years. The Statement of Claim and the Statement of Defence as well as the affidavits and exhibits provide some understanding of the claim.

[8] The plaintiff had a furniture business. It had a business relationship with 668. The parties worked out an Agreement of Purchase and Sale whereby by 668 would buy all the assets of Canasia and assume the leases at three of its stores. The purchase price was in the amount of $300,000 and 30 percent was to be paid on closing with the balance secured by a Promissory Note from 668, guaranteed by Alaviche. The parties negotiated the Agreement of Purchase and Sale themselves without legal advice. They entered into the Agreement on their own and jointly retained Elisabeth Colson to act for them in connection with the Agreement of Purchase and Sale. The closing date was expressed to be January 1, 2007 but they retained the lawyer after that date. The lawyer had both parties sign a Conflict of Interest form. The defendant 668 expressed concern about one of the leases and wished to negotiate the terms. The landlord required financial information from 668. Elisabeth Colson received that information from 668 but did not provide a copy to Canasia. The solicitor recognized a conflict of interest and sent 668 out to a different lawyer to negotiate the lease terms with the landlord’s representative. That issue was resolved and ultimately the transaction closed. Canasia received 30 percent of the purchase price on closing with the balance secured by a Promissory Note from 668 guaranteed by Alaviche. The Agreement closed later in 2007 when the landlord and tenant issues were resolved to the satisfaction of 668. The lawyer prepared an amended Agreement of Purchase and Sale. On closing Canasia received $90,000 and the Promissory Note. Unfortunately no payments were made on the Promissory Note. 668 went out of business and Alaviche filed for bankruptcy thereafter.

[9] Canasia then commenced an action against its solicitors. The essence of the allegations is that the solicitors were in conflict of interest from the beginning in agreeing to act for both parties. A further conflict occurred when Colson received financial information about 668 in connection with the landlord inquiry but did not disclose or provide this information to Canasia. Under these circumstances the plaintiff alleges that Colson ought to have recognized that there was little or no security for the Promissory Note and ought to have negotiated for better security before amending the transaction and closing it. These are live issues in the litigation between Canasia and Colson, issues which will have to be resolved by way of trial or other disposition.

THE SECURITY FOR COSTS ISSUE

[10] Colson first raised the issue of security for costs in February of 2010 shortly after it had filed its Statement of Defence. In correspondence it stated that it had reason to believe that Canasia had insufficient assets and requested voluntary financial disclosure failing which a motion for security for costs would be brought. A detailed list of disclosure was set out. There was no reply to that letter and a further letter was sent March 16, 2010.

[11] By reply in October of 2010 counsel for the plaintiff responded that the plaintiff had no assets and this failure to have assets was caused by the actions of Colson.

[12] Counsel for Colson pursued the issue further on November 18, 2010 indicating the requirement for Canasia to prove impecuniosity including providing evidence that it could not raise funds from any other source, including its shareholders. Counsel for Colson was more blunt in its letter of March 17, 2011 which stated in part:

First it is not sufficient for your client to simply allege that it is impecunious. The caselaw is clear that, in order to prove impecuniosity, the plaintiff must tender financial evidence with “robust particularity”, proving that it is not able to obtain the source of security for costs from any source, including its shareholders, directors and/or officers.

[13] No information was provided as to the assets of the shareholders of Canasia. On April 19, 2012 Colson filed its Notice of Motion for security for costs.

[14] In reply Canasia filed affidavits from the two shareholders of the plaintiff, David Koo a Chartered Accountant and officer of the corporation, and his father James Koo who is retired and an officer and shareholder of the corporation. Both parties were cross-examined on their affidavits.

[15] I am satisfied that Canasia has no assets. It sold all of its assets to 668. Its balance sheets were filed as exhibits showing that on January 31, 2007 prior to the transaction it had $44,000 in its bank account, a $57,000 letter of credit regarding one of the leases and a receivable from 668 of $300,000. It also had shareholder loans of $584,000. By way of its statement of January 31, 2008 it had no funds in its chequing account, it remained holding a letter of credit of $57,000 and it had a receivable from 668 of $132,000. Shareholder loans had been reduced to $374,900. The transactions between those two dates were not recorded but it should be noted that the company received $90,000 on closing and by the end of the year shareholder loans had been reduced by almost $200,000. Ultimately the plaintiff lost the Letter of Credit because it stood as security for one of the leases and that security was lost based on the default of 668. That loss is part of the claim against Colson.

ASSETS OF THE SHAREHOLDERS

[16] There is no information before the court about the assets of the shareholders James Koo and David Koo. In his affidavit of June 26, 2012 James Koo stated at para. 25:

David Koo and I are still owed the sum of $371,941 in total by Canasia Sales Corp. for shareholder loans. Neither James Koo or David Koo are prepared to lend any more money to Canasia Sales Corp.

[17] When cross-examined on his affidavit the following exchange took place:

Q. Now would you agree with me that one of the most practical ways for Canasia to obtain money would be from you or your father isn’t that right?

[18] Through counsel Mr. Koo refused to answer that question and later:

Q. And you’re certainly not prepared you said you’re not prepared to give Canasia any more of your own money correct?

A. That’s right.

Q. Or any of your own assets correct?

A. That’s right.

[19] James Koo also filed an affidavit which stated at para. 3:

Neither I nor David Koo are prepared to lend any more money to Canasia Sales Corp. There is no practical way for Canasia Sales Corp. to raise any funds now to pay for security for costs.

[20] James Koo was also cross-examined on his affidavit. The following exchange took place:

Q. You say “neither or David are prepared to lend any more money to Canasia Sales Corp.”?

A. You’re right.

Q. Do you recall saying that?

A. You’re right.

Q. So when I say any more you’re saying there’s a shareholders loan, there was some money lent in the past and you’re not going to lend any more of your own money to Canasia correct?

A. Yes.

STAY OF PROCEEDINGS

[21] On a temporary basis Colson seeks an order staying this action based on the plaintiff’s failure to file annual returns pursuant to the Corporations Information Act R.S.O. 1990 c.C.39. Section 18 of the Act provides as follows:

18(1) A corporation that is in default of a requirement under this Act to file a return or notice or that has unpaid fees or penalties or is not capable of maintaining a proceeding in a court in Ontario in respect of the business carried on by the corporation except with leave of the court.

[22] At the time of the motion it was evident that the corporation had not filed returns since 2005. In fact this issue was addressed when David Koo was cross-examined. On November 9, 2102 the following dialogue took place:

Q. And sitting here today which is now November 9th has Canasia filed the returns?

A. No.

Q. So your intention is to do it soon, but no date has been determined by which you actually intend to file these returns?

A. They’ll be done by year end before December 31st.

Q. That’s your intention?

A. Yes.

Q. But you haven’t done it yet?

A. No.

[23] Just before the return of the motion David Koo executed a further supplementary affidavit dated the 14th of February 2013. That affidavit stated:

I have now sent the returns pursuant to the Corporations Information Act for Canasia Sales Corp. for the years 2006 to 2012 to the Ministry of Finance and Canada Revenue Agency on February 13, 2013.

[24] Post Office receipts were attached but there was no confirmation that the filing had actually taken place or that these filings were properly recorded on the records of the Ministry. Under the circumstances, I order that this action be stayed on a temporary basis until the plaintiff provides evidence that it has complied with the requirements of s.18 of the Corporations Information Act. Upon providing this information the plaintiff may seek the consent of these defendants to remove this stay, failing which the matter can be returned to court for further consideration.

THE MERITS OF THE MOTION FOR SECURITY FOR COSTS

[25] Notwithstanding this preliminary issue both parties agree that the court should address the merits of the motion for security for costs. This motion engages rule 56.01(1). The relevant portion of the rule provides 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;

POSITION OF THE PARTIES

Position of the Moving Party Colson

[26] As set out in its factum Colson requests security for costs on the following basis:

(a) the plaintiff failed to make full financial disclosure in establishing impecuniosity with “robust particularity”;

(b) the plaintiff’s two principals do not allege that the plaintiff cannot raise funds for security, but simply that it is not “practical” for it do so because they (the shareholders) – the obvious choice – are not prepared to advance any more money to the plaintiff;

(c) neither of the plaintiffs principals allege that the plaintiff will not be able to proceed with the action if required to post security for costs;

(d) if merits are considered the plaintiff failed to establish that it has a “good chance of success” in its claim against the Devry defendants; and

(e) the plaintiff’s conduct throughout the action has created unnecessary costs and delay.

Position of Canasia

[27] The following points from its factum summarize the plaintiff’s position on this motion for security for costs:

(a) the plaintiff is impecunious and there is no practical way for Canasia to raise any funds. The plaintiff cannot proceed with this action if it is required to post security for costs because it cannot do so;

(b) the financial plight of Canasia was caused by the defendant law firm’s breaches of fiduciary duty, negligence and breach of contract;

(c) these defendants have has delayed in bringing this motion and obstructed the discovery process;

(d) the plaintiff’s claim against the defendant Colson has merit.

ANALYSIS

[28] It is clear that Rule 56 and the cases that have interpreted it attempt to balance the fairness and access to justice rights of the parties. Security for costs should not be ordered in a case where the plaintiff has a legitimate action if the order would act to deny justice to the poor. See R.S.W.H. Vegetable Farmers Inc. v. Bayerische Landesbank 2009 O.J. No. 3454 at para. 25. On the other hand the courts do not want a successful defendant to be effectively deprived of costs where, for example, wealthy shareholders have decided to carry on business and litigation through a shell corporation. See Smith Bus Lines Ltd. v. Bank of Montreal, 1987 O.J. No. 1197 at para. 43. With these tensions at play, once a plaintiff establishes it has no financial assets, the onus shifts to that plaintiff to establish it is impecunious. As the Divisional Court set out Crudo Creative Ink v. Martin (2007), 90 O.R. (3d) 213 para. 31:

On the evidence, the respondent corporation is impecunious only in the narrow and limited sense that it is inactive and without assets. However, “[e]vidence of financial difficulties does not necessarily equate with impecuniosity” to be able to post security for costs. [citations omitted]

[29] The Divisional Court further noted at para. 33 and 34:

A corporate plaintiff carries a significant burden of establishing direct and indirect impoverishment … on the record here, it has not been established by compelling evidence that the respondent does not have access to its shareholder to the means to post security for costs. In this sense, the respondent is not impecunious in the extended sense.

[30] The issue of how a corporate plaintiff establishes impecuniosity has been canvassed in a number of cases. In Georgian Wind Power Corp. v. Stelco Inc. [2012] O.J. No. 158 Newbould J. set out at para. 11:

To establish impecuniosity complete financial disclosure is required. See Coastline Corp. v. Canaccord Capital Corp., supra, at para. 7.(viii) and (ix). In Unique Labeling Inc.(c.o.b. International Private Beverage) v. GCAN Insurance Co. (2009), 2009 ONCA 591, 252 OAC 228 (CA), Weiler J.A. stated:

Inasmuch as Unique asserts that it will be without funds to prosecute its appeal if it is required to post security for costs, it bears the burden of establishing this impecuniosity. Unique is required to show that its principal shareholders, Lance and Jeffrey McLelland, who stand to benefit from any award in Unique’s favour, cannot post security for costs and have no internal or external access to funds. Complete financial disclosure is required with supporting documentation.

[31] In Coastline Corp., supra, Master Glustein reviewed many of the principles that ought to be considered in security for costs cases. At para. 7(x) he stated:

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 omitted]

[32] As to the extent of disclosure required by plaintiffs, as Quinn J. stated in Morton v. Canada (Attorney General), [2005] O.J. No. 948 at para. 32:

In motions of this nature, the financial evidence of plaintiffs must be set out with robust particularity. There should be no unanswered material questions, as is the case here. It is worth remembering that the financial status of the plaintiffs is known only to them. As I mentioned earlier, they bear the burden of proving the effect upon them of an order for security for costs.

[33] In Aviaco International Leasing Inc. v. Boeing Canada Inc., [2000] O.J. No. 3284 Nordheimer J. reviewed the issue of whether or not a corporate plaintiff who has access to resources could be relieved of its obligation to post security on the basis it had a meritorious claim. Nordheimer J. cautioned against a detailed inquiry of the merits which may in effect become “a surrogate motion for summary judgment”. Nordheimer J. noted that it was not disputed that the shareholders did have assets which could fund litigation and concluded at para. 23:

I therefore conclude that it is unnecessary for me to embark upon a consideration of the merits of the plaintiffs’ claim since the plaintiffs have admitted that their shareholder has the resources available to permit them to abide by an order for security for costs if made.

[34] It is clear that the plaintiff’s two shareholders are the only creditors of the plaintiff. The financial statements note the substantial shareholders’ loan owing to them. In Enescu v. Wawanesa Mutual Insurance Co. [2005] O.J. No. 4836 Then J., sitting on an application for leave to appeal to the Divisional Court a security for costs order, upheld the decision of the motion judge to order security for costs. In dismissing the leave to appeal application he noted at para. 6:

She then applied Design 19 Construction v. Marks, [2002] O.J. No. 1091, to hold that creditors cannot hide behind impecunious plaintiffs on the issue of security for costs and that if they intended to reap the reward of litigation they should also bear the burden of cost consequences in the event that the action should fail unless there is positive evidence that the creditors are unable to do so.

CONCLUSION

[35] I am satisfied that the plaintiff has no assets; however, on the evidence before me, the plaintiff, a corporation, has not satisfied me that it is impecunious in the broader sense. It has two shareholders who are creditors. Those shareholders have not stated that they are impecunious. They have simply stated that they are not prepared to lend any more funds to the corporation. Clearly they would benefit if the plaintiff is successful in its litigation. Any proceeds that the plaintiff achieved would flow back to them in satisfaction or partial satisfaction of their shareholders’ loan. On the other hand, if the plaintiff is unsuccessful and is required to pay costs, these shareholders would be immune from a costs order because they are not parties to the litigation and have not provided any undertaking to pay costs to the defendants.

[36] I therefore order that the plaintiff is required to post security for costs and further order that this action is stayed until such security is posted.

[37] The defendant seeks an order of security for costs of $62,000 and has provided a cost outline for costs incurred to date and the anticipated costs of proceeding with this action through trial. In my view, this is an appropriate case for a pay-as-you-go costs order in stages. I therefore order that the plaintiff pay $60,000 into court as security for costs in three phases: $20,000 – payable within 30 days of the date of this endorsement, a further $20,000 to be paid upon the completion of the examinations-for-discovery and a further $20,000 to be payable when the action is set down for trial.

COSTS

[38] The Colson defendants raised the issue of security for costs early in the proceedings and gave the responding party ample opportunity to provide voluntary disclosure. The motion was brought when it was evident that disclosure was not forthcoming. In my view, there is no delay by Colson which would disentitle it to the relief sought.

[39] These defendants have achieved success on this motion. If the parties cannot settle the issue of costs I will receive written submissions from them within 20 days of the release of this endorsement. Canasia will then have a further 10 days to respond. Costs submissions are not to exceed three pages.

MULLIGAN J.

Date: March 11, 2013