SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 09-CL-8003

MOTION HEARD: August 1 and December 5, 2012

Between: DSLC Capital Corp.

Plaintiff

v.

Credifinance Securities Limited, Donabo Inc., Georges Benarroch, Marjorie Anne Glover and Credifinance Capital Corp.

Defendants

And Between: Donabo Inc. and Georges Benarroch

Plaintiffs by Counterclaim

v.

DSLC Capital Corp., John Lorenzo and Robert Carbonaro

Defendants by Counterclaim

BEFORE: Master Thomas Hawkins

APPEARANCES:

Gregory Sidlofsky for moving defendants by counterclaim
John Lorenzo and Robert Carbonaro
Fax: (416) 364-6579

Colby Linthwaite for responding plaintiffs by counterclaim
Donabo Inc. and Georges Benarroch
Fax: (416) 363-3356

No one for other parties

REASONS FOR DECISION

[1] This is a motion by the defendants by counterclaim John Lorenzo (“Lorenzo”) and Robert Carbonaro (“Cabonaro”) for an order that the plaintiffs by counterclaim Donabo Inc. (“Donabo”) and Georges Benarroch (“Benarroch”) post security for the costs of their counterclaim against Lorenzo and Carbonaro.

[2] When this motion was commenced in June 2009 Lorenzo and Carbonaro also sought an order that Credifinance Securities Limited (“Credifinance Securities”) post security for the costs of its counterclaim against Lorenzo and Carbonaro. However, before the motion was argued Credifinance Securities made an assignment in bankruptcy on August 24, 2009. As a result, the Credifinance Securities is not pursuing its counterclaim and Lorenzo and Carbonaro are not pursuing their motion for an order that Credifinance Securities post security for costs of that counterclaim.

Background Facts

[3] Lorenzo and Carbonaro are directors of the plaintiff DSLC Capital Corp. (“DSLC”). Benarroch was the chief executive officer of Credifinance Securities. Donabo, a Nova Scotia corporation, was the majority shareholder of Credifinance Securities. Benarroch owns Donabo. The defendant Marjorie Ann Glover (“Glover”) was the chief financial officer and chief compliance officer of Credifinance Securities.

[4] Credifinance Securities was in the business of selling securities and other investments to the public. Credifinance Securities was a registered member of the Investment Industry Regulatory Organisation of Canada, formerly known as the Investment Dealers Association (the “IDA”).

[5] In the summer of 2007 Lorenzo of DSLC sought to acquire a fully licensed Canadian securities dealer to provide investment services to DSLC’s existing network of investors.

[6] At that time Credifinance Securities was undercapitalised. Benarroch was interested in selling a stake in Credifinance Securities to raise capital.

[7] In August 2007 Lorenzo was introduced to Benarroch. Benarroch showed Lorenzo a copy of the March 31, 2007 financial statements for Credifinance Securities. Notes to these financial statements disclosed that the IDA had convicted Credifinance Securities of failing to provide information to the IDA, and had both fined Credifinance Securities and ordered it to pay costs to the IDA. The notes further disclosed that the conviction and fine had been reversed on appeal.

[8] Lorenzo says that he asked Benarroch about the IDA proceedings and that Benarroch told him that those proceedings were over. Benarroch denies this and says that Lorenzo was aware both that the IDA proceedings were ongoing and that Credifinance Securities and Benarroch were two of the defendants in a multi-million dollar civil action pending in the United States District Court for the Southern District of New York.

[9] Lorenzo denies such awareness.

[10] By a share subscription agreement dated November 13, 2007 DSLC purchased a 9.1 percent interest in Credifinance Securities.

[11] By a written agreement made as of January 24, 2008 amongst DSLC, the IDA and Credifinance Securities, DSLC agreed to loan $400,000 to Credifinance Securities. The transaction closed and DSLC advanced the loan proceeds to Credifinance Securities.

[12] After these transactions, Benarroch continued to hold the office of chief executive officer of Credifinance Securities.

[13] DSLC, Donabo and Credifinance Securities also entered into a share purchase agreement made as of October 9, 2008, under which DSLC agreed to purchase from Donabo additional shares of Credifinance Securities for $600,000.

[14] Before this transaction could close the IDA publicly announced on November 13, 2008 that it was bringing charges against Credifinance Securities and its principals including Benarroch. DSLC refused to close the October 9, 2008 share purchase transaction.

[15] Thereafter Benarroch had Credifinance Securities close all of its client accounts, cease its operations, and advise the IDA of its intention to resign its IDA membership. The IDA suspended the membership of Credifinance Securities on March 9, 2009.

[16] DSLC commenced the present action on February 6, 2009. In this action DSLC makes various claims including a claim for damages of $1,000,000. This is made up of the $400,000 loan to Credifinance Securities plus the monies which DSLC alleges it spent promoting Credifinance Securities and implementing its business plan for Credifinance Securities. Part of this business plan involved Credifinance Securities hiring Carbonaro as its chief operating officer in April 2008.

[17] As I have said, Credifinance Securities made an assignment in bankruptcy on August 24, 2009. DSLC made a claim in that bankruptcy for $400,000 which the trustee in bankruptcy of Credifinance Securities denied. DSLC appealed.

[18] Marrocco J. heard that appeal. In reasons for decision reported in Re Credifinance Securities Ltd., 2010 ONSC 984 Marrocco J. found that DSLC was the victim of a fraud perpetrated by Benarroch who did not tell Lorenzo of the contingent liabilities of Credifinance Securities, namely the outstanding and ongoing IDA investigation of Credifinance Securities and the lawsuit against Credifinance Securities pending in the United States. Marrocco J. also found that Lorenzo was unaware of these contingent liabilities when he had DSLC loan $400,000 to Credifinance Securities and that Lorenzo would not have had DSLC make this loan had he been aware of these contingent liabilities. Finally, Marrocco J. found that $310,550 in funds held by Credifinance Securities was traceable to the DSLC loan proceeds and should be subject to a constructive trust in favour of DSLC.

[19] The trustee in bankruptcy appealed to the Court of Appeal. In reasons reported at 2011 ONCA 160, 2011ONCA 160, the Court of Appeal dismissed that appeal.

Motion for security for costs

[20] Lorenzo and Carbonaro move for security for the costs of the counterclaim which Donabo and Benarroch have commenced against them on the basis of the provisions of subrule 56.01(1). Because of the definitions of “proceeding”, “action”, “plaintiff” and “defendant” in rule 1.03, the provisions of subrule 56.01 (1) apply to counterclaims. The relevant provisions of subrule 56.01(1) are 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,

(a) the plaintiff or applicant is ordinarily resident outside Ontario;

(c) the defendant or respondent has an order against the plaintiff or applicant for costs in the same or another proceeding that remain unpaid in whole or in part;

(d) the plaintiff or applicant is a corporation or 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;

(e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;

[21] The parties are agreed that Benarroch is ordinarily resident outside Ontario. He resides in the City of Paris in the Republic of France.

[22] On October 11, 2011 Newbould J. awarded $14,000 in costs of an unsuccessful motion by Benarroch to set aside an ex parte Mareva injunction obtained by DSLC. He ordered Benarroch to pay such costs to DSLC within 30 days. Those costs remain unpaid.

[23] Donabo is a corporation incorporated in Nova Scotia. Lorenzo and Carbonaro submit that Donabo has insufficient assets in Ontario to pay Lorenzo’s and Carbonaro’s costs of Donabo’s counterclaim against them. Donabo disputes this and says that it has sufficient assets in Ontario.

[24] Finally, Lorenzo and Carbonaro submit that the counterclaim by Donabo and Benarroch as a whole is frivolous and vexatious and that both Donabo and Benarroch have insufficient assets in Ontario to pay Lorenzo’s and Carbonaro’s costs of the counterclaim.

[25] Because of another argument which Donabo and Benarroch make, I find it unnecessary to rule upon the merits of the four claims for security for costs which Lorenzo and Carbonaro advance.

[26] Donabo and Benarroch submit that the connection between the main action and their counterclaim is so close that security for costs should not be ordered. Donabo and Benarroch rely upon a number of decisions of this court expressing that proposition in various ways, including J. Case Canada v. Gowland’s Recreation Farm Ltd. (1998), 17 C.P.C. (4th) 337 (Ont. Gen. Div.), where the court held that a plaintiff by counterclaim should not be ordered to post security for costs where the counterclaim is closely related to the main action.

[27] I will now proceed to analyse the relationship between the main action and the counterclaim by Donabo and Benarroch.

[28] In the amended statement of claim DSLC claims a wide variety of relief, much of which is now moot because of the bankruptcy of Credifinance Securities. One claim of particular relevance to this motion is the claim by DSLC for recision of the share purchase agreement of October 9, 2008 amongst DSLC, Donabo and Credifinance Securities (the “2008 Agreement”).

[29] DSLC alleges that it first learned of new IDA charges against Credifinance Securities, Benarroch and Glover on November 17, 2008 and that it refused to close the 2008 Agreement unless the IDA withdrew the charges against Credifinance Securities, and Benarroch and Glover temporarily resigned their positions with Credifinance Securities pending the outcome of the IDA investigation into the charges against Credifinance Securities, Benarroch and Glover. DSLC alleges they refused to do so.

[30] DSLC alleges that Credifinance Securities, Benarroch and Glover concealed the IDA charges against them, all the while insisting that DSLC close the 2008 Agreement.

[31] DSLC says that the dishonest conduct of Credifinance Securities, Benarroch and Glover entitles DSLC to rescission of the 2008 Agreement.

[32] In response Benarroch and Donabo allege in their counterclaim that Credifinance Securities and Benarroch made proper disclosure to DSLC of the IDA investigation and charges. Benarroch and Donabo allege that DSLC failed to close the 2008 Agreement not because it belatedly learned of the 2008 IDA charges against Credifinance Securities, Benarroch and Glover, but because Lorenzo and Carbonaro induced DSLC to break the 2008 Agreement by making sure that DSLC lacked the funds needed to close that transaction.

[33] I observe parenthetically that in his counterclaim, Benarroch claims to be a third party beneficiary of the 2008 Agreement. That agreement allegedly provided in part that DSLC was to pay Benarroch $500,000 over five years to act as chief executive officer of Credifinance Securities.

[34] In my view, the DSLC claim in the main action for rescission of the 2008 Agreement and the counterclaim by Benarroch and Donabo for damages against Lorenzo and Carbonaro for inducing DSLC to breach that agreement cannot both succeed. If the claim by DSLC for rescission of the 2008 Agreement succeeds, the counterclaim by Donabo and Benarroch for inducing breach of the 2008 Agreement must fail. Conversely, if the DSLC claim for rescission of the 2008 Agreement fails, the main basis on which DSLC justifies its refusal to close the 2008 Agreement (the non-disclosure of the IDA 2008 charges) is gone, and the counterclaim for inducing breach of the 2008 agreement will likely succeed.

[35] I have therefore come to the conclusion that the counterclaim of Donabo and Benarroch is sufficiently closely related to the claim by DSLC in the main action for rescission of the 2008 Agreement that I should not make any order that Donabo and Benarroch post security for the costs of their counterclaim. This motion is therefore dismissed.

[36] My disposition of this motion is without prejudice to the right of DSLC to bring a second motion for security for costs should circumstances change. If, for example, DSLC successfully brought a motion for summary judgment and obtained an order rescinding the 2008 Agreement, the basis on which I dismissed this motion would almost certainly be gone.

[37] The success of the claim by DSLC for rescission of the 2008 Agreement and the success of the counterclaim of Donabo and Benarroch for inducing breach of that agreement will turn mainly on issues of credibility as between Lorenzo and Carbonaro on the one hand and Benarroch on the other hand. I have therefore decided to reserve the costs of this motion to the judge resolving those issues of credibility, whether on a motion for summary judgment or at trial.

Master Thomas Hawkins

DATE: March 27, 2013