SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 08-7158

DATE: 2013-04-12

RE: Frenchmen’s Creek Estates Inc., 550075 Ontario Inc,

and Old Willoughby Realty Limited, Plaintiffs

AND:

MSW Dallas Limited, Tuckernuck Mortgage Administration Inc.,

and Tuckernuck Mortgage Administration Inc., In Trust Defendants

BEFORE: The Honourable Mr. Justice Robert Nightingale

COUNSEL:
W. Deley, Counsel, for the Plaintiffs

K. Gill, Counsel, for the Defendant- MSW Dallas Limited

J Lo, Counsel, for the Defendants- Tuckernuck Mortgage Administration Inc. and Tuckernuck Mortgage Administration Inc., In Trust

HEARD: April 3, 2013

ENDORSEMENT

[1] The Defendant MSW Dallas Limited (“MSW”) brings this motion requiring the Plaintiffs to provide security for costs under Rule 56.01 of the Rules of Civil Procedure.

Factual background

[2] This action was commenced on November 24, 2008 by the three Plaintiff companies against MSW claiming damages of $25 million for an alleged breach of an agreement dated November 27, 2001 which gave MSW an Option to Purchase an interest in three properties owned separately by the three corporate Plaintiffs.

[3] The Plaintiffs’ Statement of Claim alleges that this Option Agreement required MSW to keep prior mortgages on title in good standing during the Option Agreement and ensure that no default occurred thereunder, among other claims. It alleges MSW failed to do so causing the default under the mortgages and the Plaintiffs’ damages.

[4] The Statement of Defence of MSW essentially pleads that there was a typographical error in the Option Agreement which should be rectified as the obligation to keep the prior mortgages on title in good standing was always that of the Plaintiffs and not the Defendant MSW during the option period. MSW pled that Mr. Zawadzki the controlling mind and shareholder of the Plaintiff companies was well aware of that error since December 2001 as the common intention was that the Plaintiffs were to ensure that the prior mortgages were maintained in good standing.

[5] The Statement of Defence of MSW also clearly referred to this action being another attempt by the related Plaintiff companies controlled by Mr. Zawadzki to relitigate issues that had already been disposed of in earlier court actions.

[6] In another Court action, file number 07 –29117, a claim by the Plaintiffs Frenchman’s Creek Estates Inc. and 550075 Ontario Inc. against the defendant MSW Dallas Limited was dismissed. Costs were ordered to be paid by Frenchman’s Creek Estates Inc. and 550075 Ontario Inc. to MSW Dallas limited in the amount of time $25,000. Further costs were ordered by the Court of Appeal in favour of the Defendant MSW in the amount of $12,000.

[7] Frenchman’s Creek Estates Inc. and 550075 Ontario Inc. brought a motion in that action for declaratory relief which was dismissed by court Order dated January 14, 2010 and costs were ordered payable to MSW in the amount of $17,500.

[8] Accordingly, Frenchman’s Creek Estates Inc. and 550075 Ontario Inc. were ordered to pay the total costs of $54,500 in that court action to MSW Dallas limited which still remain unpaid.

[9] The Plaintiff Old Willoughby Realty Limited in this action also had commenced an earlier action in the Superior Court of Justice at Hamilton, Court File 08 – 01535, against MSW Dallas limited the same Defendant in this action and others. That Statement of Claim appears to refer to the same Option to Purchase Agreement of November 27, 2001 involving Old Willoughby and MSW including a claim for damages, this time claiming that the failure of MSW to release the Plaintiff Old Willoughby from the Option to Purchase with respect to the subject property caused damages to the Plaintiff.

[10] That action was dismissed by Mr. Justice Flynn on June 30, 2009 against MSW. Justice Flynn ordered costs be paid to MSW for the action in the amount of $33,000 and the Court of Appeal,on dismissing the appeal of Old Willoughby, awarded costs payable by it to MSW in the amount of $5000.

[11] None of the above mentioned costs awards have been paid to MSW by the three Plaintiffs from the two previous Court actions totalling $61,500 plus interest.

[12] The allegation of MSW is that the Statement of Claim in this action as it relates to MSW raises essentially the same matters previously litigated in those two other actions.

[13] At this time, no motion for summary judgment has been brought by MSW although the Court was advised that one is expected in the near future.

[14] The Plaintiffs’ affidavit of Mr. Zawadzki conceded that the other actions have some connection to these proceedings. They do not dispute that $61,500 in costs plus interest are still payable by the combined Plaintiffs to MSW from the two other actions. Rather, they suggest that there is a serious accounting issue dating back to 2001 whereby approximately $40,000 or more the funds owing to the Plaintiffs have been withheld by MSW. They also suggest that the Plaintiffs should not have to post security for costs as the Defendants Tuckernuck in this action owe the Plaintiffs a greater sum for costs because of costs Orders in the other actions.

[15] They also suggest that the earlier action 08 – 01535 and its costs Orders have no relevance to this action as Frenchman’s Creek and 550075 were not Plaintiffs even though Old Willoughby Realty Limited was.

[16] The affidavit of the Defendant’s representative stated that it was his belief that the Plaintiffs do not have sufficient assets to pay the outstanding costs award in the two other actions of $61,500 plus interest.

[17] The uncontradicted evidence on this motion included the findings of Justice Flynn in his decision of September 25, 2009 in action 08 – 01535 that Mr. Zawadzki, the controlling mind of the Plaintiff declared he would not pay the costs award of $38,000 and threatened to start a new action and he did so.

[18] The Plaintiffs filed additional affidavit material being the affidavit of Mr. Zawadzki of March 14, 2013. Although it is not totally clear, Plaintiffs’ Counsel indicated in submissions that the material confirmed that the Plaintiff Old Willoughby still owned approximately 62 acres of land being sold by the Defendants Tuckernuck under the mortgage for the price of $330,000. The allegation is that the Defendants in this action are selling it at tiny a fraction of its true value.

Position of the Parties

[19] The Defendant MSW submits that it is entitled to an order for security for costs now for the entire remainder of the proceedings based on the following grounds:

a) It has an Order against the Plaintiffs for costs in another proceeding that remains unpaid. Rule 56.01(i) (c).

b) The Plaintiffs are corporations and there is good reason to believe that the Plaintiffs have insufficient assets in Ontario to pay the costs of the Defendant. Rule 56.01 (1) (d).

[20] The Plaintiffs state that although the costs of $61,500 plus interest in the other actions are admittedly owing to MSW by a combination of the Plaintiffs in this action, that does not warrant an award of security for costs in this action because of the Plaintiffs entitlement to claim a set off or reimbursement of monies allegedly owed by the MSW to the Plaintiffs as a result of serious accounting discrepancies of funds withheld by MSW and its lawyers dating back to 2001 of at least $40,000.

[21] In addition , the Plaintiffs, which do not allege they are impecunious, state nevertheless that an order for security for costs should not be made as it would be unjust to do so and that any order for security for costs should not be made until after the conclusions of the examinations for discovery which should be held in June 2013.

[22] Lastly, they state that the Defendant MSW is not entitled to bring this motion now for the relief sought because of undue delay on its part in doing so.

Analysis

[23] In this case, the Defendant MSW clearly has Orders for costs against the Plaintiffs Frenchman’s Creek Estates Inc. and 550075 Ontario Inc. in another action, Court File number 07 – 29117 totalling $54,500 which remain unpaid.

[24] It also has a significant Order for costs against the Plaintiff Old Willoughby Realty Limited in Court File 08 – 01535 which also remains unpaid.

[25] Whether the Plaintiffs may be entitled to some costs payable by the co-Defendants Tuckernuck from other actions is in my view irrelevant to the issue of the Defendant MSW’s claim for security for costs in this action. The Defendants MSW and Tuckernuck are totally separate and distinct corporations.

[26] Moreover, there is no claim for set off with respect to these other awards of costs and the accounting of the other alleged debts of MSW against the costs owing to MSW by the plaintiffs in this action in their Statement of Claim.

[27] In my view, the Defendant MSW has established the basis for its entitlement to an order for security for costs under rule 56.01(1) (c) and accordingly triggers the required inquiry regarding the factors that would militate against an order for security. Zeitoun v. The Economical Insurance Group 2008 20996 (Div. Ct).

[28] Accordingly, the Plaintiffs in order to avoid the order of security for costs must show either that the order is unnecessary because it has sufficient assets or that it should be permitted to proceed to trial despite its inability to pay costs should it fail. Holmested and Watson, Ontario Civil Procedure p.56-7.

[29] The onus is on 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. John Wink Limited v. Sico Inc. (1987) 1987 4299 (ON SC), 15 CPC (2d) 187; Smith Bus Lines Limited v. Bank of Montreal (1987), 20 CPC (2d) 38. The Plaintiffs in their affidavit material did not suggest that they were impecunious and in their submissions conceded that they were not.

Merits of Plaintiffs’ Action

[30] Because impecuniosity has not been shown, a closer scrutiny on the merits of the case is warranted and a legitimate factor in deciding whether or not it would be just to require security for costs is whether the Plaintiff has a good chance of success. Zeitoun, supra.

[31] The Plaintiffs’ position is that it would be unjust to require that Plaintiffs to post security for costs because of the merits of their claim. Essentially, their position is that their claim in this action is based on a breach of the November 2001 Option Agreement because of MSW’s alleged failure to keep the prior mortgages in good standing and because of the Plaintiffs’ right to reimbursement of monies owed by MSW back to 2002.

[32] Although MSW provided little evidence regarding the lack of merit of the Plaintiffs claim other than to suggest that this action raises the same matters as previously litigated and simply refers to its Statement of Defence in this action, the Plaintiffs provided very little evidence as well with respect to the potential merits of their claims in this action in their affidavit material. The affidavit of Joseph Zawadzki simply states that the Plaintiffs’ essential claim is that the Defendant MSW failed to comply with its obligations under an Option Agreement to keep certain mortgages in good standing on lands owned by the Plaintiffs. It also states that the Option Agreement clearly and unambiguously states that MSW will keep the permitted encumbrances in good standing which agreement was prepared by MSW’s lawyers at the time and reflected “our agreement”.

[33] The supplementary affidavit of Mr. Zawadski of March 14, 2013 makes allegations that the mortgaged lands were worth far more than the principle of the mortgage to the Defendants, that the lands were being sold by the Defendants at a tiny fraction of the value of the lands and that there were serious issues as to the proper accounting of what was due under the mortgages.

[34] In my view, the evidence put forward by the Plaintiffs to suggest that the Plaintiffs’ claims have a good chance of success is certainly weak, to say the least.

[35] MSW’s pleading that the Plaintiffs have already litigated the matters raised in this action appears to bear some merit. In Court File 08 – 01535, the Plaintiff Old Willoughby Realty Limited made a specific claim against MSW for damages for $25 million for failing to release Old Willoughby from the same Option to Purchase Agreement that is the subject matter this action. In addition, it claims damages against MSW because of an alleged breach of the October 23, 2001 agreement which is the same subject matter this action. As indicated above, that action was dismissed with a significant payment of costs by Justice Flynn on September 25, 2009 whose decision was upheld in the Court of Appeal with further costs payable to MSW in June 2010.

[36] The previous action 07 – 29117, also makes a claim by Frenchman’s Creek Estates Inc. and 550075 Ontario Inc. against MSW for breach of the October 23, 2001 agreement which is part of this action. Furthermore, in the extensive affidavit of Mr. Zawadski filed in that prior application dated February 27, 2007, he makes numerous references to the three options to purchase in favour of MSW that are the subject matter of this action. However, he alleged in that affidavit that he was essentially forced to sign those Options to Purchase because of economic duress imposed on him by MSW and that the Options to Purchase in favour of MSW were an impediment to the Plaintiffs attempt to sell some of the lands in question.

[37] The Defendant has also pled the applicability of the Limitations Act in its Statement of Defence regarding the claims now being made by the Plaintiffs against the Defendant under the Option Agreement of November 2001. This action was commenced on November 24, 2008. The Plaintiffs claim damages because of MSW’s failure to make payments they allege were required under the Option Agreement to the prior mortgagees since November 27, 2001, the date of the Option Agreement.

[38] Accordingly, there appears to be considerable merit to the limitation period defence whether that was six years for breach of contract as it then was prior to the Limitations Act, 2004 or two years since that legislation came into effect.

[39] I am not deciding this action on the merits of the Plaintiff’s claims at this stage but rather am assessing the parties evidence to determine if the Plaintiffs have established whether they have a good chance of success. However, I note that Clause 6A of the Option Agreement in question which states that the Optionor (i.e. MSW) shall ensure that the existing charge and all other permitted encumbrances of the lands are maintained by the Optionor in good standing and shall ensure that no default occurs thereunder is actually contained under the subcategory titled “Optionee’s Covenants” i.e. the covenants of the Plaintiffs not the Defendant. Without deciding the issue on the merits, requiring the Optionor MSW to be responsible for the existing charge on title during the Option Period rather than the landowner Plaintiffs doesn’t make much commercial or business sense. This adds credence to the Defendant’s position that this was simply a typographical mistake in the agreement which should be rectified.

[40] In addition, there was no evidence before me in this motion by the Plaintiffs that they ever demanded since November 2001 that MSW pay the prior charges on title until this action was commenced even though MSW’s Statement of Defence alleged that no demands were ever made by the Plaintiffs or Mr. Zawadski for payment of any of the encumbrances.

[41] Furthermore, even though MSW’s Statement of Defence alleged that neither Mr. Zawadzki or his then lawyer disagreed since December 2001 with MSW that there was an error in paragraph 6A when it was pointed out to them, no contrary evidence was led by the Plaintiffs with respect to that on this motion.

[42] Accordingly, at this stage of the proceeding, the Plaintiffs’ position that it has a good chance of success on the action on the merits is certainly questionable at best and I find that they have not established that they do.

Delay

[43] The Plaintiffs also submit that MSW is not entitled now to bring this motion because of delay. The Statement of Claim in this action was issued on November 24, 2008 and MSW’s Statement of Defence is dated February 10, 2009. This motion is dated March 7, 2013 and was served shortly thereafter. As such, the Plaintiffs state that the Defendant was at least aware of this action for over four years without taking any positive steps to seek the relief they now are.

[44] The last costs award made against the Plaintiffs in favour of MSW was a June 1, 2010 award by the Court of Appeal and that because MSW waited almost 3 years from that date to bring this motion and have not explained why this motion was not initiated earlier, they should not be allowed to bring it now.

[45] The Plaintiffs also submit they have been prejudiced not because of the delay in the Defendants bringing the motion but rather because of the Defendant’s refusal to attend at examinations for discovery that were scheduled in early February 2013. The Plaintiffs suggest that because of their refusing to attend the examinations for discovery, this Court does not have the ability to fully consider the merits of the case and that accordingly this motion should not be decided until the examinations for discovery have been completed.

[46] In my view, the delay by MSW in bringing this motion does not in and of itself justify the denial of the security sought but is a factor that can be considered in determining the quantum of security sought. Malamas v. National Bank of Greece ( Canada ) [2009] O.J. No.4368; Livent Inc (Receiver of) v. Deloitte & Touche 2011 CarswellOnt 2371.

[47] In this case, MSW in their affidavit material confirmed that this action had been inactive since the delivery of pleadings. It appeared that there has been a total of eight Status Hearings in this action commencing April 12, 2011 up to July 17, 2012 with the last Hearing then being adjourned to July 16, 2013. Its evidence was that the majority of the Status Hearing adjournments were due to the request by the Plaintiffs’ counsel stating that they were awaiting an appeal decision in another action to which MSW was not a party. This was an appeal of an Order in which the Plaintiffs sought to add four parties. That appeal decision was released on September 7, 2012 and dismissed an appeal from the motions judge who denied the Plaintiffs’ request to add those parties in that action. That court action was Court File 07 – 29117 which, as indicated above, resulted in a dismissal of that action against MSW some time ago.

[48] The logical inference from that evidence and the submissions I heard on the motion was that the delay was actually requested or caused by the Plaintiffs because of the other outstanding proceeding and not the Defendant. It also appears logical that no costs were being incurred or steps taken by the Plaintiffs in this action because of that delay.

[49] In my view, the explanation for the delay by MSW is reasonable and adequate in the circumstances of this case. This is not a case where the Plaintiffs have incurred considerable expense in advancing the lawsuit because of the delay of this motion. There is no suggestion that the Plaintiffs were lulled into a false sense of security to their prejudice because of the Defendant waiting until now to bring this motion.

[50] Furthermore, there is no evidence at all that this motion by MSW was being used in an oppressive way to stifle or block the Plaintiffs’ action and the Plaintiffs have established no evidence of any prejudice to them because of this delay.

[51] Furthermore, this is not a case where the Defendant has delayed its motion until shortly before the trial and as the Plaintiffs have admitted they are not impecunious, there is no suggestion that they cannot now raise the funds to post the security either by themselves or their shareholders because of the delay.

[52] Lastly, I have not lost sight of the fact that the Plaintiffs’ representative in earlier proceedings made it clear that his company would not pay court-ordered costs and it did not do so. The purpose of orders requiring security for costs are said to involve “consideration of two fundamental values in our system of litigation” with the first being that everyone should be able to have their day in Court and the second being that the Defendants must have reasonable protection from claims that have no merit. Wall v. Horn Abbot Ltd. (1999) 29 C.P.C.( 4th) 204 at 208; Cigar500.Com Inc. v. Ashton Distributors Inc. et al 2009 46451.

Conclusion

[53] In considering all of these factors in a contextual approach, including the delay in bringing this motion and the explanation thereof provided by the Defendant, I find that it would be just to make an Order for the Plaintiffs to provide security for costs subject to the following.

[54] In my view, this is an appropriate case whereby the Plaintiff should be required at this time to post security for costs from the date of this motion up to the completion of the examinations for discovery of the parties including the requirement to comply with their undertakings and any motion required to compel answers to those undertakings.

[55] Although the Plaintiffs arranged for the examination for discovery of the Defendant in early February 2013, the Defendant declined to attend after being served with a Notice of Examination stating that it wanted to proceed with this motion for security for costs first. There was no discovery plan provided by the Plaintiffs before that examination for discovery. The Plaintiffs’ lawyer attended and obtained a certificate of non-attendance against the Defendant.

[56] The Plaintiffs allege that the failure of MSW to attend the scheduled examinations for discovery denied the Plaintiffs the ability to provide the Court with the merits of the case. Although there may be some merit to that suggestion, the Plaintiffs could easily have provided all of the relevant evidence from their witnesses by way of affidavit in this motion had they so chosen regarding the merits of their claims but they did not do so. Moreover, the other counterbalancing factor is that, again, the Defendant is being requested to submit to and conduct lengthy examinations for discovery when the Plaintiffs have failed to honour and pay costs awards in favour of MSW in other proceedings with the risk that they would similarly do so in this action even though they do not allege that they are impecunious.

[57] The Defendant in their affidavit material provided evidence from their lawyer which is not contradicted or questioned by the Plaintiffs that they would incur legal fees on a partial indemnity basis for their lawyers of approximately $5000 to deal with documentary discovery since the exchange of pleadings and approximately $20,000 for four days of oral examinations for discovery together with one day preparation for each day at discovery at $2500 per day. I conclude that a reasonable estimate for fees to comply with undertakings and a motion to compel answers to undertakings and any refusals to questions on the examination would total approximately $5000. The evidence also suggests that there would be approximately $1000 for costs for the official examiner and $1000 for transcripts.

[58] Accordingly, the appropriate order that would balance all of the relevant factors and be just for both parties after allowing some reduction is that the Plaintiffs are to provide security for costs of the Defendant in the amount of $25,000 inclusive of fees, disbursements and HST. This would cover partial indemnity fees for the Defendants for preparation for and attendance on the examinations for discovery, review of the documentary evidence of the parties and answering undertakings from the examinations and any motions to compel answers from those examinations.

[59] Those costs or security for those costs shall be paid by the Plaintiffs within 30 days from the date of this Order failing which this action is stayed. After completion of the examinations for discovery, the Defendant, if it wishes, can renew its motion for further security for costs being incurred between that date up to and including the trial.

[60] With respect to costs, the Defendant would normally be entitled to its costs of this motion payable by the Plaintiffs. If the parties are unable to agree on the issue of costs including the amount payable, they will have 10 days from the date of this order to provide written submissions not exceeding four pages in length including the Bill of Costs.

Date: April 12, 2013

The Honourable Mr. Justice R.J. Nightingale