Court File and Parties

Court File No.: CV-09-92780

Date: 20131004

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Canasia Sales Corp., Plaintiff

-and-

Elisabeth Colson, Devry Smith & Frank LLP, William Smith, George Frank, 6680593 Canada Inc. Seyed Hossein Ahmadi, Defendants

Before: The Honourable Mr. Justice M. K. McKelvey

Counsel:
James Chow, for the Plaintiff

Alexandra Lev-Farell, for the Defendants Elisabeth Colson, Devry Smith & Frank, William Smith and George Frank

Heard: September 16 and 17, 2013

ENDORSEMENT

Introduction

[1] The plaintiff in this action seeks an order for leave to appeal an order of the court dated March 11, 2003 which orders the plaintiff to pay the sum of $62,000 in court by way of three instalments as security for costs.

[2] The test for leave to appeal is set out in rule 62.02(4) of the Rules of Civil Procedure which provides that leave to appeal shall not be granted unless,

(a) there is a conflicting decision by another judge or court in Ontario or elsewhere on the matter involved in the proposed appeal and it is, in the opinion of the judge hearing the motion, desirable that leave to appeal be granted; or

(b) there appears to the judge hearing the motion good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that, in his or her opinion, a leave to appeal should be granted.

[3] The plaintiff in this case relies on both grounds in support of their motion for leave to appeal.

Background

[4] The plaintiff in this case (“Canasia”) is a corporation which operated a furniture business. Canasia is owned by two shareholders, James and David Koo, who are father and son. Canasia entered into an asset sale of the furniture business. The purchase price was for the sum of $300,000 with 30 per cent of the price to be paid on closing and the balance to be secured by a promissory note by the purchaser 6680593 Canada Inc. (“668”). In addition, the promissory note by 668 was guaranteed by a co-defendant, Eddie Alaviche. It is agreed that the parties negotiated the agreement of purchase and sale themselves without legal advice. However, prior to closing Elisabeth Colson (“Colson”) of the firm Devry, Smith & Frank LLP was retained jointly by both parties to close the transaction. The lawyer had both parties sign a conflict of interest form at the time of the retainer.

[5] The plaintiff’s claim against Colson is that she was in a conflict of interest in agreeing to act for both parties. In addition, it is asserted that she was in breach of her fiduciary duties when she received financial information about 668 in connection with a landlord inquiry but did not disclose or provide this information to Canasia. The plaintiff asserts that Colson ought to have recognized there was little or no security for the promissory note and ought to have negotiated for better security before closing the transaction.

[6] On closing Canasia received the sum of $90,000 as well as the promissory note. However, no payments were made on the promissory note and 668 subsequently went out of business. In addition, Mr. Alaviche filed for bankruptcy. Thus, while both 668 and Mr. Alaviche have been named as defendants in the action the plaintiff’s focus for recovery is on Colson and her law firm.

[7] A statement of claim was issued on January 13, 2009. The notice of motion brought by Colson and her law firm for security for costs is dated April 19, 2012.

Grounds for the Leave to Appeal Application

[8] The plaintiff relies on the following grounds in support of its application for leave to appeal:

(a) It is asserted that the motions judge did not consider an analysis of the merits of the plaintiff’s claim;

(b) Is it asserted that the motions judge did not consider whether the cause of the plaintiff’s impecuniosity was as a result of the defendants’ actions;

(c) It is asserted that the motions judge did not consider whether Canasia was incorporated for purposes of litigation as opposed to being a legitimate litigant; and

(d) It is asserted that the motions judge did not give an adequate explanation to excuse the delay in bringing the motion for security for costs.

The Test on a Motion for Security for Costs

[9] Rule 56.01(1)(d) is the rule which authorizes the granting of an order for security for costs. This rule states:

(1) The court, on motion by defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that...

(d) The plaintiff 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.

[10] It is apparent that in considering a motion for security of costs under this section a court must initially address the question of impecuniosity on the part of the plaintiff corporation. The parties on this motion agree that the case law supports a conclusion that if impecuniosity on the part of the plaintiff corporation is established a plaintiff needs only to demonstrate that the action is not plainly devoid of merit. In such a case a court will be reluctant to make an award of security for costs. If, however, impecuniosity is not established a legitimate factor in deciding if it would be just to require security for costs is whether the claim has a good chance of success. See: Zietoun v. Economical Insurance Group (2008), 2008 20996 (ON SCDC), 91 OR (3rd) 131 (Divisional Court); affirmed 2009 ONCA 415, 96 OR (3rd) 639 (CA). The case law has also considered other factors which a court may take into consideration in exercising its judgment.

[11] In summary, the caselaw makes it clear that an impecunious plaintiff faces a lower threshold in resisting an order for security for costs than a plaintiff with sufficient assets to post security.

Is Canasia Impecunious?

[12] There is no issue about the fact that Canasia currently has no assets. The business has been sold and the proceeds from the sale have apparently been distributed. The motion judge concluded, however, that Canasia was not impecunious in a broader sense because it had two shareholders and there was no evidence that the two shareholders did not have assets which could have been made available to post security for costs.

[13] The plaintiff argues that there is good reason to doubt the correctness of the motion judge’s conclusion that Canasia was not impecunious or, at a minimum, that there are conflicting decisions on this issue. In support of its position the plaintiff referred to paragraph 32 of the motion judge’s decision where he states as follows:

As to the extent of the disclosure required by plaintiffs, as Quinn J. stated in Morton v. Canada (Attorney General), 2005 6052 (ON SC), [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.

[14] In its argument, the plaintiff referred to the fact that the decision of Justice Quinn was subject to a leave to appeal application which was granted. The appeal, however, was never argued. The plaintiff notes that the leave to appeal decision was never put before the court nor apparently considered by the motion judge. The leave to appeal decision was provided to me on the motion for leave to appeal. In reviewing the decision of the court granting leave to appeal, it appears the focus of the judge hearing the motion related to the comments of Justice Quinn that the case before him had a real possibility of success. On this issue the court stated,

To conclude that the case may have a real possibility of success and is not weak and then to suggest that failure to meet the financial disclosure requirements (whatever they may be) justifies an order for security for costs, which may have the effect of preventing the plaintiffs from continuing their action, is in my mind a good reason in itself to doubt the correctness of the order in question. I am not satisfied that a multitude of factors as cases have previously noted were adequately considered.

It is correct that the motion judge in the case before me made reference to the comments of Justice Quinn to the effect that financial evidence of the plaintiffs must be set out with robust particularity. However, this part of Justice Quinn’s decision was not the subject of any criticism by the judge who subsequently granted leave in the Morton case. Justice Quinn’s comments on the onus of a plaintiff to prove impecuniosity have, in fact, been accepted in later decisions. See, for example, Sandella’s Franchsing LLC v. Fuller Landau et al, 2013 ONSC 4418 (Ont. Master). I therefore conclude that the decision in the leave to appeal application in the Morton case does not constitute a conflicting decision as contemplated under rule 62.02(4)(a) or that it would be desirable that leave to appeal be granted on this basis.

[15] The plaintiff also made reference to the decision of Justice O’Connor in Solcan Electric Corp. v. Viewstar Canada Inc., [1994] O.J. No. 706. In that decision the court stated,

The plaintiff has not shown, nor attempted to show that it has sufficient assets in Ontario to pay costs. The admissions made by it on discovery and in its president’s affidavit, as set out above, establish that the plaintiff is impecunious.

This decision does not appear to contemplate that a corporation has to disclose more than its own assets to prove impecuniosity.

[16] The plaintiff, therefore, argues that at a minimum there are conflicting decisions as to what constitutes impecuniosity in the case of a corporation and that this issue is one which needs to be clarified at the Divisional Court level.

[17] It is to be noted, however, that the Solcan decision dates back to 1994. In reviewing the caselaw since that time it is apparent that today there is a general acceptance of the proposition that a corporation’s ability to raise funds from other sources is an appropriate consideration in considering whether it is impecunious. For example, in the case of Georgian Windpower Corp. v. Stelco Inc., [2012] O.J. No. 158, Justice Newbould at paragraph 14 states,

Regarding creditors of the company, case law supports the notion that if they stand to benefit from the litigation, it must be established that they are unable to fund an order for security for costs. See, for e.g. J.T. Stewart & Associates Inc. v Cash, Lehman & Associates, [2005] O.J. No. 4234 and Design 19 Construction Ltd. v Marks (2002), 22 CPC (5th) 117, in the latter of which Nordheimer J. stated:

If the creditors are prepared to take the benefit of this action, then I fail to see why they should not also have to accept the burden of it. We are, of course, only speaking of a requirement that security for costs be posted. If the plaintiff is ultimately successful, then those funds will be returned to the creditors. If the plaintiff is not, I fail to see why the creditors should be able to avoid the consequences of standing behind an unsuccessful action. I find, therefore, that the Master's conclusion that the plaintiff was impecunious in the absence of any evidence as to whether the creditors of the plaintiff were in a position to fund the payment of security for costs reflects an error in principle.

In my view, for a number of reasons the plaintiffs have failed to discharge their evidentiary burden to establish that they are impecunious.

[18] I conclude, therefore, that the court’s decision in the Solcan case does not constitute a conflicting decision. I further conclude there is no reason to doubt the correctness of the motion judge’s conclusion on the issue of impecuniosity. He properly took into account the fact that the plaintiff failed to adduce any evidence of the assets of its two shareholders who would have received the funds generated on this sale of the business.

[19] Even if the Solcan decision is considered to be a conflicting decision, for the reasons described above, I do not consider it desirable for leave to appeal to be granted.

Did the Motion Judge Consider an Analysis of the Plaintiff’s Case on its Merits?

[20] The plaintiff argues that the motion judge failed to make a considered analysis of the case on its merits to determine whether the case had a good chance of success. It further asserts that the motion judge failed to take into account other relevant factors such as whether the cause of the plaintiff’s impecuniosity was as a result of the plaintiff’s action and whether the company was incorporated for the purposes of litigation as opposed to being a legitimate litigant.

[21] While it is true that the motion judge did not specifically state one way or the other whether the plaintiff’s case had a “good chance of success” it is apparent that the motion judge considered the overall merits of the action. This is reflected in paragraph 9 of the court’s decision. After setting out the evidentiary background the motion judge states,

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. (underlining added)

[22] The inference I draw from the comments of the motion judge is that he did not feel it was possible to draw any firm conclusions on the merits of the case. This is consistent with the fact that the action is currently in its preliminary stages. The plaintiff has not yet delivered its affidavit of documents nor have examinations for discovery been completed. At the time of the motion the parties had filed conflicting affidavits. There were also transcripts from cross-examinations on those affidavits. It is not easy for a court to come to any firm conclusions in the face of conflicting evidence with respect to the merits of the plaintiff’s claim at such an early stage of the action. In a number of cases courts have noted that it is not possible to conclude whether the plaintiff has a good cause of action or not. For example, Justice Newbould in Georgian Windpower, supra comments,

In light of this conclusion, I think it is fair to state that for the purposes of this motion for security for costs, there are genuine issues requiring a trial but whether one can go further and say, as the plaintiffs assert, that they have a good cause of action is problematic. It appears to me that the merits of the action must be either neutral or close to it for the purposes of this motion.

[23] The plaintiff also refers to the fact that the motion judge did not specifically include in his reasons a discussion as to whether the cause of the plaintiff’s impecuniosity was as a result of the plaintiff’s actions nor did he specifically deal with the fact that Canasia had not been incorporated for purposes of litigation as opposed to being a legitimate litigant. It is correct that both of these factors have been referenced in other decisions. It is apparent, however, that the cause of the plaintiff’s impecuniosity is part of the overall consideration of the merits of the action. The defendants argue that the cause of the plaintiff’s impecuniosity is directly related to the terms of the original agreement which were negotiated between the parties without legal advice and which did not include any provision for security.

[24] In reviewing the decision of the motion judge it appears that in balancing the various factors he placed significant emphasis on the fact that denying an order for security for costs would be unfair to the defendant. He states,

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 shareholder’s 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.

[25] This is a legitimate and important factor to take into account in exercising a court’s discretion on a motion like this. For example, in Design 19 Construction Limited v. Marks, [2002] O.J. No. 1091, the court notes that a corporate plaintiff without assets, manipulated by shareholders with assets should not be able to say to a defendant, “heads I win, tails you lose.”

[26] Recognizing the fact that a motion like this is a balancing of factors by the motion judge, I am not satisfied that there is good reason to doubt the correctness of his decision as he exercised his discretion on appropriate principles and on the basis of the evidence before him. In any event, even if there were reason to doubt the correctness of his decision, this appeal does not raise a matter of general importance that goes beyond the interests of the parties. The decision turns on the particular facts of this case.

Did the Defendant give Adequate Explanation for the Delay in Bringing the Motion?

[27] In his decision the motion judge notes that the defendant, Colson, first raised the issue of security for costs in February of 2010 shortly after it filed its Statement of Defence. In that letter she stated that there was reason to believe that Canasia had insufficient assets and voluntary financial disclosure was requested. The plaintiff was further advised that in the absence of voluntary financial disclosure a motion for security for costs would be brought. It is noted that there was no reply to that letter and a further letter was sent out on March 16, 2010.

[28] Counsel for the plaintiff responded in October of 2010 and asserted that the plaintiff had no assets and that this failure was caused by the actions of the defendant Colson.

[29] There was further correspondence from counsel for Colson on November 18, 2010 pointing out the requirement for Canasia to prove impecuniosity including evidence that it could not raise funds from any other source, including its shareholders.

[30] The motion judge noted that no information was provided as to the assets of the shareholders of Canasia. On April 19, 2012 the defendant filed its Notice of Motion for Security for Costs.

[31] In rejecting the plaintiff’s objection with respect to delay the motion judge stated,

The Colson defendant 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.

[32] It is apparent that the plaintiff was notified early on in the litigation that the motion for security for costs would be brought. No evidence of prejudice has been raised by the plaintiff. The motion has been brought early on before the parties have incurred substantial costs in the action. There is also no specific limitation under Rule 56.01 as to when a motion for security for costs must be brought. There are cases where the motion has been brought after a matter has been set down for trial. I therefore conclude that there is no good reason to doubt the correctness of the decision on this issue, as the motion judge exercised his discretion on a reasonable basis. In any event, even if there were reason to doubt the correctness of the decision this appeal does not raise a matter of general importance that goes beyond the interests of the parties.

Conclusion

[33] For the above reasons the leave to appeal application is dismissed. Counsel have agreed in advance that if the plaintiff is not successful on the motion the appropriate assessment of partial indemnity costs is $6,759. If there is any basis for the defendants to claim costs on a higher scale the parties may submit further submissions with respect to costs within 10 days of the release of this decision. Otherwise, costs are payable by the plaintiff to the responding parties in the amount of $6,759, such costs to be paid within 30 days of the release of this decision.

Justice M.K. McKelvey

Released: October 4, 2013