SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-10-412011
MOTION HEARD: September 16, 2013

RE: European Flooring Contract Services Ltd. v. Toddglen ILofts Limited and ILofts Building Group Inc.

BEFORE: MASTER C. WIEBE

COUNSEL:
Bryan Whealen for ILofts Building Group Inc. (“ILofts”); Grant Doak for Toddglen ILofts Limited (“Toddglen ILofts”);
Fernando Souza for European Flooring Contract Services Ltd. (“European Flooring”).

REASONS FOR DECISION

[1] This is a motion by ILofts, on its own behalf and on behalf of Toddglen ILofts, for an order granting it leave to bring this motion and for an order requiring European Flooring to post security for the costs of both defendants in this action. The grounds for the motion are the plaintiff is a corporation and that there is good reason to believe that it has insufficient assets in Ontario to pay the costs of the defendants.

[2] ILofts delivered its Motion Record on August 20, 2013. In the Motion Record is an affidavit of Allison Pinnington, Director of Operations at ILofts, in which there are two bills of costs, one for ILofts in the amount of $34,696.25 (HST incl.) and the other for Toddglen Ilofts in the amount of $34,100 (HST incl.).

[3] In her affidavit, Ms. Pinnington gave evidence concerning the issue of whether European Flooring had insufficient assets in Ontario to pay the defendants’ costs. In this regard, Ms. Pennington deposed that European Flooring had not updated its corporate filings since 2009, that at discoveries the representative of European Flooring stated that the company’s registered head office address was different than what was indicated in the company’s last corporate filings, that the same person refused to give the company’s new address at the discoveries, and that since the discoveries the defendants had learned through investigation that the address for European Flooring as indicated on its website was also at least two years out of date. Ms. Pennington also pointed out that on September 21, 2010 ILots posted security for the plaintiff’s claim in the amount of $162,252.88, $32,450.58 of which was for the plaintiff’s costs.

[4] The corporate plaintiff, European Flooring, delivered its Responding Motion Record on or about September 10, 2013. In the Responding Motion Record is an affidavit of Mehrdad Khayeri, an officer of European Flooring. In this affidavit Mr. Khayeri went through the issues and history of the reference concerning the within action and the associated action. He also provided evidence for the motion.

[5] It appears from the Responding Motion Record, and in argument Mr. Souza confirmed, that European Flooring’s primary defence to this motion is that the plaintiff is impecunious with a meritorious claim, and therefore no security for costs should be ordered. The plaintiff also alleges that its impecuniosity was created by the defendants, and that the requested security for costs should be denied as a result. The plaintiff also submits that the defendants have unduly delayed this action and this motion, that they have failed to comply with Master Polika’s directions, and that as a result this court should exercise its discretion against awarding security for costs. Finally, the plaintiff submits that security for costs should be denied as the action contains two counterclaims that arise out of the same facts and issues as the plaintiff’s claim, that the two counterclaims are vastly in excess of the plaintiff’s claim and will be the “drivers” of this litigation, and that security for costs for the plaintiff’s claim should therefore be denied or, at least, minimized.

[6] The plaintiff did in its factum raise the issue of leave under section 67(2) of the Construction Lien Act. Because of the evidence that was presented by the plaintiff itself, I will not deal with that issue at length, nor with the issue of whether under Rule 56.01(1)(d) the defendants have met their onus of showing that there is good reason to believe that the plaintiff does not have sufficient assets to pay the defendants’ costs. I have previously held (see my decision in Norseman Construction & Development Ltd. v. Evdemon et al. 2013 ONSC, August 19, 2013) that where it is shown that there is good reason to believe that at a corporate plaintiff, such as European Flooring, does not have sufficient assets in Ontario to pay the defendants’ costs, the defendants have met the test of “necessity” under section 67(2) of the Construction Lien Act and have met their onus under Rule 56.01(1)(d).

[7] Suffice it to say that had the plaintiff not filed a responding affidavit, there may have been an issue in this regard. However, in his affidavit, Mr. Khayeri made it clear that there is a serious issue as to the plaintiff’s capacity to pay costs. He stated that European Flooring is not carrying on business, that it has access to no funds or assets, that it has two shareholders, Mr. Khayeri and his brother Mehren Khayeri, that Mehren is in a dispute with Mr. Khayeri and claims that European Flooring owes him, Mehren, money, that European owes about $24,000 in taxes and about $10,000 in trades accounts, and that he, Mr. Khayeri, is unemployed and cannot lend money to the plaintiff. I therefore find that the moving parties have established the grounds for leave and met its onus under Rule 56.01(1)(d). The onus therefore is on the plaintiff to defeat the motion.

[8] What, therefore, are the issues in this motion? They are the following:

a) Has European Flooring established that it is impecunious with a meritorious claim?

b) If not, should there be security for costs in light of the alleged delay in bringing the motion, the alleged non-compliance with court orders by the defendants, and the counterclaims of the defendants and the causal link between the defendants’ conduct and the plaintiff’s financial circumstances?

c) If so, what is the appropriate amount of security for costs, and when should it be paid?

Background:

[9] The underlying action arises from a claim for lien in the amount of $129,802.30 that European Flooring registered in relation to a subcontract it had with Toddglen ILofts for the installation of laminate and hardwood flooring in a residential development owned by ILofts in Toronto, Ontairo. This action will be called the “ILofts Action.”

[10] In its Statement of Defence, Counterclaim and Crossclaim, ILofts pleads that European Flooring delayed its work, performed its work in a totally unsatisfactory manner, provided material that was not specified and was responsible for numerous deficiencies. ILofts asserts a counterclaim against European Flooring in the amount of $1,000,000 plus the cost of the bond it posted as security for the European Flooring claim for lien. It also crossclaims as against Toddglen in the amount of $500,000 plus the cost of the said bond relying upon the same particulars for this claim.

[11] In its Statement of Defence and Counterclaim, Toddglen ILofts pleads that European Flooring failed to supply manpower and material to the project as required, thereby causing delay and leading to Toddglen ILoft’s termination of the subject contract. Toddglen ILofts claims by way of counterclaim, contribution and indemnity in the amount of $500,000 concerning the ILofts’ crossclaim. Toddglen ILofts also raises an independent claim of $100,000 in damages for breach of contract. In this crossclaim, Toddglen ILofts raises the additional assertion that European Flooring was responsible for numerous deficiencies.

[12] In its Reply and Defence to Counterclaim, European Flooring states that any delays were caused by the defendants incomplete drawings, late change orders and interferences by other trades, and that any repairs to the plaintiff’s work was caused by the defendants.

[13] It should be noted that there is another action under another reference judgment involving the plaintiff and essentially the same defendants (although under different corporate names). This is the claim of European Flooring in Court Action No. CV-10-412011 as against Toddglen Avenue Limited (“Toddglen Avenue”) and 468 Avenue Road Holdings Inc. (“468”). European Flooring’s claim for lien in this other ction is for $339,205.26 and concerns the supply and installation of hardwood and laminate flooring in another area of Toronto under a different contract with Toddglen Avenue. This action will be called the “Avenue Action.” The subject land here was owned by 468.

[14] In the Avenue Action, 468 makes allegations against European Flooring that are similar to the allegations that ILofts raises against European Flooring in the ILofts Action, and pleads a counterclaim against European Flooring for $400,000 and a crossclaim against Toddglen Avenue of $200,000. In the Avenue Action, Toddglen Avenue makes allegations against European Flooring that are similar to the allegations Toddglen ILofts raises against European Flooring in the ILofts Action, claims contribution and indemnity by way of counterclaim for the $200,000 that 468 claims against Toddglen Avenue in its crossclaim, and raises a separate claim against European Flooring of $300,000 for damages for breach of contract.

[15] In his affidavit, Mr. Khayeri states that the work that is the subject matter of both actions occurred at the same time, that the claims for lien and pleadings were generated at the same time, and that the references for both actions were given to Master Polika who managed both in tandem as they concerned essentially the same parties. I note that on September 11, 2012, Master Polika scheduled both actions to proceed to trial, the Avenue Action to be tried on January 7, 8, 9, 10 and 14, 2014, and the ILofts Action to be tried on January 15, 16 and 17, 2014.

[16] For reasons that were not explained to me, there is no motion before me for security for costs in the Avenue Action. ILofts and Toddglen ILofts brought this motion in the ILofts Action only. Therefore, my ruling is limited to the ILofts Action and has no necessary bearing on the Avenue Action.

Impecuniosity:

[17] The moving parties, curiously, presented no legal authority in support of their motion. The plaintiff presented no authority on this point concerning impecuniosity. Therefore, I fall back on my knowledge of the test for impecuniosity in such a motion.

[18] Mr. Souza argued that unsubstantiated statements by Mr. Khayeri in his affidavit as to the financial status of the plaintiff were sufficient to meet this test. In addition, he argued that unsubstantiated statements by Mr. Khayeri as his own financial status met the added requirement of showing that the shareholders of the plaintiff cannot provide the necessary security for costs. He argued that the defendants chose not to cross-examine Mr. Khayeri on these statements, and that these statements should therefore be accepted.

[19] I do not agree. In Design 19 Construction Ltd. v. Julian Norman Marks (2002), 22 C.P.C. (5th) 117 (S.C.J.), Justice Nordheimer was confronted with a similar argument from the plaintiff on a motion for security for costs. In this case the corporate plaintiff alleged impecuniosity in opposition to the motion, and the president of the corporate plaintiff had sworn an affidavit wherein he stated baldly that, “at this time, Design 19 has no assets other than the action and I am personally bankrupt.” The affidavit went on to state that the plaintiff’s financial state was caused by the defendants and that the president had no further capital to inject into the company. Justice Nordheimer found that this did not satisfy “the heavy burden that is cast upon [the plaintiff] in this regard.” He found that without substantiation of these statements, the plaintiff’s argument failed.

[20] Similarly, I find that the argument of European Flooring in this motion must fail. There is no substantiation for Mr. Khayeri’s statements – no financial statements or tax returns concerning European Flooring, no personal financial statements or tax returns of Mr. Khayeri, no statements at all about the status of the other alleged shareholder, Mehren Khayeri, and no corroboration of the statements concerning what the plaintiff owes. There is no substantiation of the statement that there are only two shareholders and that Mr. Khayeri is unemployed. Mr. Khayeri goes on at some length about his medical condition and how it allegedly adversely affected him and the plaintiff, but none of these statements are corroborated, such as with medical reports. Indeed, as Mr. Whealen pointed out, Mr. Khayeri states in paragraph 34 of his affidavit that he and his wife have begun schooling, which suggests that they may have assets.

[21] Therefore, I find that the plaintiff is not impecunious and that, as a result, the defendants are entitled to security for costs in this action unless justice requires that I do otherwise. There is no need as a result to discuss the merits of the plaintiff’s case, which occupied some of the argument.

[22] I turn now to the plaintiff’s arguments as to whether, as a matter of determining what is “just” in the circumstances, I should deny security for costs on account of the conduct of the defendants.

Delay in bringing the motion:

[23] Mr. Souza argued that there was an inexcusable and unexplained delay in bringing this motion, which should cause the court to deny the requested security. He relied upon three cases, one of which I found to be most helpful, the decision of Master Graham in Pelz v. Anderson, 2006 39571 (ON SC), [2006]O.J.No. 4726. In that case, Master Graham reviewed the history of cases concerning this issue in motions for security for costs, and made the following three conclusions: (1) motions for security for costs should be made promptly after the defendant learns that it has a reasonable basis for bringing the motion; (2) the moving party should not be entitled to security for costs if it is proven that the plaintiff has been prejudiced by the delay in bringing the motion; and (3) the moving party must in any event and regardless of the issue of prejudice, explain the delay in bringing the motion and a failure to do so is fatal to the motion. In the motion in that case, the defendant had waited until after production, discovery, mediation, the scheduling of trial and the pretrial conference to bring the motion. There was no explanation for this delay, and the motion was dismissed.

[24] In the case before me, there was a delay in bringing the motion, there was no evidence that this delay has prejudiced the plaintiff, but there was also no evidence explaining the delay. Ms. Pinnington’s affidavit provides essentially two basis for the moving parties’ position that there was good reason to believe that European Flooring had insufficient assets in Ontario to pay the defendants’ costs: (1) the statement by Mr. Khayeri at his discovery on August 22, 2012 that the plaintiff was no longer located at the head office address indicated on plaintiff’s Corporation Profile Report from the Ministry of Government Services and his refusal at the same discovery to provide the new registered head office address; and (2) the investigation by a paralegal at the firm of the lawyer for ILofts conducted almost a year later on July 22, 2013, that the address shown for the plaintiff on its internet site was the address of a psychological counseling service. There is no explanation as to why it took almost a year to conduct the follow-up investigation in (2) above when it clearly could have been done immediately after the discoveries. There is also no explanation as to why it took until the discoveries for the defendants to find out about the apparent non-existence of the plaintiff’s registered head office.

[25] Mr. Souza pointed out that a pretrial conference took place before Master Polika on September 11, 2012, namely shortly after the above noted discoveries. By this time, production, some discovery and the exchange of Scott Schedules appear to have been completed. No mention was made of a motion for security for costs. At that time Master Polika scheduled the trials in the two actions to take place in January, 2014.

[26] Mr. Whealen stated in argument that the decision to move for security for costs was made in April, 2013, and that the defendants could not schedule the motion to take place any sooner than it did because of the unavailability of court time. There is no evidence to support these statements. Furthermore, when I reviewed the court file, I noted that on May 14, 2013 Mr. Whealen sent a Motion Request Form to my Assistant Trial Coordinator by email asking specifically for 1.5 hours on September 16, 2013, namely four months later and four months before the scheduled trial. There was no request for or mention of any earlier time in the email exchange in the court file. Whether this was a genuine appointment when it was made is also an open question. The evidence of Ms. Pinnington is that the second evidentiary ground for the motion, namely the internet search, did not take place until July, 2013. The first evidentiary ground for the motion, namely the August, 2012 discovery statements, could not have been enough to prod the defendants to move because they did not raise the issue before Master Polika at the September 11, 2012 pretrial. It appears to me just as likely that the decision to move was made no sooner than in July, 2013, almost a year after discoveries, again with no explanation being given as to why it took this time to do the follow-up investigation and bring the motion.

[27] I, therefore, find that the defendants have indeed significantly delayed the bringing of this motion without providing any explanation for doing so.

Non-compliance with directions:

[28] In his affidavit Mr. Khayeri also stated that the defendants had to the date of his affidavit (September 10, 2013) not provided answers to undertakings given by their representatives at the examinations for discovery that were conducted in 2012, and that the plaintiff, on the other hand, had complied with the undertakings given at the discovery of its representative. There was no cross-examination of Mr. Khayeri and no evidence from the defendants on this point. I therefore find this to be the case for the purpose of this motion.

[29] I note that Master Polika had on September 11, 2012 ordered that all undertakings given at discoveries be answered by February 28, 2013. The defendants therefore appear to be in breach of Master Polika’s order.

[30] Mr. Souza in argument referred me to the general principle that the granting of security for costs is an exercise of judicial discretion, and that the moving party must therefore approach the court with “clean hands.” He referred me to the following passage from the case of John Wink Ltd. v. Sico Inc. 1987 4299 (ON SC), [1987] O.J. No. 5 at page 5 which concerned security for costs motions: “It might be worth adding that because a party is seeking an indulgence the usual principle requiring it to be free of misconduct in the pursuit of its claim would apply.”

[31] I find that the defendants do not have “clean hands” on account of their apparent breaches of court order in this action.

Counterclaims:

[32] There is also the issue of the counterclaims. In the ILofts Action, the counterclaims of ILofts and Toddglen ILofts appear to arise from the same facts and circumstances that gave rise to the European Flooring claim, and vastly exceed the size and gravity of the European Flooring claim. Mr. Whealen argued that the counterclaims were not the real “drivers” of the action, but Mr. Doak, for Toddglen ILofts, readily admitted that the counterclaims, particularly the one from ILofts, would consume a significant amount of trial time.

[33] Mr. Souza referred me to several cases which require that the court determine the real dynamics of a case in awarding security for costs. Where the real “driver” of the action is the counterclaim, the defendant should be either denied security for costs or have the security for costs award significantly curtailed on the principle that a “defendant” should not have to post security for costs to defend itself. Two of these cases (J.I.Case Canada, a Division of Tenneco Canada Inc. v. Gowland’s Recreation and Farm Ltd. [1998] O.J. No. 323 and ICC International Computer Consulting & Leasing Ltd. v. ICC Internationale Computer and Consulting GmbH, 1998 5634 (ON CA), [1998] O.J. No. 70) concerned motions within counterclaims by defendants-by-counterclaim, namely the original plaintiffs. I view these cases as perhaps distinguishable from the case in point on the grounds that where the moving party is the plaintiff in the main action, it does not perhaps have the same equitable argument for security for costs as does the defendant who did not start the action. However, in Better Business Bureau of Metropolitan Toronto Inc. v. Tuz [1999] O.J. No. 1359, the motion for security for costs came from the original defendant who had counterclaimed. Justice Farley denied the motion in part because of the defendant’s counterclaim. These were His Honour’s words on this topic: “Where there is a counterclaim and the facts on which the counterclaim is based is in large part on the same facts and circumstances raised in the plaintiff’s claim, this militates against an order for security for costs . . . .”

[34] I find that the counterclaims in this action are based in large part on the same facts and circumstances raised in the plaintiff’s claim, and that this militates against the requested order for security for costs.

Defendants’ alleged cause of plaintiff’s difficulties:

[35] The plaintiff submitted that there was evidence that the plaintiff’s financial difficulties were the direct result of the defendants’ conduct in the subject case. Mr. Khayari attempted to draw such a line of causation in paragraph 28 of his affidavit when he stated the following: “The failure of the Defendants to pay meant that the Plaintiff suffered very difficult financial circumstances. The loss of cash-flow from these two projects was simply something that was difficult to overcome.” He also stated that these cases “exacerbated” his health problems. For the reasons laid out in the Design 19 decision referred to above, I draw no conclusions from these unsubstantiated statements by Mr. Khayeri.

Decision:

[36] On account of the defendants’ delay in bringing this motion, their breach of court order and their counterclaims, I do not find that it would be “just” in the circumstances to award the defendants security for costs, and I therefore exercise my discretion by denying the motion.

Costs of the motion:

[37] As to the question of costs for this motion, counsel provided me with Costs Outlines. On September 20, 2013 Mr. Souza submitted a Costs Outline seeking partial indemnity costs in the amount of $1,963.38. At the time of the argument of the motion, I received the Costs Outline of the “plaintiff,” although in reading the Costs Outline further it appears to be that of the defendant, ILofts, as there is reference to the firm of Meyer, Wassenaar & Banach LLP, the lawyers for ILofts. This Costs Outline specified partial indemnity costs in the amount of $3,898.50 and substantial indemnity costs in the amount of $5,198. I do not appear to have a Costs Outline from counsel for Toddglen ILofts.

[38] I herewith order that, unless the parties can otherwise agree as to the award I should make for the costs of this motion, any parties seeking costs of the motion should serve and file written submissions in this regard of no more than two pages on or before October 28, 2013. Any responding written submissions must be of no more than two pages and must be served and filed on or before November 7, 2013. Any reply written submissions must be served and filed on or before November 12, 2013.

MASTER C. WIEBE

DATE: October 17, 2013