SUPERIOR COURT OF JUSTICE - ONTARIO

COMMERCIAL LIST

COURT FILE NO.: C V-13-10122-00CL
DATE: 20131122

RE: ESCARPMENT BIOSPHERE FOUNDATION, INC. v. WORLD HEALTH INITIATIVES INC.

COUNSEL:
Saba Ahmad for the applicant
David Shiller for the respondent

HEARD: October 17, 2013

BEFORE: MESBUR, J.

The motions:

[1] Two motions were argued before me. In the first, the applicant, Escarpment Biosphere Foundation, Inc. (EBF) moved for judgment on a promissory note and related security, and for an order dismissing or denying or declaring invalid any claim by the respondent, World Health Initiatives Inc. (WHI) for setoff against any amounts owing on the promissory note.

[2] WHI resists the relief EBF seeks, and moves for two orders for security. First, WHI seeks security to support EBF’s damages undertaking which EBF gave when it obtained an ex parte Mareva injunction. Second, it seeks a general order requiring EBF to provide security for costs.

[3] A preliminary matter arose on the motions since EBF has entered into an agreement assign all its assets to another entity, namely the Biosphere Preservation Society. (BPS) The assignment cannot be completed without WHI’s written consent to it. WHI’s counsel advised that WHI has no objection to the assignment and consents to it. As a result, I made an order at the hearing as follows:

a) WHI will provide its written consent to the assignment of the assets of EBF to BPS forthwith;

b) Since BPS consents to being added as a party, an order will issue adding BPS as a party/applicant.

[4] Accordingly, BPS is now an applicant in the proceeding. It, however, has filed no material. That, in itself, creates some difficulties with the motions. I will, nevertheless, try to put the motions in their factual and procedural context, in order to address the issues before me.

The facts in a nutshell:

[5] The respondent WHI is an Ontario corporation. Stephen Rosen is WHI’s President, Director, Secretary and Treasurer. WHI developed something called the Canadian Humanitarian Trust Donation Program. The Program operated as a registered tax shelter for the benefit of its donors.

[6] WHI solicited donations from Canadian taxpayers and then engaged in various transactions with US and Canadian charities, drug companies and lawyers to provide tax receipts to donors for amounts in excess of the original gifts.

[7] The applicant EBF was a registered charity. EBF’s role was to administer the proceeds of the Program. It used the proceeds to purchase the medications for distribution to charities abroad. They were used in the treatment of what are referred to as “neglected tropical diseases.”

[8] For its role, EBF was entitled to receive 1% of the proceeds as an administrative fee. Under the terms of a Services Agreement, EBF was obliged to pay WHI a commission of 12.5% for its fundraising services.

[9] The Services Agreement also required EBF to pay advance commissions to WHI. These advance commissions were not to exceed $5 million. The agreement required WHI to repay the monies advanced at the end of the Program.

[10] In April of 2008 WHI signed a demand promissory note in favour of EBF. It acknowledged its debt to EBF for the amounts advanced and agreed to repay those amounts, together with interest. It did not pay the interest required.

[11] In 2008 Canada Revenue Agency (CRA) audited EBF in relation to its participation in the Program. Eventually CRA disallowed charitable deductions. This resulted in the effective end of the Program, although WHI is pursuing what it calls “test cases” to set aside those disallowances.

[12] In late 2010 EBF demanded payment of interest under the promissory note. WHI said it could not pay. The parties then entered into a forbearance agreement under which EBF agreed not to pursue collection in exchange for a general security agreement securing WHI’s obligations against its assets.

[13] Despite demands for payment, WHI has not paid. EBF therefore seeks payment of the secured debt. It commenced this application to pursue its claim.

[14] As a result of CRA’s actions, EBF has now lost its charitable status, and was required to assign all its assets to another charitable entity. It has done so by assigning all its assets to BPS, as I have set out above.

Procedural history:

[15] Because EBF was concerned that funds subject to its security were being diverted to fund the legal challenges on behalf of WHI’s clients/investors, EBF moved without notice for a Mareva injunction on May 28, 2013 before Newbould J. He granted the Mareva, holding:

The evidence indicates that the respondent is using the applicant's funds for litigation purposes. This would appear to be in breach of section 4.1 of the GSA. However, once there has been an event of default section 6.2(k) of the GSA permits notice to the debtor of the assignment to EBF of the accounts of WHI under section 2.1(b). Bank accounts of WHI create a debtor–creditor relationship between WHI and the particular bank, and so the same would pertain to any account in a solicitor’s trust account.

I am satisfied on the material that there is a risk of further dissipation of the funds advanced by the application which would appear to be contrary to the note and GSA.

[16] The motion was to be returned on notice on June 10. On June 7 Newbould J adjourned it to June 26, and set a timetable to delivery of materials. He continued the Mareva in the meantime.

[17] On June 12 the parties were back in court before Morawetz J to amend the timetable. He changed the date of the motion from June 26 to June 28.

[18] On June 28, 2013 Campbell J heard the injunction motion. He delivered written reasons for his decision on July 4. He described the relationship between the parties and their claims, including the respondent’s claim for setoff. He said, among other things:[^1]

The entire business relationship between these parties at the present time arises in the context of highly disputed facts in a most unusual and atypical business context where there appears to be very few assets to carry on the litigation and with little prospect in the near future of recovery for anyone.

Based on the material before me and the submissions of counsel I am satisfied that the issue of the hollowness of the undertaking as to damages should have been disclosed to Justice Newbould …

The real issue it seems to me is whether WHI can fund litigation with monies that EBF asserts are subject to be held in trust in its favour.

That issue as well as the companion issue of alleged set off can and should with the affidavits and cross examination already held be dealt with at a short trial of one or two days.

[19] He continued the Mareva for ten days “to permit counsel to provide a proposal for permitted payments and a timetable for directing the trial of the underlying issue as well as further particulars to provide security for an undertaking as to damages which will form the basis of any order going forward.”^2

[20] Campbell J next dealt with the case on July 5 at a case conference. His endorsement reflects that counsel have discussed the possibility of a trial of issue to deal with the validity of the debt instrument and its enforceability with or without set-off. He altered the Mareva to permit payments of $3,000 per month for business expenses.

[21] Instead of proposing a timetable for the trial of the issues Campbell J had identified, the parties elected to proceed with motions instead. The irony, of course, is had they simply tried the issues, the entire case would likely have been decided by now on a complete evidentiary record.

[22] The parties were back before Campbell J on July 17 to schedule motions instead of a trial of the issues. He ordered that the two motions now before me were to be scheduled at a 9:30 by the end of July. The parties were not able to simply do that. Instead, they were back on another 9:30 before Campbell J on July 31. This time, his endorsement dealt with the material to be relied on at the motions. He endorsed:

Plaintiff [sic] relying on material filed for motion for judgment. Responding material based on among things set-off to be delivered by Aug. 15/13. Counsel for defendant [sic] may rely on responding material as part of record for security for costs & security for undertaking – this material to be delivered August 15/13. Responding material for security for costs & reply on set-off by August. 20/13

[23] The parties were back at a 9:30 in early September. This time they appeared before me on September 11. I revised the timetable, and fixed the date of October 17 for the motions.

[24] One would have thought no further court attendances would be necessary. That, however, was not the case. The parties appeared again before Campbell J at a 9:30 on September 22. He confirmed that the motions would be dealt with on October 17, according to the timetable I had set the month before, including cross-examinations.

[25] The parties were still unable to move ahead without the court’s assistance. They had yet another 9:30 appointment on October 3, this time before Morawetz J. He set the schedule for delivery of facta for the motions on October 17.

[26] I set out this procedural history in some detail in order to highlight the extent to which everything in this case has been in dispute – both between the parties, as well as between their counsel. It informs my decision here.

Discussion:

EBF’s motion for judgment

[27] EBF began this application simply by claiming payment on a promissory note and the security granted to support it. As I have said, it also sought and obtained an ex parte order for a Mareva injunction against the respondent. As is often the case, the Mareva skirmishes have essentially overtaken the underlying lis between the parties and have coloured everything that has transpired in the litigation. One need only consider the procedural history I have set out above to confirm this.

[28] On this motion, EBF seeks judgment for the full amount owing under the note, inclusive of interest. EBF frames its motion as a simple claim on a liquidated debt. That is why, it says, it elected to proceed by application, assuming no material facts were in dispute. It suggests, as a result, no trial is necessary to determine whether the funds are due, and judgment should issue.

[29] That would be correct, if the promissory note were the only issue. It is not.

[30] WHI takes the position that it was always the plan that money owing under the promissory note would be offset by money the applicant owed the respondent under the Services Agreement. It says the applicant owes the respondent more than what the respondent owes the applicant. It says judgment should not be granted in favour of the applicant.

[31] Mr. Rosen, the deponent on behalf of WHI, swears at paragraph 9 of his affidavit of June 13, 2013:

In the latter part of 2007, CRA began disallowing the charitable tax credits claimed by the thousands of participants in the Program. As a result, WHI ceased marketing the Program in late 2008 but continued to administer the Program for existing participants. In the fall of 2009, WHI decided not to proceed further with the Program … At the time WHI ceased marketing the Program, it had earned income in excess of $8,000,000 under the Services Agreement … but had yet to bill EBF for these services. Both WHI and EBF expected at the time that the participants … would be successful in challenging the CRA’s disallowance … and that WHI would then resume marketing the Program and providing fundraising and administrative services to EBF under the Services Agreement, and that EBF’s advance to WHI would be paid off by offsetting the amount owing by WHI against services fees invoiced by WHI to EBF.

[32] EBF responds to the set-off issue, taking the position that equitable setoff is not available against a claim on a bill of exchange. It relies on Dhaliwal v Gulati [^3]in which the court held:

A promissory note is a negotiable instrument governed by s. 4 of the Bills of Exchange Act, R.S.C. 1985, c. B-4, and the right of equitable set-off cannot be asserted against a claim being made pursuant to a promissory note.

[33] EBF reasons that since the promissory note is a bill of exchange, no equitable setoff is available. I am not, however, persuaded WHI’s claim for setoff is a claim for equitable setoff. As I read the affidavit, it seems to suggest a contractual basis for its setoff claim.

[34] It appears that from the beginning of this proceeding WHI has raised the issue of contractual legal setoff against EBF’s claim for payment under the promissory note and its security. One of the problems here is that the rules do not really permit a “counter-application”, in the same way as a defendant can deliver a defence and counterclaim in response to a statement of claim. In retrospect, it would have been more sensible for EBF to have started the proceeding by statement of claim. Then, WHI could have delivered a proper statement of defence and counterclaim clearly delineating the legal issues in dispute and setting out clearly the factual foundation for it position. Campbell J described this case as a situation with highly disputed facts in a most unusual and atypical business context where there appears to be very few assets to carry on the litigation and with little prospect in the near future of recovery for anyone. I agree with his assessment.

[35] It seems to me it is inappropriate to grant judgment in these circumstances. Given the highly disputed facts, it is not a case for summary judgment. The issue of set-off is significant. Oral evidence will be necessary to determine whether the respondent’s evidence is credible. There are also significant issues of limitation periods which both parties raise. They are best determined at a trial, as well.

[36] I am also troubled by EBF’s pursuing this motion after it assigned all its assets to BPS. In light of the order I made at the commencement of this motion, I have difficulty seeing how EBF actually has standing to seek this relief, since it assigned all its assets, including choses in action, to its assignee BPS. That assignment, of course, includes the assignment of this cause of action and the application itself.

[37] As I see it, all these issues require a trial. In fact, that is what Campbell J’s original endorsement contemplated. Accordingly, there will be a trial of the following issues:

a) The right of BPS as assignee of EBF, to be paid under the terms of the promissory note and GSA and if so in what amount;

b) WHI’s right to claim setoff under the terms of the Services Agreement, or otherwise, and if so, in what amount.

c) The affidavits delivered to date will constitute the pleadings, with the cross-examinations on them to constitute discoveries.

d) If BPS wishes to file further affidavit material to raise any issue that pertains to its particular and independent position in this lawsuit, it will do so within 60 days of the release of these reasons. If WHI wishes to respond, it will do so within 15 days of receiving BPS’ affidavit. Those affidavits will form part of the pleadings.

e) Any cross-examinations of the affiants on the affidavits referred to in sub-paragraph (d) above will be concluded within 45 days of delivery of the affidavits.

[38] Once all the cross-examinations are complete, the parties will arrange a 9:30 appointment before Morawetz J. to schedule the trial and any settlement conference he deems advisable. They will file a joint trial requirements summary at the 9:30 so the court will have a clear idea of how long the trial is anticipated to require.

WHI’s motion for security for the damages undertaking and for security for costs:

[39] The respondent seeks security for the damages undertaking EBF made as part of its application for the Mareva injunction. To support its position WHI points to Campbell J’s comment in his endorsement of July 4, 2013 in which he said:

Based on the material before me and the submissions of counsel I am satisfied that the issue of the hollowness of the undertaking as to damages should have been disclosed to Justice Newbould.

[40] Campbell J went on to say, however, that “Counsel for the applicant has now provided some information to satisfy the undertaking issue.” It is not clear from his reasons what that information was. It does, however, persuade me that the issue was canvassed, and the court was satisfied the undertaking might be sufficient. I am not prepared to revisit this issue, particularly in light of the fact EBF has assigned this action to BPS, which appears to have some assets. BPS, of course, has yet to participate in this application, or provide any information about its financial circumstances. It seems to me it should do so.

[41] Until then, however, I am not prepared to make the order requested, particularly since I have no real evidence to quantify WHI’s damages. The damages undertaking is to provide comfort to a respondent on an injunction that it will recover any damages it suffers as a result of the injunction being improperly granted. Without evidence of those potential damages, I am not prepared to grant the relief sought.

[42] WHI also seeks an order for security for costs, quite apart from its request for security for the damages undertaking. It quantifies its costs at a total of about $90,000 from the commencement of the proceeding to the conclusion of trial.

[43] Rule 56.01(1)(d) permits the court to make an order for security for costs where it appears that the applicant is a corporation and there is good reason to believe that the applicant has insufficient assets in Ontario to pay the costs of the respondent.

[44] Here, I have no evidence from the applicant’s assignee, BPS, concerning its assets in Ontario. The evidence before me is in the form of a letter from applicant’s counsel, setting out some information about BPS’ finances. The letter is not admissible evidence of the truth of its content. It seems to me, therefore, the motion for security for costs is premature, because I have no real evidence about the financial circumstances of BPS.

[45] In order to engage the rule, I must first have sufficient evidence to show BPS has insufficient assets in Ontario to satisfy a costs award. If that evidence were before the court, it would then fall to BPS to show either that it does have sufficient assets, or that it is impecunious, in the sense that it cannot raise the security for costs from its shareholders.[^4] Since I have none of that evidence, the motion must be dismissed. I dismiss it, however, without prejudice to its being renewed at a later date on a better evidentiary basis.

Decision:

[46] Given the complexity of the respondent’s position and claim for setoff, combined with each party’s assertion of a limitation period defence, I agree with Campbell J`s original assessment that the issues here require a trial. This is not a suit that can be resolved on a written record. There are significant issues of credibility that cannot be resolved on motion. A trial of the issues is necessary.

[47] Order to go:

a) The motion for judgment on the promissory note is dismissed. A trial of the issues is necessary;

b) The motion for security for costs and for security for the damages undertaking is dismissed, without prejudice to their being renewed on a better evidentiary basis;

c) No costs of either motion.

[48] There will be a trial of the following issues:

a) The right of BPS, as assignee of EBF, to be paid under the terms of the promissory note and GSA and if so in what amount;

b) WHI’s right to claim setoff under the terms of the Services Agreement, or otherwise, and if so, in what amount.

c) Subject to (d), below, the affidavits delivered to date will constitute the pleadings, with the cross-examinations on them to constitute discoveries.

d) If BPS wishes to file further affidavit material to raise any issue that pertains to its particular and independent position in this lawsuit, it will do so within 60 days of the release of these reasons. If WHI wishes to respond, it will do so within 15 days of receiving BPS’ affidavit. Those affidavits will also form part of the pleadings.

e) Any cross-examinations of the affiants on the affidavits referred to in sub-paragraph (d) above will be concluded within 45 days of the affidavits being delivered.

[49] Once all the cross-examinations are complete, the parties will arrange a 9:30 appointment before Morawetz J. to schedule the trial and any settlement conference he deems useful. The parties will file a joint trial requirements summary at the 9:30 so the court will have a clear idea of how long the trial is anticipated to require.

MESBUR J.

Released: 20131122

[^1]: Endorsement of Campbell J dated July 4, 2013, 2013 ONSC 4557

[^3]: [2012] O.J. No. 6413 (S.C.J.)

[^4]: Georgian Windpower Corp. v. Stelco Inc. 2012 CarswellOnt 1254 (S.C.J. – Comm. List)