SUPERIOR COURT OF JUSTICE - ONTARIO

RE: V. Vinokur Foundation in Support of Culture and Arts

v.

Mark Lathem, Litigation Administrator for the Estate of Oleg Fraev, Vladislav Moskalev and Snowview Bancorp Inc.

BEFORE: MASTER R.A. MUIR

COUNSEL: Krista Chaytor and Rachel Goldenberg for the plaintiff
David Taub and Barbara Green for the defendant Snowview Bancorp Inc.
Andrea Sanche and Dana Lue, student at law, for the defendant Vladislav Moskalev

REASONS FOR DECISION

[1] There are three motions before the court. The defendants Snowview Bancorp Inc. (“Snowview”) and Vladislav Moskalev (“Moskalev”) bring motions for an order requiring the plaintiff to post security for costs pursuant to Rule 56.01(1)(a) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”). The moving defendants take the position on these motions that the plaintiff should be required to post security for costs as it is ordinarily resident outside of Ontario.

[2] Snowview brings a further motion for confidentiality and sealing orders in respect of a certain document listing the names of various individuals who Snowview alleges were investors in the mortgage that forms part of the subject matter of this action.

[3] The plaintiff is mostly opposed to the relief sought by the Snowview and Moskalev on the security for costs motions. The confidentially motion was largely resolved prior to today.

BACKGROUND

[4] The plaintiff is a not for profit corporation located in Russia. It has no assets in Ontario or elsewhere in Canada.

[5] The defendant Mark Lathem, Litigation Administrator for the Estate of Oleg Fraev (the “Estate”) is the owner of a property located at 59 Anglewood Court in Vaughan, Ontario (the “Property”).

[6] Moskalev lives in Vaughan, Ontario. In 2011 he was appointed Chairman of the Board of Trustees of the plaintiff. The plaintiff alleges that between December 2011 and August 2012, Moskalev fraudulently misappropriated more than $3,700,000.00 from the plaintiff. The plaintiff further alleges that Moskalev used a portion of the misappropriated funds as consideration for the transfer of a mortgage registered against title to the Property from the Toronto-Dominion Bank (“TD Bank”) to himself. The plaintiff goes on to allege that on the same day as the mortgage was transferred from TD Bank to Moskalev, it was transferred again to the defendant Snowview, for no consideration or for inadequate consideration. Although the statement of claim does not specifically allege fraud on the part of Snowview, it can certainly be inferred from the allegation that it has obtained the benefit of the mortgage for inadequate consideration and the plaintiff’s demand that the mortgage be transferred to it. The defendants deny these allegations.

[7] This action was commenced on October 24, 2012. On the same day, the plaintiff brought a motion without notice to obtain an order granting it leave to issue a certificate of pending litigation (“CPL”) over the Property. That motion was granted by Master Graham and the CPL was issued on November 14, 2012.

[8] Moskalev and Snowview have both brought motions to discharge the CPL. The plaintiff has served responding material in opposition to those motions. A telephone case conference was held on December 13, 2012 at which time I ordered that those motions would be heard by me on May 2, 2013.

[9] A related proceeding is pending in Newmarket. That proceeding was commenced by Moskalev against the Estate seeking repayment of what Moskalev alleges was a loan made by him to Oleg Fraev (“Fraev”) to assist with Fraev’s purchase of the Property in 2011. Various issues have arisen in connection with that action including whether Snowview should be made a party to that action, whether a receiver should be appointed and whether the Estate should be permitted to bring the mortgage into good standing (and, if so, what amount is required to do so).

SECURITY FOR COSTS

[10] The defendants move under Rule 56.01(1)(a), which provides as follows:

56.01 (1) 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.

[11] The approach to be followed by the court when determining motions of this nature is summarized in my decision in Sadat v. Westmore Plaza Inc., 2013 ONSC 469 (Master) at paragraphs 20 and 21, which read as follows:

20. The analysis the court is to engage in when determining a motion for security for costs is summarized in Websports Technologies Inc. v. Cryptologic Inc., [2003] O.J. No. 5455 (S.C.J. – Master). At paragraphs 6 and 7 of that decision Master Haberman makes the following observations which I find to be applicable to the motions before me:

6 The law in this area is fairly clear. Both counsel agree that the court is required to follow a 2-step process when dealing with a Rule 56.01 motion. The initial onus is on the moving party, to demonstrate that the responding party appears to fit within one of the subrules of 56.01(1) (see Hallum v. Canadian Memorial Chiropractic College (1978), 1989 4354 (ON SC), 70 O.R. (2d) 119). The moving party is not required to go so far as to prove that the situation, in fact, meets the criteria of the subsection. They need only demonstrate that there is good reason to believe that that is the case (see Warren Industrial Feldspar C. Ltd. V. Union Carbide Canada Ltd. et al., 1986 2683 (ON SC), [1986] O.J. No. 2364).

7 If that is accomplished, the onus shifts to the responding party. They can either demonstrate that they are impecunious and then ask the court to make such order as is just in the circumstances or prove that they do have sufficient assets to respond to a cost order. It is agreed that that onus only arises after the moving party has satisfied the first part of the test.

21. The applicable principles are set out in full detail in Master Glustein’s decision in Coastline Corp. v. Canaccord Capital Corp., 2009 21758 (ON SC), [2009] O.J. No. 1790 (S.C.J. – Master). At paragraph 7 of that decision Master Glustein states as follows:

7 I apply the following legal principles:

(i) The initial onus is on the defendant to satisfy the court that it “appears” there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56.01 (Hallum v. Canadian Memorial Chiropractic College, (1989), 1989 4354 (ON SC), 70 O.R. (2d) 119 (H.C.J.) at 123);

(ii) Once the first part of the test is satisfied, “the onus is on the plaintiff to establish that an order for security would be unjust” (Uribe v. Sanchez (2006), 33 C.P.C. (6th) 94 (Ont. S.C.J. – Mast) (“Uribe”) at para. 4);

(iii) The second stage of the test “is clearly permissive and requires the exercise of discretion which can take into account a multitude of factors”. The court exercises a broad discretion in making an order that is just (Chachula v. Baillie 2004 27934 (ON SC), (2004), 69 O.R. (3d) 175 (S.C.J.) at para. 12; Uribe, at para. 4);

(iv) The plaintiff can rebut the onus by either demonstrating that:

(a) the plaintiff has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation,

(b) the plaintiff is impecunious and that justice demands that the plaintiff be permitted to continue with the action, i.e. an impecunious plaintiff will generally avoid paying security for costs if the plaintiff can establish that the claim is not “plainly devoid of merit”, or

(c) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to meet a costs order, the plaintiff must meet a high threshold to satisfy the court of its chances of success;

(See Willets v. Colalillo, [2007] O.J. No. 4623 (S.C.J. – Mast.) at paras. 46, 47, and 55; Uribe, at para. 5; Zeitoun v. Economical Insurance Group 2008 20996 (ON SCDC), (2008), 91 O.R. (3d) 131 (Div. Ct.) at para. 50; Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP, [2007] O.J. No. 4096 (S.C.J. – Mast.) (“Bruno”) at para. 35);

(v) Merits have a role in any application under Rule 56.01, but in a continuum with Rule 56.01(1)(a) at the low end (Padnos v. Luminart Inc., 1996 11781 (ON SC), [1996] O.J. No. 4549 (Gen. Div.) (“Padnos”), at para. 4; Bruno, at para. 36);

(vi) The court on a security for costs motion is not required to embark on an analysis such as in a motion for summary judgment. The analysis is primarily on the pleadings with recourse to evidence filed on the motion, and in appropriate cases, to selective references to excerpts of the examination for discovery where it is available (Padnos, at para. 7; Bruno, at para. 37);

(vii) “If the case is complex or turns on credibility, it is generally not appropriate to make an assessment of the merits at the interlocutory stage. The assessment of the merits should be decisive only where (a) the merits may be properly assessed on an interlocutory application; and (b) success or failure appears obvious” (Wall v. Horn Abbott Ltd., 1999 7240 (NS CA), [1999] N.S.J. No. 124 (C.A.) at para. 83);

(viii) The evidentiary threshold for impecuniosity is high, and “bald statements unsupported by detail” are not sufficient. The threshold can only be reached by “tendering complete and accurate disclosure of the plaintiff’s income, assets, expenses, liabilities and borrowing ability, with full supporting documentation for each category where available or an explanation where not available” (Uribe, at para. 12; Shuter v. Toronto Dominion Bank, 2007 37475 (ON SC), [2007] O.J. No. 3435 (S.C.J. – Mast.) (“Shuter”) at para. 76);

(ix) To meet the onus to establish impecuniosity, “at the very least, this would require an individual plaintiff to submit his most recent tax return, complete banking records and records attesting to income and expenses” (Shuter, at para. 76);

(x) A corporate plaintiff who claims impecuniosity must demonstrate that it cannot raise security for costs from its shareholders and associates, i.e. it must demonstrate that its principals do not have sufficient assets (Smith Bus Lines Ltd. v. Bank of Montreal, (1987), 1987 4190 (ON SC), 61 O.R. (2d) 688 (H.C.J.) at 705). Evidence as to the “personal means” of the principals of the corporation is required to meet this onus (Treasure Traders International Co. v. Canadian Diamond Traders Inc., [2006] O.J. No. 1866 (S.C.J.) (“Treasure Traders”), at paras. 8-11). A corporate plaintiff must provide “substantial evidence about the ability of its shareholders or others with an interest in the litigation to post security”. “A bare assertion that no funds are available” will not suffice. (1493677 Ontario Ltd. v. Crain, [2008] O.J. No. 3236 (S.C.J. – Mast.) at para. 19);

(xi) Consequently, full financial disclosure requires the plaintiff to establish the amount and source of all income, a description of all assets including values, a list of all liabilities and other significant expenses, an indication of the extent of the ability of the plaintiffs to borrow funds, and details of any assets disposed of or encumbered since the cause of action arose (Morton v. Canada 2005 6052 (ON SC), (2005), 75 O.R. (3d) 63 (S.C.J.) at para. 32);

(xii) Because the plaintiff has the onus to establish impecuniosity, a defendant “can choose not to cross-examine if the plaintiff fails to lead sufficient evidence”. The decision not to cross-examine does not convert insufficient evidence into sufficient evidence (Bruno, at pars. 27-28; Shuter, at paras. 59 and 71); and

(xiii) When an action is in its early stages, an installment (also known as “pay-as-you-go”) order for security for costs is usually the most appropriate (Bruno, at para. 65; Hawaiian Airlines, Inc. v. Chartermasters Inc., et al., (1985), 1985 2155 (ON SC), 50 O.R. (2d) 575 (S.C.O. – Mast.).

[12] These are the factors and principles I have applied in determining the issues on the security for costs motions. Overall, I am guided by the central principle that an order for security for costs is discretionary. The role of the court on motions such as these is to make the order that is just in all of the circumstances. See Hallum at paragraph 10.

[13] It is clear that the moving defendants have met their initial onus. The plaintiff is based in Russia. It has no presence in Ontario. There is no dispute about this.

[14] The onus then shifts to the plaintiff to establish that in the circumstances of this action, the court should exercise its discretion and decline to make an order for security for costs. Often a plaintiff will attempt to demonstrate that it is impecunious or that it actually does have assets in Ontario. The plaintiff on this motion has not suggested that such is the case. In fact, the evidence shows that the plaintiff has a bank account in Russia with a balance of over US $9,000,000.00. The plaintiff has provided no evidence to suggest that it has any assets in Ontario or elsewhere in Canada.

[15] Nevertheless, the plaintiff argues that only a nominal order for security for costs should be made in favour of Snowview and a significantly reduced amount should be required to be posted in favour of Moskalev.

[16] First, the plaintiff points out that Snowview is claiming the legal costs of its defence of this action as a portion of the amount it alleges is owing on its mortgage. The plaintiff argues that if Snowview is successful in recovering those amounts from the land it should not be permitted to collect the same amounts from the plaintiff in this action. The plaintiff submits that this motion is premature and should wait until after that issue is resolved in the Newmarket proceeding.

[17] I do not accept this argument. It is far from clear that there will be sufficient equity in the Property to cover all of Snowview’s costs. I do not see how the fact that Snowview may or may not be able to recover its costs from another source in any way relieves the plaintiff of its potential obligation to pay costs in this proceeding if ordered to do so by the court. It is true that Snowview should not be permitted to double collect. However, I am sure that any party who agrees to pay Snowview’s significant costs of this action would almost certainly insist on an assignment of Snowview’s rights against the plaintiff to recover those costs. Furthermore, there is simply no prejudice to the plaintiff. An order requiring a plaintiff to post security for costs is not a costs order. If the plaintiff is successful, or if other reasons exist that persuade a court not to award costs to Snowview, the plaintiff will be entitled to a return of the funds it has posted, along with accumulated interest. It must be remembered that this is not a situation where a plaintiff will be denied its right to pursue a meritorious claim because of an order for security for costs. The plaintiff in this action appears to be perfectly capable of posting the security requested.

[18] I also see no reason to delay these motions for security for costs until after the Newmarket issues have been dealt with. I do not know whether the court will decide the issues relating to the amount owing on Snowview’s mortgage at the next scheduled appearance in Newmarket on February 22, 2013. The motions to discharge the CPL are scheduled for May 2, 2013. A CPL is a significant encumbrance on title to any property. Court dates are scarce. The CPL discharge motions should not be delayed by what may or may not take place in Newmarket.

[19] Second, the plaintiff argues that it should not be required to post security for costs in respect of an interlocutory motion, such as a motion to discharge a CPL. It takes the position that security for costs should only be required for steps that are reasonable and necessary, such as pleadings, discovery or a pre-trial. The plaintiff notes that the outcome of any interlocutory motion is uncertain. The plaintiff also submits that the defendants are protected when it comes the costs of interlocutory motions by Rule 57.03 which provides that the court should generally fix the costs of interlocutory motions and order that they be paid within 30 days. If they are not paid in a timely manner, the court may then make an order dismissing the plaintiff’s action.

[20] In support of this position, the plaintiff relies on the decision of Master Dash in Uribe at paragraph 19, the decision of Master Graham in Environmental Health Foundation v. MacGregor, 2010 ONSC 215 (Master) at paragraph 6 and the decision of Master Short in Moosa v. Hill Property Management Group Inc., 2010 ONSC 13 (Master) at paragraph 121. To the extent that those decisions stand for the proposition that security for costs should never be ordered in respect of pending interlocutory motions, I respectfully disagree with my colleagues. First, there is nothing in the security for costs rule itself that limits security for costs in the manner suggested by the plaintiff. Second, the fact that a court may dismiss a plaintiff’s action if it fails to comply with a costs order from an interlocutory motion does not provide a defendant with any security for the payment of its costs. A defendant may no longer have to face a claim from a non-resident plaintiff but it is still left without an effective process to collect the costs it is owed. Finally, the moving defendants’ motions to discharge the CPL are not speculative. They have been brought and responded to. They are scheduled to be heard by me on May 2, 2013. Moreover, they are not simple discovery motions of the kind referred to by Masters Dash, Graham and Short in the decisions relied upon by the plaintiff. They will be relatively complex, somewhat lengthy and expensive. I do not see the fact that the outcome of the CPL discharge motions is uncertain as being a relevant factor. The outcome of a trial is usually uncertain but that does not prevent the court from making an order for security for costs that covers the trial portion of the proceeding.

[21] In my view, it is appropriate to order security for costs in respect of interlocutory motions in the appropriate circumstances. This is especially so when the motions are of the nature and scope of the defendants’ motions to discharge the plaintiff’s CPL. Rule 56.01 gives the court a broad discretion to make the order that is just in the circumstances. I see no reason why such an order cannot include security in respect of interlocutory motions. Of course, if the plaintiff is successful on the CPL discharge motions it can move to vary the security for costs order under Rule 56.07.

[22] The plaintiff also takes issue with the quantum of costs being sought by the defendants. I have reviewed the pleadings, the evidence filed and the draft bills of costs provided by Snowview and Moskalev. The issues in this action would appear to be moderately complex. There are several parties involved. The plaintiff and many of the relevant documents are in Russia. The action involves a significant amount of money and will require the examination of circuitous financial transactions. However, it is my view that the substantial amounts sought by the moving defendants are excessive in the circumstances of this action, especially with respect to the motions to discharge the CPL.

[23] Snowview is only seeking security for costs for its CPL discharge motion. It suggests an amount of $69,000.00 on a substantial indemnity basis is appropriate. In my view, this amount is excessive for a one day motion. The law on such motions is well settled. The motions will largely turn on an examination of the facts. In my view, a fair and reasonable costs order on such a motion would be in the range of $35,000.00.

[24] Moskalev seeks security for costs for the entire action on a partial indemnity basis. In my view, his costs outline is also inflated. His role on the motions to discharge the CPL would appear to be somewhat less involved than that of Snowview. In my view, the approximately $23,000.00 Moskalev is seeking should also be reduced by half. The items in Moskalev’s bill of costs relating to the costs of his security for costs motion and other unspecified motions should be deleted. I am satisfied, however, that the balance of the amounts claimed for pleadings, discovery, mediation, pre-trial and trial are generally fair and reasonable in the circumstances. I have therefore concluded that a total security for costs order in favour of Moskalev in the amount of $100,000.00 is appropriate in the circumstances. However, this amount will be payable in stages as set out below.

[25] I wish to make a final observation about the merits. The merits of a claim are an appropriate consideration on motions for security for costs. Where a plaintiff has demonstrated impecuniosity a low threshold applies and it need only show that its claim is not plainly devoid of merit. In all other circumstances, a plaintiff must show that its claim has a good chance of success. See Zeitoun at paragraphs 49 and 50.

[26] However, a motion for security for costs should not be transformed into a motion for summary judgment. If an action appears complex or turns on issues of credibility, an assessment of the merits is not appropriate. See Padnos at paragraphs 6-9. I am also of the view that, as a general rule, any determination of issues involving serious allegations in the nature of fraud and misappropriation of funds should only be made on the basis of a full evidentiary record.

[27] This action is at a very early stage. Serious allegations have been made but none have been tested by cross-examination or on discovery. The issues involved appear to be moderately complex. In my view, the merits are a neutral factor on these motions. I am certainly unable to conclude that the plaintiff’s claim has a good chance of success.

CONFIDENTIALITY ORDER

[28] Snowview seeks an order that a certain document listing the names of various individuals who Snowview alleges were investors in the mortgage be treated as confidential, sealed and not form part of the public record. None of the parties oppose such an order as long as the order does not restrict their ability to include the document in any future material they may wish to file with the court. I have reviewed the document in question and the evidence filed by Snowview in support of its motion. The document contains the names and certain financial information relating to non-parties against whom no allegations of improper conduct have been made. Those individuals would have a reasonable expectation of privacy over their personal financial information. I am satisfied, on balance, that it is appropriate that a sealing order be made.

[29] The plaintiff seeks its costs of the confidentiality motion. Until the day before this motion was argued, Snowview took the position that the document could be reviewed by Ms. Chaytor only and that she could not disclose the contents of the document to the plaintiff. Although the document is being relied upon by the defendant in connection with its motion to discharge the CPL, it insisted that the prohibition on the plaintiff seeing the document remain in place throughout the course of this action. As mentioned above, it was only on the eve of the hearing that Snowview abandoned that position. For this reason, the plaintiff argues that it is entitled to its costs of the confidentiality motion.

[30] Snowview argues that the confidentiality motion was really just a part of its motion to discharge the CPL and that any costs order should be reserved until that motion is heard. I do not agree. In my view, the confidentiality issue had to be resolved in advance of the motion to discharge the CPL. Ms. Chaytor had to know whether she would be permitted to disclose the document to the plaintiff as part of her preparation for the discharge motion. It would accomplish nothing to decide the confidentiality issue at the same time as the discharge motion. In my view, given the position that Snowview maintained up until the day before the argument of this motion, the plaintiff is entitled to its costs of the confidentiality motion payable within 30 days in accordance with Rule 57.03(1).

[31] However, in my view the costs requested by the plaintiff of approximately $11,000.00 are excessive in the circumstances. The issues on the confidentiality motion were not complex and ultimately very little court time was required in order to dispose of the matter. A costs order closer to the $4,000.00 range suggested by Snowview is more appropriate in the circumstances. In my view, it is fair and reasonable that Snowview pay the plaintiff’s costs of the confidentiality motion on a partial indemnity basis, fixed in the amount of $5,000.00.

ORDER

[32] I therefore order as follows:

(a) the plaintiff shall post security for the costs of Snowview in the amount of $35,000.00 by March 1, 2013;

(b) the plaintiff shall post security for the costs of Moskalev in the amount of $11,500.00 by March 1, 2013; a further $29,500.00 within 30 days after the release of the court’s decision on the CPL discharge motions or by June 3, 2013, whichever is later; a further $29,500.00 within 30 days after this action is set down for trial; and, a further $29,500.00 60 days before any scheduled trial date;

(c) these amounts shall be payable in cash or by way of an irrevocable stand-by letter of credit from a Canadian chartered bank, in a form approved by the moving defendants or the court;

(d) the confidential affidavit of Myer Betel sworn November 13, 2012, including the exhibit, shall be treated as confidential, sealed and not form part of the public record but this order shall not restrict any party from filing an unsealed copy of the exhibit with the court as part of any current or future proceeding in this action;

(e) Snowview shall pay the plaintiff’s costs of the confidentiality motion fixed in the amount of $5,000.00, inclusive of HST and disbursements, payable within 30 days; and,

(f) if the parties are unable to agree on the issue of the costs of the security for costs motions, they may make brief submissions in writing by no later than February 11, 2013.

January 31, 2013

Master R.A. Muir