SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Sprinkles Cupcakes, Inc.

v.

Dlish Cupcakes Inc. and Manuel Rodriguez, also known as Verge Manuel

BEFORE: MASTER R.A. MUIR

COUNSEL: Vincent Man for the defendants Adam Bobker and Amrita Singh for the plaintiff

REASONS FOR DECISION

[1] The defendants bring this motion 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 defendants take the position that the plaintiff should be required to post security for costs as it is ordinarily resident outside of Ontario. The plaintiff is opposed to the relief sought by the defendants.

[2] The plaintiff is a Texas corporation with its head office in California. It operates a number of retail cupcake outlets. It has no assets in Ontario or elsewhere in Canada. There is no issue about this.

[3] In its statement of claim, the plaintiff alleges, among other things, that the defendants have violated the plaintiff’s rights under the Trade-marks Act, R.S.C. 1985, c. T-13 and the Copyright Act, R.S.C. 1985, c. C-42. Specifically, the plaintiff alleges that the defendants have unlawfully copied the look and design of the plaintiff’s products and retail operations in connection with certain cupcake outlets the defendants operate in Canada. The defendants deny the plaintiff’s allegations.

[4] 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.

[5] 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.).

[6] These are the factors and principles I have applied in determining the issues on this motion. 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 this is to make the order that is just in all of the circumstances. See Hallum at paragraph 10.

[7] It is clear that the defendants have met their initial onus. The plaintiff is based in California. It has no presence in Ontario or elsewhere in Canada. As I have said, there is no dispute about this.

[8] 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. The plaintiff takes this position for two reasons. First, the evidence from the President of the plaintiff is that the plaintiff operates 11 stores in the United States and is soon expanding to the Middle East. It sells over eight million cupcakes each year. It apparently has millions of dollars in assets, the total of which exceeds its liabilities by an amount greater than the defendants seek in security. It also generates positive cash flow.

[9] Second, the plaintiff argues that any costs award the defendants may obtain against the plaintiff can easily be enforced in California where its assets are located. California is a reciprocating jurisdiction with Ontario. I note that the only evidence before the court on this issue confirms the plaintiff’s position. For the purposes of this motion, I accept that any costs order in favour of the defendants in this proceeding can be quickly and easily enforced in California, assuming the plaintiff has sufficient assets to pay the amounts awarded.

[10] The difficulty I have with the plaintiff’s evidence is that no particulars of its assets have been provided. The evidence from the plaintiff simply amounts to bald statements from the President of the plaintiff that it has assets in California sufficient to pay a costs order. No financial statements have been provided. No bank statements have been produced. I do agree with the plaintiff that the level of particularity required in the circumstances of this motion is not as great as may be required when a plaintiff is attempting to show impecuniosity. I also accept that there is evidence from which the court may be able to infer that the plaintiff is possessed of significant assets. However, in my view something more than mere assertions from an officer of a non-resident plaintiff is necessary regardless of what the court may be able to infer from a description of the plaintiff’s operations generally. Some detail and back-up should be provided. It is not the responsibility of the defendants to buttress the evidence of the plaintiff. Moreover, in most situations, a defendant would have no knowledge of the financial condition of a plaintiff. That information is usually within the knowledge of the plaintiff. As was stated in Bruno, cited above, the decision by a defendant not to cross-examine does not convert insufficient evidence into sufficient evidence. In my view, the plaintiff has not, on a balance of probabilities, met its burden in this regard.

[11] The merits of an action are usually an appropriate consideration on a motion for security for costs. However, on a motion under Rule 56.01(1)(a) the importance of the merits is minimal especially when a plaintiff is not arguing impecuniosity, as is the situation here. In any event, this action is at a very early stage. It appears that no documentary or oral discovery has taken place. The plaintiff’s allegations have not been tested in any way. I am simply unable to come to any conclusions with respect to the merits of this claim. In my view, they are a neutral factor on this motion.

[12] For these reasons, I have therefore concluded that it is just in the circumstances of this action that an order for security for costs be made. The plaintiff does not suggest that such an order would prejudice the plaintiff in any way. It will not be deprived of its ability to pursue this claim. Of course, it must also be remembered that an order for security for costs is not the same as a costs order. If the plaintiff is successful at trial, it will be entitled to a return of the security posted.

[13] I have reviewed and considered the defendants’ draft bill of costs. They seek $140,000.00 to the end of the trial. In my view, the costs they are seeking are excessive for an action of this nature. The issues, at present, do not appear to involve significant complexity. The time estimates seem quite generous. Time is being claimed for two counsel for most tasks. Costs are also sought for this motion and other motions that may or may not take place. Given these factors, it is my view that the appropriate quantum of security is closer to the amount of $40,000.00 suggested by the plaintiff. I have also concluded that fairness requires that the security be posted in stages, in accordance with the court’s customary practice. Of course, the defendants are always able to move to vary the amount of security under Rule 56.07 should the amount posted prove to be insufficient.

[14] Success on this motion has been somewhat divided. The defendants were successful in obtaining an order that security be posted but the amount of security I have ordered is much less than the defendants were asking for. Given this, both counsel agree that the costs of this motion should be payable in the cause. I agree as well. The defendants’ costs outline seeks costs of $5,169.75. This figure appears to be somewhat excessive for a motion of this nature and level of complexity. In my view, it is fair and reasonable that the costs of this motion be fixed in the amount of $4,000.00, inclusive of HST and disbursements, payable in the cause.

[15] I therefore order as follows:

(a) the plaintiff shall post security for the costs of the defendants in the total amount of $60,000.00;

(b) the plaintiff shall post the amount of $20,000.00 by April 5, 2013; a further $20,000.00 within 30 days after this action is set down for trial; and, a further $20,000.00 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 defendants or the court; and,

(d) the costs of this motion are hereby fixed in the amount of $4,000.00, inclusive of HST and disbursements, payable in the cause.

February 5, 2013

Master R.A. Muir