SUPERIOR COURT OF JUSTICE – ONTARIO
COURT FILE NO.: CV-14-1475-00
DATE: 2015 11 18
RE: General Products Inc., o/a Cabana Coast v.
Actiwin Company Limited
BEFORE: Lemon J.
COUNSEL:
G. Perinot, for the Plaintiff
A. Gaertner, for Defendant
HEARD: October 9, 2015
E N D O R S E M E N T
The Issue
[1] Actiwin Company Limited (“Actiwin”) moves for an order requiring General Products Inc. (“GP”) to post security for costs for this action to the end of trial in the amount of $215,065.74.
[2] Actiwin submits that GP is a corporation and there is good reason to believe that it has insufficient assets in Ontario to pay costs. GP, however, responds that it has sufficient assets to pay those costs and ought not to be required to post security.
Background
[3] The details of the litigation are important to understand the claims and counterclaims of the parties. The clash of claims underlies one of the issues related to this order.
[4] GP is a vendor of patio furniture; it sells directly to end consumers. Actiwin is a manufacturer of patio furniture. GP has been buying patio furniture from Actiwin since 2004.
[5] GP claims that it would generally place an order with Actiwin each fall for patio furniture for the following year. After receiving this order, Actiwin would confirm that it could fulfill the order and invoice GP for the patio furniture. GP would then issue a letter of credit to pay for the goods. GP would purchase additional furniture and cushions throughout the year, which it paid for by cheque.
[6] Actiwin would deliver the furniture to GP in late winter or early spring. It would also send data, descriptions, and images of the furniture which GP could use for promotional material. Finally, Actiwin provided a manufacturer’s warranty for the end consumer.
[7] GP claims that it placed orders with Actiwin in the fall of 2013. These orders were confirmed by Actiwin, which provided invoices to GP. Actiwin also provided images of the furniture for GP to use in its promotional material. GP commissioned the production of 20,000 promotional booklets using the images for advertising for the upcoming season.
[8] In February 2014, Actiwin advised GP that it would not be fulfilling any of the orders and that it was terminating its business arrangement with GP. Actiwin also asked GP to cease using the promotional images it had previously provided. In March 2014, Actiwin told GP that the patio furniture it had sold to GP would not be covered by the manufacturer’s warranty.
[9] GP pleads that it is in possession of $450,000 worth of incomplete patio sets which will have to be sold at a significant discount because of Actiwin’s termination of their sourcing arrangement. GP estimates this will result in lost profits of $450,000 or more.
[10] GP therefore asks for $3,000,000 in damages for lost profits, consequential damages and loss of goodwill; $500,000 in punitive and exemplary damages; a declaration that GP is entitled to use the images provided by Actiwin and a declaration that the furniture supplied to GP by Actiwin will be covered by the manufacturer’s warranty.
[11] In response, Actiwin claims that GP used the images provided by Actiwin to sell knock-off goods. Actiwin pleads that it was a term of their arrangement that GP would not take part in selling knock-off goods. As such, Actiwin was entitled to terminate the contract. Actiwin claims that their consent to GP’s use of the images was revocable at will.
[12] Actiwin says that the invoices provided prior to the receipt of letters of credit were ‘pro forma’, and only provided so that GP could obtain the necessary letters of credit. Authentic invoices for goods were not provided until after Actiwin had received a letter of credit. Since GP failed to provide a letter of credit for the 2014 order, it was never actually invoiced.
[13] Finally, Actiwin claims that at the time it terminated the contract, GP owed $224,520.11 from unpaid invoices.
[14] Because of GP’s conduct, Actiwin counterclaims for $224,520.11 in unpaid invoices; a declaration that GP has infringed Actiwin’s copyright to the images; a declaration that GP has infringed Actiwin’s “moral rights” to the images; a declaration that GP passed off knock-off goods under the Trade-Marks Act; an injunction preventing GP from further infringing the rights of Actiwin; $2,000,000 in damages; an accounting of the profits enjoyed by GP as a result of its illegal conduct; aggravated, punitive and exemplary damages in the amount of $1,000,000 for the willful and deliberate infringement of Actiwin’s rights and an order directing GP to deliver or destroy all copies of the images.
Legal Authorities
[15] Rule 56.01(1)(d) of the Rules of Civil Procedure provides that a court, on motion by the defendant in a proceeding, may make such order for security for costs as is just where it appears that the plaintiff is a corporation and there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant.
[16] There is a two-step process under rule 56.01(1)(d). The initial onus is on the defendant to satisfy the court that it “appears” that there is “good reason to believe” that the corporate plaintiff has insufficient assets to satisfy a costs award. It need not go so far as to actually prove that the plaintiff has insufficient assets.
[17] If the defendant satisfies the first stage of the enquiry, the onus switches to the plaintiff to demonstrate that it has sufficient assets in Ontario or a reciprocating jurisdiction to satisfy any order for costs or, alternatively, to satisfy the court that an order for security for costs would be unjust, for example by demonstrating that the plaintiff is impecunious and the action is not plainly devoid of merit: See Health Genetic Center Corp. v. Reed Business Information Ltd., 2014 ONSC 6449.
[18] The plaintiff corporation has a higher onus to demonstrate a sufficiency of assets "by convincing evidence." This includes information and supporting documentation as to the current status of its assets and liabilities, particularly liabilities secured against those assets put forward as available to pay a judgment for costs: See 1731431 Ontario Limited v. Crestwood Apartments et al, 2011 ONSC 6227, at para 29.
[19] Where the plaintiff asserts that it has sufficient assets in Ontario to pay an award of costs, the following factors apply in examining the evidence as to sufficiency of assets:
(a) The court must critically consider the quality as well as the sufficiency of the assets presently held and whether they are bona fide assets of the company;
(b) There must be demonstrated exigible assets. It is insufficient for the plaintiff to show that it is profitable since the focus of the rule is not on income, but rather on the nature and sufficiency of assets;
(c) The court must consider the liabilities of the company as well as its assets and in particular whether the assets to which the defendant is expected to look are secured to another creditor;
(d) The rule does not countenance extensive and speculative inquiries as to the future value and availability of the asset. A mere possibility that the assets may be removed at some future time is not, without more, grounds for security;
(e) The failure of a plaintiff to respond to a defendant’s enquiry as to the availability of assets may raise a doubt as to the existence of assets: see Health Genetic.
[20] Master Pope in Al Masri v. Baberakubona, 2010 ONSC 562, at para. 19, quoting Morton v. Canada, 2005 6052 (ON SC), [2005] O.J. No. 948, at para. 32, described the plaintiff’s financial disclosure as requiring “robust particularity.” It should include 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.
[21] On a motion for security for costs, the court has a broad discretion in deciding whether security for costs is just in the circumstances. The merits of the plaintiff’s case is a relevant factor in the exercise of the court’s discretion to make an order for security for costs. If the plaintiff shows a real possibility of success, then the court may conclude that in the circumstances of the case, justice demands that he or she not be required to post security: see Yazdani v. Ezzati (August 5, 2015), Brampton, CV-14-3239 (Ont. S.C.).
[22] If the plaintiff cannot establish that it is impecunious, but it 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 at trial: See Crestwood Apartments, at para 28.
[23] In Wilkings v. Velocity Group Inc. (2008), 2008 12500 (ON SCDC), 89 O.R. (3d) 751 (Div. Ct.), the Ontario Divisional Court said:
where "the majority of the counterclaim is the equivalent of a defence to the plaintiff's claim . . ." security for costs can be required to be posted by the initiating plaintiff.
[24] Rule 56.04 sets out that the court shall determine the amount and the form of security and the time for paying into court or otherwise giving the required security. Further, Rule 56.07 allows that the amount of security required by an order for security for costs may be increased or decreased at any time.
Positions of the Parties on the Motion
[25] Actiwin points out a number of concerns with respect to GP’s financial circumstances.
[26] There is an outstanding execution registered in favour of the Minister of Revenue in the principal amount of $597,095.87 accruing interest at 5 percent since September 20, 2010.
[27] There are three PPSA security interests registered against GP including one from a 50 percent shareholder of GP who has registered a General Security Agreement against GP’s equipment, inventory, accounts and other assets.
[28] In 2011, GP made a proposal pursuant to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. At that time, it indicated that the Minister of Revenue was an unsecured creditor in the amount of $604,230 and that the same 50% shareholder was a secured creditor to the extent of $1,200,000.
[29] The 2014 GP Financial Statement discloses shareholder loans in the sum of $2,265,606. No documents have been provided by GP to substantiate those loans.
[30] Although GP claims to have upwards of 1.5 million dollars in fully paid patio/outside furniture and accessories in its possession, that value is in unaudited financial statements provided only by management and is set at its cost to GP. Further, GP has failed to provide copies of an inventory list or copies of the respective invoices. It is the position of Actiwin that the value of such inventory should be based on liquidation value rather than an “at cost” basis.
[31] Although GP alleges that it has a bank account of $184,225.46, the only bank statement provided by GP was for a two-week period between April 13 and 27, 2015. Despite being ordered to do so, GP has failed to provide the statements for the period following the 2013 financial statements to date. In GP’s 2014 financial statements, a bank deficit is shown at its year-end.
[32] In response, GP submits that its yearly sales at the outset have been approximately $3,000,000. Its yearly purchases of patio furniture and related accessories averages $2,000,000. It also relies upon the value of its inventory as set out above, and its bank statement of $139,373.18. It points out that it has been in business since 1993. It is a family owned and operated business and its owners intend to pass the business along to the next generation. The history of the business has been to deal with and take care of any liabilities as they come along. Importantly, despite its proposal to reduce its debt to Actiwin under the BIA, GP paid Actiwin the full amount owing.
[33] GP submits that despite whether I am satisfied that its position regarding its assets is correct, I should still consider whether an order for security for costs would be just in the circumstances. I should consider whether GP’s claim is meritorious or has a chance of success. It submits that the claim is both meritorious and has a real chance of success.
[34] Further, GP submits that the claim and counterclaim are inextricably interwoven, and, as a result, an order for security for costs would have the effect of requiring GP to pay security for costs to defend itself from the counterclaim. It should not have to give security for costs as a condition of defending itself.
[35] In the final alternative, it submits that the draft bill of costs is exaggerated and includes amounts that relate to both the claim and counterclaim. It submits that the motion is premature given that examinations for discovery have not yet taken place.
Analysis
[36] I am satisfied that there is good reason to believe that GP has insufficient assets. The answers that have been provided and refused are not the robust particularity that is required. The owner’s view of the value of inventory without supporting documentation is not appropriate. I draw an adverse inference from GP’s failure to provide the information ordered by the Court. I am satisfied that Actiwin has met the first step of the process. On that evidence, I am satisfied that GP does not have sufficient assets to meet a costs order if it is unsuccessful.
[37] GP has not alleged that it is impecunious. It has staked its defence to this motion on its ability to pay costs. I am not satisfied that they have such an ability. However, I agree that, regardless, I must still consider whether an order would be just. At this stage of the proceedings, I cannot tell the strength of GP’s case, but based on what I have, I cannot say that it is devoid of merit. However, I cannot conclude that, in the circumstances of the case, it has such a real possibility of success that justice demands that GP not be required to post security.
[38] I am satisfied that the defence put forward by Actiwin is sufficiently extricably bound that the defence mirrors its own claim. If Actiwin is able to prove its allegations, those allegations will be a good defence to the action. If so, the same evidence and the same findings, by and large, support its counterclaim. At this point in the action, I am satisfied that an order for security for costs will not require GP to post security to defend itself from the counterclaim.
Amount of Security
[39] Actiwin seeks costs through to the end of trial. Orders for security for costs are generally on a step-by-step basis; I see no reason to change that practice here particularly in view of the counter-claim. Any distinction between the defence and counter-claim will become clearer with further investigation.
[40] The Statement of Claim is 11 pages long. The Statement of Defence and Counterclaim is 16 pages long. The reply and defence to counterclaim is 11 pages long and the reply to defence to counterclaim is 2 pages long. In its bill of costs for this order, Actiwin submits that security for costs is necessary in the amount of $16,740 for those 40 pages of pleadings. That amount is preposterous and colours all of the rest of its request.
[41] Actiwin also seeks $14,300 for the security for costs of this motion. Having been successful on the motion, costs will, no doubt, follow after submissions. Now, however, it ought not to form a basis of double counting for the security.
[42] Actiwin submits that it will require the benefit of two experienced lawyers to respond to this significant claim. For now, I am prepared to accept that. However it seeks a further $20,000 in disbursements for an “Expert regarding intellectual property issues”. If two experienced lawyers dealing with this litigation need a further expert opinion in the amount of $20,000, they might consider referring the matter to experienced counsel in the area. That is not an appropriate disbursement at this stage. I am satisfied that a total of $35,000 on a partial indemnity basis to the end of examinations for discovery will amply secure Actiwin’s costs if successful.
Result
[43] GP shall pay $35,000 into court within 30 days failing which its claim is stayed until the funds are paid. Actiwin may move for a further order on new materials after examinations have been completed.
Costs
[44] If Actiwin seeks costs, it should provide its written submissions within the next 15 days. GP shall respond within 15 days thereafter. Each submission shall be no more than three pages in length, not including any bills of costs or offers to settle.
Lemon J.
DATE: November 18, 2015
COURT FILE NO.: CV-14-1475-00
DATE: 2015 11 18
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: General Products Inc., o/a Cabana Coast v. Actiwin Company Limited
BEFORE: Lemon, J.
COUNSEL: W. Levitt, for the Plaintiff
G. Perinot, for the Defendant
ENDORSEMENT
Lemon J.
DATE: November 18, 2015