Court File and Parties

COURT FILE NO.: CV-11-420011 DATE HEARD: June 27, 2016 ENDORSEMENT RELEASED: August 31, 2016

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: ENERWORKS INC. v. GLENBARRA ENERGY SOLUTIONS INC. et al

BEFORE: Master R. Dash

COUNSEL: William A. Chalmers, for the plaintiff David Barbaree, for the defendant Gregory Judd

REASONS FOR DECISION

[1] The defendant Greg Judd (“Judd”) moves pursuant to rule 23.05(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 for costs of the action following service of a notice of discontinuance. Judd seeks costs of $82,804 on a substantial indemnity basis as against the plaintiff because of allegations of fraud made against him.

BACKGROUND

[2] In an earlier action, the plaintiff sued two of the corporate defendants named in this action for unpaid goods and services. It settled with Green Edge Products Inc. (“GEPI”) and received $250,000 in exchange for a release. Justice Perell granted summary judgment on November 29, 2010 against Glenbarra Energy Solutions Inc. (“GESI”) for $448,948. At various examinations in aid of execution of Darren Cooper (“Cooper”), the president and principal of GESI, the plaintiff determined that GESI had no funds to pay the judgment and that there had been transfers of assets, including receivables, among the various corporate entities who are defendants to this action such that at the time that the plaintiff had supplied its goods and services, GESI was basically a shell company with neither assets nor employees. While GESI incurred liabilities for and received the benefits of goods and services acquired (such as from the plaintiff), income from GESI’s customers was received by corporate entities other than GESI.

[3] The principals of GESI and the other Glenbarra defendants were the defendants Cooper and Jean Aoun (“Aoun”) and who were, from the evidence before me, the key players in the corporate structuring and transfers.

[4] On February 10, 2011 the plaintiff commenced this action against GEPI, GESI, the various Glenbarra companies, Cooper, Aoun as well as Judd. The action (as amended) as against all defendants (including Judd) was based on alleged fraudulent transfers of assets among the different corporate entities to defeat the plaintiff’s claim on its invoices for services and materials, a declaration that each defendant acted in concert to effect the fraudulent transfers as well as damages for conspiracy, damages for deceit and fraud and for punitive damages. In addition, claims were made only as against Cooper, Aoun and Judd for a declaration that each of them committed independent fraudulent acts and that each benefitted personally from the fraudulent transactions. The plaintiff pled that at his examination in aid of execution Cooper gave false statements about and concealed information and documents regarding corporate assets and the relationships among the companies. It also pled that the defendants settled the claim in the underlying action against GEPI and obtained a release in favour of GEPI based on fraudulent misrepresentations.

[5] The plaintiff specifically pled against Judd that between March 2006 and May 2010, Judd caused assets to be transferred by GESI to the other Glenbarra companies at a time when GESI was known by him to be insolvent, that Judd made representations that GESI would pay the plaintiff from the sale of the plaintiff’s goods to GESI’s customers, that Judd counselled Cooper to give false statements and conceal information at his examination in aid of execution respecting the corporate assets and relationships and that Judd agreed Cooper would make false statements at the time of settlement with GEPI.

[6] On January 19, 2012 Justice Perell struck a number of paragraphs of the statement of claim and the statement of claim was amended in October 2012 pursuant to leave granted. In September 2013 Judd filed his statement of defence through his current lawyers. Cooper and several of the companies (the “Cooper defendants”) and Aoun and several of the companies (the “Aoun defendants”) respectively served separate statements of defence and were represented by different counsel. After some initial difficulty obtaining agreement from the defendants for a discovery plan, one was finally ordered on consent by Master Abrams on November 28, 2013. Judd served his affidavit of documents in January 2014 (containing 108 Schedule A documents) as did the plaintiff. Judd asserted he would have listed more documents but all of his relevant emails were on a computer left at the corporate defendants’ premises when he left and not available to him. The plaintiff was required to bring motions to compel the Cooper defendants and the Aoun defendants to serve their affidavits of documents, which in turn resulted in an amended schedule for discoveries. The affidavits of documents of the Cooper defendants and the Aoun defendants were devoid of relevant documents. Aoun was discovered on March 24, 2014 and refused to answer a number of questions respecting the relationship among the companies. I do not disagree with the plaintiff’s assertion that these refusals were unreasonable but this is not relevant to the claim against Judd. Lawyers for the Cooper defendants and for the Aoun defendants both went off the record around this time. Cooper was not discovered.

[7] Judd was discovered on April 2, 2014 and a number of questions were refused (and I will have more to say about those refusals later.) No motion was ever brought to compel answers to questions refused. The plaintiff’s representative was examined for discovery by Judd’s lawyers on April 4, 2014 but he would not attend for the scheduled second day.

[8] On March 11, 2014 Aoun filed a proposal under the Bankruptcy and Insolvency Act and on March 30, 2014 Cooper filed an assignment in bankruptcy, both resulting in stays of this action against those defendants. GESI and several of the companies also filed assignments in bankruptcy on March 31, 2014. Judd did NOT file an assignment or proposal in bankruptcy.

[9] Judd answered his undertakings on November 5, 2014. No further steps were taken in the action (such as a motion to compel Judd’s refusals) but on February 12, 2015 the plaintiff filed a trial record. On July 6, 2015 the plaintiff answered its undertakings (but not its questions taken under advisement).

[10] The plaintiff took no steps to set a trial date. On January 26, 2016, the plaintiff served a notice of discontinuance of the entire action. Judd served his notice of motion for costs of the discontinued action on or about February 24, 2016 and the motion record was served on March 17, 2016.

LIABILITY FOR COSTS OF THE DISCONTINUED ACTION

The Law

[11] Rule 23.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 provides as follows:

If all or part of an action is discontinued, any party to the action may, within thirty days after the action is discontinued, make a motion respecting the costs of the action.

[12] Since the amendments to rule 23.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 in October 2009 there is no longer a prima facie entitlement of the defendant to costs of the discontinued action. Rather costs of a discontinued action, on a motion brought by any party, are within the discretion of the court, as are all costs of or part of an action pursuant to section 131(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43. Rule 57.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 sets out a number of factors for the court to consider in exercising that discretion. The overriding principle is reasonableness: Digiuseppe v. Todd, 2012 ONSC 1028 at paras. 18-21; Marupov v. Metron Construction Inc., 2013 ONSC 609 at para. 32.

[13] The court is further to consider on a motion for costs under rule 23.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 whether the plaintiff has satisfied the court that the material filed on the motion “discloses a bona fide cause of action, that is not frivolous and vexatious and which the plaintiff had some justification to commence, having regard to the conduct of the defendant”: Digiuseppe v. Todd, 2012 ONSC 1028 at para. 22. There must have been some evidence to justify the commencement of the action even if at an early stage it is not possible to say that the action may or may not ultimately succeed: Digiuseppe v. Todd, 2012 ONSC 1028 at para. 22. Likewise a consideration of what may have constituted a bona fide claim at its commencement should not involve speculation on what the result may have been had the claim been adjudicated: Digiuseppe v. Todd, 2012 ONSC 1028 at para. 24.

[14] This was a test that had been applied under former rule 23.05 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 for the court to weigh in determining whether to displace what was then a prima facie right of the defendant to costs of a discontinued action. In accordance with the post-amendment jurisprudence, the bona fide test remains a starting point in considering costs of a discontinued action: Digiuseppe v. Todd, 2012 ONSC 1028 at para. 23. It is still considered as a relevant factor in the determination of costs of a discontinued action: Bulloch-McIntosh v. Browne, 2011 ONSC 1210 at para. 19, Marupov v. Metron Construction Inc., 2013 ONSC 609 at para. 33. Commencing an action without a bona fide claim could be considered as a step in the proceeding that is improper, vexatious or unnecessary, as per the factor in rule 57.01(1)(f) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The plaintiff concedes, and I agree, that in most cases, the defendant would be entitled to costs if the plaintiff commenced the action without justification and bona fides.

[15] However, even if the court determines that the plaintiff had a bona fide claim when it commenced the action, that would not, by itself, relieve the plaintiff of the potential cost consequences of a discontinued action. There is “nothing in rule 23.05(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 that adds to, or subtracts from, the court’s discretion to award costs or its obligation to consider the general principles under rule 57.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 when exercising that discretion”: Digiuseppe v. Todd, 2012 ONSC 1028 at para. 23. “Whether or not a defendant should be awarded costs on the discontinuance of an action will require a very fact-specific analysis of the circumstances giving rise to the initiation of the action and its discontinuance”: Metropolitan Toronto Condominium Corp. No. 943 v. Channel Property Management Ltd., 2013 ONSC 3278 at para. 4; Carriere Industrial Supply Limited v. 2026227 Ontario Inc., 2013 ONSC 1016 at para. 9. In the final analysis “the court has complete discretion to fashion a costs award that is in the interests of justice”: Metropolitan Toronto Condominium Corp. No. 943 v. Channel Property Management Ltd., 2013 ONSC 3278 at para. 4; Carriere Industrial Supply Limited v. 2026227 Ontario Inc., 2013 ONSC 1016 at para. 9.

Bona Fide Basis to Commence Action against Judd?

[16] It appears that there were ample grounds to commence this action against Cooper, Aoun and their companies. That however is not the issue before me on this motion. The question I must address, as a starting point, is: what justification did the plaintiff have to commence an action against Judd that would demonstrate a bona fide claim against Judd?

[17] Philip Whiting, the former president and CEO of the plaintiff explains why Judd was made a party to the action in paragraphs 24 and 26 of his affidavit filed in response to this motion for costs of the discontinuance as follows:

24. Judd was named as a party in this Action because of the evidence given under oath by Cooper during the Cooper JD Examination. Judd was given the opportunity to provide information that might have obviated the need for Judd to be included as a party in this Action when questions were asked of Cooper to make enquiries of Judd by was of undertaking in the Cooper JD Examination. According to Cooper, Judd failed to respond to enquiries made of Judd in this regard.

25. Judd failed to respond to these requests for information. His failure to do so meant that EnerWorks had no choice but to act on the evidence by Cooper regarding the involvement of Judd in the “suspicious” transactions involving the Glenbarra entities relating to EnerWorks.

[18] The plaintiff references the examination in aid of execution of Cooper conducted in January and February 2011, as well as answers to undertakings, as the basis for suing Judd in two respects. Firstly, he references Cooper’s evidence under oath about Judd. I have reviewed the transcript of Cooper’s cross-examination and his answers to undertakings. Over the course of the cross-examination Cooper at one time referenced himself, Aoun and Judd as the management team of one of Glenbarra Energy Management Corp., acknowledged that Judd held himself out as Chief Financial officer of at least one of the related companies, although he identified Judd’s position as “consultant”. He said Judd rendered monthly invoices, but was unsure which corporate entity paid Judd. In answer to undertakings, Cooper clarified that only he (Cooper) and Aoun (not Judd) were the sole officers, directors and shareholders of the various corporate entities, that Judd had “almost no” involvement with and never invoiced GESI. Cooper named a number of other individuals who were employed by the corporate defendants, but none of them are parties to this action. Cooper admitted that during times that Cooper was otherwise occupied, Judd engaged in email correspondence with the plaintiff about paying the plaintiff’s invoices, but was not compensated by GESI for this work. Others also performed some services for GESI without compensation. He said it was possible Judd had some cheque signing authority but was unsure. It was another employee who prepared purchase orders and cheques to the plaintiff. Although Cooper admitted that the various corporate entities shared premises, that GESI had no assets or employees and that Glenbarra Renewable Energy Solutions Inc. (“GRESI”) essentially took over the GESI business, Cooper gave no evidence that ties Judd into playing any role in the corporate structuring.

[19] I have seen nothing in the examination in aid of execution of Cooper or his answers to undertakings that directly implicates Judd in any of the impugned inter-company transactions or that indicates Judd benefitted from any such transactions.

[20] Secondly, the plaintiff places great weight on certain of certain of Cooper’s answers to undertakings from that examination. It appears that during the examination Cooper was somewhat evasive respecting corporate asserts and transfers and raised suspicions about the transfers. Ten of the 133 undertakings given were to ask four persons as to their knowledge of loans, off-balance sheet payables and receivables, inter-company transactions, shareholder transactions and expenses of GESI. One of those persons was Judd. Cooper answered each of these undertakings as follows: “Inquiries were made of these four individuals but none of them responded to the inquiries. If responses are ever obtained from any of these individuals then the information will be provided.”

[21] As it turns out that information may have been incorrect. At his own subsequent examination for discovery, Judd stated that Cooper did discuss with him the undertakings given at the examination in aid of execution to locate documents, but Cooper told Judd “he knew where most of it was and he would do it himself”. Judd said he left Cooper with an offer to assist him in any way he could but Cooper never took Judd up on that offer. Of course, at the time it commenced the action against Judd, the plaintiff would not have known of Judd’s offer, only Cooper’s broad statement that none of the persons he asked to assist responded to his enquiries.

[22] The plaintiff argues in its factum that Judd’s failure to respond to requests for information meant that the plaintiff “had no choice but to act on the evidence by Cooper regarding the involvement of Judd in the ‘suspicious’ transactions…”

[23] In my view it is disingenuous for the plaintiff to say that it “had no choice” but to add Judd as a defendant based on Cooper, in answer to undertakings, saying that Judd (and others) failed to respond to requests for information.

[24] When it commenced action against Judd, the plaintiff had absolutely no evidence that Judd played any role in the “suspicious” transactions upon which the claims of conspiracy and fraud are based or that he benefitted from them. In fact as it turned out, the impugned transactions had largely, if not entirely, all taken place prior to Judd’s engagement with any of the defendant companies.

[25] Even by the time of the plaintiff’s examination for discovery on April 4, 2014, the plaintiff was unable to provide any substantive information respecting the allegations against Judd. Mr. Whiting testified at question 414 that as a result of the examination in aid of execution of Cooper, he believed that a fraud had occurred. When asked what information he had that Judd received any benefit from the impugned transactions, the following exchange took place between Mr Barbaree and Mr. Whiting at questions 415 to 421:

Whiting: We believe that it’s the case, otherwise we would not have launched this action, but we do not have – I mean fundamentally the point of a fraud thing is that the folks who defraud you don’t give you all the information, right? So, you piece the puzzle – you put the pieces of the puzzle together and it adds up to that and we’ve launched this action to discover that , with the expectation that we will.

Barbaree: So your belief is that as a part of this litigation it will come to light what benefit Mr. Judd received?

Whiting: Yes

Barbaree: And right now you don’t have any information on that?

Whiting: Yeah, I have no awareness today of the financial transactions of Mr. Judd .

Barbaree: So, it’s a guess?

Whiting: Well, you can phrase it that way if want.

Barbaree: How would you phrase it?

Whiting: I would say it’s a logical conclusion from what we learned.

Barbaree: So with respect to Mr. Judd, did he receive a benefit directly or indirectly?

Whiting: I already said we don’t know how – we’re attempting to discover that . Mr. Judd was an officer of the corporation that in my view of the world defrauded us and I think that he participated in that.

(emphasis added)

[26] What followed was a discussion between Mr. Barbaree and Mr. Chalmers as to whether there was evidence that Judd was an officer.

[27] In my view this passage highlights Judd’s contention that the plaintiff sued him with no real evidence of his involvement in or benefit from the impugned transactions with the hope of substantiating its claim of fraud against him at a later date, but the plaintiff was never able to do so. Questions taken under advisement by the plaintiff respecting the alleged conspiracy, fraud and fraudulent transactions allegedly perpetuated by Judd were never answered. Although two days of discovery of the plaintiff were booked, the defendant only attended on one and failed to co-operate in setting a second date. The discontinuance then shielded the plaintiff from further discovery.

[28] I do not accept the plaintiff’s assertion that it had a bona fide claim against Judd at the time it commenced the action based on the ambiguous references to Judd’s position in Cooper’s examination in aid of execution and Cooper’s statement that Judd (and others) did not respond to requests to provide assistance to Cooper in answering undertakings. In my view, the plaintiff did not have a bona fide claim against Judd with sufficient, if any, evidentiary merit to justify the commencement of this action against him.

[29] There was absolutely nothing in Cooper’s examination in aid of execution or answers to undertakings to indicate any involvement whatsoever of Judd with the impugned transactions or any participation in what the plaintiff refers to as a “shell game” played with the corporate entities. The claim was commenced based on speculation and the belief of the plaintiff’s principal. It is clearly insufficient to allege dishonest conduct based on speculation.

Commencing an Action In Case Liability Might Later be Proven

[30] Even if I am wrong and there was a bona fide claim against Judd at the time the plaintiff commenced this action against him, that is but one factor in the determination of costs. I adopt as appropriate the following passage dealing with costs consequences when a plaintiff commences an action “ in case their investigation may lead to the liability of that defendant but then elects to discontinue that claim”:

When a plaintiff commences an action against a defendant in case their investigation may lead to the liability of that defendant but then elects to discontinue that claim, the defendants can be considered as having been successful in the action even though there has been no adjudication on the merits. While a plaintiff has a right to bring any parties into an action as named defendants and later release them, the party responsible for bringing them into the action should in most circumstances be responsible for their costs. While prudent to name all possible tortfeasors against whom a cause of action might reasonably be asserted, and to keep them in the action until their liability has been ruled out by admissions from other defendants or subsequent investigation or trial, the defendant should prima facie be entitled to the costs it has incurred as a result of being brought into an action and required to participate. Marupov v. Metron Construction Inc., 2013 ONSC 609 at para. 34. [citations omitted]

[31] Even if it could be said that the plaintiff had “some” justification for commencing an action against Judd based on its suspicions arising out of the Cooper examination in aid of execution in the hope that evidence would emerge from the discovery process to make a case against Judd, clearly it would (or at least should) have known that if it were unsuccessful in being able to satisfy its onus of proving fraud on the part of Judd, either at trial or by discontinuance, that there would be costs to pay.

Continuation of the Action

[32] While the focus of the court’s enquiry is on the bona fides of the claim at the time the action is issued, I also consider the plaintiff’s explanation as to why it continued the action against Judd and why it ultimately discontinued the action on January 31, 2016. The plaintiff itself has gone to some length to justify the continuation and then discontinuance of the action.

[33] The plaintiff points to evidence given by Judd at his examination for discovery conducted on April 2, 2014 to support its ongoing claims against Judd. Judd admitted that in certain business cards, linked-in profile and press releases he inaccurately referred to himself as vice-president of business development or chief financial officer of “Gemco Solar Inc.” whereas he was just a business development officer (doing financial analysis for assessing new projects and preparing proposal documents), that he held himself out as a representative of “Glenbarra Energy” at a seminar and that he used the phrase “Glenbarra Group of Companies” when no such corporate entity existed. Plaintiff’s counsel points out that Judd admitted to having conversations with Cooper and Aoun about GESI’s obligations to the plaintiff, but all of the transactions between the plaintiff and GESI took place and all of the projects were undertaken before Judd’s involvement with any of the defendant companies. Judd admitted that after he became “aware that there were accounting balances”, he had several email exchanges with the plaintiff respecting a reconciliation of the payable on Cooper’s instructions, but this was part of the overall reconciliation of intercompany balances and he reviewed the plaintiff’s invoices as part of that reconciliation. Although Judd admitted to having access to view some limited accounting records provided to him for use in the reconciliations, his evidence was that he did not prepare them and did not process any inter-company transactions. He was aware that Cooper and Aoun could obtain money to pay bills and make payroll by advancing money from one company to another, but there is no evidence that he was involved in those advances. Judd was aware of an intended transfer of GESI’s assets to a new investor, but the transaction never took place. He was informed of the settlement with the plaintiff after it was signed, but he was not part of the settlement discussions.

[34] Judd was unable to recall any specific inter-company transactions or transfers although he believed there had been some. Mr. Chalmers, in his examination for discovery of Judd, refused to put specific transactions to Judd for his comments, although Judd had stated that he needed to know the specific transaction about which Mr. Chalmers wanted information in order to answer questions about his knowledge. It was in that context that Judd stated “I don’t know what I know about specific transactions.” Mr. Chalmers points to this remark as evidence of Judd avoiding answering questions about the impugned transactions; however in my view it was improper and unfair to the witness not to put a specific transaction to Judd before asking him general questions about such transactions.

[35] Judd admits he was aware that Cooper was going to be examined in aid of execution of the judgment against GESI, but Judd was unable to help him because most of the events in issue took place before Judd came to the companies in July 2009. I have earlier referenced Judd’s evidence that Judd offered to help Cooper answer his undertakings from the examination in aid of execution and help locate documents but Cooper had not followed up on that offer because Cooper “knew where most of it was and he would do it himself.”

[36] Despite a rigorous examination for discovery of Judd, it is clear on the evidence adduced that Judd’s involvement in the events at issue, was minimal if at all, although he had been subsequently made aware of some of them. In my view nothing adduced at Judd’s discovery could support the allegations of fraud and conspiracy made against him nor did they provide any justification for continuing the action.

[37] What the plaintiff particularly relies upon is Judd’s refusal at his examination for discovery to go through the entirety of Cooper’s affidavit and cross-examination used on the summary judgment motion against GESI in the underlying action and the entirety of the transcripts of Cooper’s examinations in aid of execution and identify which if any of the assertions about Judd are true, which are untrue and which he has no knowledge of. I agree with Judd that these requests were improper, unreasonable and disproportionate. It was the obligation of plaintiff’s counsel, in conducting the examination for discovery, to put to Judd particulars of any of Cooper’s claims about Judd and to such questions, Judd would be required to respond (and during the examination for discovery Judd did agree to respond if asked in that manner). Judd would have no obligation to review an entire evidentiary record from an earlier proceeding (of which Judd was not a party) to look for and pick out references about him and then advise as to their veracity. It is of no assistance to the plaintiff to rely upon Judd’s refusal to answer clearly improper questions to bolster its claim the plaintiff could have extricated himself from this action “by being forthright”. Judd offered to answer the questions if asked properly but plaintiff’s counsel refused.

[38] I note that the plaintiff never moved to compel Judd to answer the questions refused to test the propriety of the questions.

[39] There is in my view no merit to the plaintiff’s asserted justification for continuing the action against Judd based on his discovery answers or based on Judd’s refusal to help himself by refusing to go through the prior evidentiary proceeding to pick out what is or is not true. The plaintiff also points to the unreasonable litigation positions taken by Cooper and Aoun in their deficient productions and discovery refusals, but this cannot be a basis for continuing against Judd who from what I have seen acted as a reasonable litigant. He appears prima facie to have provided an affidavit of documents to the best of his ability, answered relevant questions at his discovery (to the extent of portions pointed out to me), properly refused unreasonable requests and answered his undertakings in a timely manner.

Reasons for Discontinuance

[40] Finally the plaintiff purports to justify the subsequent discontinuance. It claims that had it been able to continue with the action “it would have succeeded in its claims against the defendants”. However, as earlier pointed out, there has been no evidence adduced that would have amounted to a case against Judd. The plaintiff is in effect asking me to accept on a motion for costs what it has backed down from proving at trial – that there is evidence pointing to Judd as a fraudster. Indeed, by discontinuing, the plaintiff has precluded Judd from obtaining a judicial ruling that he committed no fraud and that he played no role in the impugned transfers.

[41] The plaintiff asserts it could not continue the action because of events beyond its control. The plaintiff claims the most significant events that impacted its prosecution of this action were the bankruptcy proposal of Aoun on March 11, 2014, Cooper’s assignment into bankruptcy on March 30, 2014 and the bankruptcy of GESI and two other Glenbarra companies on March 31, 2014. The plaintiff claims that it was likely that Judd would “follow suit” and also make an assignment in bankruptcy when faced with a judgment of the magnitude to which the plaintiff was entitled. There is however no evidence whatsoever that Judd would declare bankruptcy. It is no more than blatant speculation with no supporting evidence. In fact, Judd is the only defendant that continued to defend the action through counsel when lawyers for the other defendants went off the record. In the 22 months between the bankruptcies of the other defendants and the discontinuance there was never any suggestion from Judd about assigning into bankruptcy.

[42] The plaintiff also points to the difficulty and cost of proceeding when it would be unable to pursue questions against Cooper and Aoun, referred to by the plaintiff as the “principal protagonists”, given their bankruptcies, the inadequate documentary productions of those principal defendants and Aoun’s refusals (which it never pursued). The plaintiff claims this made proceeding further economically unfeasible. There is little doubt that the bankruptcies of Cooper, Aoun and their companies made it much more difficult for the plaintiff to prove its case, but the behaviour of his co-defendants is no reason to deprive Judd of his costs. The plaintiff also points to the difficulties caused by Judd’s refusals to go through the various transcripts, affidavits and pleadings to answer questions about the veracity of any allegations against him. I have found those questions to be improper and the plaintiff is the author of its own misfortune by not asking the questions in a proper manner as invited to do by Judd’s counsel.

[43] I am of the view that a significant reason why, despite the bankruptcies of the co-defendants, the plaintiff discontinued its action against Judd is that there was no reasonable possibility that it could prove fraud against Judd.

Reasonable Expectations of Parties

[44] Another consideration in any award of costs is the reasonable expectations of the party who may be called upon to pay costs. When the plaintiff determined to commence an action that included Judd as a defendant based upon suspicion and belief but only upon the slimmest of evidence, surely it would have contemplated at that time that if it was unable to prove a claim against Judd, it would be responsible for Judd’s costs. Had this action gone to trial on the currently available evidence, at least as against Judd, and the plaintiff was unable to prove a claim against Judd, it would have reasonably expected to pay Judd’s costs (subject to all of the other factors respecting costs). It would be anomalous indeed if the plaintiff could escape costs by discontinuing the action at a very late stage, after the action had been set down for trial, at a time when it had insufficient evidence to prove a claim against Judd. What the plaintiff has done by discontinuing short of trial, is save itself paying the costs of trial. This however should not deprive Judd of his costs incurred up to the time of discontinuance.

Conclusion

[45] Costs of an action, including costs of a discontinued action are within the discretion of the court. Where an action is discontinued short of trial, there must be a fact-specific analysis of the circumstances giving rise to the initiation of the action and its discontinuance such that any costs award made be in the interests of justice. I have reviewed the plaintiff’s rationale for commencing, continuing and discontinuing the action as against Judd and found them lacking. In my view, for all of the reasons set out in this endorsement, it would be in the interests of justice that Judd have his costs of the action.

SCALE OF COSTS

[46] The next issue is the scale of costs to which Judd is entitled. Judd claims costs on a substantial indemnity scale because of the unsubstantiated allegations of fraud against him.

[47] The starting point for determining whether costs should be awarded on a substantial indemnity scale is the Supreme Court of Canada decision in Young v. Young, [1993] 4 S.C.R. 3 where the court stated that solicitor-client costs (the predecessor name for substantial indemnity costs) “are generally awarded only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties.” at p. 134.

[48] As stated by the Supreme Court of Canada in Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, 2004 SCC 9, “an unsuccessful attempt to prove fraud or dishonesty on a balance of probabilities does not lead inexorably to the conclusion that the unsuccessful party should be held liable for solicitor-and-client costs, since not all such attempts will be correctly considered to amount to ‘reprehensible, scandalous or outrageous conduct’”: at para. 26. A party, “believing itself to be wronged, has a right to litigate vigorously, even if ultimately unsuccessful, so long as its behaviour does not rise to the reprehensible, scandalous or outrageous threshold”: Kaymar Rehabilitation Inc. v. Champlain Community Care Access Centre, 2010 ONSC 6614 at para. 16. Nonetheless, “allegations of fraud and dishonesty are serious and potentially very damaging to those accused of deception”: Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, 2004 SCC 9 at para. 26.

[49] Although it is not inexorably the result, “unfounded allegations of fraud typically attract an award of costs on a substantial indemnity scale”: 1623242 Ontario Inc. v. Great Lakes Copper Inc., 2016 ONSC 1002 at para. 88. Also see paras. 91 and 93. If a plaintiff makes “unfounded allegations of fraud or improper conduct seriously prejudicial to the character or reputation of a party” the court may award costs on a substantial indemnity scale and “a plaintiff who proceeds in this manner must be prepared for these costs consequences if the allegations turn out to be unfounded”: Mele v. Thorne Riddell, 32 O.R. (3d) 674; 1623242 Ontario Inc. v. Great Lakes Copper Inc., 2016 ONSC 1002 at para. 91.

[50] Clearly, if the plaintiff makes allegations of fraud at trial with access to information sufficient to conclude that the behaviour was merely negligent and neither fraudulent nor dishonest, substantial indemnity costs are appropriate: Hamilton v. Open Window Bakery Ltd., [2004] 1 S.C.R. 303, 2004 SCC 9 at para. 26. On the other hand, “potential litigants should not be penalized for failing to meet their onus of proof where they have alleged facts responsibly based on credible evidence that could support an inference of such facts”: Nguyen-Crawford v. Nguyen, 2012 ONSC 1337 at para. 31. In that case however the plaintiff siblings had good reason to allege forgery based on known facts. In determining whether to award substantial indemnity costs, “all the circumstances must be considered...Of particular importance in such a case is whether the allegations were advanced recklessly or with an improper motive”: Albert Bloom Ltd. v. Bentinck (Township) Chief Building Official, 29 O.R. (3d) 681 at p. 18.

[51] If the plaintiff discontinues the action before a court can determine if the allegations of fraud are unfounded, the inference is that the allegations were unfounded:

A dilemma arises when the plaintiff commences an action in which it alleges fraud, and later withdraws the allegations or discontinues the action before a judgment is rendered. It can be inferred from the withdrawal of the allegations or discontinuance of the action that the allegations of fraud were unfounded. Because of this, the action rightly attracts an award of costs on a substantial indemnity scale until the allegations are withdrawn or the plaintiff discontinues the action. 1623242 Ontario Inc. v. Great Lakes Copper Inc., 2016 ONSC 1002 at para. 92.

[52] A primary rationale for this conclusion is that a defendant, against whom allegations of fraud have come to an end by reason of a notice of discontinuance, has been deprived of the opportunity of being absolved at trial.

[53] I conclude that the primary consideration in determining whether to award costs on a substantial indemnity scale in the circumstances of this case is whether the unfounded and unproven allegations of fraud against Judd were advanced recklessly or whether they were based on credible evidence that could support an inference of fraud against Judd.

[54] The sole basis for naming Judd as a party to the alleged fraud was, as stated by the plaintiff, the evidence of Cooper at his examinations in aid of execution and the alleged failure of Judd to respond to inquiries made by Cooper as to assets, liabilities, receivables and records of GESI in answer to Cooper’s undertakings from those examinations. As I have set out earlier in this endorsement there were some vague references by Cooper to Judd being part of management or an officer of a related company, and “possibly” with cheque signing authority but his position with the companies was that of “consultant”. This was clarified in Cooper’s answer to undertakings in which he stated that only he (Cooper) and Aoun (not Judd) were the sole officers, directors and shareholders of the various corporate entities, that Judd had very limited involvement and never invoiced GESI. Cooper confirmed that Judd had corresponded with the plaintiff about GESI’s payable to the plaintiff, but this was some time after GESI incurred the indebtedness and was part of a reconciliation of payables.

[55] In my view this was not credible evidence to support serious allegations of fraud against Judd, including allegations of participation in the impugned transfer of assets. Some of the allegations, such as counselling Cooper to make false statements at his examination in aid of execution and agreeing to suppress or conceal material documents were outrageous and totally without foundation.

[56] Insofar as Cooper’s statement in response to undertakings that Judd failed to respond to Cooper’s inquiries about Judd’s information respecting GESI, I note that Cooper was asked to make enquiries of four individuals, only one of which was Judd (the others being Gary Friedlander, Pat from Tonin and Gayle Schwartz). Cooper’s stock answer lumped all four individuals together as “inquiries were made of these four individuals but none of them responded to the inquiries”. Based on this only Judd, but not the other three individuals were added as a party to the fraud. There is no evidence of any follow up questions asked of Cooper as to particulars of his inquiries such as how and when they were made or to provide copies of any enquiries in writing. In my view, it would be reckless in the extreme to make serious allegations of fraud against Judd based on this evidence.

[57] Further, Judd clarified at his own examination for discovery that he did offer to assist Cooper, but Cooper had not followed up on that offer, preferring to answer his undertakings himself as Cooper had the requisite knowledge. Although this information is not relevant to the decision made to commence the action against Judd (as it was not known at the time), it is relevant to the continuation of the action for 22 months after Judd’s clarification.

[58] While I have great sympathy for the plaintiff who in good faith supplied work and materials to GESI, a company that turned out to be little more than a shell with no assets or income to pay for the services, that does not absolve the plaintiff from alleging that Judd was a participant in fraud, conspiracy and fraudulent transfer of assets. The plaintiff acknowledges that Cooper and Aoun were the “principal protagonists” and I do not criticize the plaintiff making these allegations against them and their companies.

[59] In my view however it was reckless to name Judd as a participant in the alleged fraud without credible evidence to support it and based on little more than suspicions. This amounts to reprehensible behaviour.

[60] Further, Judd is a chartered professional accountant, and the plaintiff should have known that alleging that Judd participated in a fraud could be particularly damaging to his reputation.

[61] In my view Judd is entitled to his costs of the action up to the time of discontinuance on a substantial indemnity basis. To order otherwise would absolve this plaintiff of responsibility for unfounded allegations, discontinued only after the action was set down for trial, and “would fail to deter reckless allegations from being pleaded in the first instance, or maintained after they are known to be without foundation”: 1623242 Ontario Inc. v. Great Lakes Copper Inc., 2016 ONSC 1002 at para. 92.

QUANTUM OF COSTS OF ACTION

[62] Costs are “in the discretion of the court, and the court may determine by whom and to what extent the costs shall be paid”: Courts of Justice Act, R.S.O. 1990, c. C.43. In exercising that discretion in the fixing of the quantum of costs to be paid, the court shall consider the factors set out in rule 57.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

[63] The guiding principle in the fixing of costs is that the quantum of costs awarded must be fair and reasonable and within the reasonable expectations of the party called upon to pay costs, rather than a precise measure of actual costs incurred by the successful litigant. The fixing of costs is more than a mechanical exercise of multiplying hours spent by an appropriate hourly rate, although this calculation is one factor to be considered together with the other factors in rule 57.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194: Boucher v. Public Accountants Council for the Province of Ontario, 71 O.R. (3d) 291 at paras. 24 to 26.

[64] These principles must be applied even if costs are to be fixed on a substantial indemnity scale.

[65] Some of the salient factors as set out in rule 57.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 relative to the matter before me are the result of the proceeding, the principle of indemnity, the reasonable expectation of the unsuccessful party, the amount claimed in the action, the complexity of the proceeding, the importance of the issues, conduct of the plaintiff that tended to lengthen unnecessarily the duration of the proceeding, and the plaintiff’s refusal to admit that it had no case against Judd.

[66] As previously indicated, by virtue of the notice of discontinuance, the defendant Judd is in my view deemed to have been successful in the litigation.

[67] Judd has provided a bill of costs for the action seeking costs on a substantial indemnity scale in the sum of $82,804. This is based on actual costs incurred of $89,369. (Partial indemnity costs, had they been awarded on that basis, would have been requested in the sum of $57,019). The plaintiff has not sought full indemnity costs, which are awarded only in exceptional circumstances and for the most egregious of conduct: 1623242 Ontario Inc. v. Great Lakes Copper Inc., 2016 ONSC 1002 at paras. 95 to 100, which is not present in this case.

[68] The court of appeal has indicated that partial indemnity rates are generally considered to be in the range of 55 to 60% of reasonable actual rates: Inter-Leasing Inc. v. Ontario (Revenue), 2014 ONCA 68 at para 5, and substantial indemnity costs are defined as 1.5 times that of partial indemnity costs: Rule 1.03(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Substantial indemnity rates are generally considered to be in the range of 85% of reasonable actual rates.

[69] The costs sought of $82,804 on a substantial indemnity scale include fees of $68,455 (out of $74,265 actual fees incurred), plus HST plus disbursements of $5,450. Disbursements have not been challenged. I find the hourly rate by senior counsel Mr. Weintraub on a substantial indemnity basis was appropriately reduced to $525 from an actual billing rate of between $600 before and $650 after 2015 but Mr. Barabee’s substantial indemnity rate should be modestly reduced to $265 from an actual billing rate of between $300 before and $320 after 2015.

[70] Significant hours were spent by both lawyers in communicating with client and opposing counsel, preparing defence, preparing affidavit of documents, preparing for and attending examinations for discovery, answering undertakings and conducting research. This of course includes reviewing the plaintiff’s pleadings, documentary productions and answers to undertakings. Judd would also have had to review the proceedings in the underlying action as he was not a party to that proceeding.

[71] The amounts in issue were significant. Although the outstanding judgment debt against GESI was $448,938, the plaintiff sought against Judd (and all defendants), in addition to declaratory relief, damages for conspiracy of $1,000,000 plus damages for deceit or fraud of $1,000,000 plus punitive damages of $100,000 plus full indemnity costs.

[72] The issues in the action were complex, including inter-company transfers of assets to defraud creditors, false representations, fraudulent concealment of documents and particulars of conspiracy. The claim involved a number of transactions and numerous documents. The plaintiff chose to make the action particularly complex with sweeping allegations of fraudulent conduct against 11 named parties set out in a 60 page statement of claim. The plaintiff made the allegations against Judd even more complex by alleging that he counselled Cooper to give false evidence at his examination in aid of execution and agreed to the concealment of documents.

[73] The allegations of fraud were particularly important to Judd as Judd was a professional accountant and such allegations could have serious consequences to his reputation. As a result, the plaintiff should have anticipated that Judd would mount a vigorous defence.

[74] Some of the litigation conduct of the plaintiff caused additional costs to be incurred. The plaintiff brought a number of procedural motions without consulting as to dates. When the plaintiff refused to revise the discovery plan to postpone Judd’s discovery until after all documents were produced, Judd was required to obtain a court order solely to vary his discovery date. At discovery the plaintiff asked questions to Judd about documents that had not been disclosed in its affidavit of documents without putting the document to Judd and identifying the nature and source of the document. Although the court ordered discovery plan required the plaintiff to attend for two days of discovery, the plaintiff advised four days before the scheduled dates that he would attend on only one day. Requests to reschedule the second day went unanswered. Additional costs were incurred by the failures of Cooper and Aoun initially to serve their affidavits of documents or respond to the proposed discovery plan and then failing to provide adequate productions, by Aoun failing to answer proper questions at discovery and by Cooper failing to attend his discovery. The behaviour of Cooper and Aoun was neither the fault of the plaintiff or Judd. Judd on the other hand, in my view, acted responsibly throughout the litigation.

[75] The plaintiff’s refusal to admit that it had no case against Judd on any or all of the allegations, insisting even at the time of discontinuance and at the hearing of this motion that it could have proven its case against Judd also added to the cost of the litigation.

[76] The number of hours attributed to Mr. Weintraub, particularly at the early stage of the litigation, prima facie seems excessive given that most of the substantive work was undertaken by Mr. Barbaree; however I recognize that Mr. Weintraub was senior counsel on the file and counsel of record and had an obligation to oversee the file. The involvement of both lawyers however likely resulted in some duplication of effort at the various stages of the litigation, but there is no evidence that the duplication was extensive. I do not find the time spent on pleadings, productions, discovery and answering undertakings excessive despite arguments to the contrary by plaintiff’s counsel. I have considered that the time docketed includes not only Judd’s defence and productions, but reviewing those of other parties. There were three days of discovery, although Judd’s lawyers had to prepare for additional discovery dates that did not take place. Judd had a right and in my view his counsel had an obligation, to attend Aoun’s discovery, even though Aoun and Judd were not adverse in interest, as Aoun’s evidence would have been relevant to the claims against Judd as Judd is alleged to have acted in concert with Aoun and Cooper.

[77] In my view the totality of the time spent by Judd’s lawyers was not excessive in all the circumstances including the complexity of the issues, the continued assertion of fraud against Judd throughout the entire litigation, the fact that the work set out in the bill of costs spanned 29 months of litigation following the retainer of Judd’s current lawyers in August 2013 and the action has been set down for trial. There was no cross-examination on the affidavit supporting the bill of costs. Some reduction should be made for duplication of effort by Judd’s two lawyers, but given that costs are awarded on a substantial indemnity scale and given the vigorous defence that should have been anticipated by a professional person to allegations of fraud, the reductions will not be excessive.

[78] In all the circumstances I find that fair and reasonable costs of the action (excluding costs of this motion) on a substantial indemnity scale would be fees of $56,000 plus HST of $7,280 and disbursements of $5,450 for a total that I have rounded down to the all-inclusive sum of $68,000. Is this sum within the reasonable expectations of the plaintiff? The plaintiff has failed to file its own bill of costs for the action. I have no information as to the amount of time spent by plaintiff’s counsel in this action by which to compare the time spent by Judd’s counsel.

[79] There is however “no requirement for the losing party, who is not seeking costs, to file a bill of costs, although it is preferable that he or she does so”: Smith Estate v. Rotstein, 106 O.R. (3d) 161, 2011 ONCA 491 at para. 50. The plaintiff is still entitled to challenge the defendant’s bill of costs as not being fair and reasonable standing on its own without filing its own bill of costs: Smith Estate v. Rotstein, 106 O.R. (3d) 161, 2011 ONCA 491 at para. 54, and is entitled to challenge the defendant’s costs even if the plaintiff paid fees to its own counsel equivalent to or in excess of those paid to defendant’s counsel: Smith Estate v. Rotstein, 106 O.R. (3d) 161, 2011 ONCA 491 at para. 56.

[80] Nonetheless, if the losing party chooses not to file its own bill of costs, this is a factor that the court “may take into account when considering the reasonable expectations of the losing party”: Smith Estate v. Rotstein, 106 O.R. (3d) 161, 2011 ONCA 491 at para. 50, and to the same principle para. 54. An attack by the responding party on the quantum of costs claimed by the successful party as excessive “in circumstances where the court does not have before it the bills of all counsel ‘is no more than an attack in the air’. In such case, the court can rightly make the inference that the Appellants devoted as much or more time and money...but...it can only be some measure of what was expected. It still cannot be determinative...”: United States v. Yemec, 85 O.R. (3d) 751 at para. 54.

[81] In all the circumstances I infer from the failure of the plaintiff to provide its own bill of costs that it spent at least as much if not more in costs than Judd, although that is not determinative of the reasonableness of the defendant’s bill. Nonetheless it remains a factor in considering the plaintiff’s reasonable expectations. I have already determined that the sum of $68,000 is fair and reasonable. I also conclude that that sum should have been within the reasonable expectations of the plaintiff, particularly given the nature of the serious allegations of fraud against Judd and the knowledge that he is a professional accountant who would likely mount a vigorous defence as well as the complexity of the proceeding as pled by the plaintiff.

COSTS OF MOTION

[82] At the hearing of the motion I was advised that offers to settle the motion had been made which may affect the determination of costs of the motion. As such it was not appropriate to require costs outlines for the motion at the conclusion of the hearing.

[83] It may be that as a result of the determinations made in this endorsement, the parties can agree on costs of the motion. If not, I am prepared to receive brief costs submissions from the parties.

ORDER

[84] I hereby order as follows:

(1) The plaintiff shall pay to the defendant Greg Judd his costs of the discontinued action within 30 days fixed in the sum $68,000.

(2) Brief submissions as to costs of this motion shall be provided by the defendant Greg Judd within 10 days of the release of these reasons and by the plaintiff within 7 days of receipt of the defendant’s submissions. Any party seeking costs shall also provide a costs outline and redacted dockets.

Master R. Dash

DATE: August 31, 2016