Court File and Parties

COURT FILE NO.: 14-CV-518415

Heard: October 20, 2016

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Chemical Vapour Metal Refinishing v. Terekhov

BEFORE: Master Joan Haberman

COUNSEL: Hodder, G. for the moving party Wires D. for the responding party Dollak, P. for Van der Linde (excused as he was not involved in this motion)

ENDORSEMENT

Master Haberman:

[1] This is a motion for security for costs brought by the defendant, Terekhov, against the three plaintiffs. Terekhov raises two grounds for the relief sought: 1) the plaintiffs do not have sufficient assets in Ontario to pay any cost order that may be made against them; and 2) their claim against him is frivolous and vexations. Terekhov need only make out one of those two grounds to succeed on this motion.

[2] At the end of the hearing, I concluded that security for costs should be posted, as I was not satisfied that any of the three plaintiffs has sufficient assets in the jurisdiction to pay a cost order. I was also not satisfied that they had established that they had a good case on the merits. I indicated that my reasons, along with the substance of the order, would follow.

Preliminary issue

[3] In June 2016, two security for costs motions were assigned to me as one long motion. Before speaking with counsel to arrange a date, I asked both moving parties to provide me with a draft of their notice of motion, so I could assess if one day was going to be adequate for both matters. In view of my fast approaching retirement date, I was particularly concerned about ensuring we could complete both motions in the time booked. In view of the limited dates I still had open for long motions, I knew that if the motion was not completed as scheduled in one day, it could be problematic. As matters turned out, I had no further long motion slots remaining when this matter was argued. It was therefore crucial that it all be completed in the day booked.

[4] Both notices of motion were provided. One involved a motion by the defendant, Terekhov, for security for costs from the three plaintiffs. The other motion was brought by the plaintiffs, as defendants by counterclaim at the behest of the co-defendant, Van Der Linde, seeking security for costs from him. This was the sole relief sought by the plaintiffs at the time the motion was scheduled on June 28, 2016.

[5] I had concerns at that time as to whether we could get through both motions in a single day but was assured by counsel it could and would be done. My scheduling order that day included reference to this assurance. It also provided that counsel were to notify me if anything arose that impacted on the date scheduled as soon as they were aware of same.

[6] It therefore came as a surprise when I picked up the file to read for this motion on October 19, 2016, as I learned, for the first time, that the plaintiffs’ motion had expanded to encompass two new requests for relief – consolidation of two actions and leave to amend their pleadings. Although I am assured by Mr. Wires that his motion was confirmed, I neither received the confirmation nor was it referenced in the case history as having been received by the court. I assumed from all of this, that he had opted to adjourn his motion in view of the additional relief sought. Having already spent considerable time reading for Mr. Hodder’s motion, I then stopped reading.

[7] Apparently, my assumption was not correct but, in the absence of the requisite confirmation and as Mr. Wires had neglected to notify me about the additions to his motion, there was no way I was to know what he had in mind. In view of this and my belief that the hearing of his motion would take us beyond the day scheduled, his motion was adjourned to a new LM date to be scheduled and Mr. Dollack was excused, his costs thrown away to be decided by the master who next deals with this matter.

[8] It is unfortunate counsel thought they could simply tack on additional relief without any notice to me or an explanation for this change. Depending on when this expansion to the motion was first contemplated, I may have still had a date available to add to this one so we could have completed both motions.

[9] As it turned out, we did not complete the first motion until almost 3:30 so it remains doubtful that we could have dealt with the plaintiffs’ motion in the hour of court time left to us.

THE LAW

Policy reasons for Rule 56.01(1) – Ontario is a cost jurisdiction

[10] The rules dealing with security for costs flow naturally from the fact that Ontario is a cost jurisdiction, such that our civil justice system requires the losing party to pay a portion of the costs of the party who prevails at trial. Rule 56.01 was enacted to ensure that, in cases where a plaintiff’s ability to comply with our costs rules is in doubt, a defendant can seek to have security posted during the life of the action in certain circumstances, so as to protect his cost position at the end of the day.

[11] This Rule was created with some flexibility in that the Rule mandates the court to make the order that is just. Though this is something we are expected to do in all cases, as this wording is expressly included here, special attention must be paid to this directive.

[12] As a result, the court can determine that, in certain cases, the just order is that no security be posted (see Horvat v. Feldman (1986), 15 CPCP (2d) 220). Where, for example a plaintiff is able to demonstrate that they are impecunious, a term of art that goes beyond simply not having cash on hand, the court is free to waive security where the merits of the case justify it. Similarly, even when a plaintiff is not impecunious, the merits can be an important factor in allowing a plaintiff to be exempted from having to post security. A more stringent test regarding the merits is applied in these latter cases where impecuniosity is not a factor.

[13] It is the policy reason for this Rule that guides the court’s hand when applying it. It is part of the court’s arsenal to ensure that the losing party will generally be required to bear a portion of the successful party’s costs, providing the defendant with a way to protect his position regarding costs in certain defined situations.

The two-stage inquiry

[14] The general availability of security for costs is dealt with by Rule 56.01(1), which sets out 6 possible routes a party can pursue to achieve this end. In this case, Terekhov moves under two subparagraphs (d) and (e).

[15] The law dealing with security for costs, generally, as well as these two provisions, is well settled. The starting point is Hallum v. Canadian Memorial Chiropractic College (1989), 1989 CanLII 4354 (ON SC), 70 OR (2d) 119. There, the court explained that Rule 56.01(1) involves a two-part inquiry. During the first stage of the inquiry, the onus is on the moving party to demonstrate a basis for invoking one of the 6 subparagraphs of the Rule.

[16] In the context of subparagraph (d), that does not require the moving party to actually prove that the respondent in fact, has insufficient assets to meet a cost order. All he must show is that there is good reason to believe that that is the case. Essentially, this means that the moving party must have some evidence, but not necessarily conclusive evidence, as to the insufficiency of the plaintiff’s asset.

[17] Once the moving party has accomplished that, he has a prima facie right to the order sought, subject to stage two of the inquiry. Stage two is where the onus shifts – it is then up to the plaintiff to prove, in a subparagraph (d) motion, that he does in fact have assets in the jurisdiction that can satisfy a cost order. I will discuss what this actually means in greater detail below.

[18] It is in the context of stage two that the court assesses how to achieve an order that is just in the context of the facts before them. In doing so the court is directed to assess the merits to the extent that it is possible to do so. This will depend on the stage of the litigation at the time the motion is brought. For example, if discoveries have been completed there will be some evidence from which the court can start to get a picture of the case that is far clearer than earlier on. In such cases, the court can get a better sense of the merits than if the motion was brought immediately after the close of pleadings.

[19] Further, as stated in Padnos v. Luminart Inc., (1996), 1996 CanLII 11781 (ON SC), 32 OR (3d) 120, the merits must be considered in every motion for security for costs, but their weight will vary depending upon where on the continuum of subparagraphs the motion falls. They are considerably more important under subparagraph (e), for example, where the basis of the motion is that the action is frivolous and vexatious, than they would be under (a).

Insufficient assets

[20] Subparagraph (d) of the Rule allows the court to make such order for security for costs as is just where 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.

[21] As establishing the sufficiency of their assets falls under the second stage of the inquiry, the onus is on a plaintiff to establish that they (or each of them when the order is sought from a group of plaintiffs as is the case here) are able to meet that test. There is, again, a sound policy reason for approaching the matter in this way – who but the plaintiff is in a position to address their own financial situation?

[22] When dealing with this subparagraph, it is not enough for plaintiff to simply point to their possessions and declare that there is surely enough there to satisfy a cost order. First, an independent evaluation must be performed with respect to each asset put forward. The court must consider how much each asset can reasonably be expected to fetch and assess if this would be adequate to meet a security order that is reasonable in the context.

[23] The court must also have evidence at to the status of each asset: owning a house on paper means little unless a party actually has equity in that house. Similarly, the court has to be assured that the plaintiff has sufficient equity in the assets relied on in response to a motion for security for costs to meet a cost order.

[24] Further, even if an asset is owned free and clear, the court has to be confident that there are no other creditors about with a higher priority, or a better claim, against those same assets. Parties engaged in litigation often find themselves embroiled in court proceedings with more than one party or creditor. If a moving party is denied security on the basis of sufficiency of assets, the court must be certain that those assets will still be there at the end of the day so there can be execution to satisfy a cost award.

[25] Finally, the assets must be readily exigible and marketable, so that they can be easily transformed to cash to generate the funds needed to meet a cost order. As stated in Bluefoot Ventures Inc. v. Ticketmaster, 2008 CarswellOnt 8788, a party should be able to recover costs ordered in their favour without having to resort to extraordinary measures to do so.

[26] While the case law addressing the level of evidence needed most often speaks in the context of establishing impecuniosity, similar principles apply here. The court expects the plaintiff to make financial disclosure with full particularity, as they have the ability to speak to their financial status while the moving party would not.

[27] As was stated in Uribe v. Sanchez [2006] OJ No. 2370, the financial evidence of the plaintiff must be set out with robust particularity, leaving no unanswered questions. Thus, the evidence about assets should be backed up by production of all appropriate supporting documents, and a reliable listing of assets and liabilities, income and expenses. A list of assets on its own is evidence in a vacuum. It provides an incomplete snapshot of a party’s actual financial situation and is of no real assistance in response to a motion of this kind.

[28] Thus, in Websports Technologies Inc. v. Cryptologic Inc., 2005 CarswellOnt 2317, I ordered that security for costs be posted where a web-based game was put forward by the plaintiff as their asset in response to the motion. As I noted there, there was no evidence as to computer components, their age, or what they could fetch if sold. Whether or not the game actually had value depended on whether it could be launched, which was something that could not occur in Canada, as it involved a form of prohibited gambling. It would have to be sold to an off-shore entity in order to realize any value. In my view, that meant that the game could not be easily liquidated and converted to the dollars needed to fund a cost order. As a result, it could not be relied on as an asset, within the context of this Rule.

[29] In the case now before the court case, the major asset relied on by the plaintiffs are the value of their patents. In Gregg v. Bassett, [1902] OJ No. 52, the court held that a trademark was not exigible under execution.

[30] Similarly, in Bluefoot Ventures Inc. v. Ticketmaster, supra, the court, though satisfied with the evidence regarding value of trademarks, noted that the plaintiff had provided no evidence as to their exigibility. While it was clear that an application to the Federal Court would be the starting point, there was no evidence to suggest that that court would automatically transfer ownership of the trademarks in question for the purpose of satisfying a cost order obtained before this court. Further, this is not something one would have to do in the normal course – it is a step much more onerous than would normally be required to execute against the assets of an unsuccessful plaintiff. Security was therefore ordered.

[31] The overall tendency in the case law is to order that security be posted wherever the marketability of an asset is questionable. This included a part-interest in a shared family cottage (see Henderson v. Wright, 2016 ONCA 89).

[32] It therefore appears that the Rule does not mean any asset when it speaks of assets. The assets relied on to resist having to post security must be those that can meet both the letter and spirit of the Rule. If they cannot be readily used to pay off a cost order, the purpose of the Rule is defeated.

The merits

[33] Leaving subparagraph (e) aside for the moment, the merits of the case are necessarily a factor in any event, as the court is bound to make the order that is just.

[34] When evaluating the impact of the merits, the test that court applies depends on whether or not impecuniosity has been relied on and, if so, if it has been established to the court’s satisfaction. When it has been proven, the threshold that the plaintiff must meet is not onerous – he need only show that the claim is clearly not devoid of merit (see John Wink Ltd. v. Sico Inc., (1987), 1987 CanLII 4299 (ON SC), 57 OR (2d) 705). This is because there is a compelling policy reason, where a plaintiff has no funds, to avoid dismissing a potentially meritorious claim because security cannot be posted.

[35] That onus increases when the plaintiff relies, instead, on what they claim to be sufficient assets in the jurisdiction or where they try but fail to prove impecuniosity, as that policy reason does not apply. The test, in this instance, is whether the plaintiff can show that the claim has a good chance of success (see Zeitoun v. Economical Insurance Group, 2008 CanLII 20996 (ON SCDC), 2008 CarswellOnt 2576.

[36] In Zeitoun, the plaintiff’s failure to adduce any evidence going to the merits was taken to be a failure to show that the claim had a good or even a reasonable chance of success. This was fatal to the plaintiff’s ability to make the argument.

THE FACTS

Background

[37] There are three plaintiffs to this action with similar names. For convenience sake I will refer to them as follows:

• Chemical Vapour Metal Refining Inc. = Refining Co.

• CVD Manufacturing Inc. = Manufacturing Co.

• CVMR Corporation = CVMR Co.

[38] The evidence of all three companies on this motion is largely contained in the affidavit of Kamran Khozan, who describes himself as an officer and director of all three plaintiffs. In the statement of claim, it is alleged that in 1999, he purchased the assets of Mirotech though a holding company. Mirotech was Terekhov’s former employer. Through a series of corporate moves, the three plaintiffs emerged.

[39] Refining Co. was incorporated in 1999 to develop and promote technologies to refine metals. The statement of claims states that it is currently in the business of metal refining and vapour metallurgy process development but its financial records suggest it is no longer operational.

[40] Manufacturing Co. currently manufactures nickel molds. No financial statements have been produced for this entity.

[41] CVMR Co. was incorporated as the holding company for the other two and to also hold all of the group’s patents. Over time, it assumed all of the technical and commercial activities of the group such that it is now the umbrella company under which it and the other two operate.

[42] The plaintiffs concede that neither Refining Co. nor Manufacturing Co. has any assets. CVMR Co. therefore undertakes to pay any cost orders that may be awarded in this litigation in respect of either of the other two.

[43] On cross examination of Khozan, however, it became clear that this undertaking was not an “undertaking” in the usual sense of the word. He conceded that no corporate resolution had been passed by CVMR Co. to authorize the undertaking so it doubtful if it is even binding on the company. He also indicated that he would not be able to assess the board’s position on this point until CVMR Co. was called upon to honour the undertaking. When asked what would occur if they refused, Khozan joked that he would have to plead guilty.

[44] He then followed this up by explaining that he takes the advice of his board of directors seriously, so that even if he is the majority shareholder, if they advise him not to honour the undertaking, he will consider that advice seriously. Plaintiffs’ counsel then asked why he would have to go to the board, but it was clear from the discussion on the record that Khozan felt he would be bound to do so.

[45] Refining Co. filed unaudited financial statement for the years 2012 and 2013 only. As at December 31, 2013 their assets totaled $447,112, their liabilities, $1,722.243. Of that, $1,458,873 represents a loan from Khozan. The company’s net position was a deficit of $1.275 million at the start and at the close of the year. It has no income or operating expenses. The year prior, it had a net income of $363,450. It therefore does not appear to be operating.

[46] Manufacturing Co. filed none of their financial statements or any evidence as to their financial status. They rest on the undertaking that even Khozan made clear is not what it appears to be. In effect, they appear to have no response of their own to this motion.

[47] This action is actually the second piece of litigation arising from the relationship between Terekhov and the plaintiffs. In the first action, started by Terekhov in June 2014, he seeks damages against the current plaintiffs for wrongful dismissal and compensation for oppression as a shareholder. In November 2014, he agreed to refer the shareholder-related issues to arbitration.

[48] Though the arbitration is pending, the preliminary issue involving an alleged expired limitation issue was already heard and disposed of by the arbitrator, Stan Fisher. His findings, and the arbitrator’s jurisdiction to proceed further, were challenged before the Divisional Court, whose decision has not yet been released.

[49] Three weeks after Terekhov agreed to divert this issue to arbitration, as sought by the current plaintiffs, they started this action instead of counterclaiming in Terekhov’s action. The parties are therefore now engaged in three separate legal proceedings instead of one.

[50] This odd strategy is either the result of counsel not seeing the big picture, or seeing it all too well. I am inclined to think the latter. Khozan appears to be a man of some considerable wealth, having invested, by way of shareholder loans, well in excess of $1.4 million in Refining Co. and $3 million CVMR Co. He can clearly afford this litigation, so three proceedings rather than one and a side trip to the Divisional Court is something he can apparently mange. It is unclear if Terekhov is in a similar position. His counsel asserts that he is not.

[51] This strategy appears to have backfired against the plaintiffs. Now they assert that the plaintiffs are defendants by counterclaim. In order to be able make that claim, they are suddenly moving to consolidate the two civil actions. Presumably, the purpose of this shift in approach, initiated only after these motions were booked, would allow them to say that there are claims going in both directions – that Terekhov, too, is a plaintiff in the very same proceeding, such that some, or according to the plaintiffs in this action, most of the issues between their two claims overlap. They assert that as a plaintiff, Terekhov cannot seek security for costs to pursue his own claim, and that this should essentially deprive him of the ability to seek security in this action.

[52] I was taken to no case law that suggests the principle that applies when there is a claim and counter claim would apply equally to this situation, where there are two distinct actions and an arbitration. Plaintiffs’ counsel did not address the problem of undertakings of confidentiality created by the rules which could very well impede his suggested approach. The court must also explore the extent to which there really is a significant overlap of issues as the plaintiffs here allege and if there isn’t, this is a non-issue.

THE EVIDENCE

[53] The plaintiffs have taken a de minimus approach to this motion, filing little by way of direct evidence addressing either their assets or the merits of the case They rely, instead, on evidence taken from Terekhov’s cross-examination and their responses to some undertakings in an effort to bolster their position.

[54] Terekhov left their employ in mid-2014, so having him agree that they had buildings and equipment, therefore, assets, back then in no way addresses their current situation. It is not clear that they still have the same facilities and equipment. They have provided no indication in their own evidence as to the age and condition of the latter and we have no idea what the the value of any of it is, let alone the extent of the plaintiffs’ equity in it, if any

[55] More importantly, there are obvious flaws with this approach, particularly as Terekhov was examined after the plaintiffs’ deponent. The purpose of swearing or affirming affidavit evidence before the hearing of a motion is to enable the party opposite to cross examine on it. By choosing, instead, to hide their cards and only show them during cross-examination, the plaintiffs have attempted to deprive Terekhov of the opportunity to cross-examine them on what they claim is evidence that supports them.

[56] In my view, this strategy has diminished the weight of any evidentiary “hits” achieved by the plaintiffs, as they have created a scenario which precludes challenge. In other words, this is a transparent strategy and one which, in my view, is not appropriate. As matters turn out, the plaintiffs scored few, if any, points using this approach. It added little to their case.

[57] Finally, it is critical to bear in mind that it is the plaintiffs who has the onus during the second stage of the inquiry. This is something their counsel appears to have lost sight of repeatedly. I will return to that when I deal with the evidence regarding the assets.

[58] In their evidence, the plaintiffs appear to rely almost exclusively on the value of their patents as the asset on which they rely in response to the motion. Their factum picks up from this theme. It was only during the cross-examination of Terekhov that other possible assets began to be explored, based on what he knew or saw. Again, it seems the point was to either catch Terekhov’s counsel unprepared, or plaintiffs’ counsel was not prepared, himself. Neither is appropriate.

THE ISSUES, ANALYSIS and CONCLUSION

Sufficiency of assets

[59] In general, the starting point when approaching a motion of this kind in the context of a corporate plaintiff is to examine their financial statements. I have already indicated what was learned from the two produced by Refining Co. and noted that none were provided by Manufacturing Co. In any event, neither has professed to have any assets and both rely on the undertaking provided by CVMR Co. instead.

[60] CVMR Co.’s position is therefore critical for all three plaintiffs on this motion. They have provided unaudited financial statements, between December 31, 2012 and December 31, 2015. The 2012 document, of course, compare the company’s status at year end 2011 and year end 2012, so we have the 2011 numbers as a starting point. They demonstrate that, at that time;

o There was about $10,000 cash on hand or on short term deposit;

o No figure was attributed to property, plant and equipment at that time;

o $390,851 was attributed to intellectual property, though there is no note to indicate how this figure was arrived at;

o They owed the bank nothing;

o There was a management bonus scheme in place in the amount of $125,000

o They paid income tax of almost $50,000 that year;

o There was a note of almost $400,000 payable to an undisclosed recipient; and

o There were shareholders loans, which were apparently advanced by Khozan, of just over $100,000.

[61] The year ended with net income of $110,406.

[62] The numbers for 2012 were very different:

o There was no cash on short term deposits;

o $5,333 was attributed to property, plant and equipment;

o Intellectual property was increased to $519,917, though again, there is no note to explain how this figure was arrived at;

o The company owed the bank $10,120;

o There was no management bonus scheme in place any longer;

o The note of $390,851 remained on the books;

o The shareholders’ loans increased to $507,661, and

o The company was now in a net loss position of $527,922 despite the capital injection from Khozan.

[63] By 2013, property, plant and equipment were down to $2,400 and intellectual property had a modest increase to $608,154. The note for $390,851 remained but the shareholders’ loans, and therefore liability to shareholders, had increased to $1.9 million. By year end, the company had a net loss of $675,588.

[64] There were changes in 2014, as well, but none as significant as the shareholders’ loans, now up to just under $2 million, so that the net loss was reduced to $376.971. By 2015, the shareholders’ loans had expanded to just under $3 million, so the net loss was again reduced, now at $271,647.

[65] It is clear from these records that CVMR Co. operated at a profit for only one of the years for which financial disclosure was made, and that was back in 2011. Since that time, their intellectual property, which appears to have been self-evaluated, has climbed to $770,639, but the shareholder loans were approaching $3 million by last year’s fiscal year end. The note payable to an undisclosed recipient, on the books since at least 2011, remained.

[66] Khozan maintains that this is a lucrative business, and that it is solvent. However, the financial statements produced tell a very different story. They show a company that has been operating at a loss for years, a loss that has been reduced somewhat only because of increasingly higher shareholder loans advanced by Khozan from year to year.

[67] On its face, this is a company formed about 16 years ago, which has created or acquired intellectual property, but which has generated insufficient income to stand on its own two legs. Khozan is a believer, and he appears to have invested at least $3 million of his own funds in this project so far.

[68] In the face of what appears to a bleak financial position, plaintiffs’ counsel had tried to paint a very different picture, suggesting that the court’s focus should not be on the books, but on what’s there to be seen.

[69] He focused on two aspects: the buildings and equipment, and then the patents. Dealing first with buildings and equipment, counsel pointed to photos of them, and Terekhov’s recall of them (back to when he was terminated in 2014), asserting that all of this must be viewed as assets. This raises the obvious question: All of what?

[70] There is no itemized list of what this plaintiff owns, as distinct from what they may lease. Assuming they own this generic bundle of things, something I am prepared to accept for this exercise only, what is it worth, not to them, but on the open market? What condition is it in? Is the equipment state of the art or is it outdated? What is their equity in it? There is no solid evidence before the court to enable me to conclude much of anything about the buildings and equipment. This approach falls far short of what the case law mandates in terms of the onus on a responding party.

[71] Turning to the patents, though he devoted very little attention to the work his clients actually perform in the plaintiffs’ evidence or his factum, plaintiffs’ counsel spent considerable time cross-examining Terekhov about the various contracts the company has had and may get. He also focused on this issue during oral submissions.

[72] What he ignored, however, was the following: whatever income these contracts have generated or may generate, this is clearly a costly enterprise. Considerable research and development, followed by legal work, is required to get from the idea stage to registering a patent. The evidence indicates that hefty legal fees - $622,136 for 2014 - were incurred in order to register some of these patents that year.

[73] Further, if these large contracts were actually profitable, where did the money go and why is Khozan lending more and more to CVMR Co. each year? None of this was explained.

[74] The evidence also indicates that the plaintiffs lease, rather than sell, their patents and the leases are sometimes accompanied by additional contracts that deal with implementation of the technology being acquired. CVMR Co. works at times in a collaborative way with others in joint projects that involve construction of infrastructure. Their role varies from project to project. Much of this work is done beyond Canada. As a result, they cannot even say what would be involved in selling a patent to generate funds to pay a cost order, as they have never sold one.

[75] CVMR Co. says they own about 70 patents, which they value at $625,000-$771,000, yet they are unable to explain, in a meaningful way, how they arrived at these numbers. This was essentially a calculation performed by Khozan on the basis of criteria he selected, with no support for his approach. The plaintiffs undertook no independent valuation of the shares, claiming this would have been too costly. That very fact is problematic in and of itself. In the event that the patents are all that CVMR Co. has at the end of the day to satisfy a cost order, how would the court even be able to say which ones and how many of them should be transferred to satisfy a cost order?

[76] The plaintiffs say they were prepared to obtain an evaluation but only if the moving party agreed to share in the expense. This approach, however, completely ignores the fact that, at this stage of the motion, the onus was on the plaintiffs to show they have sufficient assets of a nature and quality sufficient to pay a cost order. Why would there have been any expectation that the moving party would assist them in meeting that onus? There seems to have been a fundamental misunderstanding, even at the oral hearing stage, though the moving party had produced its brief of authorities by then.

[77] To further complicate matters, only 9 of the 70 or so patents the plaintiffs hold are registered in Canada and two of those are likely to expire before this matter gets to trial. Some of the rest are older, so may have little value over time due to advances in technology. That is why an evaluation was critical. It was in fact only required with respect to those patents in Canada, as only they could be called upon to satisfy a cost order. So what is the value of the 7 patents that are here, in Canada but not necessarily in Ontario, to satisfy a cost order if one is made? There is no evidence at all about that and no formula for extrapolating that number from the larger one.

[78] At the end of the day, I am unable to attribute a value to these patents as the plaintiffs failed to present the necessary evidence in that regard to enable me to do so. Add to that the complexity with respect to execution of a cost order on such esoteric property. Plaintiffs’ counsel could not provide a solid plan for how the parties could go about transferring ownership of a patent if required to do so and he conceded that he was not certain if the sheriff could even seize a patent. What was clear is that, at the very least, an application would likely have to be made to the Federal Court.

[79] In my view, this is the kind of additional measure the case law speaks of when stating that a party should not have to take extra steps which would make execution more onerous than it would normally be.

[80] CVMR Co. has not satisfied their onus regarding the sufficiency of assets. As a result, neither of the other two plaintiffs can rely on their undertaking, already problematic, to escape having to post costs, subject to the court’s consideration of the merits.

The Merits

[81] This action will turn in large part of the credibility of the main players, Terekhov and Khozan. Although the action has yet to proceed to examinations for discovery, both Terekhov and Khozan have already given oral testimony in the context of the arbitration I spoke of earlier.

[82] Though the arbitration arises in respect of issues hived off of Terekhov’s action, the issue of credibility is common to all three proceedings. As a result, I find the result of the arbitrator’s work helpful.

[83] On December 10, 2015, Stan Fisher released his interim award, in the context of a motion brought by the plaintiffs to dismiss the claims set out in the statement of claim that deal with whether or not Terekhov owns shares in CVMR Co.. The motion was based on the alleged expiry of the applicable limitation period. Terekhov responded to the motion by relying on his allegations of fraud made in the main action, submitting that his delay in starting the action was the result on ongoing fraudulent representations made to him by Khozan.

[84] At paragraph 33 of this award, Fisher states:

On issues of credibility, I find the narrative told by the Claimant (Terekhov) and largely corroborated by Popik is much more credible. Both the Claimant and Popik in a very credible manner state that they knew nothing about finances and even less about marketing. They both stated they were hired for their technical knowledge. While they were both grateful for receiving equity in CVMR, they assumed it was an incentive to develop new processes which could be used commercially.

[85] At paragraph 38, he adds:

I had the opportunity to see the 3 men (Terephov, Popik and Khozan) in the witness box, under cross examination and to view the documents. I accept the narrative told by the Claimant.

[86] Part of the problem was that, in denying that a significant dividend had been issued to Terekhov, Khozan was then unable to account for emails that appeared to clearly support the conclusion that this is what he had told Terekhov had occurred. He simply had no explanation at all for one of them.

[87] Further, Khozan relied there, as he does in this action, on the fact that Terekhov was an officer of these companies at one point in time so that he was well aware of the financial status and various transactions in which each was engaged. While admitting he held office, Terekhov denied he actually knew much about any of this. Again, Fisher accepted his version of events. At paragraph 58, he stated:

I accept the Claimant’s evidence that he did not have any real knowledge of CVMR’s finances; he did not understand the corporate documentation and relied on what he was told by Khozan, about the meaning and effect of these documents.

[88] Fisher then concluded (paragraphs 63-66) that the expiry of the presumptive limitation period was not a bar to Terekhov proceeding:

…as he had been assured by Khozan from time to time that the money (the dividend) was safely invested in Switzerland with Credit Suisse, and then with the new financial manager.

If no dividend was paid out of CVMR and no investment was made for the Claimant, as claimed by Khozan, then Khozan deceived the Claimant and cannot rely on a limitation period to defeat the claim. He has misrepresented the state of CVM’s affairs to his minority shareholder and employee intended to be relied upon. It was relied upon by the Claimant.

In those circumstances, the limitation period defence is not available and does not afford the Respondents with any defence. Equity will not permit a statute to be used as an instrument of fraud…

I see the 2005 so called corporate resolutions as part an parcel of the deception perpetrated by Khozan.

[89] Fisher went a step too far in his award. Having made these findings, he then went on to conclude that Terekhov was therefore the owner of the shares in issue. When it was pointed out to him that that was not the issue on the table for him to deal with at that time, on July 21, 2016, he recalled the paragraphs of the award dealing with that conclusion.

[90] These are very strong findings of credibility with respect to both men, made after having heard oral evidence and reviewing critical documents. These findings, on their own, are significant in that they deal with credibility in a way that can be viewed as general, as well as specific to particular issues. Further, to the extent that they are specific they deal with issues that arise in the context of this action, as well.

[91] Though the court’s decision has yet to be released, it would be unusual for a court to reverse findings of credibility made by an arbitrator. I am therefore of the view that I can rely on the arbitrator’s award as strong indicator as to where the merits of this case are likely to go.

[92] Finally, the plaintiffs have put forward no evidence of their own addressing the issue of the merits. Again, the onus is on them at this stage of the motion to demonstrate that they have a good chance of success in order to successfully resist having to post security in view of my finding of insufficient assets. They have not done so.

Findings under subparagraphs (d) and (e)

[93] I have approached this motion in the context of subparagraph (d), on the basis that the plaintiffs, corporation, have failed to show that they have sufficient assets in the jurisdiction to satisfy a possible cost order. I have also determined that the plaintiffs have failed to show that they have a good chance of success on the merits in view of what Fisher has said regarding Khozan’s credibility combined with their own failure to put forward compelling evidence on the merits.

[94] Having made that finding, it is not necessary for me to go further to address subparagraph (e), that is, whether the action appears to be frivolous and vexatious and there appears to be insufficient assets. However, in view of my finding as to the merits of the case, I am also of the view that the moving party has been successful on both counts.

Deductions from security based on Terekhov being a plaintiff in the first action

[95] As matters stand, there are currently two separate actions and an arbitration between these parties, and in some cases, others.

[96] I was not advised there would be a motion to consolidate actions when I scheduled these matters by way of special appointment, nor did the plaintiffs pursue this issue separately on a regular list before me or any other masters before the hearing of this motion. This would have been the best approach as everyone would have known where they stood on this issue before these motions for security for costs were argued. It would have also been an easy thing to have done in advance as the motions were scheduled in late June for late October, a period of almost 4 months.

[97] Finally, having been told I would not deal with the additional issues they raised late-in-the-day without notice to me, no adjournment was sought to ensure that the actions were consolidated before this motion was argued to facilitate the plaintiffs’ ability to make this submission. I must therefore deal with this matter as it currently stands – as three separate proceedings. I cannot assume that the actions will be consolidated.

[98] As a result, as matters stand, there will be necessarily have to be production of documents and oral discoveries in each of the two civil actions and the arbitration will run in tandem. There are undertakings of confidentiality that apply under the Rules as between the two actions and the arbitration that prevent the use of oral evidence obtained during examination for discovery in one civil action at in the context of the other or the arbitration. Further, as the overlap of the parties between the two actions is only partial, the parties are bound by these rules - it is unclear if all parties in both actions will consent to a waiver of these rules. That means these oral and documentary disclosure have to be approached separately in each of the two civil actions, and then again in the arbitration.

[99] Thus, while there may be some overlap of the issues, because the plaintiffs failed to assert their claim as a counterclaim in Terekhov’s action and as they hived off issues from that action to arbitration, this overlap does not necessarily mean a cost savings. Much of what they have to do will have to be repeated at least once. As Terekhov will have to incur those costs a second time in this action, what policy basis is there for reducing the amount of security he is entitled to in this action?

[100] Further, there are many new issues raised in the plaintiffs’ actions, as the plaintiffs accuse Terekhov of effectively interfering with and usurping their business opportunities. They claim breach of contract, breach of fiduciary duties, breach of a duty of confidence and misappropriation of corporate opportunities. They accuse him of being in a conspiracy with his do-defendant, Van der Linde, to compete with the plaintiff companies. The claim against for damages Terekhov exceeds $18 million, along with injunctive relief, an accounting, equitable tracing and more.

[101] By way of contrast, Terekhov had sued for wrongful dismissal and relief from oppression, seeking a little over $1 million in damages. The oppression remedy has now been hived off to mediation so is not even part of the action.

[102] In view of the above, I do not share the plaintiffs’ view that what the moving party seeks by way of security should be diminished by the fact that they have claims, as well. They chose to assert those claims in two separate proceedings thereby increasing Terekhov’s costs, as well as their own. Having employed this strategy, they cannot then rely on it to again disadvantage Terekhov.

THE ORDER

[103] The standard approach is to make a “pay as you go” order. This anticipates the fact that most cases settle before trial but allows for the “what if this one doesn’t” scenario.

[104] Aside from their general position that the quantum of security that must be posted should be diminished because, in their view, this situation was equivalent to a claim and counterclaim, the plaintiffs said little about the moving party’s draft bill of costs and took no issue with it.

[105] It is important to bear in mind that, though the amount of time predicted for various events seems high, the plaintiffs have advanced a very complex proceeding. As a result, I believe the quantum sought for each event is reasonable in that context.

[106] Accordingly, IT IS ORDERED AS FOLLOWS:

The plaintiffs shall post security for costs, jointly and severally, as follows:

1. The first tranche of costs, covering costs already incurred and those to be incurred up to the completion of documentary disclosure and oral examinations (excluding disclosure-related motions) is fixed at of $40,000, and shall be paid within 45 days of the release of these Reasons;

2. The second tranche of costs, covering all costs associated with the preparation for and attendance at mandatory mediation, is fixed at $13,000, which shall be posted no later than 45 days after the conclusion of the last witness being examined for discovery;

3. The third tranche of costs, covering the pre-trial, is fixed at $6,900, which shall be paid within 30 days of the completion of the mediation;

4. The fourth tranche of costs, covering the preparation for and conduct of the trial, is fixed at $140,000, which shall be paid within one week of the completion of the pre-trial;

5. Security shall be posted with the court in accordance with the Rules by the deadlines set out above;

6. Save and except for rights of appeal, this action is stayed pending security being posted for the first tranche and, thereafter as each event concludes, until payment is made for the next tranche in accordance with the timetable created above;

7. In the event that any of the tranches remains unpaid after the deadlines specified, the moving party shall be at liberty to move for the dismissal of this action;

8. This order may be varied as provided by the Rules in the event that the projections for tranches 2-4 inclusive shift in either direction. If that occurs, the parties are encouraged to try to resolve the issue inter se before involving the court again;

9. The costs of the motion are to the moving party. In view of my imminent departure, I can accept brief written submissions regarding quantum from the moving party by November 18, 2016; from the responding party by November 22, 2016 and in Reply by November 25, 2016.

Master Joan M. Haberman

Released: November 15, 2016