CITATION: RESET ELECTRONICS INC. et al v. HYDRO ONE NETWORKS INC. et al 2016 ONSC 921
COURT FILE NO.: 13-58119
DATE: March 09, 2016
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: RESET ELECTRONICS INC. and PATRICK JAMES WHITTAKER, Plaintiffs
AND:
HYDRO ONE NETWORKS INC. and THE ONTARIO POWER AUTHORITY Defendants
BEFORE: Master Nathalie Champagne
COUNSEL: Charles Gibson, for the Plaintiffs
Monica Caceres, for the Defendants
HEARD: January 28, 2016
E N D O R S E M E N T
[1] This motion for security for costs was heard by me on January 28, 2016. The motion is brought in the context of the claim by Reset Electronics Inc. against Hydro One and the Ontario Power Authority for negligence, negligent misrepresentation, misfeasance in public office and breach of contract.
[2] Initially Reset and Whittaker brought this action against Hydro One and the Ontario Power Authority alleging that they suffered damages as a result of the actions and representations of Hydro One. The action against the Ontario Power Authority was discontinued by both Plaintiffs on November 6, 2013 and Whittaker discontinued his action against Hydro One on the same day, so he is no longer a plaintiff in this action.
[3] Hydro One seeks an order for security for costs in the sum of $336,000.00.
The Issues
[4] In this matter the court must decide:
a. Whether this court may order security for costs under rule 56(1)(d) of the Rules of Civil Procedure on the grounds that the plaintiff has insufficient funds in Ontario to pay costs;
b. Whether the plaintiff is impecunious;
c. If the plaintiff is found to be impecunious, whether its case is devoid of merit and should not be permitted to proceed;
d. If the plaintiff is not found to be impecunious, whether or not the case has "a good chance of success" and should be permitted to proceed.
BACKGROUND
[5] Reset Electronics Inc. ("Reset") is a corporation under the laws of Ontario. Between 2008 and 2011, Reset was in the business of distributing and installing electronic components, in particular T5 fluorescent light technology, and served the territory of Hydro One and of Hydro Ottawa. Patrick James Whittaker ("Whittaker") was the sole shareholder of Reset.
[6] Between 2008 and 2011, Hydro One was responsible for the delivery of two energy conservation programs, namely the Electricity Retrofit Incentive Program ("ERIP") and the Save on Energy Retrofit Program ("SERP"). Both programs provided financial incentives to applicants who replaced T12 fluorescent lights with T5 fluorescent lights. Reset provided services to the applicants of the ERIP and SERP programs by replacing T12 fluorescent lights with T5 fluorescent lights and by filling out their requisite applications to the ERIP and SERP programs. Reset's agreement with its customers was that Reset would be paid when the customers were reimbursed by Hydro One. Reset alleges that it based its business plans on those two programs and on the representations made by Hydro One with respect to those programs.
[7] For reasons unknown to the Court, in June 2011, customers of Reset experienced significant delays in the processing of applications to, and payment from, the ERIP and SERP programs. It is undisputed that between June 2011 and September 2012, Hydro One did not reimburse Reset customers who were applicants to the ERIP and SERP programs. Reset alleges that it was not paid by its customers during that time as its customers were not reimbursed by Hydro One. For that period of 18 months, Whittaker alleges that he was not paid a salary by Reset and both he and Reset incurred significant debt, including to CIBC.
[8] CIBC appointed a receiver ("the Receiver") for Reset in December 2012 after both Reset and Whittaker defaulted on a forbearance agreement with CIBC that was signed in the fall of 2012. CIBC also seized and sold Whittaker's home under power of sale. On January 30, 2013 Whittaker made an assignment in bankruptcy.
[9] Hydro One brings this motion for security for costs under Rule 56 of the Rules of Civil Procedure. Hydro One and Reset concede that the receivership of Reset and Whittaker's bankruptcy puts Reset squarely under rule 56(1)(d). That rule provides that a court may order security for costs against a plaintiff who has insufficient assets in Ontario to pay the costs, if awarded, to the defendant. Hydro One alleges that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant, but it contends that the plaintiff is not impecunious. The impecuniosity (or not) of the plaintiff is an important factor in determining whether an order for security for costs should be made.
Impecuniosity of the Plaintiff
The Plaintiff's Position and Evidence
[10] Reset's position is that it is impecunious. The evidence of the plaintiff is that Reset was placed into Receivership in December 2012 and Patrick James Whittaker who was Reset's sole shareholder, made an assignment into bankruptcy on January 30, 2015. To be clear, neither Reset nor Whittaker made a proposal to creditors. Whittaker was discharged from his bankruptcy on November 5, 2013. Reset is still in receivership and is said to have had inventory of $200,000.00, which is still in the process of being sold to pay creditors. Whittaker's evidence is that he is not currently employed. He earned no income in Canada in 2013 and 2014. He is living with a partner, who is a former airline attendant who is supporting him financially and with whom he is trying to start a business in the U.S.A. named Reset Electronics LCC. He travels between the U.S.A. and Canada using his partner's travel points. The 2012 Profit and Loss Statements for Reset Electronics LCC show a gross income of $88,818.51 and a net income $1,618.66. In 2013 its gross income was $31,421.01 and its net income was $1,819.29. In 2014 its gross income was $69,864.00 and net income was $298.93.
[11] Whittaker was asked on his cross-examination if he had tried to obtain financing for this litigation. He responded that he approached CIBC and was turned down. An email from Alden Christiansen dated September 17, 2015 establishes this.
[12] In addition, in response to an initial refusal at his cross-examination Whittaker's counsel sent a letter confirming that that his client approached several financial institutions seeking financing but was turned down as he was recently discharged from bankruptcy. In another response to a refusal, counsel for the plaintiff confirmed that Whittaker managed to borrow $2,336.36 from family and friends to pay for some disbursements with respect to the litigation. In addition, the evidence is that the plaintiff's counsel is proceeding with this action on a contingency fee basis.
[13] Whittaker's evidence is that he wanted to commence this claim against Hydro One to right what he perceived to be a wrong. It is uncontroverted that he approached the Receiver and CIBC and requested that they commence litigation against Hydro One and they refused. It is also uncontroverted that Whittaker entered into an Assignment Agreement dated October 22, 2013 with his main creditor, CIBC, the Receiver BDO Canada Limited and the Plaintiff's counsel, assigning the claim to Whittaker. By the terms of that assignment, Whittaker is to pursue the claim as his own cost, risk and expense. The agreement provides that should there be an award in the plaintiff's favor, after legal fees are paid, CIBC will collect 50 percent of any award and the remaining 50 percent will be paid to the plaintiff.
[14] Whittaker swore a lengthy affidavit, supported by exhibits which set out in detail the manner in which Reset's business operated, including the reliance on Hydro One and Hydro Ottawa as an indirect but sole source of income for Reset. His evidence is that he, on behalf of Reset, relied on representations by Hydro One regarding the payment scheme to applicants under the ERIP and SERP programs. That evidence is uncontroverted by Hydro One. It is also uncontroverted that Hydro One did not make payments on applications submitted by Reset on behalf of its customers from June 2011 until September 2012. His evidence is also that by September 2012, Reset and Whittaker were in serious financial difficulty that lead to the appointment of a Receiver for Reset and the bankruptcy of Whittaker.
The Defendant's Position and Evidence
[15] Hydro One's position is that Reset has not demonstrated that it is impecunious. Hydro One says that Whittaker failed to provide evidence that Reset is unable to raise funds. Hydro One did not provide any evidence of its own.
[16] Hydro One points to the fact that Whittaker travels between Canada and Nevada and meets his day-to-day expenses yet claims he has no income. I accept Whittaker's explanation that he travels using his partners travel points and is financially supported by her while he tries to launch his new business in the U.S.A.
[17] Hydro One also relies on the refusal of CIBC to fund the litigation as grounds for an order for security for costs.
Analysis of the Evidence
[18] Reset and Whittaker state that they are impecunious. Hydro One contends that Reset and Whittaker have not satisfied the plaintiff's burden of proof by establishing that they are unable to raise funds to post security for costs. With respect, I disagree. I find as fact that in December 2012, CIBC appointed a receiver for Reset. I find as fact that Whittaker who was Reset's director and sole shareholder, was assigned into bankruptcy on January 30, 2013. There is documentary evidence to support these facts. Reset's Notice of Statement of the Receiver dated March 4, 2013 clearly shows that the business assets were inventory valued at $200,000.00 and that CIBC Bankruptcies was owed $800,000.00. I accept the uncontroverted evidence in Whittaker's affidavit which sets out that he is bankrupt, lost his house under power of sale, is unemployed and being financially supported by a partner at the present time. I find that he did not earn any income in Canada in 2013 and 2014 as set out in his Notice of Assessment for 2013 and a draft copy of his tax return for 2014. I accept Whittaker's evidence that he is trying to start a new business in the USA by the name of Reset Electronics LCC and of which he is a fifty one (51) percent shareholder. I find as a fact that the net income from the business has been less than $2,000.00 per year since its inception in 2012. I also find that Whittaker approached CIBC and other financial institutions to request financing for this litigation, but that he was turned down. There is no evidence before the court to suggest otherwise.
[19] I am satisfied that Reset is impecunious and that it is unable to raise funds for security for costs.
The Law
[20] Rule 56(1)(d) of the Rules of Civil Procedure provides as follows:
The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that…
(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent.
[21] In determining whether to order security for costs where a corporate plaintiff has insufficient assets in Ontario to satisfy a costs order, a court must do a three step analysis:
a. If a corporate plaintiff is found to have insufficient assets in Ontario to pay the costs of a defendant or respondent, the plaintiff must show that it is either impecunious or that it has sufficient assets to pay costs to the defendant: see Smith Bus Lines Ltd. v. Bank of Montreal (1987), 1987 CanLII 4190 (ON SC), 61 O.R. (2d) 688, at p. 704 (H.C.).
b. If the plaintiff can show that it is impecunious it needs to demonstrate that its claim is not "devoid of merit": John Wink Ltd. v. Sico Inc. (1987), 1987 CanLII 4299 (ON SC), 57 O.R. (2d) 705, at pp. 708-709 (H.C.) [John Wink].
c. If on the other hand, the plaintiff is found not to be impecunious it must prove that its claim has a "good chance of success": see Zeitoun v. Economical Insurance Group, 2009 ONCA 415, 96 O.R. (3d) 639.
Analysis
[22] The onus is on a plaintiff claiming impecuniosity to show it cannot raise the security for costs. In 1164966 Ontario Inc. v. Coulter, 2011 ONSC 5817 [Coulter], Master Pope expands on this concept which originates in John Wink. At paragraph 26 of Coulter Master Pope states:
"Where the plaintiff is a private corporation, the court will require cogent evidence that both the corporation and its shareholders cannot sell assets, borrow or otherwise raise the necessary funds to post security for costs. Evidence of impecuniosity must be set out with robust particularity, with full and frank disclosure of the financial circumstances of the plaintiff and its principals"
[23] Design 19 Construction Ltd. v. Marks (2002), 22 C.P.C. (5th) 117 (Ont. S.C.) [Design 19], makes it clear that in determining impecuniosity, consideration must be given not only to a plaintiff's insufficient assets, but also to whether a corporate plaintiff's shareholders or creditors are able to post security for costs.
[24] I am of the view that the present case can be distinguished from Design 19 where Justice Nordheimer ordered security for costs because the plaintiff corporation failed to adduce evidence that its creditors were unable to post security for costs. In Design 19 the plaintiff had not approached its creditors because the plaintiff felt that it would be inappropriate to do so. In addition, the evidence of the plaintiff on the issue of impecuniosity was limited to one paragraph in the President's affidavit, without particulars, that set out that "At this time, Design 19 has no assets other than this action and I am personally bankrupt". It is also important to note that in Design 19 the plaintiff made a proposal in bankruptcy which was accepted by its creditors and the creditors would have been the sole beneficiaries of proceeds from a successful action. These were all factors considered in Justice Nordheimer's decision.
[25] In the present case, unlike the plaintiff in Design 19, the plaintiff's sole shareholder provided a fairly lengthy affidavit detailing its impecuniosity as well as his own. That affidavit was supported by documentation and was the subject of cross-examinations. Unlike the plaintiff in Design 19, in the present case the plaintiff did not make a proposal to creditors that was accepted by its creditors. Reset was appointed a receiver and its sole shareholder made an assignment in bankruptcy. Further, the Assignment Agreement signed by Reset, the Receiver and CIBC provided that Whittaker would direct the litigation and would retain one half (less costs) of any award ordered by the court if successful; he therefore has a direct interest in the outcome. This was not the case in Design 19, where creditors approved the proposal and all proceeds of any award that might be granted by a court would go to creditors and not to the plaintiff in that case.
[26] In the present case, given my findings of fact and the analysis above, I am satisfied that Reset has provided evidence that neither it nor its sole shareholder can sell assets, borrow or otherwise raise funds to post security for costs.
[27] Having found that the plaintiff is impecunious and unable to raise security for costs, the next step is to examine the merits of the claim to ascertain whether the claim is "devoid of any merit". The evidence of Whittaker is that he and Reset relied on Hydro One's representations regarding two energy conservation programs available to qualified applicants and that, between 2008 and 2011, Reset's business was premised in large part on the two programs. Whittaker's uncontroverted evidence is that the applications of Reset's customers were not processed and paid for a period of 18 months between June 2011 and September 2012. Reset alleges that it suffered damages as a consequence and points to its receivership and the bankruptcy of its sole shareholder as evidence of the damage it suffered. On these limited facts alone, I am of the view that the claim has merit.
Decision
[28] I must make a decision that is just given the circumstances of this case. Hydro One is a major corporation with considerable resources and in-house counsel. Reset on the other hand is an impecunious corporation in receivership whose sole shareholder is a discharged bankrupt, allegedly as a result of the actions and representations of Hydro One. Reset's case has merit and its sole shareholder would benefit directly from a positive outcome in this action, as would CIBC. In my view, while CIBC should not benefit without assuming some risk, they refuse to do so, to the prejudice of Reset and Whittaker. If an order for security for costs is made, I am of the view that it would effectively end the litigation. In all of the circumstances, I am of the view that it would be unjust to order security for costs. The defendant's motion for security for costs is therefore dismissed with costs to the plaintiff.
[29] If the parties cannot agree on costs, they shall provide me with written submissions limited to 3 pages each, within 14 days.
Master Nathalie Champagne
DATE: March 09, 2016
COURT FILE NO.: 13-58119
DATE: 2016/03/09
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: RESET ELECTRONICS INC. and
PATRICK JAMES WHITTAKER,
Plaintiffs
AND:
HYDRO ONE NETWORKS INC. and THE ONTARIO POWER AUTHORITY Defendants
BEFORE: Master Nathalie Champagne
COUNSEL: Charles Gibson, for the Plaintiffs
Monica Caceres, for the Defendants
ENDORSEMENT
Master Nathalie Champagne
DATE: March 9, 2016