Court File and Parties

COURT FILE NO.: CV-14-500065 MOTION HEARD: November 15, 2016 SUPERIOR COURT OF JUSTICE – ONTARIO

Re: RAYS OUTFITTERS INC. Applicant

v.

LIXO INVESTMENTS LIMITED Respondent

BEFORE: Master Lou Ann M. Pope

APPEARANCES: Van Thi Tuong Truong, with leave of the court granted October 5, 2016 to represent the applicant corporation 22 Meadowhawk Trail, Bradford, Ontario Telephone: 416-550-7558 Email: tuongvan99992003@yahoo.com

Susan Zakaryan, Wagman, Sherkin Barristers & Solicitors for respondent Fax: 416-465-3941

Reasons for Endorsement

[1] The sole issue to be determined on this motion is whether the applicant is required to post security for costs.

[2] This action arises out of a commercial lease signed on January 14, 2013 in which the applicant (“tenant”) leased from the respondent (“landlord”) premises located at 18 Ashwarren Road in Toronto. On January 7, 2014, the landlord entered the subject premises and purported to distrain against the tenant’s goods due to non-payment of arrears of rent said to be owed by the tenant.

[3] In this application, the tenant sought a declaration that the distress carried out by the landlord was unlawful and an order permitting the tenant to remove its chattels from the premises. It also sought an order referring the issue of the alleged damages arising out of the alleged unlawful distress to trial.

[4] The landlord also commenced an application for, among other things, payment of the arrears of rent.

[5] The two applications came before the Honourable Mr. Justice Mew on May 21, 2014. Justice Mew found that the tenant was in arrears of rent at the time of the lockout; however, he also found that the landlord forfeited the lease on January 7, 2014 and that the distress was unlawful. Justice Mew ordered the landlord to grant access to the tenant to remove its chattels and he ordered that the tenant pay the arrears of rent. Lastly, His Honour referred the issue of damages allegedly sustained by the tenant as a result of the lockout to trial. The trial is currently scheduled for June 5, 2017.

[6] Ultimately, the tenant removed its chattels and paid the arrears of rent.

[7] Following Justice Mew’s order, no pleadings were exchanged and no discoveries were conducted. The applicant filed a trial record in July 2015. The trial record contains a summary of the damages claimed by the applicant in the total amount of $735,745.75. The bulk of this amount is the value of goods that were allegedly destroyed. In contrast, the applicant claimed in its application that the value of the goods that were in the subject premises at the time of the lockout was approximately $200,000.

[8] Mediation has been held. Counsel for the parties at the time agreed that the cross-examinations that were conducted of the applicant prior to the hearing of the application form part of the discovery of the applicant. The respondent conducted a further examination for discovery of the applicant on June 15, 2016. Two days later, a pre-trial conference was held and as the matter did not settle, it was scheduled for trial.

[9] Following the pre-trial conference, respondent’s counsel advised applicant’s counsel that the respondent intended on bringing this motion and asked for counsel’s dates.

[10] Applicant’s counsel was removed as counsel of record by order of Master Dash on August 10, 2016. By mid-September 2016, the applicant had not complied with subrules 15.04(6) and (7) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (“the Rules”), which required the applicant corporation to appoint a new lawyer of record or obtain and serve an order under subrule 15.01(2) granting it leave to be represented by a person other than a lawyer, within 30 days after being served with the order. Therefore, the respondent amended its notice of motion to include relief for an order dismissing the application or, in the alternative, an order requiring the applicant to post security for costs.

[11] On October 5, 2016, I made an order granting Ms. Van Truong (“Truong”) leave to represent the applicant pursuant to rule 15.01(2), unopposed by the respondent. My order contained numerous terms which included a requirement that Truong bring with her to every court appearance a Vietnamese interpreter.

Motion For Security For Costs

[12] The respondent relies on subrule 56.01(1)(d) of the Rules which provides as follows:

56.01(1) The court, on motion by the defendant or respondent in a proceeding, may make such order for security for costs as is just where it appears that,

(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.

[13] The following are the basic principles on a motion for security for costs.

[14] The decision to order security for costs is discretionary and the court considering the motion is afforded broad latitude to make an order that is just in the circumstances. (Morton v. Canada (Attorney General) (2005), 2005 ONSC 6052, 75 O.R. (3d) 63 at para. 38 (S.C.J.))

[15] The courts have established a two-step inquiry when considering whether to order security for costs.

[16] Initially, the onus is on the defendant to demonstrate that the plaintiff falls into one of the subrules of 56.01(1). The onus is not a heavy one. For example, the defendant need only demonstrate that “it appears” that the plaintiff is a corporation and there is “good reason to believe” that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant. Only if the defendant succeeds with the first stage does the inquiry move to the second stage.

[17] At the first stage, the defendant in satisfying its onus that there is a good reason to believe the corporate plaintiff has insufficient assets to satisfy a cost award must provide enough information about the corporation that goes beyond mere conjecture, hunch or speculation. There must be some evidence placed before the court from which the court can accept that the concern is genuine and that it is based on proven facts regarding the corporation’s current financial circumstances. (Cigar500.com Inc. v. Ashton Distributeurs Inc. et al., 2009 ONSC 46451, paras. 23-24)

[18] The authorities are clear that the second step onus on the plaintiff is not even reached until the defendant satisfies its initial burden. Once the defendant has done so, the onus shifts to the plaintiff.

[19] At the second stage the onus shifts to the plaintiff. The plaintiff can either demonstrate that it has sufficient assets in Ontario to pay a costs order or that it is impecunious and then ask the court to make such order as is just in the circumstances.

[20] At the second stage, the merits of the case remain a relevant factor. If it is found that the plaintiff has insufficient assets in Ontario, the court may exercise discretion as to whether an order for security for costs would be “just” in all of the circumstances. An inquiry into all factors must be taken including the merits of the case, balancing the interests of the parties, review of the financial circumstances of the plaintiff and the effect of an order.

Evidence of the Parties

[21] Truong was examined for discovery on behalf of the applicant. The following is a summary of the evidentiary record.

[22] Rays Outfitters Inc. is an Ontario corporation which was incorporated on May 28, 2012. Truong is a one of three directors and the president. The two other directors, both family members, are Bao An Le and Thi Bao Tran. According to its Business Plan, the company was incorporated to design and sell fashion apparel and accessories at affordable prices. It is stated that its products are “stylish timeless garments and up-to-the-minute designs, all in exclusive materials and at attractive prices ($5)”. (see p. 5 of Business Plan) The company is mainly funded by Truong who is described as an “experienced investor” with “experience in investment—production—trading in Vietnam (as PhuQuoc resort, Cuchi shopping center & apartment, garment work house in Quangphu & NhiXuan industrial park—Hochiminh city) and trading in USA, Canada”. (see p. 3 of Business Plan)

[23] The applicant entered into the subject commercial lease with the respondent in January 2013 and started the business sometime thereafter. The January 7, 2014 lockout was the second time the applicant was locked out of the leased premises. The applicant had been locked out in June 2013 for non-payment of rent. It had been allowed back in after it paid the rent arrears. Of the twelve post-dated cheques that the applicant gave the respondent, seven were returned due to non-sufficient funds.

[24] Truong’s evidence is that although the company was incorporated in May 2012, the business started in 2013. Truong immigrated to Canada in 2012 on a temporary visa which was valid until 2016. Although this motion was heard in November 2016 while Truong was still in Canada, there is no evidence whether she continues to remain in Canada at the time this decision is being written in March 2017.

[25] The applicant was operating at the subject premises manufacturing clothing and accessories. As can be gleaned from the transcript of the examination of Truong, the applicant had rented numerous sewing machines and other equipment and along with fabric supplied to it by a third party business, as well as its own fabric, were manufacturing garments. Some or all of those garments were intended to be shipped to the third party business and the balance sold to retailers.

[26] The applicant filed its Business Plan. Appendix D of that plan sets out information regarding its proposed supplier; namely, a company called Maxgarmex.co. The company brochure for Maxgarmex.co shows a photograph of Truong and describes her as the managing director and CEO. Maxgarmex.co is described as follows:

… one of the most progressive garment manufacturers in Vietnam today. Founded in January 2003, Maxgarmex.co has an invested capital in excess of 5 Billion VND with factories located in HCMC and Quang Phu.

[27] Both HCMC and Quang Phu are located in Vietnam. The brochure further states that Maxgarmex.co has a total skilled labour force of over 750 people and two factories. Maxgarmex exports products to Russia, U.S., Europe, Middle Eastern countries and Australia.

[28] In an article of sorts contained in the applicant’s Business Plan, Rays Outfitters is stated as being headquartered in Toronto, Canada specializing in “sports fashion brands for all seasons Spring-Summer-fall-Winter, and for all ages and gender, with products ranging in price from 5-8 USD.” The article states further that the applicant’s products are manufactured in Canada and Vietnam with nearly 50 successful stores operating in major cities of Canada, the U.S. and some countries in the EU community.

[29] On examination held June 15, 2016, Truong stated that the applicant has not carried on business since it was locked out on January 7, 2014 and it has no assets.

[30] The applicant has made a claim for damages. It is undisputed that the applicant removed all of its chattels from the premises as permitted by the order of Justice Mew sometime in July 2014, some six months after the lockout on January 7, 2014.

[31] The main dispute regarding the applicant’s claim for damages is whether actions of the respondent caused the applicant’s goods located in the warehouse area to be damaged due to water.

[32] It is the applicant’s position that its assets in the warehouse became wet when there was a flood the day before the lockout and as the tenant was not permitted to re-enter the premises to retrieve its goods for some six months, the wet goods developed mold and had to be destroyed. The applicant states that the day before the lockout there was “ankle high” water on the floor which damaged its goods in the warehouse area; namely, hundreds of rolls of fabric.

[33] Conversely, it is the respondent’s position that, firstly, there were no complaints by the applicant regarding the condition of the chattels in July 2014 when they were removed or shortly thereafter. Secondly, the respondent admits that there had been flooding in the front office area in early January 2014 and that flooding was caused by the applicant’s failure to pay its Enbridge bills which resulted in Enbridge turning off the heat to the unit. This, in turn, caused a water pipe between the walls to freeze and burst when they thawed. However, the respondent states that there was no water in the warehouse area where the applicant’s goods were located.

[34] The following is a summary of the salient evidence on the damages issue.

[35] The applicant served a report from DSL Industrial Limited (“DSL”). The applicant hired DSL to inspect its goods that had been recently removed from the respondent’s premises in July 2014. DSL inspected five large plastic bags full of goods and found black mold; therefore, it recommended that the goods be destroyed as it was unsafe to continue the inspection. DSL did not provide an opinion on the value of the goods. The final paragraph of DSL’s report states that the applicant’s assets had been affected by “water damage”. Aside from other issues with this report, it fails to state how the author arrived at the conclusion that the goods had been water damaged. It is merely a bald unsupported statement.

[36] Truong’s evidence is that when she got the fabric out of the premises in July 2014, the colour was “smearing” and it was all moldy. She says this was due to the fact that the fabric had been wet and left in a humid condition for a long time. (Transcript, June 15, 2016, at pp. 228-232)

[37] The respondent filed the affidavit of its counsel, Charles Wagman, sworn September 13, 2016 in support of this motion. Mr. Wagman stated that he was advised by Adel Kirloss, a director of the landlord and his instructing client, that there had been no flooding in the warehouse where the tenant’s chattels were at any time between the lockout in January 2014 and the removal of the chattels in July 2014. Mr. Wagman’s affidavit includes copies of photographs of the tenant’s chattels which he states were taken by the landlord on June 9, 2014, some five months after the lockout. The photographs show an abundance of large plastic bags full of soft items lying on the floor or on pallets. It is the respondent’s evidence that the photographs show the tenant’s goods as they were left by the tenant at the time of the lockout in January 2014.

[38] In addition to Mr. Wagman’s evidence, the respondent filed the affidavit of Scott MacDonald, a general contractor who worked for a number of property management firms. Essentially, his evidence provides a history of times he was called to the premises by the respondent due to the applicant’s complaints. His evidence corroborates the respondent’s position that flooding had in fact occurred on January 6, 2014 as a result of a broken water line in the wall between the applicant’s unit and the adjacent unit. Mr. MacDonald’s evidence is that the water line broke due to freezing that was the result of there being no heat to the premises as Enbridge had disconnected the gas supply due to the applicant’s failure to pay its gas bills. He states that later than week Enbridge attended at the premises to restore the gas supply as the respondent had assume responsibility for the gas bill. He states further that immediately after the gas supply was restored, the heaters started working.

[39] According to Mr. MacDonald, there was another issue with flooding on January 8, 2014, two days after the water pipe broke and the day following the lockout. He states that he and a representative of Arcam, the company that had a contract with the respondent to fix sprinkler systems, attended at the premises because the sprinkler system had set off the alarm. Mr. MacDonald states that there were four to five inches of water in the front office that covered about one third of the office area. The sprinkler system was fixed. It was his opinion that the sprinkler system broke due to freezing for the same reason the water line had broken a few days prior.

[40] Regarding the quantification of the applicant’s alleged damages, the applicant has attempted to do so by producing copies of invoices for goods purchased, such as fabric and labels for the clothing. It is the applicant’s position that it purchased inventory between January 2013 and August 2013 totalling $718,000 and that all of the purchased goods remained in its premises at the time of the lockout in January 2014. The applicant’s evidence is that it had not sold any items by the time of the lockout as the company was new and in the process of manufacturing the clothing.

[41] A great deal of time was spent on examination for discovery of Truong regarding this issue. It was Truong’s evidence that she paid for the goods in cash which had been withdrawn from her bank account in Vietnam or from the cash her company in Vietnam had in the safe. The applicant has not produced bank statements or accounting records to evidence the payments which she took under advisement at her examination. Further, the respondent states that the applicant has not produced any documents showing wire transfers that Truong stated she made to pay for some of the goods. The respondent’s position is that the applicant has not produced credible evidence to substantiate its claim for any amount.

[42] The respondent made submissions regarding any potential claim by the applicant for loss of business, goodwill and reputation. However, it is not evident that the applicant is making such a claim from its damages calculation attached to the trial record. In the event that it is, the respondent examined Truong regarding the applicant’s late lease payments and dishonoured cheques. Truong’s evidence is that the applicant had large business expenses shortly after starting the business and there had been delay in receiving payment of accounts receivables. On examination, Truong also attributed the applicant’s financial difficulties due to fraud committed by an agent in Montreal who allegedly misappropriated $495,000 in fabric and accessories owned by Rays Outfitter at its Montreal location. The applicant commenced an action against the agent; however, the applicant has not produced the statement of claim or the order that was made in that proceeding. Truong’s evidence is that the matter is being investigated by the RCMP although she has not produced the name of the investigating officer.

[43] Truong also gave evidence on examination that the applicant had future plans to sell franchises. Although Truong’s evidence is that she had a list of customers who wanted to purchase “Rays name”, she has not produced the list of names of those customers if, in fact, there is a list. Truong produced a receipt from the Canadian Intellectual Property Office dated June 13, 2012 for the applicant’s application for the registration of a “Rays $5” trademark. However, there is no evidence that the application has been accepted. In addition, Truong produced a draft franchise agreement and a letter from the Canadian Franchise Association dated October 8, 2013. The Canadian Franchise Association advised that it could not proceed with the application due to non-compliance with the Arthur Wishart Act franchise legislation. The applicant has filed no further evidence in response to that application.

Analysis

(i) Is the applicant a corporation and is there good reason to believe that the applicant has insufficient assets in Ontario to pay the costs of the respondent?

[44] There is no dispute that the applicant is a corporation. Further, on the evidence, the applicant has not operated since the lockout in January 2014 and it has no assets. Thus, I find that the respondent has satisfied the first part of the test under rule 56.01(d) that it appears that the applicant is a corporation and there is good reason to believe that the applicant has no assets in Ontario to pay the costs of the respondent.

(ii) Has the applicant demonstrated that it has sufficient assets in Ontario to pay a costs order or that it is impecunious?

[45] The applicant has the onus on the second part of the test given my finding that the respondent satisfied the first part of the test.

[46] The applicant did not file a factum as required by the Rules for this motion. However, in Truong’s affidavit she set out three reasons that the applicant opposes this motion which will be addressed below.

a. This motion was brought too late

[47] Truong submits that Justice Mew “released his decision of the damages claimed” by the applicant on June 26, 2014. That statement is incorrect. At paragraph 40, subparagraph 7 of his Reasons for Decision dated June 26, 2014, Justice Mew directed a trial of the issue of the damages claimed by the tenant. Justice Mew’s direction is reflected in his Order of same date at paragraph 7 a. which ordered a trial of the issue of the damages claimed by the tenant. The trial has not been held and is currently scheduled for June 5, 2017.

b. Rays Outfitters Inc.’s business has a good chance of success

[48] This point fails to address the second part of the test on a motion for security for costs.

[49] The applicant has the onus to establish either it has sufficient assets in Ontario to pay the respondent’s costs or that it is impecunious.

[50] There is simply no evidence that the applicant has any assets in Ontario to pay the respondent’s costs if so ordered at trial.

[51] Therefore, the enquiry now is whether the applicant has proven that it is impecunious.

[52] In proving impecuniosity, there is a positive obligation on a party claiming to be impecunious to substantiate its claim by way of evidence. This has been defined as showing that an applicant is “impoverished or needy”. (Shuter v. Toronto Dominion Bank, 2007 ONSC 37475, 2007 CarswellOnt 5732, at para. 69)

[53] It is well established that the onus to establish impecuniosity rests with the applicant and its failure to adduce adequate evidence to that effect will be fatal to its position. There is a high evidentiary threshold that must be met before a court can find that an applicant is impecunious and that this threshold can only be reached by tendering complete and accurate disclosure of the applicant’s income, assets, expenses, liabilities and borrowing ability, with full supporting documentation for each category where available or an explanation where not available. At a minimum, this would require an individual applicant to submit his most recent tax return, complete banking records and records attesting to income and expenses and a corporation to submit its last financial statement and current financial projections. (Shuter, at paras. 71 and 76)

[54] Master MacLeod, as he then was, held that full and frank financial disclosure is required to persuade the court that an order for security for costs will necessarily bring the action to a halt. (Shuter, at para. 74, citing J.T. Stewart & Associates Inc. v. Cash, Lehman & Associates, [2005] O.J. No. 4234) Master MacLeod held that the shareholders had not made that level of disclosure and it was not sufficient to rely on the bald assertions by Ms. Stewart that this will be the result. He held further than when impecuniosity is relied upon the onus is on the party alleging it to present the necessary evidence.

[55] It is also well-established law that as the plaintiff’s or applicant’s financial capabilities are solely within his knowledge, it is incumbent on him to provide evidence with supporting documentation as to his income, expenses, assets and liabilities, and that assets should be described with particularity. In other words, the financial evidence of the plaintiff or applicant must be set out with robust particularity, leaving no unanswered questions. The following is a list of what the courts have found should be included in the plaintiff’s or applicant’s financial evidence:

• the amount and source of all income
• a description of all assets including value
• a list of all liabilities and other significant expenses
• an indication of the extent of the ability of the plaintiff or applicant to borrow funds
• details of any assets disposed of or encumbered since the action arose

[56] Regarding corporate applicants, it is well established law that a corporate applicant carries a significant burden of establishing direct and indirect impoverishment. The Divisional Court in Crudo Creative Inc. v. Marin, 2007 ONSCDC 60834, 2007 CarswellOnt 8895, at para. 33, held that Rule 56.01(d) and its equivalents are clearly intended to place corporate plaintiffs in a more vulnerable position that plaintiffs or applicants who are individuals.

[57] In Crudo, at paragraph 31, the court found that the respondent corporation was impecunious only in the narrow and limited sense that it was inactive and without assets. However, the court went on to state that evidence of financial difficulties does not necessarily equate with impecuniosity to be able to post security for costs. The court held that the key question was whether the respondent corporation had access to assets or funds, for example, whether assets were available to it to fund the appeal as presumably the appeal was being funded by some source outside of the company.

[58] In Crudo, the court cited the decision in Rhonmont Properties Ltd. v. Yeadon Fabric Structures Ltd., [2003] O.J. No. 1883, at para. 5, where the Court of Appeal held that a corporation is not impecunious in the extended sense that the shareholders and principals of the corporation are unable to fund security for costs.

[59] On the record herein, there is no evidence of unsuccessful attempts by the applicant to borrow or raise funds through its shareholders, Truong being one of them. The applicant is funding this application and Truong, a director and president, and owner of a similar multi-national company named as the applicant’s supplier in its business plan, is far from being impoverished. Therefore, I find that the applicant has not established by compelling evidence that it does not have access through its shareholders to the means to post security for costs. Therefore, the applicant is not impecunious in the extended sense.

c. The applicant stopped operation because of the respondent’s actions

[60] This is the third point raised by the applicant in opposing this motion. This point addresses in part the issue of the merits of this application.

[61] As for the merits of the application, in my view, it cannot be realistically found that the application is totally without merit. There is no dispute that there was a commercial lease between the parties and Justice Mew found that the respondent forfeited the lease having conducted an unlawful distress. The remaining issue is the applicant’s alleged damages. On the issue of whether the respondent caused water damage to the applicant’s goods, there is clearly evidence of flooding in the premises at the time of the lockout and the following day. Therefore, I conclude that the application is not without merit.

Conclusion

[62] The court has discretion to order security for costs as is just having regard to interests of the parties and what is just in the circumstances.

[63] In summary, I have found that there is good reason to believe that the applicant has insufficient assets in Ontario to pay the respondent’s costs. Further, the applicant has not established that it has assets in Ontario to pay the respondent’s costs or that it is impecunious. Should the applicant be successful at trial, it is reasonable to conclude that it will be able to collect its costs from the respondent as the respondent has demonstrable assets in Ontario. Conversely, should the respondent obtain a costs award against the applicant at trial, it is highly probable that it will be unable to collect its costs from the applicant.

[64] Considering the financial circumstances of the applicant and its president and director, Truong, I find it just to order that the applicant pay security for costs.

[65] As for the quantum of security for costs, Justice Mew dealt with the costs of the application in ordering that the respondent pay the applicant’s costs of $20,000 inclusive of fees, taxes and disbursements. The respondent seeks security for costs of $41,632.90, inclusive of fees, disbursements and H.S.T. This amount includes costs of mediation, examination for discovery, pre-trial conference and anticipated steps in preparation for trial. The trial is scheduled for five days. The respondent did not file its costs outline that was before the court on the hearing before Justice Mew. Upon a review of the respondent’s bill of costs filed for this motion, it appears that some of the disbursements should have been claimed on the hearing of the application, such as the Law Society levy and possibly fees to Teraview. Therefore, I have taken this into consideration in determining the quantum of security for costs. In my view, the appropriate amount of security for costs to be posted by the applicant is $32,500 inclusive of fees, disbursements and H.S.T.

Costs of this Motion

[66] As the respondent was successful on this motion, I fix its partial indemnity costs in the amount of $7,500 inclusive of fees, disbursements and H.S.T. payable within 30 days.

Orders

[67] The following orders shall be issued:

(a) the applicant shall post security for the respondent’s costs in the total amount of $32,500, by payment into court to the credit of this application, as follows:

(a) $15,000 by April 14, 2017; and (b) $17,500 by May 12, 2017

(b) the applicant shall pay the respondent’s costs of this motion fixed in the amount of $7,500 payable within 30 days of the date these reasons are released.

(original signed) March 22, 2017 Master Lou Ann M. Pope