Court File and Parties

Court File No.: CV-14-10773-00CL Date: 20160605 Ontario Superior Court of Justice (Commercial List)

Between: 1511419 ONTARIO INC. (FORMERLY KNOWN AS THE CASH STORE FINANCIAL SERVICES INC.), Plaintiff – and – CANACCORD GENUITY CORP., Defendant

Before: F.L. Myers J.

Counsel: Pat Flaherty and Emilia Galan, counsel for Canaccord Genuity Corp. Gerald C.R. Ranking and Dylan Chocla, counsel for KPMG LLP Daniel Murdock and Michael Currie, counsel for Cassels Brock & Blackwell LLP John Finnigan and Megan Keenberg, counsel for the plaintiff Heather Meredith, counsel for FTI Consulting Canada Inc., the Monitor

Heard: June 2, 2017

Endorsement

[1] The endorsement applies as well to the action brought by the plaintiff against KPMG LLP under Court File No. CV-14-010771-00CL and to the action brought by the plaintiff against Cassels, Brock & Blackwell LLP under Court File No. CV-14-010774-00CL. A copy of this endorsement is to be placed in each court file.

[2] The plaintiff in these three actions concedes that it has insufficient assets to pay the costs of the defendants if they successfully defend the actions. The plaintiff also concedes it has not met the test to show that it is impecunious (i.e. it cannot prove that those who will benefit from the plaintiff’s success in the litigation cannot afford to fund the plaintiff).

[3] The action is brought by the plaintiff on behalf of substantial, commercial creditors who suffered very substantial losses on the plaintiff’s insolvency. The creditors have provided some funding to the plaintiff in a litigation trust established and funded in the plaintiff’s CCAA proceeding. The plaintiff has approximately $1.5 million available to fund security for costs in the litigation trust fund. The plaintiff delivered no evidence to establish that the creditors lack the means (as distinct from the desire) to fund the trust further if called upon to do so.

[4] The creditor-directed plaintiff points to what appear to have been significant misstatements made by the plaintiff in its public disclosures prior to the plaintiff and the bulk of its funding creditors entering into the transaction by which the creditors made their ill-fated loans to the plaintiff. The plaintiff claims that the defendants ought to have known of and prevented the plaintiff’s misstatements. Had the defendants not violated their obligations, the plaintiff and its creditors say they could not have completed the impugned transaction and incurred their losses. Moreover, the plaintiff seeks to blame the defendants for its insolvency which it claims was caused by the impugned transaction among other things (like its regulatory non-compliance which it lays at the feet of the defendants or Cassels Brock & Blackwell at least).

[5] The merits are very hard to assess at this early stage of three complex cases. Incorrect public disclosures can but do not inexorably lead to a finding of auditor’s negligence. The assessment of claimed breaches of applicable auditing standards can be a difficult task. Similarly, assuming that an I-banker gives a fairness opinion based on erroneous facts, this merely begs the next questions, like: what did it know; what ought it to have known; and was any loss caused by any negligence that may be proved against the banker, for example. Finally, while there is a smell of conflict wafting from CBB’s offices, that is but a single hurdle on a long track to prove lawyers’ liability.

[6] I do not doubt that there are legitimate claims being made in that some valid causes of action are asserted that have some evidentiary support from a 30,000 foot overview of a few select documents. But, nothing in my quick survey of the documents affects the balancing of interests in relation to the key factors affecting security for costs. That is, I do not see a meritless or vexatious claim. Nor do I see an especially strong claim that cries out for justice for a marginalized or powerless plaintiff regardless of the cost. Rather, I see three complex, sophisticated, hotly contested, commercial claims that may be provable after a thorough analysis of a very significant amount of documentation and testimony spanning several years.

[7] These are heavy duty, expensive pieces of commercial litigation. The plaintiff seeks damages of more than $150 million. I agree with Charney J. in Proxema Ltd. v. Birock Investments, 2016 ONSC 5686, at paragraph 25, that there is an imbalance in an action that is being pursued by a shell company for the benefit of creditors who are not parties. The creditors are quite properly realizing on the plaintiff’s causes of action. They will be entitled to the benefit of costs awards if they win. But as things currently stand, the creditors will not be liable for costs if the plaintiff loses. That is the imbalance that security for costs was designed to remedy.

[8] I agree with Mr. Finnegan that the court’s discretion is always to be exercised based on seeking a just outcome balancing the relevant inputs. See Georgian Windpower Corporation v. Stelco Inc., 2012 ONSC 292, at paras. 20 to 37. Security for costs is always a discretionary matter in which the court seeks to do justice - to be fair as between and among the parties. In this case, the merits are a neutral factor in my view as discussed above. As was the case in Georgian Windpower, assessing blame for the plaintiff’s insolvency in this case necessarily becomes bound up in the assessment of the merits of the actions.

[9] I do not agree with the thrust of Mr. Finnegan’s argument that due to the losses they have already suffered, the creditors get to choose how much they will fund towards the defendants’ costs if the plaintiff loses. Decisions as to the funding of a litigation trust in a CCAA proceeding do not limit the amount of security for costs that the trustee may be obliged to post in litigation that it brings. The consequences of the creditors’ funding choices affect themselves not the defendants. That is, they can choose to fund the plaintiff as required or choose not to sue. They do not get to underfund the plaintiff to meet the costs burden that it undertook by suing - at least not in the absence of impecuniosity, a sufficiently strong case that justice demands be allowed to proceed, or other, sufficiently weighty equitable grounds.

[10] I note that the creditors have already received substantial distributions in the millions of dollars under the CCAA plan successfully implemented by the plaintiff. Their outstanding losses are many times greater than the distributions that they have received. Nevertheless, they plainly can fund the litigation if they choose to do so.

[11] The defendants seek over $10 million for security for their costs in the aggregate. The plaintiff did not deliver a bill of costs or provide much information as to its costs to date for comparison. I reviewed the draft omnibus discovery plan which is still not finalized despite months of negotiation. The parties have done an excellent job agreeing on a large number of specific categories for document production. This should aid their computer search efforts. But the parties advise that the sheer number of categories will lead to productions in the tens of thousands of documents by each party. Combined discoveries provide some efficiencies but they also require each defendant to review all the documents and participate in the discovery of the other defendants. Ms. Keenberg argues that the defendants are not entitled to security for the costs of such efforts. But she agreed that the defendants were being reasonable and she could not articulate why costs reasonably incurred by a party in defending the claim could not be included in its bill of costs. It is not an expansion of any party’s liability to have to pay the other side its reasonably incurred costs.

[12] The plaintiff also chose to bring its Pierringer agreement approval motion as part of its CCAA plan approval process. It is appropriate for the defendants to seek those costs which quite properly are considered costs of these proceedings to which the Pierringer provisions relate.

[13] I am satisfied that it is fair and just for the plaintiff to post security for the costs of the defendants. The order should be staged to fairly reflect the outcome of the upcoming summary judgment motion(s) and to allow for better refinement of expensive pre-trial and trial steps once the facts are better understood.

[14] In my view, the plaintiff should pay into court the aggregate sum of $1.6 million in relation to steps 1 to 3 on Mr. Finnegan’s chart at this time. I have reduced the chart total from $1.846 million to account for some liberality in costs estimates. The plaintiff is to pay $533,333 into court for each action within 60 days. Order to go in form 56A. Security should be in cash or by an unconditional letter of credit with no time limit drawn on a bank listed in Schedule I of the Bank Act, SC 1991, c 46.

[15] There will be a further amount to be posted 45 days before the date scheduled for the first examination for discovery. That amount will be set by agreement of the parties or further order made at a case conference. A final instalment will be set at the pretrial conference if not on consent before then.

[16] Defendants may each deliver no more than five pages of costs submissions by June 12, 2017. The plaintiff may deliver no more than five pages of costs submissions by June 19, 2017. All parties, other than the Monitor, will deliver costs outlines regardless of whether they seek costs. In addition, any party relying on an offer to settle may also deliver a copy of the offer. All documents shall be delivered to my office as attachments to an email in searchable PDF format. No case law or statutory material is to be delivered. References to case law or statutory material, if any, are to be made by hyperlink embedded in the party’s submissions. There are no costs awarded to or against the Monitor.

F.L. Myers J. Date: June 5, 2017