Court File and Parties

COURT FILE NO.: 14-4221-SR DATE: 2017/07/21 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: LIFESTYLE CUSTOM CABINETS INC., Plaintiff AND: NORDAN GROUP INC., Defendant

BEFORE: The Honourable Justice D.A. Broad

COUNSEL: J. Sebastian Winny, for the Plaintiff Kaleigh Dryla, for the Defendant

HEARD: July 8, 2017

Endorsement

Background

[1] The plaintiff brought action against the defendant by Statement of Claim under the Simplified Procedure in rule 76 of the Rules of Civil Procedure on December 17, 2014 claiming $92,720 in damages for breach of an alleged verbal contract to sell manufacturing equipment (the “assets”) to the defendant. The plaintiff alleged in its Statement of Claim that the defendant agreed to purchase the assets from it for $64,000, and paid a deposit in the sum of $2,000 to be credited towards the purchase price. The plaintiff says that it gave possession of the assets to the defendant, however, the defendant refused to complete the purchase by paying the balance of the purchase price.

[2] The defendant defended the action and counterclaimed by Statement of Defence and Counterclaim dated February 9, 2015. The defendant denied that it entered into an agreement to purchase the assets from the defendant. Although it acknowledged that it engaged in negotiations respecting the acquisition of the assets from the plaintiff, it says that it specified that any proposed acquisition would be by way of an equipment lease involving Scotia Leasing and that any transaction would be conditional upon its approval, including its approval as to the value of the assets, that they be free and clear of any liens and not subject to any security agreement. The defendant stated that its payment of $2,000 was for the use of the assets during the time that Scotia Leasing was reviewing the transaction. The assets were subject to a security interest in favour of a secured creditor of the plaintiff. The defendant alleged negotiations took place between the parties and the secured creditor regarding arrangements to have the security discharged in exchange for payment, but before an agreement could be concluded the plaintiff’s landlord took possession of the assets for arrears of rent and the transaction did not proceed.

[3] The defendant counterclaimed for $10,000 for the $2,000 it paid for the use of the assets, repairs that it says it performed on the assets while in its possession and costs incurred to store, disconnect and move the assets, and to move and store other assets which were abandoned by the plaintiff.

[4] Each of the parties was represented by previous counsel and the action and counterclaim lay dormant following the exchange of pleadings until April, 2017, when the plaintiff served its Affidavit of Documents and requested delivery of the defendant’s Affidavit of Documents. Counsel for the defendant demanded proof that the plaintiff was still in operation. Plaintiff’s counsel attempted to arrange a settlement conference mandated by sub-rule 76.08. Counsel for the defendant ultimately refused to participate in a settlement conference or to deliver an Affidavit of Documents until the plaintiff had posted satisfactory security for costs.

Defendant’s Motion for Security for Costs

[5] The defendant brought a motion for security for costs in reliance upon Rule 56.01(d) of the Rules of Civil Procedure which provides that the court may make such an order for security for costs as it is just where 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.

[6] The plaintiff acknowledges that it is inactive and that its only asset is the “receivable” represented by the claim against the defendant in the action. It is also subject to a judgment in favour of the landlord of the premises 1390744 Ontario Limited dated February 2, 2015 in the sum of $31,670.94, plus costs in the sum of $421. The judgment bears interest at the rate of 15% per year from its date.

[7] During the negotiations respecting the purchase agreement the plaintiff was represented by Stephen P. O’Neill, who described himself as the Vice-president of the plaintiff. He stated that his mother Linda O’Neill is the President of the plaintiff, although she has no actual involvement with the company and there are no other Directors, officers or employees. Mr. O’Neal deposed that Linda O’Neill is the sole shareholder of the plaintiff, is 88 years old and “living on a fixed income and has no assets to speak of-just clothes and furniture.” No further information is provided respecting the financial resources of Ms. O’Neill and in particular, she provided no affidavit nor any net worth statement.

[8] The defendant did not make a representation on the amount of the security to be posted by the plaintiff. Orie Niedzviecki, counsel for the defendant deposed simply “should this matter proceed through a trial, I expect the total legal fees of the defendant to be approximately $45,000. My rate is $450 per hour.” No draft Bill of Costs was provided and no other explanation was offered for the $45,000 figure.

Plaintiff’s Motion to Strike Statement of Defence and Counterclaim and Other Relief

[9] In response to the motion for security for costs the plaintiff brought a motion for an order striking out the Statement of Defence and Counterclaim, or in the alternative, for an order that the defendant serve its Affidavit of Documents within 10 days and an order dispensing with the requirement for a Notice of Readiness for a Pre-Trial Conference and directing that the plaintiff may set the action down for trial and pretrial conference. In the alternative, the plaintiff sought an order that the defendant shall participate in a settlement discussion between counsel.

[10] Counsel for the plaintiff submitted that the defendant be ordered to serve an Affidavit of Documents and to participate in a settlement conference or that the court dispense with the requirement for the filing of a Certificate under rule 76.09 prior to setting the action down for trial.

[11] Counsel for the defendant advised that the defendant is prepared to deliver an Affidavit of Documents and to participate in a settlement conference once its motion for security for costs is disposed of, and if security for costs is ordered, the security is posted.

Discussion

[12] A useful summary of the principles governing a motion for security for costs under Rule 56.01(d) is set forth in the case of Proxema Ltd. v. Birock Investments Inc., 2016 ONSC 5686, a decision of R.E. Charney, J.

[13] The initial onus is on the defendant to demonstrate that it appears “there is a good reason to believe” that the plaintiff corporation has insufficient assets in Ontario to pay the defendant’s costs. This initial onus is a low threshold.

[14] If the defendant satisfies the first stage of the inquiry, the onus switches to the plaintiff to either demonstrate that it has sufficient and appropriate assets in Ontario to satisfy any order for costs, or alternatively, satisfy the court that an order for security for costs would be unjust, for example by demonstrating that the plaintiff is impecunious and the action is not devoid of merit.

[15] I am satisfied that the defendant has satisfied the initial onus of showing that the plaintiff has insufficient assets in Ontario to pay the defendant’s costs.

[16] The plaintiff in this case argues that it is impecunious and the action is not devoid of merit. However, the case law indicates that in the case of a corporate plaintiff it is not sufficient in order to resist a motion for security for costs to establish that the corporate defendant itself is impecunious, but the plaintiff must also establish that it and its shareholders cannot sell assets, borrow or otherwise raise the funds to post the security (see Design 19 Construction Ltd. v. Marks (2002), 22 C.P.C. (5th) 117 (Ont. S.C.J.) at para. 6).

[17] In my view the information provided with respect to the ability of the sole shareholder of the plaintiff, Ms. O’Neill, to sell assets, borrow or otherwise raise the funds to post security is insufficient. There is no affidavit from her, and no suggestion that she lacked the capacity to give evidence by affidavit. There is no indication as to whether she owns her residence and other than a bald assertion in Mr. O’Neill’s affidavit that she “has no assets to speak of” no particulars are provided with respect to her resources.

[18] It is not necessary for me to carry out an analysis of whether the plaintiff’s action is devoid of merit, as the plaintiff has not shown that it is impecunious in the sense that the resources of its shareholder may not be available to post the security.

[19] Another aspect of the matter which speaks to whether an order for security for costs would be just is the judgment against the plaintiff in favour of its former landlord. It would appear that the beneficiary of the first $31,670.94, plus costs in the sum of $421 and interest at 15% per annum from 2015 would be the judgment creditor prior to the plaintiff receiving any benefit of the action, if successful.

[20] In my view it is just and appropriate that the plaintiff be required to post security for costs. However, the amount claimed by the defendant for security for costs is grossly excessive, in the context of a simplified procedure action involving the issues set forth in the pleadings. I would expect that there would be some costs incurred by the defendant in delivering an Affidavit of Documents, some costs to conduct a limited examination discovery and in conducting a brief trial perhaps consisting of one or two days. I would fix the amount of the security for costs, on a partial indemnity basis, in the sum of $7,500.00.

[21] It is appropriate to order that the defendant deliver an Affidavit of Documents within 20 days of the posting by the plaintiff of the security for costs. It is not necessary to make an order respecting the holding of a settlement conference as rules 76.08 and 76.09 speak to that.

Disposition

[22] On the basis of the foregoing, it is ordered as follows:

(a) the plaintiff shall post security for costs by payment into court or by posting in court a satisfactory letter of credit or other security in the sum of $7,500 within 45 days of the date hereof;

(b) the defendant shall deliver an Affidavit of Documents within 20 days of the posting of security for costs, as aforesaid, by the plaintiff.

[23] The defendant filed a Bill of Costs and the plaintiff filed a Costs Outline at the conclusion of submissions. The partial indemnity costs sought by the defendant was the sum of $3,610.35 and the amount sought by the plaintiff was the sum of $3,330.36. I find that the defendant was the successful party on the motion, however, the defendant overreached substantially in the amount of security for costs which it was seeking. In my view this was an impediment to settlement of the motion. Taking that factor into account, and applying the principle of proportionality I would fix the amount of costs to be paid by the plaintiff to the defendant in the sum of $1,200 inclusive. This amount is to be paid within 30 days hereof.

D.A. Broad Date: July 21, 2017