Court File and Parties

CITATION: Mazzika Arbika Lounge Ltd. v. Aviva Insurance Company of Canada, 2017 ONSC 6801

COURT FILE NO.: CV-15-537233

MOTION HEARD: 20171018

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Mazzika Arbika Lounge Ltd. and Ahmad Harb, Plaintiffs

AND:

Aviva Insurance Company of Canada, Intact Insurance Company, The Economical Insurance Group, Defendants

BEFORE: Master Jolley

COUNSEL: Charles Dobson, Counsel for the Moving Party Defendants

Arnold Zweig, Counsel for the Responding Party Plaintiffs

HEARD: 18 October 2017

REASONS FOR DECISION

Overview

[1] The corporate plaintiff (hereinafter “Zanobia”) operated a restaurant. The individual plaintiff Ahmad Harb (“Harb”) is Zanobia’s manager and directing mind. The premises leased to Harb and occupied by Zanobia were flooded in February 2015. The defendant insurers have paid funds to Zanobia under the policy of insurance but the plaintiffs allege significantly more is due to them and have sued for $2,000,000 in damages and $250,000 in punitive damages.

[2] The defendants bring this motion for security for costs under Rule 56.01(1)(d) with respect to Zanobia and Rule 56.01(1)(e) with respect to Harb. The defendants argue that each of the plaintiffs has insufficient assets in Ontario to pay the defendants’ costs. With respect to Harb, they also allege that his action is frivolous and vexatious.

[3] In its materials, Zanobia accepted that it had insufficient assets to satisfy a costs award but argued that its financial position was as a result of the defendants’ breach of contract. It argued that the insurers should not be permitted to put it out of business by refusing to pay what is due under the contract of insurance and then use the impecuniosity they created to deny Zanobia the ability to pursue its action.

[4] After the defendants had argued their motion, Zanobia advised it was abandoning the position that it had set out in its materials and instead would now defend the motion on the basis that it had sufficient assets in Ontario.

[5] Harb argues that the defendants did not clear the first hurdle of demonstrating that there was good reason to believe that he had insufficient assets in Ontario and that the motion should be dismissed on that basis. However, were that hurdle met, he argues that the defendants have not shown good reason to believe that his claim is frivolous and vexatious. In light of his position that the defendants have not met the onus on them, Harb chose not to submit any evidence as to his financial wherewithal.

The Test

[6] Rule 56.01(1) provides that 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;

(e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent.

[7] The initial onus is on the moving party to satisfy the court that it appears there is good reason to believe the matter falls into one of the categories under Rule 56.01(1). The onus is not a heavy one.

[8] If the first part of the test is met, the court may make any order as to security for costs “as is just”. As noted in Hallum v. Canadian Memorial Chiropractic College 1989 CanLII 4354 (ON SC), 70 O.R. (2d) 119 (Ont. H.C.) this second stage requires an inquiry into all factors which may assist in determining the justice of the case. Thus, the court has a broad discretion to consider all of the circumstances surrounding the proceeding and I have done so.

[9] The responding party may avoid an order for security for costs by showing that security is unnecessary because it has sufficient exigible assets in Ontario; alternatively it may demonstrate that it should be permitted to proceed to trial despite its inability to pay costs. (Montrose Hammond v. CIBC World Markets 2012 ONSC 4869 at paragraph 33).

Analysis

Issue 1: Have the defendants demonstrated that the case falls within Rule 56.01(1)?

[10] The defendants have shown that there is good reason to believe that Zanobia has insufficient assets in Ontario to pay the costs of the defendants. Zanobia was locked out of the leased premises in July 2015 and ceased to operate after the flood. With respect to Zanobia, the defendants have met the low threshold to demonstrate that it falls within Rule 56.01(1). Accordingly the inquiry is triggered as to whether an order for security for costs ought to be granted.

[11] For Harb the defendants must show there is good reason to believe that his action is frivolous and vexatious and show good reason to believe that he has insufficient assets in Ontario to pay the defendants’ costs. The information about Harb’s assets must go beyond “mere conjecture, hunch or speculation” (1327814 Ontario Ltd. v. 3697584 Canada Inc. 2008 CarswellOnt 5554 (S.C.J.) citing City Commercial Realty Services (Canada) Ltd. v. Bakich et al). The defendants do not have any information about the assets of Harb. They rely on two paragraphs in the statement of claim for their position that there is good reason to believe that Harb has insufficient assets in Ontario: first, paragraph 26 of the claim which states that by June 2015 Harb advised the adjuster that he had “lost everything I had”; and, second, paragraph 27 which states that by the end of that month, the plaintiffs had run out of money to pay the rent.

[12] I note that those statements are now more than two years old. There is no evidence about Harb’s means, what he has done to earn a living since 2015, whether he owns property, etc. The evidence does demonstrate that in May 2015 he purchased a house in Mississauga for his family and advanced approximately $200,000 toward the purchase price. It is not clear whether the house is in his name. Evidently those funds came from the defendants’ insurance payments to Zanobia for the reconstruction of the business but that is a matter for another day.

[13] On the basis of the record presented, I find there is no evidence one way or the other about Harb’s assets and therefore no good reason to believe he has insufficient assets. I find that the defendants have not met the onus on them with respect to Harb.

[14] Harb argues that, even if there were a basis for good reason to believe that he has insufficient assets in Ontario, the defendants have not met the second part of the test, namely that his claim is frivolous and vexatious, which is a two pronged test. Were the test only whether the claim were frivolous, I may have agreed with the defendants. Harb does not plead any contractual relationship with the defendants and it is clear he is not an insured under the policies. He has not pleaded a duty of care and consequent breach nor has he pleaded unjust enrichment. His reference to the duty to act in good faith lacks the sufficient contractual underpinning. However, under Rule 56.01(1)(e) the defendants must also demonstrate that Harb’s claim is vexatious. While there is a degree of overlap in the meaning of the terms frivolous, vexatious and abuse of process, the addition of “vexatious” to the test of “frivolous” suggests that there is an additional requirement intended before a frivolous action attracts security for costs. The Court of Appeal has noted that a vexatious appeal is one taken to annoy or embarrass the opposite party (Pickard v. London (City) Police Service Board 2010 ONCA 643 at paragraph 19). The fact that the claim has very little chance of success is insufficient, on its own, to support a finding that the matter appears both frivolous and vexatious.

Issue 2: Should security for costs be awarded against Zanobia?

(a) Has Zanobia established that it has sufficient exigible assets in Ontario?

[15] As noted above, at the hearing, Zanobia abandoned the position that it was impecunious. Instead, its lawyer, who was counsel for both Zanobia and for Harb, argued that his client Zanobia in fact had sufficient assets in the form of a cause of action against his other client, the plaintiff Harb, for improperly taking the insurance proceeds that the defendants had paid to Zanobia and using those corporate funds for his own purposes. Is this “cause of action” sufficient to qualify as an exigible asset?

[16] There is simply no information at all on the record about the strength of the cause of action or its exigibility. The insurers delivered certain proceeds to Zanobia and it is uncontested that Harb then used those funds either for his own use or for that of his family. He used $40,000 for a deposit on a residential property for his family and a further $162,695.15 to complete the purchase. Harb used another $100,000 that the defendants had paid to buy out a business partner.

[17] While Zanobia now argues that it has a cause of action against Harb for return of those funds, that does not mean the funds are exigible or easily so anyway. It may be that Harb has a counterclaim for unpaid fees or some other entitlement to those funds unknown to the defendants. He may have a claim against Zanobia for contribution or indemnity in respect of the action commenced by the landlord against him for default under the lease. The strength of Zanobia’s cause of action against Harb cannot be assessed on these materials and there is little comfort that judgment could be easily or quickly obtained and then realized. There is no indication of whether Harb has any assets that could satisfy any future judgment should Zanobia succeed. Further, given the funds were taken by Harb in 2015, any such cause of action may be statute barred at this point. Lastly, the defendants already have their own counterclaim against Harb for return of those funds.

[18] It is not sufficient that Zanobia simply turn over a potential cause of action to the defendants in satisfaction of a costs award and then embroil the defendants in some years of litigation to recoup those costs. Even if Zanobia pursued the claim itself against Harb, there is no indication that Harb would not contest the claim. I do not find that Zanobia’s potential cause of action against Harb is a sufficient or exigible asset to meet the test.

(b) Has Zanobia established that an order for security for costs would not be just?

[19] The Zanobia plaintiff has failed to establish the sufficiency of its assets and has abandoned the position that it is impecunious.

[20] Even in this scenario, the court must still determine whether an order for security for costs is just. The merits of the claim remain a relevant factor in that analysis. In considering the merits at this stage of the proceeding, there is before the court a statement of claim, an amended statement of defence and counterclaim and an affidavit by the plaintiffs. The affidavit filed by the defendants on this motion did not address the merits of the Zanobia claim.

[21] In determining what is just, the court may consider whether it was the defendants’ conduct that is the subject matter of the litigation that has caused the plaintiff’s assets to become insufficient. As noted in Cigar500.com Inc. v. Ashton Distributors Inc. 2009 CarswellOnt 5241, quoting John Wink Ltd. v. Sico Inc. 1987 CanLII 4299 (ON SC), 57 O.R. (2d) 705 (H.C.):

There can be no question that an injustice would result if a meritorious claim were prevented from reaching trial because of the poverty of a plaintiff. If the consequence of an order for costs would be to destroy such a claim no order should be made. Injustice would be even more manifest if the impoverishment of plaintiff were caused by the very acts of which plaintiff complains in the action.

[22] On the record, what we do know is that Zanobia was a valid business concern before the flood. Since the flood it has been evicted for non-payment of rent and is now closed permanently. We also know that the defendants have advanced close to $300,000 under the policy, which the plaintiffs say was too little and, more importantly, too late. Zanobia takes the position that it could have remained in the premises and kept its operations alive if the defendants had advanced the funds for it to make the necessary repairs and done so on a timely basis. Zanobia alleges that it received only $10,000 under the business interruption coverage and even that came more than two months after the flood. The balance of the funds did not arrive until July 2015, around the time the landlord locked Zanobia out.

[23] We also know that there was business interruption coverage of $300,000 in addition to coverage for contents. What we do not know at this stage is whether the $300,000 paid to date satisfies the insurers’ obligations to Zanobia.

[24] The case of 423322 Ontario Ltd. v. Bank of Montreal 1988 CanLII 4678 (ON SC), 66 O.R. (2d) 123 (H.C.), considered in Cigar500.com Inc., is instructive. The plaintiff sued the bank for improperly calling its loans and appointing a receiver, rendering the plaintiff insolvent. The defendant easily met its burden at the first stage of Rule 56.01(d) analysis, but at the second stage, Granger J. declined to make an order for security for costs and held:

In my opinion, having regard … to the fact that the plaintiff’s action is not frivolous or vexatious and is founded upon the actions of the defendants which the plaintiffs alleged caused its insolvency, I am not prepared to exercise my discretion and order the plaintiffs to submit to an order for security for costs at this stage. If I was to make such an order it would cause an injustice.

[25] As noted in Cigar500.com Inc. supra at paragraph 40:

… the plaintiff was entitled to take the position that any deficiency in its assets was due to the wrongful conduct of the defendants, which was the very subject matter of the litigation. The suspension of its business and resulting lack of cash flow, as well as its debts to its lawyers, were direct results of the various causes of action that it alleged against the defendants.

[26] The defendants did not file evidence concerning the merits of Zanobia’s claim other than to say it is pursuing a counterclaim for the payments made to date. The materials filed by Zanobia, absent any challenge, suggest that it has a good chance of success at trial.

[27] Exercising my discretion, I decline to order security for costs, particularly in light of the allegation that Zanobia is in the financial situation it is because of the defendants’ failure to pay what is owing under the insurance policy. I find that such an order would not be just in the circumstances.

Costs

[28] While the plaintiffs’ were successful, there will be no order as to costs. After the defendants argued their motion, the plaintiffs abandoned the position taken in their materials on impecuniosity. The defendants were left to respond in reply to this new position that Zanobia had sufficient exigible assets without any real materials from the plaintiffs. Further, Zanobia’s position on the sufficiency of its assets ultimately failed.

Master Jolley

Date: 14 November 2017