7868073 Ontario Ltd. et al v. 1841978 Ontario Inc. et al

CITATION: 7868073 Ontario Ltd. et al v. 1841978 Ontario Inc. et al, 2017 ONSC 92 COURT FILE NO.: CV-12-9795-00CL DATE: 2017-01-04 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 7868073 Canada Ltd., 1841979 Ontario Limited, 1636833 Ontario Inc. Architectural Coatings Solutions Inc., Transreflect Inc. and Itolo Mallozzi, Plaintiffs AND: 1841978 Ontario Inc., Powder Coating Solutions Inc., Vacuum Metallizing Limited, Robert W. Langlois carrying on business as Reflectionight, Carrie Ferguson, carrying on business as Reflectionight, Robert W. Langlois, Carrie Ferguson, Jeffrey Steven Sugar, Gary Sugar, RJG Labs Inc. and Pultrucoater Inc., Defendants

AND BETWEEN: Powder Coating Solutions Inc., Robert W. Langlois and 1841978 Ontario Inc., Plaintiffs by Counterclaim AND: 7868073 Canada Ltd., 1841979 Ontario Limited, 1636833 Ontario Inc., Architectural Coatings Solutions Inc., Transreflect Inc., Itolo Mallozzi, Fram Professional Corporation, Wade Kosowan and Low Risk Logistics Inc., Defendants to Counterclaim

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: Lorne Silver and Carly Cohen, for the Defendants/Plaintiffs by Counterclaim other than Gary Sugar Gary Sugar, Defendant, in Person Maureen Whelton and Ed Hiutin, for the Plaintiffs/Defendants by Counterclaim

HEARD: November 22, 2016

ENDORSEMENT

[1] In this proceeding, there are three motions for security for costs from, respectively, the defendants other than Gary Sugar (collectively, the “Langlois Defendants”), Gary Sugar (“Sugar”), and the defendants by counterclaim other than Fram Professional Corporation (collectively, the “Kosowan Defendants”). I will first set out a brief summary of the claims of the plaintiffs and the counterclaims of Powder Coating Solutions Inc. (“PCS”), Robert W. Langlois (“Langlois”) and Langlois’ holding corporation 1841978 Ontario Inc. (“184”) (collectively, the “Langlois Plaintiffs”). I will then address the applicable legal principles on these motions before dealing separately with each motion.

Summary of the Claims of the Plaintiffs and the Counterclaims of the Langlois Plaintiffs

[2] The plaintiffs say that Wade Kosowan (“Kosowan”), Langlois and Itollo Mallozzi (“Mallozzi”) agreed to form a joint venture to pursue the manufacture, distribution, and sale of powder coating, and reflective products (the “Joint Venture”). It was envisaged that the businesses would be owned by 7868073 Canada Ltd. (“786”), a holding corporation that was owned equally by each of the three parties through their respective holding corporations. The Joint Venture was to be carried on in two subsidiaries of 786. Architectural Coatings Solutions Inc. (“ACS”) was to carry on the business of powder coating, and Transreflect Inc. (“Transreflect”) was to carry on the business of reflective coating. In consideration for his one third share of 786, Langlois entered into an exclusive licence agreement with 786 respecting powder coating and reflective technology owned by him (the “Licence Agreement”).

[3] The Joint Venture commenced in the summer of 2011. Kosowan and Mallozzi each advanced $120,000. The Joint Venture ceased operating in early 2012. By an email dated April 19, 2012 from Langlois’ counsel, Sugar, Langlois purported to terminate the Joint Venture.

[4] The plaintiffs allege that, thereafter, Sugar, his brother Jeffrey Sugar, Langlois, PCS, RJG Labs Inc., and Pultrucoater Inc. misappropriated the ACS business plan and confidential information of the Joint Venture to operate their own powder coating business using Langlois’ intellectual property, which the plaintiffs allege continued to be subject to the Licence Agreement with 786. They also allege that, in doing so, the Langlois Defendants breached fiduciary duties owed to 786 and ACS, among others.

[5] In addition, the plaintiffs allege that Langlois and his wife, Carrie Ferguson (“Ferguson”), began operating their own reflective coating business out of their home using Langlois’ intellectual property that was also alleged to be subject to the Licence Agreement. The plaintiffs say that, in doing so, Langlois and Ferguson have also misappropriated confidential information of Transreflect and breached fiduciary duties owed to it and 786.

[6] In their defence, the Langlois Defendants deny that there is any intellectual property in which the plaintiffs have any proprietary interest. They say that, at all times, it was Langlois’ knowledge, training, technical skills and know-how that was relevant. They also say that the processes and technology used by PCS differ from those contemplated for ACS. Accordingly, they deny they have misappropriated, or misused, any alleged intellectual property belonging to 786.

[7] Further, the Langlois Defendants deny that the Licence Agreement was enforceable for a number of reasons and, in the alternative, they say that the Licence Agreement was terminated by Langlois as described above. They also deny that a unanimous shareholders agreement among Kosowan, Langlois and Mallozzi (the “USA”), upon which the plaintiffs also rely, is enforceable. Lastly, the Langlois Defendants also deny that they have breached any fiduciary duties owed to 786, ACS or Transreflect.

[8] In their counterclaim, the Langlois Plaintiffs claim damages for breach of contract, misrepresentation and breach of fiduciary duty against the Kosowan Defendants. They also seek a declaration that the USA and the Licence Agreement are invalid and/or unenforceable against Langlois, a declaration that PCS has not competed with the Joint Venture, and a declaration that there is no intellectual property at issue.

Applicable Law

[9] The parties rely on the provisions of Rules 56.01(1)(d) and (e) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which provide as follows:

(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;

(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;

[10] In Hallum v. Canadian Memorial Chiropractic College (1989), 1989 CanLII 4354 (ON SC), 70 O.R. (2d) 119 (Ont. S.C.), Doherty J. (as he then was) described the two-stage inquiry required in respect of a claim for security for costs:

Rule 56.01 which empowers a court to order security for costs establishes a two step inquiry. First, the defendant must show that it "appears" that one of the six factors set out in cls. (a) through (f) of rule 56.01 exists. Secondly, if the defendant can clear the first hurdle, the court may make any order as to security for costs "as is just". I take this second stage to require an inquiry into all factors which may assist in determining the justice of the case. I also take the discretion created by this second stage as permitting orders which range from an order requiring full security for costs in a lump sum payment to an order which provides that no security for costs need be posted: Horvat v. Feldman (1986), 15 C.P.C. (2d) 220 (Ont. H.C.J.).

[11] Of significance, a moving party is not required to establish that a plaintiff has insufficient assets in Ontario to honour any costs award. Instead, the moving party must only establish that there is good reason to believe that the plaintiff has insufficient assets in Ontario. If a moving party can meet that standard, the burden effectively shifts to the plaintiff to rebut the “good reason to believe”.

[12] In respect of section 56.01(1)(e), the test for establishing that an action is “frivolous and vexatious” entails a high standard. It has been suggested that the standard is expressed as demonstration that the action is one which “on its face, is so unreal that no reasonable or sensible person could bring it” (876502 Ontario Inc. v. I.F. Propco Holdings (Ontario) 10 Ltd. (1997), 1997 CanLII 12196 (ON SC), 37 O.R. (3d) 70 (Ont. S.C.)) or more simply that the action is “devoid of merit”.

The Motion of the Langlois Defendants

[13] The Langlois Defendants seek an order requiring the plaintiffs to post security for costs. I will address the claim in respect of the corporate plaintiffs and the individual plaintiffs separately.

Corporate Plaintiffs

[14] The Langlois Defendants seek costs against the corporate plaintiffs pursuant to Rule 56.01(1)(d). It is not disputed that the corporate plaintiffs other than 1636833 Ontario Inc. (“833”) never acquired any material assets, never generated any revenue, and have been dormant since 2012. There is therefore good reason to believe they have insufficient assets. The issue on this motion turns on the position of 833.

[15] The Langlois Defendants rely on the evidence of Langlois given in an affidavit sworn September 2, 2016 in this matter (the “Langlois Affidavit”). At paragraph 30 of the Langlois Affidavit, he states that, to his knowledge, “833 is only a holding company and did not generate any revenue, acquire any material assets, sell any product or get any external investment during the limited time the [Joint Venture] was in operation”. He also states that he believes that 833 has been dormant since the Joint Venture was abandoned in early 2012. Langlois’ knowledge is based on the fact that Kosowan used 833 to hold his 1/3 interest in the Joint Venture. Langlois was not cross-examined on his evidence so his belief is uncontradicted

[16] The plaintiffs have produced a bank statement of 833 showing the bank balance as of August 25, 2016, being $180,913.61. Kosowan testified in an affidavit dated September 20, 2016 that the amount in the bank account of 833 remained approximately the same as of the date of the affidavit. On his cross-examination, Kosowan produced an updated bank account statement as of October 18, 2016. This statement shows a total balance of $177,905.61 and U.S. $136,250.55. It is unclear why the U.S. dollar account balance was not shown on the earlier bank statement. In addition, on his cross-examination, Kosowan testified that 833 carried on an active business of trailer rentals and storage and that it had conducted this business since its incorporation in 2004. Kosowan has, however, refused to provide any further documentary evidence regarding 833’s financial condition or to answer any questions related thereto. In particular, while Kosowan says the bank balance was generated by 833’s active business, there is no evidence regarding its operations.

[17] The plaintiffs acknowledge that the issue of security for costs with respect to 833 turns on whether Langlois’ evidence is sufficient to demonstrate “good reason” such that the onus shifts to the plaintiffs to disprove such evidence. They agree that Kosowan’s evidence is not sufficient to disprove Langlois’ evidence. I also agree. Merely stating that 833 has a bank balance without also indicating its liabilities and its operating performance is hardly sufficient to demonstrate that 833 would have liquid sufficient assets to satisfy a costs award. Moreover, the plaintiffs have failed to adduce any other reason why the Court should not order the posting of security for costs.

[18] Accordingly, the issue for the Court is whether Langlois’ evidence is sufficient to establish “good reason to believe that the applicant has insufficient assets in Ontario” to pay a costs award. Insofar as the test is, as the plaintiffs suggest, that the evidence must establish more than “a mere hunch, conjecture or speculation”, the test is satisfied in the present case. Langlois’ knowledge comes from participation in the short-lived Joint Venture among Kosowan, Mallozzi and himself. In that context, each used personal holding corporations to hold their respective one-third interests in 786. Moreover, Langlois’ evidence of any absence of material assets or revenues was not contradicted on cross-examination. As the actual status of 833 was within Kosowan’s control and could not be known to Langlois, I think his honest belief based on his involvement with Kosowan and 833 in the Joint Venture is sufficient to establish good reason.

[19] Based on the foregoing, I conclude that the Langlois Defendants have satisfied the requirements of Rule 56.01(1)(d) in respect of the corporate plaintiffs and, accordingly, are entitled to an order that the plaintiffs post security for costs. I deal with the quantum of such security for costs below.

Mallozzi

[20] The Langlois Defendants also seek costs against the individual plaintiff Mallozzi on the basis of Rule 56.01(1)(e).

[21] The Langlois Defendants have established that there is good reason to believe that Mallozzi has insufficient assets, which is not disputed by the other plaintiffs. There is no evidence of Mallozzi’s assets. His whereabouts are unknown, but he has been charged with several serious drug-related offences since the Joint Venture broke down in early 2012.

[22] With respect to the second part of the test in Rule 56.01(1)(e), the Langlois Defendants argue the action is both frivolous and vexatious and without merits. With respect to the former, they say the best evidence is the unwillingness of the plaintiffs to prosecute their claim since it was commenced in 2012. With respect to the latter, the plaintiffs’ central claim is that the defendants have appropriated intellectual property belonging to the Joint Venture. The Langlois Defendants say that there is no intellectual property and that it has always been Langlois’ expertise and technical understanding that has been of value.

[23] It is not appropriate to infer that the plaintiffs’ claim is frivolous and vexatious based solely on the course of this litigation, particularly as the plaintiffs argue that their procedural actions evidence a continuing interest in pursuing their claim. It is also not appropriate to make a finding regarding ownership of the intellectual property based solely on the pleadings exchanged to date. Both these issues require a factual determination which cannot be made at this time.

[24] However, at the hearing, the Langlois Defendants advised the Court that they are not seeking an order against Mallozzi for the posting of security for costs in the event that such an order is granted in respect of the corporate plaintiffs. Accordingly, it is not necessary to address further the motion in respect of Mallozzi and I decline to do so.

Quantum of Costs

[25] While the Langlois Defendants seek an order requiring the posting of security for costs governing all costs through to the trial, they acknowledge that it is more customary, and more appropriate, to award security for costs in stages. They suggest it would be appropriate to address the costs of the proceeding through to, and including, mediation. I am of the view that it is more appropriate at this time to limit the order to costs of the proceeding to the completion of discoveries. After discoveries, it will be possible to assess the merits of the plaintiffs’ case to the extent that it is a factor to be considered in respect of any future motion for security for costs.

[26] Further, any award must also be reasonable. In this case, the Langlois Defendants seek an award for security for costs in the amount of $63,480 for the period to the completion of discoveries. Of this amount, approximately $50,000 pertains to the costs of discoveries, which they estimate will last six days and involve the examination of six separate parties. Of this estimate, two thirds is attributable to senior counsel and one-third to an associate, each spending roughly equal amounts of time. This is certainly a generous estimate for several reasons, including the relatively straightforward nature of the claims in this litigation based on the pleadings.

[27] I conclude that a more reasonable amount of security for costs for the period mentioned above is $45,000.

The Motion of Sugar

[28] The plaintiffs commenced this action in 2012. They subsequently amended their claim on October 9, 2015 to, among other things, add as defendants Sugar as well as RJG Labs Inc. and Pultrucoater Inc., both wholly-owned subsidiaries of PCS.

[29] Sugar submits that the plaintiffs’ case against him is devoid of merit on two grounds. First, he says that the plaintiffs’ case is statute barred under the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B. He argues that the claim against him was discoverable as of July 27, 2012, when the plaintiffs issued their original statement of claim. He says that the plaintiffs knew all of the relevant facts concerning his involvement at that time. He also says that no new facts or claims arose in the period from that date to October 9, 2015, when he was added as a defendant. Second, Sugar says that the plaintiffs do not have a valid cause of action against him as he is not claiming any rights in the intellectual property personally.

[30] The plaintiffs deny that the claim against Sugar was discoverable in 2012. They say that they only learned of the claim against him when they learned of the extent of his involvement with PCS. They say they did not learn of these facts until they saw Sugar’s statement of claim in his action, which was commenced on May 21, 2015.

[31] As mentioned, these motions are proceeding solely on the basis of the pleadings as exchanged between the parties, and the affidavits and related cross-examinations in support of these motions. It is not possible to make any determination of the merits of Sugar’s position that there is no viable cause of action against him, or of his position that the claim against him is statute-barred. These issues require factual determinations which are not appropriate based on the record as it exists today. Accordingly, Sugar cannot succeed insofar as his claim for security for costs is asserted pursuant to Rule 56(1)(e).

[32] Sugar also makes the same arguments as the Langlois Defendants regarding the insufficiency of assets of the corporate plaintiffs and his entitlement to an order that the corporate plaintiffs post security for costs pursuant to Rule 56.01(1)(d). Given the determination above in respect of the motion of the Langlois Defendants, Sugar would otherwise be entitled to an award of security for costs under this Rule. There is, however, a more fundamental issue with Sugar’s claim for security for costs.

[33] Sugar is a lawyer who is a member in good standing of the Law Society of Upper Canada. He has chosen to represent himself. He seeks his security for costs in the amount of $27,700, which represents his estimated time of 99 hours at a partial indemnity rate of $300 per hour. This assumes attendance at all of the examinations for discovery which may not be necessary if he had the very limited role he suggests he had. However, in view of the determination below, it is not necessary to address the appropriateness of his estimated costs.

[34] In Fong v. Chan (1999), 1999 CanLII 2052 (ON CA), 46 O.R. (3d) 330, the Court of Appeal addressed the right of self-represented parties to receive costs of an action in which they are successful. In that decision, Sharpe J.A. held, at para. 21, that self-represented lawyers may be awarded costs, including an allowance for counsel fees. However, in accordance with the principle in London Scottish Benefits Society v. Chorley (1884), 13 Q.B.D. 872 (C.A.), such costs are awarded as an indemnity on the “time is money” or opportunity cost rationale: see Fong, at para. 23. Sharpe J.A. described the basis of the Chorley case as an entitlement of self-represented lawyers “to claim costs on the basis that by devoting their personal efforts to the litigation rather than other remunerative work, they incur an opportunity cost which is compensable”.

[35] The plaintiffs say that they have been unable to find any case in which security for costs has been awarded in favour of a self-represented lawyer. While I am not prepared to find that there is an absolute prohibition at law against such an order, I do not think it is appropriate to award security for costs in favour of Sugar for the following reasons.

[36] In his statement of claim, Sugar expressly states, at paragraph 51, that the parties to that action intended that Sugar would wind down his legal practice and transition to full time involvement with PCS. He further states that this intention was implemented and, in that connection, he terminated his counsel relationship with a mid-sized Toronto law firm. While Sugar says that he continues to practice law, there is no evidence before the Court regarding the amount of time he devotes to his legal practice as opposed to his business activities.

[37] Accordingly, at this stage, there is no evidence before the Court establishing that there has been any opportunity cost to Sugar’s involvement in this litigation to date or that there would be any such cost to his continued involvement. In addition, it should be noted that Sugar is pursuing his own claim against the Langlois Plaintiffs and certain other parties, which action has been consolidated with this action. There would appear to be considerable factual overlap between his claims in his action against the Langlois Defendants and his defence to the claims against him in the present action. It therefore appears that a substantial, but unquantifiable, portion of the costs for which he seeks an order for security for costs would pertain as well to his own action, which he must bear on his own.

[38] In these circumstances, I conclude that the Court should not exercise its discretion under Rule 56.01(1)(d) to order that the plaintiffs post security for costs in respect of their claim against Sugar.

The Motion of the Plaintiffs in their Capacities as Defendants by Counterclaim

[39] The Kosowan Defendants move for security for costs against the Langlois Plaintiffs. There is, however, a threshold legal issue regarding the entitlement of the Kosowan Defendants to such an order in the circumstances of this proceeding.

[40] The Langlois Plaintiffs argue that their counterclaims arise out of the same factual matrix as the defence of the Langlois Defendants. They say that, while the Court has discretion to award costs, the case law demonstrates that security for costs is typically not awarded where the causes of action overlap. The Kosowan Defendants argue that the plaintiffs’ claims are different from the Langlois Plaintiffs’ claims. They also argue that they should not be penalized in their capacities as plaintiffs for being the first to assert a claim in this litigation. They argue that, based on the counterclaim of the Langlois Plaintiffs, the Langlois Defendants and/or the Langlois Plaintiffs are effectively the plaintiffs in this action.

[41] I am not persuaded by the argument of the Kosowan Defendants that they should not be penalized by being the first to assert a claim in this proceeding. They chose to assert their claims first and bear the consequences, positive and negative, of doing so. On balance, it is more unfair to require a defendant which has not chosen to involve itself in litigation to choose between an order for security for costs and initiating a counterclaim.

[42] However, the issue on this motion is not being determined on the basis of the timing of the assertion of claims by the parties, but on the basis of the interdependence of the claims. This situation was addressed by the Divisional Court in Wilkings v. Velocity Group Inc. (2008), 2008 CanLII 12500 (ON SCDC), 89 O.R. (3d) 751. At para. 26 of that decision, Cumming J. accepted that “where the majority of the counterclaim is the equivalent of a defence to the plaintiff’s claim”, security for costs can be required to be posted by the indicating plaintiff.

[43] In my assessment, that is the case here. When the pleadings as described above are viewed in their entirety, I am not persuaded that the plaintiffs’ claims and the claims of the Langlois Plaintiffs predominantly involve separate causes of action. I acknowledge that it is possible to identify a few claims in paragraph 70 of the Amended Statement of Defence and Counterclaim that are not referred to in the Defence itself, including the claim for breach of contract. However, all of the claims asserted in the Counterclaim of the Langlois Plaintiffs relate to the same factual nexus pertaining to the formation and termination of the Joint Venture, as well as the post-termination actions of the parties, upon which the plaintiffs base their claims. It is therefore quite likely that the success or failure of the claims of the Langlois Plaintiffs will depend upon the success or failure of the defence asserted by the Langlois Defendants.

[44] In summary, the majority of the counterclaim of the Langlois Plaintiffs is the equivalent of the Langlois Defendants’ defence to the plaintiffs’ claim. Indeed, there is reason to believe that the counterclaim would not have been asserted if the plaintiffs’ claim had not first been asserted.

[45] In these circumstances, I conclude that it is appropriate to exercise the Court’s discretion to deny the motion of the Kosowan Defendants for an order that the Langlois Plaintiffs post security for costs. Accordingly, it is not necessary to address whether the Kosowan Defendants have otherwise established the requirements for the posting of security for costs by the Langlois Plaintiffs and I therefore decline to do so.

Conclusions

[46] Based on the forgoing, the plaintiffs are required to post the amount of $45,000 as security for the costs of this proceeding of the Langlois Defendants to date and through to the completion of discoveries. The motions of Sugar and of the Kosowan Defendants for security for costs are dismissed.

[47] The Langlois Defendants were therefore successful on this motion in respect of the requested relief for an order that the plaintiffs post security for costs and the Langlois Plaintiffs were also successful in resisting the motion of the Kosowan Defendants. The Langlois Defendants and the Langlois Plaintiffs, who I will treat collectively as the Langlois Defendants for the purposes of costs, are therefore entitled to their costs on a partial indemnity basis. They seek costs of $24,456 plus HST on such scale. Their costs outline does not separate their costs in respect of the two motions.

[48] The plaintiffs provided costs outlines for each motion separately. They sought costs of $6,044.96, on an all-inclusive basis, in respect of the motion of the Langlois Defendants and $8,714.47, on an all-inclusive basis, in respect of the motion of the Kosowan Defendants, for a total for both motions of approximately $14,750, on an all-inclusive basis. I take this as evidence that they would reasonably have expected the costs of the Langlois Defendants and the Langlois Plaintiffs collectively to be at least equal to this amount. The plaintiffs also provided a third costs outline in respect of the motion by Sugar which is addressed below.

[49] In fixing costs of the two motions on which the Langlois Defendants were successful, I have had regard to the nature of the proceedings, which were relatively straightforward, highly factual, and did not raise any complex legal issues. I note that the Langlois Defendants devoted in excess of 75 hours of lawyer time plus an additional 14 hours of student time on these matters. The plaintiffs’ counsel spent a total of 33.5 hours, which might be increased slightly to the extent there was some duplication in respect of the time spent on the Sugar motion. Even with such an adjustment, the numbers suggest that there was some inefficiency or unnecessary work on the part of counsel for the Langlois Defendants given the nature of the motions.

[50] Based on the foregoing, I find fair and reasonable costs for both motions to be $20,000 on an all-inclusive basis payable to the Langlois Defendants forthwith.

[51] In addition, Sugar sought the costs of his motion for security for costs. The Court held that, while Sugar was able to establish the requirements of Rule 56.01(1)(d) in respect of 833, it should not exercise its discretion to require that 833 post security for costs in the absence of any evidence that Sugar would incur an “opportunity cost” in representing himself in this proceeding. Accordingly, neither the plaintiffs nor Sugar were successful on Sugar’s motion. For this reason, no costs are awarded in respect of Sugar’s motion that the plaintiffs post security for costs in respect of the action against him.

Wilton-Siegel J.

Date: January 4, 2017