Court File and Parties

Court File No.: CV-16-549609 Date: 2018-06-22 Superior Court of Justice - Ontario

Re: Sirron Systems Inc., Plaintiff/Appellant in Appeal And: Scott, Pichelli & Easter Limited, Peter Pichelli and Joel Easter, Defendants/Respondents in Appeal And Insyght Engineering Inc., Third Party

Before: Lederer J.

Counsel: Paul H. Starkman, for the Appellant (Plaintiff) Dylan Chochla, for the Respondents (Defendants)

Heard: May 31, 2018

Endorsement

[1] The plaintiff, Sirron Systems Inc. and Insyght Systems Inc. both provided consulting engineering services. In 2009 the plaintiff sued Insyght Systems Inc. in relation to alleged breaches of employment contracts by certain former employees. They had been hired by Insyght Systems Inc. During April 2013, Insyght Systems Inc. declared bankruptcy. The defendant in this action Scott, Pichelli and Easter Limited was appointed the trustee in bankruptcy. As trustee, this defendant consented to the plaintiff continuing the claim it had commenced against Insyght Systems Inc. and, in light of its understanding that the bankrupt corporation was without assets, did not defend. In February 2015, the plaintiff obtained judgement against Insyght Systems Inc. in the amount of $379,385.71. The claim that is the subject of this action arises out of the administration of the estate of the bankrupt company. It is said that the defendants which include a partner and employee of the trustee, breached their fiduciary duty to the plaintiff. Rather than take control of a bank account held to the credit of Insyght Systems Inc., it allowed funds to be deposited to that account and then distributed to third parties rather than maintained for the benefit of the creditors of the bankrupt. In particular, funds were directed to the third party, Insyght Engineering Inc.

[2] In response, the defendants brought a motion for security for costs. They sought the amount of $213,307.13. The master granted the motion but required the plaintiff to post only $33,252.11 intended to cover the period to the end of the examinations for discovery. The order was made without prejudice to the defendants’ right to return to seek further security for costs for preparation and attendance at the trial.

[3] This is an appeal of the order of the master brought on behalf of the plaintiff.

[4] The order of the master is discretionary. The applicable rule makes this clear:

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 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. [1]

[Emphasis added]

[5] The parties agree as to the applicable standard of review. The decision of the master will be interfered with:

… only if the master made an error of law or exercised his or her discretion on a wrong principle or misapprehended the evidence such that there is a palpable and overriding error. [2]

[6] In this case the errors suggested, at their highest, would be understood as errors of mixed fact and law. The supposed errors are not purely in understanding the facts but rather in the application of the applicable legal principles to those facts. As such these alleged mistakes fall on a spectrum between being general with a broad potentially precedential value where the standard of review tends towards correctness and those that are particular and unlikely to have any impact beyond the case at hand where the standard of review would be or approach palpable and overriding error. [3] In this case the applicable standard of review is “palpable and overriding” error. A finding is a palpable error if it is obvious, clearly wrong, unreasonable or unsupported by the evidence. It is overriding if it is serious enough to vitiate the finding of fact in issue. [4]

[7] The Court of Appeal has recently considered the approach to be taken on motions seeking security for costs. Courts should not look to apply any rigid set of factors like checking off an established recipe of requirements which once established dictate the result. Each case should be considered on its own, holistically:

Courts in Ontario have attempted to articulate the factors to be considered in determining the justness of security for costs orders. They have identified such factors as the merits of the claim, delay in bringing the motion, the impact of actionable conduct by the defendants on the available assets of the plaintiffs, access to justice concerns, and the public importance of the litigation. See: Hallum v. Canadian Memorial Chiropractic College (1989), 70 O.R. (2d) 119 (H.C.); Morton v. Canada (Attorney General) (2005), 75 O.R. (3d) 63 (S.C.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 99 O.R. (3d) 55 (S.C.); Wang v. Li, 2011 ONSC 4477 (S.C.); and Brown v. Hudson’s Bay Co., 2014 ONSC 1065, 318 O.A.C. 12 (Div. Ct.).

While this case law is of some assistance, each case must be considered on its own facts. It is neither helpful nor just to compose a static list of factors to be used in all cases in determining the justness of a security for costs order. There is no utility in imposing rigid criteria on top of the criteria already provided for in the Rules. The correct approach is for the court to consider the justness of the order holistically, examining all the circumstances of the case and guided by the overriding interests of justice to determine whether it is just that the order be made. [5]

[8] The Master wrote comprehensive reasons outlining the reasons for the decision she made and the basis upon which she exercised her discretion. The reasons raised, and the master responded to, the pertinent questions:

(1) Is there any good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant? (2) Has the plaintiff demonstrated that it has sufficient exigible assets in Ontario? (3) Has the plaintiff demonstrated that it is impecunious? (4) Has the plaintiff demonstrated that its claim has a good chance of success on the merits? (5) Is it just that an order for security for costs be made? (6) What is the appropriate quantity for security for costs?

[9] Nonetheless, Counsel for the defendants says that the master made palpable and overriding errors that should cause this court to set aside her order. Fundamental to this is the reliance by the master on the submission made on behalf of the defendants that although certain of the customers of Insyght Systems Inc. continued to direct deposits into its bank account, those funds were automatically applied to reduce the indebtedness to “the only secured creditor of Insyte Systems” [6] being the TD Bank. The master noted:

…The defendants plead that Insyght System’s secured creditor was owed $106,222.87. Its only asset was its accounts receivable of $128,770, a small portion of which the Trustee was able to collect. While the Trustee acknowledges that direct deposit funds did continue to flow into the Insyght Systems’ bank account, it states that those funds were seized by the secured creditor to reduce its indebtedness. [7]

[10] Counsel for the defendants submitted that this is plainly wrong. Rather, the third party Insyght Engineering Inc., took an assignment of the debt and subsequently paid it off. Had the defendants complied with their responsibilities and maintained the money where it belonged, in the bank account of bankrupt corporation it would have been available for the benefit of the unsecured creditors. This understanding does not appear to be based on evidence but stands rather as allegations found in the pleadings. The factum on which of the appellant relies submits that “… The Master ignored the evidence and failed to appreciate the evidence including the pleadings in respect of the secured creditor of Systems and the payment of the secured debt” [emphasis added]. The factum follows this by quoting the Statement of Defence and Third Party Claim:

The purpose of the assignment was to relieve Smith and Robertson of their guarantee obligations in respect of the TD indebtedness. At the time of the assignment, there was approximately $43,028.92 owing from Insyght to TD from the TD account. In and around November 2013 the assignment was complete and the TD secured indebtedness was repaid in full. The Defendants stopped receiving account statements from TD as of that date. [8]

[11] Pleadings are not evidence. There are allegations. On their own, they demonstrate a position. They do not prove anything. The following paragraph of the factum asserts:

The payments to TD by Engineering of the secured debt of $43,020.92 was made from funds not deposited into the TD account but rather from other sources. All of the funds deposited into the TD account in the amount of $178,320 were improperly transferred to engineering. Even if $43,020.92 is on account of the secured debt, there is a balance of $135,291.08 transferred improperly to Engineering which the Trustee has refused to explain. [9]

[12] This paragraph appears as a statement. There is no reference to any evidence that would support the assertions it contains.

[13] It may or may not be that the master made an error. Money that should have been held in the TD Bank account may not have been held there and if it was it may not have gone to the bank as a secured creditor. This does not mean that the error was either palpable or overriding. It may not have been obvious, clearly wrong or unreasonable. It does not vitiate the fundamental finding that the plaintiff did not have sufficient assets in Ontario to pay the costs of the defendants. I shall return to this consideration later in these reasons.

[14] There is an allegation of a second error said to be palpable and overriding. The master failed to find that the plaintiff was impecunious and on that basis it is said that she erred in her determination that there should be an order for security for costs. It was the submission of counsel for the plaintiff that a consideration of whether his client was impecunious is tied to the strength the case his client seeks to bring forward. One concern is to be considered in the context of the other:

… Low J., giving the judgment of the Divisional Court (Lederman and Swinton JJ concurring) stated:

The motions judge held that the master had erred in imposing too high an onus on the plaintiff in relation to the merits of the action. I am, with respect, unable to concur. There is a difference in the quality of the evidence required depending on whether or not the plaintiff is able to show impecuniosity.

Where impecuniosity is shown, the plaintiff needs only to demonstrate that the claim is not plainly devoid of merit. (See John Wink Ltd. v. Sico Inc., (1987), 57 O.R. (2d) 705 (H.C.J.)). That is a very low evidentiary threshold.

Where impecuniosity has not been shown however, a closer scrutiny of the merits of the case is warranted; in those cases there is no compelling argument that there is a danger that poverty of the plaintiff will cause an injustice by impeding pursuit of a claim that otherwise would have been permitted to be tried. Where impecuniosity has not been shown, a legitimate factor in deciding whether or not it would be just to require security for costs is whether the claim has a good chance of success.

The Court’s reasoning nicely resolves the tension in the jurisprudence by holding that the merits of the Plaintiff’s case are always relevant but where “impecuniosity” is first established the burden on the Plaintiff concerning the merits of its case is much lower than where the Plaintiff has access to funds and could pay an order for security for costs. This distinction makes obvious good sense from a policy perspective, for the reasons given by Low J. [10]

[15] Counsel for the appellant complains that the master did not and could not address this issue. Why? Because at the cross-examination of the defendant Peter Pichelli, counsel for the defendants would not permit any questions respecting the merits of the action.

MR. CHOCLA: Well, I don’t think the merits are relevant to this motion.

Followed by:

MR. STARKMAN: You’re saying that you don’t think the merits are relevant to a security for [costs] motion?

MR. CHOCLA: No. [11]

[16] Thus, the master was unable to consider impecuniosity in the context of the appropriate understanding of the strength of the case of the plaintiff. As seen by counsel for the plaintiff, the defendant should not benefit from its own refusal to answer relevant questions. This misses the point. It is not a question of whether impecuniosity has or has not been demonstrated. In this case it is not that impecuniosity was established but not considered in the context of the strength of the plaintiff’s case, it was not alleged or relied on:

MR. STARKMAN: is this what you’re saying? So, you’re not going to let me ask any questions related to the merits?

MR. CHOCLA: sorry, you, you haven’t alleged that your client is impecunious to your (inaudible) asset. [12]

[17] There are two basis that may form the foundation for the opposition to a motion for security for costs. The first is that the party from whom costs are being sought, in fact, has sufficient assets in Ontario that there ought to be no concern about the ability to pay costs should such an order be made. The second is that the party is impecunious and should not be denied the right to a trial on that account. These two grounds are antithetical to each other. How can the same party claim to have assets in Ontario and at the same time propose that he, she or it is impecunious? In the motion heard by the Master, the plaintiff relied on and submitted that it had sufficient assets in Ontario and that there ought to be no concern as to its ability to satisfy any order for costs. There was no suggestion that the plaintiff was impecunious. How could there be? Consistent with this approach as taken on the motion before her, the master when answering the question: “Has the plaintiff demonstrated that it is impecunious?” noted: “The plaintiff does not allege that it is impecunious.” [13]

[18] On this appeal, counsel for the appellant (the plaintiff) referred to the proposition that the plaintiff was impecunious as an “alternate” submission or “argument in the alternative”. Before the master, had it been made, this might have been an accurate proposition albeit one that was unlikely to succeed. I say it was unlikely to succeed because counsel for the appellant, in suggesting that it was impecunious relied on evidence that the company was no longer operating and that its equipment and corporate records had been seized by the police. The master was aware of these facts. Her assessment of the question she posed as to the impecuniosity of the plaintiff went on from her initial observation (see: fn. 13 above) as follows:

However, it alleges that its shareholder Norris is impecunious and is unable himself to post security for costs. If I were to take this as an argument that the plaintiff is impecunious, it would fail. The court has held that bald statements alleging impecuniosity of a party are insufficient. In this case, there is not even a bald statement that the plaintiff is impecunious - it has taken the position that it has assets, even though it has admitted that it is no longer operating and will not be at least until the police return the seized equipment and corporate records. [14]

[19] On the appeal the argument that that the appellant was impecunious was an entirely new submission, one that was not raised before the master and accordingly is not a proper consideration for this appeal.

[20] In dealing with the failure of counsel for the defendants to allow questions as to the merits, counsel for the respondent (the defendants) submitted that it was open to those acting on behalf of the plaintiff to bring a motion on the refusals, asking that they be answered. Given that the plaintiff did not propose to rely on impecuniosity it may not be surprising that it did not do so. On the other hand, the answer to these questions might have provided evidence that sustained the idea that the secured creditor had been paid and that the funds, said by the defendants to have been taken from the bank account for that purpose should have been available to satisfy other creditors including the plaintiff. The only evidence referred to in the course of the submissions on this appeal which reflect on this question was a chart prepared by the “president and shareholder” of the plaintiff. [15] In an affidavit he deposed that he had reviewed the bank records of Insyght Systems Inc. and Insyght Engineering Inc. (the third party) and determined that funds were improperly transferred from one to the other. [16] Ultimately, the accuracy of this work and the conclusions to be drawn from it (were there other explanations?) are matters for trial. Whatever it may or may not say at this early stage about the strength of the case of the plaintiff, it was not enough to convince the master that, in the absence of any allegation of impecuniosity and the absence of sufficient assets in Ontario to respond to the cost order that could be made, there need not be an order for security for costs.

[21] While it may have been preferable for counsel for the defendants to allow for answers the failure to do so does not support the submission that the treatment, by the master, of the supposed impecuniosity of the appellant is demonstrative of a palpable and overriding error. The master was not required to consider impecuniosity or deal with it in the context of the merits of the case. The issue was not raised. This is not to say that the merits of the case are not relevant. They always are (see the quotation at para. [14] above). However, given that there was no allegation of impecuniosity the standard on which to examine the strength of the case was higher than it otherwise would have been. Where impecuniosity is found the test for examining the strength of the plaintiff’s case is whether it is completely devoid of merit. When there is no impecuniosity the case of the plaintiff is judged based on whether it has a good chance of success (see the quotation at para. [14] above).

[22] The master examined whether the case of the plaintiff had a good chance of success. It is here that I return to the submission that the master’s alleged error in failing to accept that money that was improperly transferred from account of Insyght Sytems Inc. would otherwise have been available for distribution to unsecured creditors and not have been directed to bank as the secured creditor. As counsel sees it, this was a palpable and overriding error. With the understanding that the money would have been available for unsecured creditors, the plaintiff had a good chance of success and the determination of the master should be set aside.

[23] I do not agree.

[24] The master engaged in a proper analysis with respect to the merits of the claim based on the limited evidence before her. She reviewed the allegations that the Appellant (the plaintiff) asserted against the Respondents (the defendants):

The plaintiff alleges that the defendants did not exercise proper diligence with respect to the bankruptcy of Insyght Systems. It alleges that the Trustee allowed Insyght Systems unfettered access to the existing bank account from the date of bankruptcy in April 2013 until September 2014. In that period, it is alleged that Insyght Systems transferred $201,291.61 to Insyght Engineering from that account, funds that the plaintiff argues belonged to it as a then potential creditor. Further, it argues that the Trustee facilitated what was in effect a fraudulent bankruptcy. [17]

[25] The master also reviewed the submissions brought forward by the Respondents (the defendants):

The defendants argue that the estate was properly administered. The secured creditor received the available assets of Insyght Systems and there were no funds for unsecured creditors. The defendants argue that, even if the plaintiff proves that there were funds that should have been kept in a separate estate account and were not, those funds, too, would have been the property of the secured creditor. In short, even if the plaintiff proves its case at trial, it would not be entitled to damages. [18]

[26] The master found that while there may be some merit in the plaintiff’s claim, there was no evidence that suggested that one party’s case was stronger than the other. [19] She found the merits to be a neutral factor. [20] The master summarized this by quoting and for the purpose of her finding adopting as “equally applicable” the following:

… 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. [21]

There is no palpable and overriding error.

[27] Finally, the rule notes that any order that is made as to security for costs should be “just” (see: para. [4] above). Counsel for the Appellant (the plaintiff) submitted that the order made by the master was not. He submitted that since it was the defendants that had “denuded” the estate of the bankrupt Insyght Systems Inc. thus denying the plaintiff what it was owed, it would be unjust to require the plaintiff to pay security for costs. It would allow the defendants to gain from their own failings. In taking this position counsel relied on two cases: and Hilltop Group Ltd. v. Katana [22] and Jonathan’s-Aluminum Steel & Supply Inc. v. JRBS Machine Inc. et al. [23] These cases are to be distinguished. They are different and do not assist the Appellant.

[28] In the first case Hilltop had judgment against Katana. It understood that he was going to fraudulently convey property to render Valleywood valueless and thus avoid payment of the judgment. Hilltop sought a mareva injunction. Valleywood sought security for costs. But for the judgment, Hilltop was impecunious. Valleywood took the position the judgment was worthless. The basis of the action as commenced by Hilltop was that the judgment was valid. If there was fraud to avoid satisfying that judgment it would continue to have value. It would be an injustice to award security for costs and prevent Hilltop from proceeding when its impecuniosity arose from the actions of the defendant that were the subject of the proceeding. Security for costs would allow the defendants to benefit from their wrong doing if, in fact, it was demonstrated that they had acted in a fashion that wrongfully denied Hilltop the right to collect on the judgment.

[29] In the second case Jonathan’s-Aluminum Steel & Supply Inc. had been sold. The purchaser defaulted on the payments. The seller obtained a judgment following a trial. The judge found the husband of the putative purchaser (she had assigned the contract to a corporation founded for the purpose of the purchase) to be “self-serving” and “internally inconsistent”. An appeal was commenced and withdrawn. As a result of a series of fraudulent transactions the plaintiff sued JRBS Machine Inc. a company to which the value had been transferred and which was not arm’s length to the company that had been the ultimate purchaser. JRBS Machine Inc. and the other defendants which included the original purchaser, the company she had incorporated and her husband sought an order for security for costs. It was refused by the master. Her ruling was upheld on appeal where she was quoted as follows:

I agree with Mr. Starkman when he posits that this case is factually similar to that of Hilltop Group Ltd. v. Katana … in that here there is a valid judgment. With the plaintiff being a judgment creditor of Retail Alloy, a company that is closely interconnected with the moving defendants against whom claims of fraudulent conveyance have been made, it would not be in the interests of justice, in my view, for the court to order the plaintiff to post security. The defendants took steps that had the effect of denuding Retail Alloy of assets sufficient to satisfy the judgment against it. Whether those steps were innocent or intentional, they have diminished the value of the plaintiff’s judgment. [24]

[30] In this case there is a judgment that is held by the plaintiff but it does not serve to substantiate any wrong of the defendants. As trustee they did not contest the action. They understood the defendant Insyght Systems Inc. to be without assets. To argue that, in this situation the defendants have denuded the assets of the bankrupt company to the detriment of the plaintiff is to accept that the allegations of the plaintiff are correct. If this is enough to find injustice such that an impecunious plaintiff could avoid an order for security for costs, it would mean that any plaintiff without funds to pay an order for costs, regardless of the strength of its case could successfully oppose an order for security for costs. In any event the proposition is not applicable in this case. The plaintiff did not rely on and has not been found to be impecunious. This quotation is apposite:

The plaintiff has an interest in not having her access to justice unfairly impaired by having to put up security. In the absence of evidence of impecuniosity or financial hardship, I do not see how being obliged to protect the defendant from the risk of unrecoverable costs can be unjust simply because the plaintiff has some merit or more merit in her position in the claim. I can imagine a case where the merits overwhelmingly favour the plaintiff as an exception but the evidence before me does not show this to be such a case. [25]

[31] The plaintiff has not been found to be impecunious, the master has determined that the case of the plaintiff has no more strength than that of the defendants and that there is no injustice in allowing for an award of security for costs. There is no palpable and overriding error. Looked at holistically there is no reason to, and no basis for, setting aside the order of the master.

[32] The appeal is dismissed.

[33] In the event that the parties are unable to agree as to costs I will consider written submissions on the following terms:

(1) On behalf of the Respondents, no later than 15 days after the release of these reasons, such submissions to be no longer than 3 pages double spaced not including any Costs Outline, Bill of Costs or caselaw that may be referred to. (2) On behalf of the Appellant, no later than 10 days thereafter, such submissions to be no longer than 3 pages double spaced not including any Costs Outline, Bill of Costs or caselaw that may be referred to. (3) On behalf of the Respondents, in Reply if necessary, no later than 5 days thereafter, such submissions to be no longer than 1 page.

Lederer J. Date: June 22, 2018