Court File and Parties

COURT FILE NO.: CV-09-1262-00 DATE: 2018 09 13

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

ANTONIA RUSSO, TRUSTEE OF THE ESTATE OF GAETANO LO FASO

- and -

ANTHONY FERRACUTI, ANTHONY FERRACUTI INVESTMENTS LIMITED, DALLAS INVESTMENTS LIMITED, CRAVIT & FERRACUTI INTERIOR DESIGN INC., 518391 ONTARIO INC., DRUMLIN DEVELOPMENTS LIMITED, DAVID FERRACUTI INVESTMENTS LTD., HEATHER FERRACUTI, GERALD BOREAN, PARENTE BOREAN, and MAURO (aka Maurizio) MARCHIONI

COUNSEL: John Lo Faso, for the Plaintiff Colby Linthwaite, for the Defendant David Ferracuti, 518391 Ontario Inc., Drumlin Developments Limited, David Ferracuti Investments Ltd., and Heather Ferracuti

HEARD: August 16, 2018

REASONS FOR DECISION

Emery J.

1Mr. Gaetano Lo Faso was a lawyer who died after chasing Kelton and Ferracuti Consultants Limited (“Kelton”) for over 20 years to enforce a judgment he had obtained against Kelton in 1994.

2In 2006, Kelton made an assignment into bankruptcy. Between 2007 and 2009, Gaetano Lo Faso obtained four orders under s.38 (the “section 38 orders”) of the (Canada) Bankruptcy and Insolvency Act (“the BIA”) to bring an action against third parties who may be trustees for Kelton to enforce his judgment despite Kelton’s bankruptcy. Pursuant to one of more of those section 38 orders, Kelton’s trustee in bankruptcy assigned certain rights to Gaetano Lo Faso.

3In 2009, Gaetano Lo Faso commenced this action against several of the defendants claiming that they had participated in a fraudulent conveyance in respect of real properties located on Haines Road in Mississauga, and on Sheridan Street in Peterborough. He made claims in this action alleging those facts against Kelton, 518391 Ontario Inc. (“518”) and others for which he was seeking damages based on allegations of conspiracy, oppression, breaches of fiduciary duty and other causes of action.

4Gaetano Lo Faso died on January 28, 2018. His estate trustee, Antonia Russo, subsequently obtained an order to continue this action in the name of the Estate.

5The moving defendants bring this motion under Rule 56.01(1)(d) of the Rules of Civil Procedure for an order requiring the Estate of Gaetano Lo Faso (the “Estate”) to post security for costs in the aggregate amount of $267, 863.01.

6The moving defendants state that they are agreeable that any order they obtain provide for the staggered posting of such amounts.

7It is conceded by counsel for the plaintiff that the Estate has virtually no assets except for this claim.

Contextual facts

8John Lo Faso, counsel for the Estate, is the brother of the late Gaetano Lo Faso. I shall refer to John Lo Faso as Mr. Lo Faso, as distinct from his late brother whom I shall refer to as Gaetano Lo Faso.

9This has been a legal saga extending over two and a half decades between Gaetano Lo Faso and Kelton.

10In 1994, Gaetano obtained judgment in an action against Kelton for $63,637, on top of which he was awarded $278,000 for costs.

11Kelton was the sole shareholder of 518. Although 518 had always held title to Haines Road since that property was purchased in 1982, it is clear from the evidence that 518 held title as a bare trustee and that Kelton was the beneficial owner of Haines Road. This continued to be the case even after Kelton ceased operations as a business in 1993.

12Anthony Ferracuti was the guiding mind of both Kelton and 518, and held most if not all shares in 518. In or around 1998, Anthony Ferracuti transferred all shares in 518 to his wife, Heather Ferracuti in exchange for financial support that 518 desperately required to meet obligations to its lenders. After this transfer of shares, the Ferracuti’s treated 518 as the full owner of Haines Road.

13Kelton made an assignment into bankruptcy on October 13, 2006. Not to be deterred, Gaetano Lo Faso obtained his orders under section 38 of the BIA to bring legal proceedings for his own benefit to recover any interest held for Kelton in various properties, including Haines Road.

14518 is one of the third parties Gaetano Lo Faso pursued under the authority of the section 38 orders. Gaetano Lo Faso alleged in the statement of claim that Kelton had transferred the beneficial interest to Haines Road. He made this claim to recover the beneficial interest that had belonged to Kelton all along so that it will vest in Kelton’s trustee in bankruptcy, making that beneficial interest available for distribution to Kelton’s creditor’s, namely himself.

15The defendants brought a motion for partial summary judgment to truncate this claim in 2012. In that motion, the defendants asked the court to dismiss the action with respect to the claim that Kelton had transferred the beneficial interest in Haines Road to 518, in tandem with the change in ownership within 518 itself. On April 2, 2012, Justice Lemon of this court granted partial summary judgment dismissing Gaetano Lo Faso’s claims on that basis.

16The defendants appealed. On February 27, 2013, the Court of Appeal set aside the judgment Lemon J. had granted to the defendants. The court held that the court below could not have made the order it did in the absence of proof that the beneficial interest in Haines Road had been transferred from Kelton to 518 separate and apart from the matter of title and the ownership of shares in 518. At paragraph 26, Justice Pepall described the issue this way:

26Because he conflated the two transactions, the motions judge failed to properly consider indicia reflecting an absence of any transfer of the beneficial interest. There was no evidence of compliance with s. 2 of the Statute of Frauds, which provides that no interest in lands shall be granted or surrendered unless by deed or note in writing signed by the party so granting or surrendering, or by the party’s agent. Furthermore, even if the Statute of Frauds may in certain circumstances allow for the use of an oral contract as a defence to an action, the motions judge made no finding of any oral agreement between Kelton and Mrs. Ferracuti that reflected the transfer of the beneficial interest. Moreover, there was no evidence of any payment of the land transfer tax which would have been payable on the transfer of the beneficial interest in Haines Road.

17Under the regime established by the BIA for bankruptcy proceedings in Canada, the Estate has no independent right to bring an action against third parties to recover assets or interests held for the bankrupt. The Estate can only pursue those claims with leave granted by the court under section 38 of the BIA. That step, in essence, is exactly what Gaetano Lo Faso took to continue his quest to recover on his judgment.

18The moving defendants bring the motion under subrule 56.01(1)(d) on the basis that the Estate is a nominal plaintiff with insufficient assets to satisfy an order for costs. Those defendants argue that the nature of the order through which the Estate is pursuing its claim must be considered to properly address whether the Estate is a nominal plaintiff to bring it under the rule. Their argument is based on the fact that Gaetano Lo Faso, and now his Estate, is a plaintiff in an action brought with leave of the court under section 38 of the BIA to pursue a claim only the trustee could otherwise bring.

Issues and Analysis

19A motion seeking an order that a plaintiff post security for costs consists of two parts. Justice J.R. Henderson recently described the process in 2311888 Ontario Inc. v. Ross, 2017 ONSC 1295 in the following manner:

17In summary, the proper way to analyze a motion for security for costs is as follows:

(i) The initial onus is on the defendant to satisfy the court that it appears there is good reason to believe that the matter comes within one of the circumstances enumerated in Rule 56.01. See Hallum v. Canadian Memorial Chiropractic College (1989), 70 O.R. (2d) 119 at p. 123;

(ii) Once the first part of the test is satisfied, the onus is on the plaintiff to establish that an order for security for costs would be unjust. See Chachula at para. 10, and Uribe v. Sanchez (2006), 33 C.P.C. (6th) 94 at para. 4;

(iii) The plaintiff can meet the onus by demonstrating that:

(a) the plaintiff has appropriate or sufficient assets in Ontario in a reciprocating jurisdiction to satisfy any order of costs made in the litigation;

(b) the plaintiff is impecunious and the plaintiff’s claim is not plainly devoid of merit (See Pitkeathly v. 1059288 Ontario Inc., [2004] O.J. No. 4125 at para. 10); or

(c) if the plaintiff cannot establish that it is impecunious, but the plaintiff does not have sufficient assets to meet a costs order, the plaintiff must satisfy the court that the plaintiff’s claim has a good chance of success on the merits. See Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP, [2012] O.J. No. 3620 at paras. 41-46.

20The defendants motion for an order that the Estate post security for costs was argued on two primary grounds:

1. Is the Estate of Gaetano Lo Faso a nominal plaintiff because it has continued this action against the defendants as a section 38 plaintiff; and

2. Would it be just to require the Estate to post security for costs?

21In the event that I answer both of these questions in the affirmative, I will then determine what amount the estate should be required to post as security for costs at this time, having regard to all of the circumstances.

1. Is the Estate a nominal plaintiff?

22The issue whether the Estate is a nominal plaintiff because it is a section 38 plaintiff strikes at the heart of this motion. This action was commenced through the portal of section 38 of the Bankruptcy and Insolvency Act (BIA). Its standing and the right to prosecute this action against 518 with respect to the beneficial ownership of Haines Road flows from section 38 of the BIA.

23The defendants have the burden as the moving parties of satisfying the court that one of the grounds specified under Rule 56.01(1) applies to the Estate. This threshold issue is therefore an issue for the defendants to overcome. Once the moving defendants have satisfied the court that one of those grounds applies to the Estate, the onus then shifts to the Estate as the plaintiff to show that it would be unjust for the court to make an order requiring it to post security for costs.

24The moving defendants rely on the facts that the plaintiff derives its ability to commence and continue the action in the place and stead of the trustee defines its status as a plaintiff. In Culp Investments LLC v. KPMG Inc., 2007 BCSC 451, the Defendants brought a motion for security for costs under s. 236 of the (British Columbia) Business Corporations Act. The court is given the authority under that statutory provision to make an order for security for costs against a foreign corporation, if it appears that the foreign corporation will be unable to pay costs for the action if the defendant is successful.

25Culp Investments was a Montana corporation who had brought an action against the moving defendants in British Columbia. It was a foreign corporation which had obtained an order under section 38 of the BIA to continue the action in the place of the trustee on its own behalf and for the benefit and 16 other creditors.

26The question before Justice Gerow of the B.C. Supreme Court was whether the exposure of Culp Investments to costs should be limited to its proportionate share of the claim, and not to the full amount of security for costs on the motion. It is important to note that Justice Gerow was not deciding the threshold issue, as Culp Investments was clearly a foreign corporation. When he ruled that the plaintiff should not be put in a better position than the Trustee who had assigned the claim, Justice Gerow was deciding on how much, not if, a plaintiff should be liable under an order to post security for costs. In my view, Culp Investments does not assist the moving defendants on the motion before me.

27The moving defendants also refer to Indcondo Building Corp. v. Sloan, 2012 ONCA 502, a decision of the Court of Appeal, as authority for the argument that a section 38 plaintiff is no more a nominal plaintiff than the trustee who assigned the claim. Justice Goudge in Indcondo quotes Justice Cronk in Shaw Estate (Trustee of) v. Nicol Island Development Inc., 2009 ONCA 276:

23In Shaw Estate (Trustee of) v. Nicol Island Development Inc., 2009 ONCA 276, 51, C.B.R. (5th) at 12, this court set out the purpose of s. 38 of the BIA. Speaking for the court, Cronk J.A., at para. 37, cited with approval Toyota Canada Inc. v. Imperial Richmond Holdings Ltd. (1994), 1994 ABCA 261, 27 C.B.R. (3d) 1 (Alta. C.A.), at paras. 14-15, leave to appeal to S.C.C. refused, [1994] S.C.C.A. No. 346:

In my view, its primary purpose is to ensure that the bankrupt’s assets are preserved for the benefit of the creditors. It provides the mechanism for creditors to proceed with an action when the trustee refuses or fails to act; thereby ensuring that assets of the bankrupt (which may otherwise go unrecovered) are available to creditors willing to finance the litigation.

The secondary purpose, relating to notice, is to make sure the section operates fairly. While it is fair that those parties willing to accept the risks and costs of litigation receive a preference in terms of recovering their losses, the right to that preference must be shared with all creditors.

24Cronk J.A. went on, at para. 72, to clearly describe the difference I have delineated:

A creditor obtaining a s. 38 order advances not his or her own cause of action but, rather, the trustee’s cause of action: Re Zammit (1998), 3 C.B.R. (4th) 193 (Ont. Gen. Div.), at para. 4. The proceeding authorized by a s. 38 order is brought on the basis that the trustee in bankruptcy has the right to bring the action, and the creditor with a s. 38 order is taking the action as if the creditor were the trustee. As the Motion Judge indicated, once a s. 38 order is made, the creditor to whom it is granted stands in the shoes of the trustee: see for example, Swerdlow, at para. 17. This accords with the intended purpose of s. 38(1) of the Act, namely, to ensure that the bankrupt’s assets are preserved for the benefit of all creditors.

28As Justice Goudge explained, the distinction between a creditor pursing its own action and a creditor who obtains an order under section 38 is that under the section 38 order, the creditor advances not his or her own cause of action, but instead the cause of action available to the trustee. This is apparent from the section 38 order where the trustee is ordered to assign its right, title and interest in those claims. Justice Goudge summarizes this principle at paragraph 26 of Indcondo as follows:

26In short, the proceeding authorized by this order is not an action by the appellant on its unsatisfied judgment. To paraphrase Cronk J.A. at para. 73 of Shaw Estate, in the s. 38 motion, the appellant was not seeking to pursue its own claim in bankruptcy based on its default judgment. Rather, it was seeking leave of the court to proceed with the Trustee’s claim against the respondents in relation to conveyances said to be fraudulent.

29The Estate argues that the gravitus of its claim stems from the initial judgment Gaetano Lo Faso obtained against Kelton. As the sole judgment creditor, the Estate is just like any other creditor who brings an action, and not just a nominal plaintiff. In support of this position, the Estate relies on the decision of Campbell v. Scott, [1998] O.J. No. 62. In that case, the applicant had obtained a judgment against Dr. George Scott, a bankrupt, in the amount of $312,000 plus pre-judgment interest and costs. Ms. Campbell had filed a claim as an unsecured creditor in the Estate of Dr. Scott with respect to her judgment.

30Justice Chadwick granted an order to Ms. Campbell under section 38 of the BIA allowing her to commence and prosecute proceedings to set aside certain conveyances that the bankrupt had made. Subsequently, the respondents brought a motion pursuant to Rule 56.01(d) for an order that Ms. Scott post security for costs.

31On the motion for an order for security for costs, the respondents restricted their application to the issue of whether Ms. Scott was a nominal plaintiff. Ms. Scott did not file any material in response to that motion.

32Justice Chadwick framed the issue on the motion, and provided a concise analysis, with authorities, in paragraphs 13-16 of his decision as follows:

13 The issue on this application is whether the s.38 creditor Tammy Campbell is "a nominal plaintiff" within the meaning of Rule 56.01(d). In this case the applicant in her own personal capacity has obtained a judgment against the bankrupt and therefore has substantial interest in the outcome of the litigation. The trustee also may derive some benefit from the litigation if the applicant is successful in setting aside the various conveyances.

14 "Nominal" is defined in The Shorter Oxford English Dictionary - 3rd Edition, Oxford University Press, as "existing in name only, as distinguished from real or actual". The Ontario courts have also defined a nominal plaintiff as one having no interest in the result of the action.

15 In support of their positions, the respondents have relied upon the decision in the Trustee of Property of E.R. Delorme, debtor, v. American Equitable Insurance Co. of New York et al., [1938] O.W.N. 110 and Trustee of Altridge Ltd. v. Cook [1960] O.W.N. 272. Both these cases can be distinguished on their own fact situation as the plaintiffs were indeed nominal plaintiffs. In this case the plaintiff has a substantial judgment against the bankrupt and is bringing this application on her own behalf. As such, I do not find she is a nominal plaintiff. 16 In Rolmac Construction Co. v. Rio Tinto Mining Co., [1961] O.W.N. 269 (Ont. H.C. Master), affirmed on appeal by McRuer C.J.H.C. [1961] O.W.N. 272 n.

33Justice Chadwick found that the respondents had failed to discharge the onus of bringing the facts within the requirements of Rule 56.01. Consequently, the motion for security for costs was dismissed.

34I agree with this analysis. The Estate on the motion before me is not a “man of straw”. Even though the Estate has been granted the right to commence the action against the various defendants under section 38 of the BIA, the Estate has shown that it has a substantial interest in the result of the litigation. It is not a nominal plaintiff.

35I do not find that the Campbell decision is inconsistent with the authorities relied upon by the moving defendants. There is no dispute that a trustee has the right to litigate a claim available to the bankrupt before bankruptcy for the benefit of creditors of the Estate, but not the obligation to do so. Justice Gerow in Culp Investments states within paragraph 17 that while there is a statutory presumption that a trustee will not be personally liable for costs, this presumption does not apply when a trustee brings an action on behalf of a bankrupt where there is no duty to do so. If the trustee brings an action by exercising the power to litigate without a duty to do so, the normal rules of costs apply. This could include facing a motion that the trustee post security for costs, if appropriate.

36The discussion of risk and costs associated with the secondary purpose underlying section 38 in Shaw Estate and discussed in Indcondo suggests that, where the plaintiff is the sole creditor of the bankrupt, he is litigating for himself. This view is consistent with the decision of Justice Chadwick in Campbell v. Scott. This view also resonates with Justice Cronk’s observations that the risk and costs of litigation apply to a section 38 plaintiff who has a real and substantial interest in the action. This sets a section 38 plaintiff who is the sole creditor of the bankrupt apart from qualifying as a nominal plaintiff.

37There is also the fact that Ms. Russo as the estate trustee of the Estate of Gaetano Lo Faso is pursuing the action for the Estate to consider. In Bedi Estate v. Dajwa, 2003 Carswell 5055 Master Polika concluded that a nominal plaintiff is a plaintiff who has no real interest in the outcome of the litigation. An estate trustee is not a nominal plaintiff as it cannot be said the estate trustee has no interest in the outcome of the action when exercising his or her duty to prosecute the action, regardless of the fact she was the sole beneficiary of the estate. The right to pursue the action emanated from the rights to make the claim held by the deceased before his death. Those rights devolved to the estate trustee. For this reason, the litigation interests of the estate trustee in the Bedi Estate case were real and subsisting.

2. Would it be just to require the Estate to post security?

38The moving defendants have not satisfied the court on the first part of the test. It is only when the moving defendants satisfy the threshold issue does the burden shift to the Estate to establish it would be unjust for the court to make an order under Rule 56.01. This point was made by Justice Code in Cigar500.com Inc. v. Ashton Distributors Inc., (2009), 99 O.R. (3d) 55:

29This is why the case law under rule 56.01 is clear that the defendant moving party must first meet its initial onus before the court even turns to the second-stage onus on the plaintiff. The issues are different at the two stages, the degrees of proof are different and failure by the plaintiff at the second stage does not necessarily imply success by the defendant at the first stage.

39The power of the court to require a plaintiff to post security for costs under Rule 56.01 is discretionary. Even if I had found that the moving defendants had discharged their burden of establishing that the Estate was a nominal plaintiff, I would not order the Estate to post security for costs at this time.

40I consider this case to involve an access to justice issue. Gaetano Lo Faso obtained judgment against Kelton that has never been satisfied. The Court of Appeal in 2012 identified a very real issue that remains for this court to determine as between the plaintiff and the moving defendants. To deny the Estate its right to litigate if it truly lacks assets from which to post security for costs would be to deny the Estate access to justice. An order to post security for costs in the current circumstances would be inconsistent with the guiding principle for the interpretation of the rules under Rule 1.04: to construe the rules liberally to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.

3. What amount of security for costs would have been ordered?

41Mr. Lo Faso has given an undertaking on behalf of the Estate that it will limit its claims against the moving defendants to the beneficial interest 518 holds for Kelton in Haines Road, and any lost profits arising since the date of judgment. In view of that undertaking, the moving defendants have conceded that the quantum of the security they seek can be reduced by half.

42The moving defendants have also agreed, as noted above, that any amount ordered for the Estate to post as security for costs may be staggered. The payment of security for costs at stages of an action is a customary term for the court to grant on motions under Rule 56.01 where an order is made.

43The moving defendants were seeking $40,000 to stand as security for the potential costs the moving defendants could incur up to and including the determination of both the plaintiff’s motion for partial summary judgment and the defendants motion to dismiss for delay. These motions are scheduled to be heard together on October 16, 2018. Had I found there are grounds to order security for costs, I would have ordered the Estate to post half that amount, namely $20,000, within 30 days of this order.

Conclusion

44I conclude that the Estate of Gaetano Lo Faso, deceased is not a nominal plaintiff within the meaning of Rule 56.01(1)(d). For the reasons given, I also consider that it would be unjust to order the Estate to pay security for costs. The defendant’s motion that the Estate post security for costs is therefore dismissed.

45If the Estate seeks costs, written submissions shall be filed by September 17, 2018 consisting of no more than two pages, not including time dockets or disbursement receipts. The moving defendants shall then have until September 20, 2018 to file responding submissions limited to the same extent. No reply submissions are permitted without leave. All written materials may be sent to my judicial assistant, Ms. Melanie Powers by email at melanie.powers@ontario.ca or fax at 905-456-4834 in Brampton.

Emery J.