Court File and Parties

Court File No.: CV-13-489058 Motion Heard: 28052018 Superior Court of Justice - Ontario

Re: 2027707 Ontario Ltd. and John Kraner, Plaintiffs And: Richard Burnside & Associates Ltd., John Schnurr, 7887035 Canada Inc., c.o.b. as Cedar Creek Remediation and John Allen Wilford, Defendants

Before: Master P. T. Sugunasiri

Counsel: P. Cozzi, Counsel, for 2027707 Ontario Ltd., Responding Party S. Dewart, Counsel, for Allen Wilford/Moving Party

Heard: May 28, 2018

Reasons for Decision

[1] This action is a slow moving train on a long and scenic track. Although commenced in 2013, it is still only at the pleadings stage due to a series of interlocutory steps taken by the various parties. Over the protests of several of the defendants, the statement of claim has been successfully amended at least twice and parties have come and gone. Before the action gains momentum and litigation costs increase, Mr. Wilford seeks security for costs against the corporate plaintiff (“CP”) on the basis that it has insufficient assets in Ontario. For the reasons that follow, I order the CP to pay $12,500 as security for costs.

Facts:

[2] The dispute arises from the receivership of the CP’s lodge business. John Kraner is the principal of the CP. He and his former wife operated a motel in Tobermory called the Tobermory Lodge. Mr. Kraner is alleged to have been the registered owner of the property and the business was operated through the CP. In the course of matrimonial litigation, Mrs. Kraner alleged that Mr. Kraner was dissipating assets. Accordingly, Mr. Allen Wilford (“Wilford”) who acted for Mrs. Kraner moved successfully for the appointment of a receiver to operate the business.

[3] On May 16, 2012, Justice Corbett appointed the Defendant Richard Burnside & Associates Limited (the “Receiver”) as receiver and manager of Tobermory Lodge. At the time, Mr. Kraner was living at the lodge. On May 28, 2012, Justice Corbett also ordered Mr. Kraner to leave the lodge during the receivership because he was frustrating or impeding the receivership.

[4] In or around March 2013, Mr. Kraner agreed to sell the Lodge. After the sale was complete, he alleged that kitchen equipment and other valuable fixtures had been removed from the property prior to closing. The CP commenced this action in September of 2013 seeking damages for conversion of property in the amount of $316,245.17 and punitive damages.

[5] On February 19, 2017, Master Dash added Mr. Kraner as a plaintiff to the action and Wilford as a defendant. He also permitted some, but not all of the proposed claims against Wilford. Master Dash granted the Plaintiff’s proposed conversion claim against Wilford but not the claim for “damages for the devaluation of the value of the Tobermory Lodge in the amount of $600,000.” However, Master Dash provided the Plaintiffs a final opportunity to seek amendments to add the devaluation claim.

[6] That further motion came before me on April 21, 2017. On July 11, 2017 I permitted the Plaintiffs to deliver a Fresh as Amended Statement of Claim allowing claims against Wilford for the devaluation of Tobermory Lodge, inducing breach of fiduciary duty and trespass to property. In rendering my decision, I concluded that these causes of action, with at least one being novel, were tenable for the purposes of allowing the pleading to advance to the next stage. The analysis was based strictly on what was pleaded rather than on any evidence tendered to support the proposed claims.

Law and Analysis:

[7] Wilford relies on Rule 56.01(1)(d) to support his request for security for costs. It states that the court may order security for costs as is just where it appears that the plaintiff is a corporation and there is good reason to believe that it has insufficient assets in Ontario to pay costs.

[8] The leading case on security for costs is now Yaiguaje v. Chevron Corp., 2017 ONCA 827.[^1] The important paragraphs of that decision are at paragraphs 22 to 25:

[22] In deciding motions for security for costs judges are obliged to first consider the specific provisions of the Rules governing those motions and then effectively to take a step back and consider the justness of the order sought in all the circumstances of the case, with the interests of justice at the forefront. While the motion judge concluded that an order for security for costs would be just, with respect, she failed to undertake the second part of that analysis. The failure to consider all the circumstances of the case and conduct a holistic analysis of the critical overarching principle on the motion before her constitutes an error in principle. It therefore falls to this panel to conduct the necessary analysis of the justness of the order sought.

[23] The Rules explicitly provide that an order for security for costs should only be made where the justness of the case demands it. Courts must be vigilant to ensure an order that is designed to be protective in nature is not used as a litigation tactic to prevent a case from being heard on its merits, even in circumstances where the other provisions of Rules 56 or 61 have been met.

[24] 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), 1989 4354 (ON SC), 70 O.R. (2d) 119, [1989] O.J. No. 1399 (H.C.J.); Morton v. Canada (Attorney General) (2005), 2005 6052 (ON SC), 75 O.R. (3d) 63, [2005] O.J. No. 948 (S.C.J.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 2009 46451 (ON SC), 99 O.R. (3d) 55, [2009] O.J. No. 3680 (S.C.J.); Wang v. Li, [2011] O.J. No. 3383, 2011 ONSC 4477 (S.C.J.); and Brown v. Hudson's Bay Co., [2014] O.J. No. 795, 2014 ONSC 1065, 318 O.A.C. 12 (Div. Ct.).

[25] 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. [My emphasis]

[9] In a nutshell, defendants seeking security for costs must first meet the threshold test in Rule 56.01(1). If met, the Court must take a bird’s eye view of all the circumstances of the particular case to determine if it is just to make the order. In taking this view, the tests enumerated in previous case law are not, in my view, defunct. Rather, they are to be applied contextually and as an aid to determining the just result.

[10] As such, I now turn to the various tests and the circumstances of this particular case.

There is good reason to believe that the Corporate Plaintiff does not have sufficient assets in Ontario to pay an adverse costs award

[11] Wilford argues that the first hurdle to clear is to establish that it appears that the CP has insufficient assets in Ontario to pay an adverse costs award. Wilford submits that he has cleared this hurdle because the CP is struggling to pay a previous costs award of $25,500 payable by it to a former Third Party to the action, Mr. Van Bavel.

[12] Mr. Van Bavel had been brought in as a Third Party by the Receiver Defendant, Richard Burnside & Associates for contribution and indemnity as the receiver’s counsel. On August 31, 2015, Van Bavel brought a motion to stay the action as against the receiver. Justice Pollak granted the motion and awarded costs of $17,500 to be paid to Mr. Van Bavel. The Court of Appeal then dismissed the CP’s appeal of Justice Pollak’s order and was ordered to pay Mr. Van Bavel a further $8,000.

[13] As of November 28, 2016, these costs orders remained outstanding. By letter of November 30, 2016, counsel for the CP proposed payment of $400/month to satisfy the costs order. On cross-examination, Mr. Kraner indicated that he was paying to $400/month and that the money was coming from personal loans to him.

[14] I agree with Wilford that CP’s apparent inability to pay previous costs awards leads to a conclusion that there is a good chance that it has insufficient assets in Ontario to satisfy a future award. As the CP submits, this does not mean that Wilford has an immediate right to security for costs. Rather, it merely triggers further inquiry into whether or not an order for security for costs is just. I now turn to explain why it is.

An Order for security for costs against CP is just

[15] In considering the justness of the order, I am guided, but not limited by, the following principles as they have been established in the case law:

i. A plaintiff may avoid an order for security by demonstrating that it is impecunious and that its claim is not plainly devoid of merit;[^2]

ii. It is for the plaintiff to provide full and frank disclosure of its financial circumstances in order to allow the court to properly determine its financial circumstances;[^3]

iii. Where a plaintiff has not established impecuniosity, there is a heavier burden for it to show that it should be permitted to proceed without posting security. It must show that it’s claim has a good chance of success;[^4]

iv. A plaintiff should not be deprived of pursuing a meritorious claim because of its impecuniosity;[^5]

v. Even where a plaintiff has not decisively proven impecuniosity, proof of financial hardship in paying security for costs is a relevant factor;[^6]

vi. Where conduct of the moving party may have caused the plaintiff to be impecunious, this may be a basis to deny security for costs;[^7]

vii. In many cases it is difficult to assess the merits of the claim from the vantage point of a motions judge or master and that can render the question of merit a neutral consideration.[^8] and

viii. In making an order that is just in the circumstances, the court must balance the rights of the litigants. In particular, the court should consider affording the defendants a reasonable measure of protection for their costs, with regard to the potential impact of a security for costs award on the plaintiff.[^9]

[16] In the present case, the CP plaintiff argues that the action is really one brought by Mr. Kraner and that he is impecunious. In support of that argument, Mr. Kraner provided two sworn affidavits and was cross-examined on his evidence therein. A summary of his evidence is as follows:

i. 202 is not the real plaintiff, Kraner is;

ii. Kraner has suffered most of the damage as the previous owner of the property and as the sole shareholder of 202 who operated the lodge;

iii. 202 was incorporated solely to operate the lodge. It ceased business in 2013 when Tobermory Lodge was sold;

iv. Kraner is 74 years of age and not working or earning any income. Kraner’s only income is CPP and Old Age Pension income and a small German income. In 2016 his net income was less than $20,000.

v. Kraner lives in Mississauga and occupies a condominium as a tenant. He pays rent of $1000/month.

vi. Kraner did not receive any net proceeds from the sale of the lodge – monies were disbursed to other parties to whom debts were owed.

vii. When fund were needed in the past, Kraner borrowed from his ex-wife’s husband, Dr. Byers. He is not able to borrow any more from him nor anyone else.

[17] As a result of this evidence, the CP claims that it is impecunious. Wilford counters by submitting that the CP has not tendered evidence about its borrowing power or attempts to raise funds. Wilford’s motion is solely against the CP, as such, Kraner’s evidence of lack of funds is insufficient to meet CP’s burden. Further, it appears that there is a discrepancy as to who owned the property – it appears as a corporate asset on the CP’s corporate return. Wilford also questions the veracity of the evidence with respect to how funds from the sale of the lodge were distributed. The Directions attached to Kraner’s affidavit do not specify who the third parties are that were paid, why they were paid and what relationship they were to Mr. Kraner.

[18] In my view, I accept that the CP was a single purpose corporation and ended its business in 2013 when the lodge sold. There is no basis to doubt Kraner’s assertion on this point. As such, it is unreasonable to expect an inoperative company to demonstrate its borrowing and fundraising attempts. Kraner’s evidence attests to the fact that the CP’s only shareholder also has little to no borrowing power. As far as I am aware, the cross-examination did not shake Kraner’s description of his meagre income and assets. Ironically, the whole basis for this motion, that CP could not pay an outstanding costs order and therefore likely has no assets in Ontario, also supports CP and Kraner’s position of impecuniosity. There are no assets to pay the current costs award, and it is unlikely, with the plaintiffs’ financial profiles, that funds can be obtained for any future ones.

[19] This leads me to another factor particular to the circumstances of this case. CP raised the argument at the hearing that Rule 56.01 speaks of “a plaintiff” and that security for costs motions cannot be brought against two plaintiffs. Mr. Dewart directed me to two cases that appear to stand for the proposition that if the claims of the multiple plaintiffs are joint, an order for security for costs cannot be made against just one since the defendant can pursue the others for costs should it succeed. If the claims are several, an order can be made.[^10] These cases were in the context of security for costs being sought against a non-resident plaintiff who brought the claim with resident plaintiffs.

[20] In considering this proposition in the context of this case, I find it to be a relevant factor to consider. Wilford is seeking security for costs from the CP, and not Kraner. Presumably this is because Kraner does not fall within one of the enumerated categories of Rule 56.01(1). By in large, the claims brought by the CP and Kraner are joint. There is one claim of trespass to personal property that is solely related to Kraner. Otherwise, the main allegations of inducing breach of fiduciary duty thereby causing a devaluation of the lodge, and conversion of property, is brought jointly. In such instances, the benefit of a security for costs order is diminished because there is a second plaintiff to claim costs from. There is also a second plaintiff who can continue the action without a costs order and put the defendant in the same precarious position of incurring unrecoverable costs. In the present case however, Kraner has indicated that he too is impecunious and cannot pay a security for costs order. Given this evidence, I consider this factor to be neutral.

[21] Having accepted CP’s claim of impecuniosity, it is important to consider the merits of the claim. At this point, the plaintiff’s need only show that it is not devoid of merit. The parties disagree as to what this test entails. CP argues that since I allowed it to add the claims as against Wilford, I have already concluded that the claim is not devoid of merit. Wilford argues that the test is not the same as the one I applied on the motion to amend and that it involves taking a preliminary look at the evidence that underlies the various causes of action.

[22] I am inclined to agree with Wilford on this point. My decision to allow amendments to the claim was clearly based on my review of the proposed pleading and my assumption that the facts as pleaded were true. For the purpose of security for costs motions, the inquiry lies beyond the pleadings and is an evidentiary one. While a motions judge or master must tread lightly in making findings of fact which are reserved for a trier of fact, the inquiry into the merits of the claim involves a preliminary look at the plaintiff’s evidence in support of its claims.

Merits of the Claim are weak

[23] Based on the record before me, I agree with Wilford that the Plaintiffs’ claims against him are teetering on the edge of being plainly devoid of merit. The Plaintiffs did not tender evidence to support their claim beyond bald assertions in Mr. Kraner’s affidavits. Mr. Kraner was heavily cross-examined on his evidence in support his and the CP’s claims. Kraner’s evidence is weak or non-existent in key areas of inquiry such as the alleged inducement of the receiver, the improper hiring of tradespeople, the blocking of inspections of the lodge, the devaluation of the lodge, and the desire to keep the lodge for his own use. This latter point is important because according to the Plaintiffs, this was Wilford’s motive for manipulating the receiver and causing a devaluation of the lodge.

[24] Kraner’s friend Dr. Byers offers double hearsay evidence with respect to this latter point. He states that Mr. Schnurr told him that he was advised by the receiver that Wilford’s plan was to take over the lodge. In assessing his evidence, it is also relevant that Dr. Byers has admitted to having an interest in this litigation as Kraner’s lender. According to him, he is to receive 50% of any amounts recovered from the litigation after some expenses are paid. At the very least, this raises questions about the probative value of his evidence. I take his evidence as neutral.

Wilford did not cause CP’s impecuniosity

[25] Finally the CP strongly urges that security for costs are not appropriate where, as in this case, Wilford was the cause of the CP’s impecuniosity. In my view, this conclusion is not supported by the record before me. Any evidence on this point is dampened by the admissions that the lodge was suffering losses long before Wilford became involved.

Conclusion on security for costs

[26] What we are left with is a case in which there are two impecunious plaintiffs with seemingly weak claims, only one of whom can be made to post security. Having considered the totality of the evidence, the principles noted above, and the factors unique to the circumstances of this case, I conclude that it is just to order security for costs in order to give Wilford some protection for having to defend the action without any assurance that costs can be recovered. Making such an order will not stop the action in its tracks. Indeed, if the CP is unable to pay, Mr. Kraner can continue on with his claim that is virtually identical to that of his corporation. Mr. Kraner has not indicated any prejudice to pursuing such a course and in fact he has stated that the action is really his, anyway.

Quantum of security for costs is not appropriate

[27] I do not agree with Wilford, however, that the $84,000 amount requested is fair, reasonable or just in the circumstances. In fixing quantum, the Court must continue to be mindful of the interests of justice for both parties. The quantum requested is what counsel believes to be Wilford’s partial indemnity costs from now until trial. Given Wilford’s own arguments about the weakness of CP’s claim, it is unclear whether the case would reach trial or be resolved by way of summary judgment. In any event, at this early juncture, it is impossible to predict the full trajectory of the litigation and I am unwilling to assign a dollar value to it.

[28] For the time being, security for costs shall be paid up to the end of discoveries. I note that Wilford’s draft Bill of Costs includes time spent on the motions to amend the claim. These costs have already been addressed in the respective motions and I disregard that portion of the draft Bill. Wilford estimates approximately $11,000 in partial indemnity fees to complete discoveries. Approximately $1200 in partial indemnity fees has already been spent on delivering Wilford’s defence. I therefore order the CP to pay security for costs in the amount of $12,500 within 60 days of today. This amount is without prejudice to Wilford bringing a motion for further security at a later date.

Costs:

[29] Mr. Cozzi and Mr. Dewart both provided costs outlines. Given the result, I see no reason to deviate from the principle that costs follow the event. Wilford may not have been successful in quantum but was otherwise successful on his motion. The CP shall pay costs to Wilford in the all-inclusive amount of $7000 payable within 30 days of today’s date.

Disposition

[30] I order as follows:

i. The Plaintiff, 2027707 Ontario Ltd., shall pay security for costs in the amount of $12,500 within 60 days of today’s date;

ii. The Plaintiff, 2027707 Ontario Ltd. shall not take any further steps in this action unless it posts security;

iii. The Plaintiff, 2027707 Ontario Ltd., shall pay costs of this motion to Wilford in the all-inclusive amount of $7000 payable within 30 days of today’s date.

[31] I thank Mr. Dewart and Mr. Cozzi for their able submissions and extremely helpful facta and briefs of authority.

Original signed

Master P. Tamara Sugunasiri

Date released: October 22, 2018

[^1]: An Application for leave to appeal to the Supreme Court of Canada was filed in June 15, 2018. [^2]: DiFilippo v. DiFilippo, 2013 ONSC 5460 at para. 27. [^3]: Ibid. at para. 28 and Zeitoun v., Economical Insurance Group, 2008 20996 (ON SCDC), [2008] OJ No 1771 at para 45-46, 49 (SC). [^4]: Supra note 2 at para. 31. [^5]: York University v. Markicevic, 2017 ONCA 651 citing Stojanovic v. Bulut, 2011 ONSC 874 at para. 5; See also Cigar500.com Inc. v. Ashton Distributors Inc., 2009 46451 (ON SC), [2009] OJ No 3680 at para. 62 (SCJ). [^6]: Bulut supra note 5 at paras. 69 and 72. [^7]: Can-Stor Management Inc. v. Storage Advantage Corp., 2017 ONSC 6388 at para 12 (Master). [^8]: Hawaiian Airlines Inc. v. Charterways Inc., (1985), 1985 2155 (ON SC), 50 OR (2d) 575 at 577 (Master) as adopted by Michigan National Bank v Axel Kraft International Ltd., [1999] OJ No 418 at para 10 (SCJ). [^9]: Panther Film Services Inc. v RJR Financing Inc., 2010 ONSC 4225 at para. 22. [^10]: Khan v TD Waterhouse Investment Advice, 2006 3467 at para. 1(Master) following Willowtree Investments Inc. v Brown, (1985) 48 CPC 150 at para 11.