Court File and Parties

Court File No.: CV-15-539199 Motion Heard: 2019-03-19 Reasons Released: 2019-08-22 Superior Court of Justice – Ontario

Between: K. LEE & ASSOCIATES LTD., Plaintiff

• and – YAW JUNG LEE, Defendant

And Between: YAW JUNG LEE, Plaintiff by Counterclaim -and – K. LEE & ASSOCIATES LTD., K.G.S. TAX SERVICES INC., K LEE & ASSOCIATES, YE AROUND TAX SERVICES, L. LEE AND ASSOCAITES INC., SCARBOROUGH TAX SERVICES, K. LEE AND ASSOCIATES LTD., K. LEE ASSOCIATES, L-LEE ASSOCITES LTD., KEN LEE & ASSOCIATES, BASIC TAX ACCOUNTING, MYUNG SAE LEE a.k.a. MYUNG LEE a.k.a. SAE LEE a.k.a MYUNG SAE a.k.a. MYUNG (KEVIN) SAE LEE a.k.a. KEVEN SAE LEE a.k.a. KEVIN LEE, a.k.a MYUNG KEVIN LEE, K LEE, C.A., KEN LEE, C.A., and KENNETH LEE a.k.a. KENNETH JONATHAN LEE a.k.a. KENNETH J. LEE, Defendants by Counterclaim

Before: Master D. E. Short

Counsel: Larry J. Levine, Q.C., for the moving Defendant James R.C. Clark, for the Plaintiff, responding party

Reasons Released: August 22, 2019

“Follow the Money” Reasons on Motion for Security for Costs

[1] “Follow the money" is a catchphrase popularized by the 1976 drama-documentary motion picture All the President's Men, which suggests unusual activities can be brought to light by examining money transfers between parties.

[2] In the present case, a family dispute as to the whereabouts of various sums of money apparently paid for accounting services has been unresolved for a significant number of years.

[3] On this motion the defendant moves for security for costs from the plaintiff. The determination of that issue involves a consideration of another money related concept and turns in part on the interpretation of a particular adjective:

IMPECUNIOUS. adj. Lacking sufficient assets for a purpose and unable to raise the moneys required from other sources.

I. Parties

[4] The Plaintiff K. Lee & Associates Ltd. is a corporation that provides bookkeeping and tax filing services. The sole owner, officer and director is Young Soon Lee.

[5] The Plaintiff corporation has admitted, through its sole officer, director and shareholder that it is presently without assets. However, the Plaintiff also stipulates that it is “not impecunious”. From this assertion I take it that the plaintiff could be financed, if it became necessary.

[6] I am advised that while “impecunious”, the Plaintiff company “has 4-5 employees”. One of the employees is Myung " Kevin " Lee. He is the husband of Young Soon and is the brother-in law of the Defendant Yaw Jung Lee (“Yaw”).

[7] The Statement of Claim indicates that Yaw was the wife of Myung Yoon Lee ("Yoon"). Yoon was diagnosed with cancer in the early 1990s. He was a Certified Management Accountant.

[8] While Yoon was alive, he operated a tax preparation business located on Kennedy Road, in Scarborough. His wife, the Defendant Yaw, assisted him in that business.

[9] The Statement of Claim sets out the Plaintiff’s understanding of the arrangement amongst the parties:

“8. In early 1995, Yoon was unable. to work as he was too ill from cancer. Ken, Kevin and Kevin's wife assisted Yoon and Yaw by providing services to Yoon's clients for that tax season. Yoon passed away in April 1995.

[10] Yaw was employed at the Scarborough office from 1995 until 2015 (the Plaintiff was incorporated in 2005 but “assimilated the previous corporation's business”). Following her husband’s death, the Defendant was the only employee in the Scarborough office. Kevin attended the Scarborough office 1 to 3 times per week.

[11] Shortly thereafter Yoon’s death, K. Lee & Associates, the unincorporated predecessor to the Plaintiff, was formed. It was a partnership between Ken and two of his sisters. An agreement was reached with Yaw and K. Lee & Associates under which:

i. K. Lee & Associates would not charge Yaw for the services they provided to Yoon and Yaw' s clients, and in exchange would service all clients from Kennedy Road, Scarborough; ii. K. Lee & Associates would employ Yaw to assemble documents for income tax and GST filings for those clients, while K. Lee & Associates would provide the accounting oversight, review, preparation of tax returns, and in addition provide payroll services to some of the Scarborough clients; iii. K. Lee & Associates would pay Yaw monthly rent for the Kennedy Road location as it would be used to store Scarborough client files and to meet with those clients.

[12] Commencing on or about May 1, 1995, Yaw, as an employee, worked with existing and new clients, and collected and prepared their tax related information.”.

[13] The Defendant is a Korean woman in her sixties. She does not have a professional designation but worked with her husband while he was alive in an accounting business that was operated out of the Scarborough location. The Defendant speaks very little English.

[14] To add to the potential confusion, I note that Kenneth " Ken " Lee is a Chartered Accountant, the son of Kevin and Young Soon. He is a Defendant by Counterclaim, but he is not a part of K. Lee and Associates Ltd. He has his own firm, “separate and distinct from his parent's business”.

II. Action to Date

[15] This action was commenced on October 27, 2015 by way of Statement of Claim.

[16] On or about March 8, 2016, the Defendant was served with the Statement of Claim. With the Claim, a motion record was served for a "Mareva" injunction order, freezing two of the Defendant's properties from being sold or encumbered. That Order was granted, on consent, on March 23, 2016;

[17] In May 2016, the Defendant served the Statement of Defence and counterclaim and later that month a Reply and Defense to Counterclaim was filed.

[18] On July 12, 2016, counsel for the Plaintiff wrote to counsel for the Defendant that the Plaintiff would be bringing a motion seeking the following relief:

i. Partial summary judgment for a finding of liability against your client and dismissing your client's counterclaim; ii. Striking various paragraphs of the Defendant's Statement of Defence and Counterclaim; and iii. Production by TD Canada Trust of your client's bank account statements, cancelled cheques and deposited cheques.

[19] The Plaintiff, in these proceedings, has accused the Defendant of stealing funds which was paid by clients, to the Scarborough location, as fees to the Plaintiff and its alleged predecessors for accounting work.

[20] The Statement of Claim asserts:

“Overview of the Operations of the Scarborough Office

14. The Defendant's principal job was to take the source documents and compile figures for corporate, partnership and proprietorship businesses, manually into a summary sheet. Kevin would then review the GST (and later HST) filings and complete the personal or corporate tax return. The entire process was paper based. Yaw did not use a computer for the tax preparation business.
15. Accounts for services rendered to 1154 Kennedy Road clients were issued by the Plaintiff or its predecessors.
16. Yaw, in the course of her employment, received payment of accounts, on behalf of her employer, the Plaintiff.
17. In June 2015, and subsequently, the Plaintiff learned that since 1995, Yaw has been keeping some client payments instead of remitting those payments to the Plaintiff.
18. Yaw diverted funds in a number of ways, including: i. Keeping cash payments; ii. Directing clients to make their payment cheques payable to her personally; iii. Receiving client payment cheques where sometimes the cheque was signed in blank, or the payee portion was blank, and then writing in her own name and cashing or depositing the cheque to an account she controlled, or to the account of her nominee; and iv. Not providing clients with the Plaintiffs invoice but rather with her own invoice so that the clients would direct the payment to her personally, and/or creating invoices on her own form of invoice, so that clients were charged additional amounts beyond the Plaintiffs billing.”

[21] The Plaintiff claims:

a) Damages in the amount of $900,000.00; b) Punitive damages of $90,000.00; c) Pre-judgment and post-judgment interest d) Costs on a substantial indemnity basis.

III. Defendant’s Position

[22] The Defendant has denied the allegations against her and has pleaded that the Plaintiff was fully aware of its outstanding accounts receivable from the beginning of the Plaintiff's alleged claim in 1996, and said nothing to the Defendant. It is further asserted that the Plaintiff and its alleged predecessors never, until 2015, asserted that clients’ accounts handled by the Defendant were outstanding.

[23] The Defendant’s factum (with my emphasis) describes the situation from her point of view;

“5. After her husband passed away, the Defendant began to work for his brother, Myung (Kevin) Sae Lee, the Defendant's brother-in-law. She was completely dependan t upon Kevin for her livelihood and felt bound to do his bidding in all respects. Realistically, she had no alternative if she was going to be able to make a living following the passing of her husband. The Defendant trusted Kevin implicitly. She confesses that she did not consider the potential legal implications when he asked her to take client's cheques in payment for accounting services into her personal bank accounts and then provide him with cash in the same amount . She did this for many years, until dismissed from her employment with the Plaintiff in 2015.”

[24] The Defendant has maintained throughout, that she deposited clients' funds in her own accounts and provided the equivalent in cash to her brother-in-law, Kevin at his request. Her factum asserts that the Defendant “was vigorously cross-examined by experienced counsel and was steadfast in this evidence.”

[25] The Defendant’s factum asserts:

“The Defendant has responded in detail to all of the Plaintiff's claims with respect to the year 2014. She intends to respond to each and every other year in detail with reference to her bank statements and the Plaintiffs myriad claims. There has been no response to the Defendant's evidence with respect to the calendar year 2014, although she is specific with respect to each example of allegedly misappropriated client's funds.”

[26] The issues for trial would seem to ultimately involve a determination as to which position is supported by the available evidence on these and other issues:

• The Plaintiff alleges the Defendant deposited client money into her account and kept the proceeds.
• The Defendant acknowledges having deposited numerous client cheques into her personal accounts, and into the accounts of her children. Her defence is that proceeds were paid to Kevin in cash.
• As well the Defendant has a counterclaim for wrongful dismissal relating to these matters.

[27] While there have been other motions seeking production of numerous bank account information and accounting documents, the major component of the present motion by the Defendant seeks the posting of security for costs, at this point, by the Plaintiff Corporation.

[28] The Defendant has counterclaimed against numerous entities not previously in the litigation. However, those entities all would seem to be various relatives and their business operations related to the Plaintiff.

[29] In the course of dealing with the motion for security for costs, I dealt with a number of other incidental issues. In particular numerous deletions sought by the plaintiff and the defendants by counterclaim from the Statement of Defence (which was prepared by a previous counsel) were approved.

[30] In particular, I am directing that a Fresh as Amended Statement of Defence be delivered within 20 days which reflects the deletion of these paragraphs: 4 to 8, 27, 30 to 32, 40 and 65 to 72, inclusive.

[31] I am further directing that any party that has not yet filed an affidavit of Documents is do so by September 30, 2019.

IV. Is Security Appropriate in this Case?

[32] The plaintiff, K. Lee and Associates Ltd. Apparently has no assets yet is said to be “not impecunious”. Assuming it could obtain funds, as needed, does that circumstance alter the defendant’s potential entitlement to security? I think not. There is no enforceable claim against any such potential lenders that could ultimately be enforced by the moving defendant.

[33] In my view, the plaintiff is not a normally functioning corporation.

[34] Normally where the moving Defendant is also a Plaintiff by Counterclaim, the normal approach is to hold that a Plaintiff by Counterclaim should not be given security for costs with respect to the costs related to the counterclaim.

[35] The inclusion of the various defendants by counterclaim would appear to be an effort to ensure that “everyone is at the table”, as distinct from asserting independent causes of action. I’m not satisfied that the investigation as to the various parties who might have shared in the funds in issue in this action merits any significant adjustment and the quantum of security for costs to be posted.

[36] I recognize that Justice Charney in Proxema Ltd. v. Birock Investments Inc et al., 2016 ONSC 5686, 2016 CarswellOnt 14127; 271 ACWS (3d) 48; 71 CLR (4th) 113; observed:

34 In the present case there is a counterclaim. A defendant should not be given security for costs with respect to costs that will arise from its counterclaim. See: Unimac -- United Management Corp. v Metrolinx, 2015 ONSC 2372: “Where the "real driver" of the action will be the moving defendant's counterclaim, there is authority for the proposition that the court may not only discount the award of security for costs by the estimated costs of litigating the counterclaim, but refuse the award altogether.” Even where the counterclaim is only a portion of the estimated costs of the litigation the court should discount any award of security for costs by the anticipated costs of the counterclaim, as it would be unfair for the plaintiff to pay security for costs to defend a counterclaim (Unimac at para. 50).

[37] However, here, it seems that there is real doubt as to who got what, and when (and why) with the movements of various cash amounts not being fully documented for nearly 20 years (for whatever reasons). Put simply there is one issue, did the Defendant receive and retain any funds to which she was not entitled.

[38] In such circumstances should the Plaintiff be ordered to post security for costs? If so, “How much and in what stages? ”

V. Applicable Rule

[39] Under subrule 56.01(1) of the Rules of Civil Procedure, the court may order a plaintiff to post security for costs where it appears that any of the following factors are satisfied:

(a) the plaintiff or application is ordinarily resident outside Ontario; (b) the plaintiff is a corporation and there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant; (c) there is good reason to believe that the action is frivolous and vexatious and that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant; or (d) the defendant has an order against the plaintiff for costs in another proceeding that remains unpaid in whole or in part.

[40] The application of subrule 56.01 (1) of the Rules of Civil Procedure involves a two-step inquiry. First, the defendant must show that it appears that at least one of the foregoing factors is satisfied. If the defendant does so, the onus shifts to the plaintiff to demonstrate that it would be unjust to require the posting of security for costs.

[41] Rule 1.04 of the Rules of Civil Procedure directs me to strive to obtain a proportional result that takes into account all the circumstances of the overall dispute:

General Principle 1.04 (1) These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits

Proportionality (1.1) In applying these rules, the court shall make orders and give directions that are proportionate to the importance and complexity of the issues, and to the amount involved, in the proceeding.

[42] Here the plaintiff’s counsel points out:

53. The Defendant has refused to agree to a Discovery Plan and refused to provide an affidavit of documents. The Plaintiff only learned of the Defendant's nominee accounts … in which she deposited client cheques, from TD Canada Trust, 18 months into the litigation. This case is three years old, and the Defendant has not reconciled her own accounts.
54. Given the Defendant's delay, the Defendant's conduct, the Defendant's disregard for the Rules and her disregard for her responsibilities in the litigation, and the tactical timing of this motion, the Defendant's motion should be dismissed. Alternatively, it should be dismissed without prejudice to the Defendant to renew it if she is ever in compliance with the Rules and upon completion of the motion for summary judgment.

[43] I am not convinced by the latter argument. I believe that it is still inappropriate at this stage for me to assess the defendant’s actions to date. However, I am not precluding any future motion to vary the security for costs I am ordering at this stage, if the plaintiff established future failures to comply with the rules on the part of the defendant.

VI. Moving Party’s Position

[44] The factum in support of this motion asserts:

6. The Statement of Claim seeks $900,000.00 in damages from the Defendant and a further $90,000.00 in punitive damages. She is accused of fraudulently depriving the Plaintiff and its alleged predecessors of their professional fees.
7. There has been no evidence, other than the bald assertion of the Plaintiff, that the Plaintiff is the legal owner of or successor in interest to any accounts receivable of its alleged predecessors.

[45] The Defendant, in support of this motion, produced a draft Bill of Costs. In that regard it was asserted:

“There has been no dispute or response to that draft Bill of Costs by the Plaintiff, other than an attack on an insignificant portion of the fees paid to prior counsel, …. However, it should be noted that only one-half of [his] fees has been included in the draft Bill of Costs. Further, Mr. Levine has not included fees billed to the Defendant for significant time spent in reviewing the voluminous file material received … when assuming carriage.”

[46] I am satisfied that the initial requirement under Rule 56.01 (1)(d) of the Rules of Civil Procedure is satisfied by the Plaintiff's admission that it is a corporation and that it has no assets to pay the costs of the Defendant. The Plaintiff has specifically acknowledged that it is not impecunious, and accordingly, does not purport to rely upon arguments that might otherwise be made in resisting an Order for Security for Costs.

[47] An order for security for costs is discretionary. The Court will engage in the following two-stage inquiry to determine whether it should exercise its discretion:

(a) first, the defendant must show that one of six factors set out in rule 56.01 (1) of the Rules of Civil Procedure applies in the circumstances; and (b) then, the Court may make any order "as is just" after inquiring into all factors which may assist in determining the justice of the case.

[48] In the words of my colleague Master McGraw in 2176693 Ontario Ltd. v. The Cora Franchise Group Inc., 2017 ONSC 6600 at para. 80,:

Rule 56.01 of the Rules of Civil Procedure does not create a prima facie right to security for costs but rather triggers an enquiry whereby the court, using its broad discretion, must take into account a number of factors to make such order as is just in the circumstances. These factors include the merits of the claim, the financial circumstances of the plaintiff and the possible effect of an order for security for costs preventing a bona fide claim from proceeding.

[49] Given the Plaintiff's admission that it has no assets, and the Plaintiff's further submission that it is not impecunious, it necessarily falls to the Plaintiff to demonstrate why it should be permitted to proceed without providing security for costs. Re DiPaola 2006 Carswell Ont. 6757 (Ontario Court of Appeal)

[50] In dealing with a motion for security for costs, a Master may consider all matters which will be of assistance in making a "just" Order, which may include the merits of the case. The appropriateness of any investigation into the merits will depend, among other things, on the nature of the action, the complexity of the pleadings themselves and whether the Defendant can satisfy one of the preliminary requirements set out in (a) - (f) of Rule 56.01 of the Rules of Civil Procedure.

[51] The merits of the case are only one consideration in making an Order for Security for Costs as is just and are by no means determinative. It is almost impossible in most cases to come to a conclusion on the merits of a claim at the time of the motion for security for costs. (see John Wink Ltd., v, Sica Inc. (1987), 57 O.R. (2d) 705 and Mastercraft Group Inc. v. Confederation Trust Co. 15 C.P.C. (41h) 48

[52] Here I also adopt the defendant’s submission that there is no principle of law which permits the Plaintiff to resist a limitation period defence by simplistically pleading fraud on the part of the Defendant, where the Plaintiff was in possession of all of the facts necessary for the determination of its rights within the limitation period, “simply pleading fraud will not permit the Plaintiff to avoid the defence that the action is statute-barred.”

[53] Having considered all the foregoing, I am satisfied this is an appropriate case for ordering security for costs.

VII. Disposition

[54] It seems to me that proportionality dictates that inasmuch as two of the widow’s properties have been frozen by virtue of the injunction obtained over three years ago, there is a form of protection for any of the legal costs encountered by the various defendants to the counterclaims asserted by the defendant, plaintiff by counterclaim.

[55] In my view the defendant ought to be entitled to at least some form of reciprocal security in the event that she is found to be correct in the arguments put forward in her statement of defense.

[56] This is clearly a case that cries out for progressive security for costs deposits.

[57] Because fraud is alleged the defendant defendant’s counsel has submitted a bill of costs on a substantial indemnity basis which totals in excess of $300,000. That bill of costs contemplates a 20 day trial and appropriate preparation for such an event. However, in this case there is a pending motion for summary judgment which could bring the matter to a much earlier conclusion.

[58] I’m advised that the first counsel on this matter incurred fees in excess of $50,000 in fees to date. The amount proposed as an allowance towards those costs is $25,000 which I find quite reasonable

[59] Mr. Levine sought roughly that amount again for preparation and delivery of materials with respect to this application.

[60] The estimated preparation and attendance for cross examination for a total of 10 days an amount of $35,000 is within the range of reasonableness. Similarly the preparation of a factor etc. for the motion for summary judgment estimated $12,500 also seems reasonable.

[61] Rule 56.04 of the Rules of Civil Procedure gives me substantial latitude with regard to the amount and form of security and the time for paying into court or otherwise giving the required security being determined by the court.

[62] In coming to an appropriate amount, I considered that these last three sums are substantial indemnity amounts. Applying proportionality, I have split the total of those three items ($72 500) to arrive at $36,250 for those components.

[63] I therefore have arrived at the total sum of $61,250 to be paid into court.

[64] I am not satisfied that it is appropriate for me to make any provision for costs going forward with respect to the anticipated 20 day trial and related activities.

[65] I am therefore determining that the present sum of applying proportionality and therefore determining that the sum of $61,250 should be paid to into the credit of this action with Accountant of the Superior Court within 60 days.

[66] My arrival at this amount reflects a consideration of the counterclaim and of the costs, for the time being, contemplated on a partial indemnity basis.

[67] If that sum is not paid, the action will be stayed pending further order. A determination of the quantum of costs with respect to any appeal from the summary judgment motion and the contemplated extent of the discoveries etc., if the motion for summary judgment is unsuccessful should be addressed at a later point in time.

[68] While I am prepared to make those determinations, in order to facilitate and contemplate future scheduling problems etc,. I am not seizing myself of any such a determination.

[69] That brings us to the question of costs of this motion. Relief was obtained by both sides with respect to a number of items, nevertheless it seems to me that the defendant was successful with respect to the issue of substance regarding the posting of security for costs. Again, applying proportionality and some degree of offset I am awarding the net costs of these motions, to the defendant, fixed at $7500 plus HST and disbursements, payable within 60 days.

[70] I am obliged to counsel for their helpful and comprehensive submissions.

Released: August 22, 2019 Master D. E. Short R. 282/DS