Court File and Parties

COURT FILE NO.: CV-12-9795-00CL DATE: 2019/03/19 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL COURT

RE: 7868073 CANADA LTD., 1841979 ONTARIO LIMITED, 1636 ONTARIO INC., ARCHITECTURAL COATINGS SOLUTIONS INC., TRANSREFLECT INC. and ITOLO MALLOZZI Plaintiffs

AND:

1841978 ONTARIO INC., POWDER COATING SOLUTIONS INC., VACUUM METALLIZING LIMITED, ROBERT W. LANGLOIS carrying on business as RELECTIONIGHT, CARRIE FERGUSON, carrying on business as REFLECTIONIGHT, ROBERT W. LANGLOIS, CARRIE FERGUSON, JEFFREY STEVEN SUARY, GARY SUGAR, RJG LABS INC. and PULTRUCOATER INC. Defendants

AND BETWEEN:

POWDER COATING SOLUTIONS INC., ROBERT W. LANGLOIS and 1841978 ONTARIO INC. Plaintiffs by Counterclaim

AND:

7868073 CANADA LTD., 1841979 ONTARIO LIMITED, 1636833 ONTARIO INC., ARCHITECTURAL COATINGS SOLUTIONS INC., TRANSREFLECT INC., ITOLO MALLOZZI, FRAM PROFESSIONAL CORPORATION, WADE KOSOWAN and LOW RISK LOGISTICES INC.

BEFORE: Hainey, J.

COUNSEL: Richard Macklin and Lucinda Bendu, for the Plaintiffs Lorne Silver and Carly Cohen, for the Cassels Defendants Mark Ross and Eric Brousseau, for Gary Sugar

HEARD: March 4, 2019

Endorsement

Background

[1] The Cassels Defendants and Gary Sugar seek an order requiring the plaintiffs to post security for costs for the period from the completion of discoveries to the completion of trial pursuant to Rule 56.01(1)(d) of the Rules of Civil Procedure (“Rules”) and an order requiring the plaintiffs to post increased security for costs for the discovery stage of this proceeding pursuant to Rule 56.07 of the Rules.

[2] In January 2017, Wilton-Siegel J. made an order requiring the plaintiffs to post security for costs in the amount of $45,000 in favour of the Cassels Defendants. He declined to make an order for security for costs in favour of Gary Sugar, who was self-represented at the time.

[3] The Cassels Defendants seek additional security for costs on this motion in excess of $600,000. Gary Sugar seeks $380,000 in security for costs.

[4] The trial of this action was scheduled to commence in June, 2019 for three weeks. It has now been adjourned due to prolonged discoveries. I have been attempting to case manage this action which has proved to be difficult due to the very aggressive and non-cooperative manner that all parties have approached the litigation. Their approach has dramatically and unreasonably increased the cost of the litigation.

Law

[5] In deciding these motions I have relied upon the following legal principles set out by Master Glustein (as he was) in My Portfolio Analyzer Inc. v. Kouverge Digital Solutions Corp., [2009] O.J. No. 937 at para. 38 as follows:

(i) There is a two-step process under Rule 56.01:

First, the moving party must discharge the onus of showing that there is a good reason to believe that the plaintiff has insufficient assets in Ontario to pay the costs of the defendant in the event that the plaintiff is unsuccessful. It is a lighter onus than proof on a balance of probabilities, but requires more than a “hunch” or “speculation”.

Second, if the defendant meets its initial burden, the onus shifts to the plaintiff to establish either that it has sufficient assets in the jurisdiction or it is impecunious and injustice would result if the plaintiff is unable to proceed with its action because of its inability to provide security …

(ii) The court may consider critically the quality as well as the sufficiency of the assets presently held by the plaintiff, and whether or not they are bona fide assets of the company …

(iii) There must be demonstrated exigible assets. It is insufficient that the responding party shows that it is profitable or that it has equity …

(iv) The court must consider the liabilities of the plaintiff corporation as well as its assets, and in particular whether the assets to which the plaintiff claims the defendant can look to for costs are secured to another creditor …

(v) Rule 56.01(1)(d) does not countenance extensive and speculative inquiries as to what the future value and availability of the assets are likely to be. A mere possibility that assets may be removed at some time in the future is not without more grounds for security since a disposal of assets before judgment is a possibility in any case …

(vi) The failure of a plaintiff to respond to a defendant’s enquiry as to the availability of assets may raise a doubt as to the existence of assets …

(vii) Conversely, if the plaintiff properly decides not to answer irrelevant questions, no adverse inference can be drawn from the refusals …

(viii) Rule 56.01(d) does not distinguish between tangible and intangible assets …

Analysis

[6] In dealing with the first step of the process under Rule 56.01(1)(d) I must consider whether the defendants have demonstrated that there is good reason to believe that the plaintiffs have insufficient assets in Ontario to pay the defendants’ costs.

[7] There is no dispute that this test has been met for all of the plaintiffs except 1636833 Ontario Inc. (“833”) which the plaintiffs submit has sufficient assets in Ontario to pay the defendants’ costs.

[8] Wilton-Siegel J. considered this issue in November 2016 when he ordered the plaintiffs to post $45,000 in security for costs. At paras. 14-19 of his Endorsement he concluded that 833 did not have sufficient assets to satisfy a costs award as follows:

Corporate Plaintiffs

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

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

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

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

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

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

[9] The plaintiffs acknowledge that they did not produce sufficient evidence of 833’s assets before Wilton-Siegel J. However, they submit that they have now produced evidence (including Mr. Kosowan’s testimony about 833’s financial condition) that establishes that 833 does, in fact, have sufficient liquid assets to satisfy a costs award. I agree with their submission for the following reasons:

a) Since January 1, 2018, 833 has invoiced Mattel Inc., a major U.S. corporation, over $900,000 and collected more than $800,000 in cash from Mattel. Moreover, 833’s business relationship with Mattel has existed for over 20 years. b) As of December 31, 2018, the balance in 833’s bank account was over $309,000. As of January 31, 2019, the balance in the account was over $183,000. c) 833 also has an investment account that holds stock equity investments that are primarily cannabis equity shares. As at December 31, 2018 the balance in this account was over $280,000. d) According to Mr. Kosowan’s evidence, 833’s financial results will improve in future years and its pre-tax net income increased to $251,427 in 2018. e) There are no executions registered against 833 and no court orders or judgments requiring it to pay any money. All of the money in 833’s bank accounts is unencumbered. f) Mr. Kosowan undertakes to the court to direct 833 to pay any costs award made against any of the plaintiffs in this proceeding. g) 833 has produced significant supporting documents with respect to 833’s assets. These include banks statements back to January 2017, invoices for business back to 2016, investment account statements back to January 2018, available tax returns, financial statements and account receivable information.

[10] None of this information was before Wilton-Siegel J. when he concluded that 833 had insufficient assets to satisfy a costs award.

[11] Funds in a company’s bank account can demonstrate that it has sufficient assets to satisfy a costs award. In this case 833 had almost $600,000 in its two accounts at December 31, 2018. These funds are exigible and, in my view, more than adequate to satisfy any costs awards that may be made in favour of the defendants. The defendants’ request for close to $1 million in security for costs is excessive. If I had concluded that the defendants are entitled to further security for costs, I would have awarded an amount far less than what the defendants have requested.

[12] The defendants complain about the sufficiency of the disclosure made by 833 concerning its assets and the risk that Mr. Kosovan will remove the assets from 833 to avoid having to pay a costs award. The Court of Appeal for Ontario made it clear in 671122 Ontario Limited v. Canadian Tire Corp. Limited, 1993 CarswellOnt 466, at para. 10 that there is a limit to the inquiry that should be made into the availability of a company’s assets on a motion for security for costs as follows:

10. Further, the Divisional Court was right to observe that there must be ‘some limit to the inquiry’. The future financial prospects of many companies may well be the subject of debate but the rule as drawn does not countenance extensive speculative inquiries as to what in each case the future value and availability of the plaintiff’s assets is likely to be. This would not be to ‘secure the just, most expeditious and least expensive determination’ of the proceedings (emphasis added).

[13] In my view, the Court of Appeal’s admonition in the Canadian Tire case applies to the defendants’ complaints about 833’s disclosure of its assets and Mr. Kosowan’s ability to move those assets out of 833. I am satisfied that 833 has made sufficient disclosure of its financial condition for the purposes of this motion.

[14] I find that the evidentiary record on this motion concerning 833’s assets is much more fulsome and persuasive than the record that was before Wilton-Siegel J. I have concluded on the record before me that the plaintiffs have demonstrated that 833 has sufficient assets in the jurisdiction to satisfy a costs award following trial.

Conclusion

[15] For the reasons set out above the defendants’ motions for security for costs are dismissed.

Costs

[16] I urge the parties to settle the issue of the costs of these motions. If they cannot they may schedule a 9:30 a.m. attendance with me to determine costs.

HAINEY J. Date: March 19, 2019