Horizon Entertainment Cargo Ltd. v. Marshall 2019 ONSC 2081
Court File and Parties
Court File No.: CV-13-486658 Motion Heard: 20190318, 20190319 Superior Court of Justice – Ontario
Re: Horizon Entertainment Cargo Ltd., Plaintiff And: Jeffrey Marshall, Robin Peter Williams, Raymon M.J. Lord, Michelle Spanik, G. Martin Moore, Shuttle Freight Logistics Inc., Global Motion Canada Inc. and Lucky 13 Productions Inc., Defendants
Before: Master Jolley
Counsel: Alan Cofman and Andrea Fernandes, Counsel for the Moving Party Defendants Jeffrey Marshall, Robin Peter Williams, Raymon M.J. Lord, G. Martin Moore, Shuttle Freight Logistics Inc., Global Motion Canada Inc. and Lucky 13 Productions Inc. Harvey Dorsey, Counsel for the Responding Party Plaintiff
Heard: March 18 and 19, 2019
Reasons for Decision
[1] The defendants other than Michelle Spanik (hereinafter the “defendants” for the purpose of this motion), bring this motion for security for costs under Rule 56.01(1) which provides that 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 a 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;
(e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent.
[2] This motion was originally to be heard in April 2015 but was derailed for a number of procedural reasons, for which each party bears some of the responsibility.
Legal Framework
[3] The parties agree that the following principles, as set out by Master Glustein (as he then was) at paragraph 7 of Coastline Corp. v. Canaccord Capital Corp., 2009 ONSC 21758, [2009] O.J. No. 1790 (Ont. S.C.J.) (“Coastline”) govern this motion:
(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 (Hallum v. Canadian Memorial Chiropractic College (1989), 1989 ONSC 4354, 70 O.R. (2d) 119 (H.C.J.) at 123);
(ii) Once the first part of the test is satisfied, "the onus is on the plaintiff to establish that an order for security would be unjust" (Uribe v. Sanchez (2006), 33 C.P.C. (6th) 94 (Ont. S.C.J. - Mast) ("Uribe") at para. 4);
(iii) The second stage of the test "is clearly permissive and requires the exercise of discretion which can take into account a multitude of factors". The court exercises a broad discretion in making an order that is just (Chachula v. Baillie (2004), 2004 ONSC 27934, 69 O.R. (3d) 175 (S.C.J.) at para. 12; Uribe, at para. 4);
(iv) The plaintiff can rebut the onus by either demonstrating that:
(a) the plaintiff has appropriate or sufficient assets in Ontario or in a reciprocating jurisdiction to satisfy any order of costs made in the litigation,
(b) the plaintiff is impecunious and that justice demands that the plaintiff be permitted to continue with the action, i.e. an impecunious plaintiff will generally avoid paying security for costs if the plaintiff can establish that the claim is not "plainly devoid of merit", 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 meet a high threshold to satisfy the court of its chances of success (See Willets v. Colalillo, [2007] O.J. No. 4623 (S.C.J. - Mast.) at paras. 46, 47, and 55; Uribe, at para. 5; Zeitoun v. Economical Insurance Group (2008), 2008 ON SCDC 20996, 91 O.R. (3d) 131 (Div. Ct.) at para. 50; Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP, [2007] O.J. No. 4096(S.C.J. - Mast.) ("Bruno") at para. 35);
(v) Merits have a role in any application under Rule 56.01, but in a continuum with Rule 56.01(1)(a) at the low end (Padnos v. Luminart Inc., 1996 ONSC 11781, [1996] O.J. No. 4549 (Gen. Div.) ("Padnos"), at para. 4; Bruno, at para. 36);
(vi) The court on a security for costs motion is not required to embark on an analysis such as in a motion for summary judgment. The analysis is primarily on the pleadings with recourse to evidence filed on the motion, and in appropriate cases, to selective references to excerpts of the examination for discovery where it is available (Padnos, at para. 7; Bruno, at para. 37);
(vii) "If the case is complex or turns on credibility, it is generally not appropriate to make an assessment of the merits at the interlocutory stage. The assessment of the merits should be decisive only where (a) the merits may be properly assessed on an interlocutory application; and (b) success or failure appears obvious" (Wall v. Horn Abbott Ltd., 1999 NSCA 7240, [1999] N.S.J. No. 124 (C.A.) at para. 83);
(viii) The evidentiary threshold for impecuniosity is high, and "bald statements unsupported by detail" are not sufficient. The threshold can only be reached by "tendering complete and accurate disclosure of the plaintiff's income, assets, expenses, liabilities and borrowing ability, with full supporting documentation for each category where available or an explanation where not available" (Uribe, at para. 12; Shuter v. Toronto Dominion Bank, 2007 ONSC 37475, [2007] O.J. No. 3435(S.C.J. - Mast.) ("Shuter") at para. 76);
(ix) To meet the onus to establish impecuniosity, "at the very least, this would require an individual plaintiff to submit his most recent tax return, complete banking records and records attesting to income and expenses" (Shuter, at para. 76);
(x) A corporate plaintiff who claims impecuniosity must demonstrate that it cannot raise security for costs from its shareholders and associates, i.e. it must demonstrate that its principals do not have sufficient assets (Smith Bus Lines Ltd. v. Bank of Montreal (1987), 1987 ONSC 4190, 61 O.R. (2d) 688 (H.C.J.) at 705). Evidence as to the "personal means" of the principals of the corporation is required to meet this onus (Treasure Traders International Co. v. Canadian Diamond Traders Inc., [2006] O.J. No. 1866 (S.C.J.) ("Treasure Traders"), at paras. 8-11). A corporate plaintiff must provide "substantial evidence about the ability of its shareholders or others with an interest in the litigation to post security". "A bare assertion that no funds are available" will not suffice. (1493677 Ontario Ltd. v. Crain, [2008] O.J. No. 3236(S.C.J. - Mast.) at para. 19);
(xi) Consequently, full financial disclosure requires the plaintiff to establish the amount and source of all income, a description of all assets including values, a list of all liabilities and other significant expenses, an indication of the extent of the ability of the plaintiffs to borrow funds, and details of any assets disposed of or encumbered since the cause of action arose (Morton v. Canada (2005), 2005 ONSC 6052, 75 O.R. (3d) 63 (S.C.J.) at para. 32);
(xii) Because the plaintiff has the onus to establish impecuniosity, a defendant "can choose not to cross-examine if the plaintiff fails to lead sufficient evidence". The decision not to cross-examine does not convert insufficient evidence into sufficient evidence (Bruno, at pars. 27-28; Shuter, at paras. 59 and 71); and
(xiii) When an action is in its early stages, an installment (also known as "pay-as-you-go") order for security for costs is usually the most appropriate (Bruno, at para. 65; Hawaiian Airlines, Inc. v. Chartermasters Inc., et al. (1985), 1985 ONSC 2155, 50 O.R. (2d) 575 (S.C.O. - Mast.)).
[4] The Court of Appeal affirmed the test for an order for security for costs, including its discretionary nature, in Yaiguaje v. Chevron Corporation 2017 ONCA 827 and noted:
“23. The Rules explicitly provide that an order for security for costs should only be made where the justice 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 rr. 56 or 61 have been met.
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….
While the 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 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.”
Discussion
[5] The plaintiff admits that at present it is not conducting active business operations in Ontario. It does not argue that it is impecunious but takes the position that it does not have sufficient assets in Ontario to pay the costs of the defendants. It accepts that the onus shifts to it to demonstrate that its claim has a good chance of success and that it should not be required to post security for costs as a result (2311888 Ontario Inc. v. Ross 2017 ONSC 1295 at paragraph 17).
[6] The plaintiff also argues that it would be unjust for the court to order it to post security for costs as it was the defendants’ conduct that is the subject matter of the litigation that has caused the plaintiff’s assets to become insufficient. As noted in Cigar500.com Inc. v. Ashton Distributors Inc. 2009 ONSC 46451, [2009] O.J. No. 3680, quoting John Wink Ltd. v. Sico Inc. (1987) 1987 ONSC 4299, 57 O.R. (2d) 705 (H.C.):
“There can be no question that an injustice would result if a meritorious claim were prevented from reaching trial because of the poverty of a plaintiff. If the consequence of an order for costs would be to destroy such a claim no order should be made. Injustice would be even more manifest if the impoverishment of plaintiff were caused by the very acts of which plaintiff complains in the action.”
[7] This approach was also taken by Granger, J. in declining to order security for costs in 423322 Ontario Ltd. v. Bank of Montreal (1988) 1988 ONSC 4678, 66 O.R. (2d) 123 (H.C.). His Honour stated:
“In my opinion, having regard … to the fact that the plaintiff’s action is not frivolous or vexatious and is founded upon the actions of the defendants which the plaintiff alleged caused its insolvency, I am not prepared to exercise my discretion and order the plaintiff to submit to an order for security for costs at this stage. If I was to make such an order it would cause an injustice.”
[8] As noted in Cigar500.com Inc. supra at paragraph 40:
“… the plaintiff was entitled to take the position that any deficiency in its assets was due to the wrongful conduct of the defendants, which was the very subject matter of the litigation. The suspension of its business and resulting lack of cash flow, as well as its debts to its lawyers, were direct results of the various causes of action that it alleged against the defendants.”
[9] Initially, the defendants filed an affidavit from a legal assistant in the office of its then counsel. That affidavit exhibited the pleadings and evidence that the plaintiff no longer had a business presence in Ontario.
[10] A “good chance of success” is a higher standard than proof that a claim is “not devoid of merit” but is not as high as proving the claim on a balance of probabilities at trial or establishing that there is no triable issue on a summary judgment motion (Stojanovic v. Bulut 2011 ONSC 874 at paragraph 62; affirmed 2011 ONSC 4632).
[11] Given this obligation to demonstrate a good chance of success and to counter the defendants’ assertion that the action was frivolous and vexatious, the plaintiff filed voluminous materials in response. These included the original responding affidavit of John Greenstreet, the principal of the plaintiff, sworn 10 March 2015, the transcript of the bank representative responsible for opening the plaintiff’s bank account who was examined in aid of this motion in August 2018 and two recent expert’s reports purporting both to calculate the plaintiff’s damages and to support its position that those damages were caused by the defendants.
[12] In response, the defendants filed a reply affidavit sworn by Marshall. That affidavit addressed Marshall’s background in the music industry, his involvement with Greenstreet, his subsequent employment by the plaintiff, his introduction to Global Motion UK and to Williams and Moore, principals of Shuttle Freight, the company that had been acting as agent for Global Motion UK in Canada. He also outlined the financial position of the plaintiff prior to the merger, what Greenstreet told him about the terms of the merger and about his role in the new arrangement. His affidavit then addressed the disintegration of the Global Motion UK-Horizon relationship, the subsequent proposed change in Marshall’s ownership position and salary and his resignation as a result. He also outlined his dealings with former clients after his resignation from the plaintiff, his decision to join Global Motion Canada, the timing of that decision and the ongoing work of Shuttle Freight and Global Motion Canada.
[13] The defendants also relied on the affidavits that Williams and Marshall sworn in support of an earlier motion to amend their statement of defence. The transcript of the examination and cross-examinations, as appropriate, of each of Greenstreet, Williams and Marshall were also filed for use on the motion.
[14] While it is understandable that the parties chose to file such a volume of material, the court in Padnos, supra, warned against embarking on a “summary judgment-like” analysis on a security for costs motion. The analysis is primarily on the pleadings with recourse to evidence filed on the motion, and in appropriate cases, to selective references to excerpts of the examination for discovery where it is available (see paragraph 3(vi) above.)
[15] In this context, I have considered the pleadings and evidence filed on the motion. In short, the plaintiff pleads that during the currency of the arrangement between it and Global Motion UK that commenced in the fall of 2010, Marshall, Williams and Spanik owed it fiduciary duties as either key employees or officers or directors of the plaintiff, each with access to confidential information of the plaintiff. Each of these defendants denies any fiduciary duty and denies they held the positions so described.
[16] The plaintiff pleads it was approached by a UK company called Global Motion UK to enter into a working relationship whereby Global Motion UK would use the plaintiff for its Canadian work. The plaintiff alleges that, as part of that overall agreement, Williams agreed to become a director and shareholder of the plaintiff and provide management services. The plaintiff also pleads that Shuttle Freight was to transfer all of its business in the entertainment field to the plaintiff as part of this plan, an allegation denied by Shuttle Freight and its directors and shareholders.
[17] The plaintiff then alleges that during the year in which this arrangement existed, Marshall and Williams embarked on a scheme and conspiracy to divert all of the plaintiff’s customers to one or more of the defendants. That conspiracy included misrepresenting to the public that it was the same entity as or at least had a relationship with the plaintiff after their arrangement ended.
[18] The plaintiff admitted that in November 2011 it terminated its relationship with Global Motion UK as it was not beneficial for the plaintiff. Thereafter, so it is alleged, the defendants put their plan in motion and solicited the plaintiff’s customers through various misrepresentations and breaches of fiduciary duty.
[19] The defendants take the position that the arrangement that was discussed between them and the plaintiff never got to the implementation stage. Marshall and Williams were not given shares in the new business, as was discussed. Marshall was ultimately given the choice to take a salary reduction or leave and he chose the latter. Marshall denies soliciting any of the plaintiff’s customers. He states that he never signed a non-competition agreement or restrictive covenant with the plaintiff in any event, which is uncontested. The defence alleges and Marshall deposed that when the plaintiff ended its relationship with Global Motion UK, the relationship between the plaintiff and the defendants simply went back to the business they had before the UK arrangement was negotiated. Without making any determination, I note that this appears to be supported by Greenstreet who advised in an email in early 2012 that, at the request of Global Motion UK any chance of a worldwide network happening had ceased, that he had determined that the Canadian venture (the arrangement between the plaintiff and the defendants) had no chance of succeeding as a result and that the plaintiff would be going back to operating as it was pre February 1, 2011, the date of its agreement with Global Motion UK.
[20] With respect to the damages reports, the mandate of the report by Joseph Ruble, business valuator with Caliber Advisors, was to calculate the plaintiff’s loss of profits which he assumed commenced on 1 February 2012 and which he determined to be equal to the fair market value of the company. He also assumed as part of his instructions that the loss was caused by the actions of the defendants. The report prepared by Greg McEvoy, forensic accountant with Cohen Hamilton Steger, was to determine whether business was diverted from the plaintiff to the defendants and whether the defendants made misrepresentations to the customers of the plaintiff to the effect that the defendants were one and the same as the plaintiff.
[21] It is not appropriate at this stage to subject these reports to the kind of scrutiny to which they will be subject at trial. Suffice it to say that the plaintiff may argue at trial that the reports support a finding of liability on the part of the defendants, but for the purpose of this motion, I find they are not evidence that the defendants were the cause of these alleged damages. They demonstrate the value of the business post the business breakup and also demonstrate that there were a number of former clients of the plaintiff who are now clients of Global Motion Canada. How and why the migration of clients came to be remains to be seen. That is the key issue to be determined at trial. The defendants admit that certain former clients of the plaintiff became clients of the defendants. What they challenge is the suggestion that that transfer of clients was the result of any wrongful conduct on their part. Additionally, I note that on the material reviewed, McEvoy advised that he could not comment on whether misrepresentations were made to suggest the defendants were the same business as the plaintiff.
[22] Kiteley, J. went on in Padnos, supra, to find as follows:
“While I have considered them, I find that the merits are such that they are neutral to the outcome of this motion. This is a dispute between and among entrepreneurs where commercial issues must be resolved. The result is not a foregone conclusion either for the plaintiff or the defendants. I am not in a position to assess credibility. The merits do not compel me to find that it is "just" that the motion for security for costs be granted or dismissed.”
[23] I find similarly on the facts before me that the merits are neutral for the purposes of this motion. The plaintiff may succeed at trial in proving that Marshall was a fiduciary. Or Marshall may succeed in showing that he was an employee who was subject to a charge of insubordination if he did not comply with the directives of Greenstreet. The plaintiff may prove that Marshall and Williams wrongfully took clients from it. Or the defendants may succeed in demonstrating that they were not subject to non-competition or non-solicitation clauses and/or that they were not fiduciaries and that any clients who did business with the defendants after the dissolution of the arrangement with the plaintiff did so of their own accord. The plaintiff may prove at trial that the defendants breached their contract to deliver the entertainment end of the business of Shuttle Freight. Or the defendants may prove that it was the plaintiff who terminated the arrangement when things fell apart with Global Motion UK. On the record before me, I cannot find that the plaintiff has proven it has a good chance of success at trial.
[24] The outcome of this dispute among business entrepreneurs is not a foregone conclusion for either the plaintiff or the defendants, to borrow the language of Kiteley, J. For these same reasons, I do not find the plaintiff’s claim to be frivolous or vexatious.
[25] I note that the plaintiff has the onus on this motion to demonstrate not only a good chance of success but also that, while it is not impecunious, it does not have sufficient assets to post security for costs. While I recognize that the test is less onerous than that required of a plaintiff who pleads impecuniosity, had I found that the plaintiff had demonstrated a good chance of success, I would not have been satisfied on the record that the plaintiff had insufficient assets to post security. While the plaintiff has ceased operating, its principal appears to have some equity in his home and there was no explanation offered as to whether funds could be raised by way of mortgage or otherwise to post the requested security.
[26] Stepping back and considering the justness of the order holistically, examining all the circumstances of the case and considering the overriding interests of justice, I find that it is just that the plaintiff post security for costs. As noted in Padnos, supra, if the commercial dispute involved litigants residing in Ontario, the successful defendants would have recourse to all the available remedies in Ontario to recover costs. In balancing the interests of the parties, there is no reason on these facts that the defendants should not have recourse to the equivalent remedies which an order for security for costs provides if they succeed at trial.
[27] The defendants have incurred costs to date of $82,382 which have covered the preparation of pleadings and their affidavits of documents, preparation for and attendance at a mediation and preparation for and attendance to conduct the examination for discovery of Greenstreet. They seek security in the amount of $40,000 for these steps based on a partial indemnity scale with some appropriate reductions in time spent. I find the amount of $25,000 to be an appropriate sum for the plaintiff to post as security for these incurred steps. I find this amount to be fair and reasonable considering pleadings and mediation, only one day of discovery has taken place to date. $10,000 of this amount has already been posted pursuant to my order made on 14 November 2018. The plaintiff shall post the balance within 30 days of the date of this order.
[28] The defendants estimate that they will incur costs of $185,225 going forward to the end of trial and seek security for those future costs in the amount of $65,000 plus HST and disbursements. They have estimated various motions, a continued examination for discovery of Greenstreet and examinations for discovery of each of the defendants, pre-trial preparation and a four week trial.
[29] I find that the usual instalment payment is appropriate. While the case is six years old, some of the defendants have not been examined and it is too early to determine what might be the length of trial.
[30] There are 4-5 days of examinations for discovery remaining. The defendants have estimated those preparation and attendance costs at $29,690. I order the plaintiff to post security for those costs in the amount of $20,000 plus HST. The plaintiff shall post security for this amount at least 30 days before the commencement of examinations for discovery.
[31] I decline to award security for the costs of upcoming motions. If the defendants are successful, they can request costs as part of the motions. If those costs are awarded and not paid, the defendants have their remedies.
[32] If the parties cannot agree on security for costs with respect to any experts’ reports and pre-trial and trial work, the defendants may renew this motion before me on appropriate materials on quantum.
Costs
[33] Each party submitted a bill of costs. The defendants’ bill of costs for this motion totaled $99,292.88 on a partial indemnity basis. Recognizing that the quantum was extraordinary, they sought costs of the motion in the all-inclusive amount of $55,000, $6,519.99 of which was for disbursements. The defendants acknowledged that they could not provide particulars of the time spent by their former counsel, Mr. Regan, who has been uncooperative throughout, other than to say they were billed for the time that they included in the costs outline. There is in excess of 172 hours of time by Mr. Regan on this motion. While there is no doubt he did spend some time, I cannot award costs for 46.8 hours spent on “review of documents and consideration of issues”, for instance, without evidence as to what was done.
[34] I have used some of the time spent by plaintiff’s counsel as a benchmark for what might have been a reasonable amount of time for Mr. Regan to spend on a task. For instance, Mr. Dorsey spent approximately 34 hours on examinations, cross examinations and answers to undertakings. Attributing a similar amount of time to Mr. Regan for those tasks, the adjustment results in a partial indemnity bill of $52,393.47 including HST and disbursements.
[35] Considering the factors of this motion, the number of steps required by both parties, the complexity of the facts and the arguments submitted, I award the defendants their costs of this motion in the all-inclusive amount of $35,000 payable within 60 days of the date of this order. I find this amount falls within the reasonable contemplation of what the plaintiff would have expected to pay if it were unsuccessful, given its own partial indemnity bill totaled $32,869.66.
Master Jolley Date: 2 April 2019