Court File and Parties

COURT FILE NO.: CV-16-566209 DATE: May 31, 2019

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: The Gatti Group Corp. v. John Zuccarini and Claudia Zuccarini;

BEFORE: MASTER C. WIEBE;

COUNSEL: Marco Drudi for John Zuccarini and Claudia Zuccarini (“the Defendants”), the moving parties; Peter J. Mitchell for the Gatti Group Corp. (“GGC”), the responding party;

HEARD: May 30, 2019.

REASONS FOR DECISION

[1] The Defendants brought two motions before me on May 30, 2019, one was for an order requiring that GGC post $124,913 as security for the costs of the Defendants, and the other was for an order requiring that Mr. Gatti answer outstanding undertakings and refusals given at his discovery. After a discussion, the latter motion, the motion for undertakings and refusals, was adjourned to be argued through written submissions, and I imposed a schedule for same.

[2] Concerning the Defendants’ security for costs motion, Mr. Drudi confirmed that it was based on Rule 56.01(1)(d) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, namely the rule whereby security for costs can be ordered as is just where the plaintiff is a corporation and court has determined that there is “good reason to believe” the plaintiff does not have sufficient assets in Ontario to pay the Defendants’ costs.

[3] It was conceded by both counsel that motions for security for costs have a two-step process, with the first step being one where the moving party has the onus of establishing that the case falls into one of the enumerated categories (ie. in this case Rule 56.01(1)(d)), and with the second step being one where the moving party has met his or her initial onus and the respondent has the onus of showing that it would be unjust to order security for costs or that the security should be reduced; see Websport Technologies Inc. v. Cryptologic Inc. (2004) [2003] O.J. No. 5455 (Ont. Master) at page 2. I have found in Totalsiteworks Construction Corp. v. Mady Contract Division Ltd., 2014 ONSC 178 at paragraph 18 that if the moving party succeeds at the first step, it has succeeded also in the test for leave to bring such a motion for security for costs under Construction Act, R.S.O. 1990, c. C.30 section 67(2).

[4] After hearing submissions and considering this motion carefully, I have reached the conclusion that the critical aspect of the motion before me is the first step, namely the step where the onus is on the moving party, the Defendants, to show that there is “good reason to believe” that the respondent corporation, GGC, does not have sufficient assets in Ontario to pay the Defendants’ costs. The case law is clear that, while this onus is not a high onus, it is real one. In City Commercial Realty (Canada) Ltd. v. Batich, 2005 CarswellOnt 10512 (C.A.), Just Lang found at paragraph 8 that the moving party must establish belief of asset insufficiency that goes beyond “mere conjecture, hunch, or speculation.” She found in paragraphs 12 that there must be indicia of corporate instability or insolvency, such as a temporary dissolution or a failure to make appropriate corporate filings. She found in paragraph 13 that the necessary belief in asset insufficiency could arise from evidence that the plaintiff corporation was incorporated for a single purpose or has unsatisfied judgments or liabilities.

[5] To meet the Defendants’ initial onus, Mr. Drudi focused heavily on the merits of the Defendants case. I agree with him that there appears to be much to be concerned about with the GGC claim. There was evidence suggesting that there was a written contract between the parties requiring that GGC do the construction for a fixed price, that GGC simply ignored this fixed price and treated the contract as a cost-plus contract running up costs that were three times the fixed price, that GGC divested the Defendants of any real control over the mounting construction cost by obtaining post-dated cheques for payment of the contract price and by not rendering invoicing or cost information to the Defendants prior to payment, and that GGC rendered change orders for the increased cost of the original scope and got them paid under threat of work cessation. Mr. Mitchell rightfully pointed out that I should not prejudge these issues, as there was much other evidence that suggested that, according to GGC, the Defendants knew and approved of these developments.

[6] The concern I have is this. Mr. Drudi did not provide me with any authority for the proposition that the merits of the Defendants’ case is relevant to the issue of GGC’s asset insufficiency. The court must look to the evidence of asset insufficiency at the first step of the motion, not the merits of the case. The merits are relevant to the second step in the process.

[7] What, therefore, is the evidence of GGC’s asset insufficiency that goes beyond mere conjecture, hunch or speculation? I have found on careful examination none.

[8] The first piece of proffered evidence was Mr. Gatti’s admission at his examination for discovery that GGC closed down its office and let go of all of its employees with the exception of his brother, and that GGC is being run out of Mr. Gatti’s home. Mr. Mitchell pointed out that this was not necessarily evidence of asset insufficiency. I agree. The fact that a construction corporation may be reduced to a skeleton staff does not necessarily suggest corporate instability. Many general contractors run their business on a “broker” model, namely one where they subcontract all of their work and collect a margin for management services. The key asset for those companies is their account receivables.

[9] Furthermore, the fact that GGC is being run out of Mr. Gatti’s home is not necessarily evidence that GGC does not own real estate. There was no evidence as to what person or entity owns that home. In fact, there was no real estate search of GGC in the motion at all. This is something that the Defendants could have provided, but did not. Finally, even if there was evidence that GGC owns no real estate, such evidence would not necessarily be of corporate instability. It has been found that corporations often do not hold real estate in their own name; see Delta Muskoka General Contractors Inc. v. Ophelders [2011] O.J. No. 3291 (Ont. Sup. Ct.) at paragraph 42. This case was not raised in argument; but, as it concerns a minor and contingent point, I did not think that it merited having counsel reconvened to address it.

[10] The second piece of evidence was Ms. Zuccarini’s statements in her affidavit that she reviewed “social media” which indicates that GGC is currently working on one project, an ensuite bathroom, and that the “last review” by a past client was in 2016. This is questionable evidence. Ms. Zuccarini did not state what this “social media” was and when she obtained it. She did not append the “social media” reference to her affidavit, which is suspicious. I have no way of assessing the evidence of the timing of client reviews on this “social media.” Furthermore, if anything, this evidence detracted from the Defendants’ motion as it showed that GGC continues to work.

[11] The third piece of evidence was Ms. Zuccarini’s statement in her affidavit that, when she worked on the project, she “was advised” that GGC had few assets and that it could not afford “construction management software.” It is undisputed that Ms. Zuccarini provided some services to GGC. This is dubious evidence. It is a bald statement. There is no indication as to the source of this information. Its timing dates back three years, and therefore does not address GGC’s present status. Coming from Ms. Zuccarini, a party to this action, its credibility is in issue.

[12] The fourth piece of evidence was the most significant. At his discovery, Mr. Gatti admitted that GGC received billings from subcontractors and suppliers on the subject project totaling $680,857.93, that GGC paid these subcontractors and suppliers only $375,060.87 (despite being paid $485,678.74), and that there are unpaid subcontractor and supplier accounts of about $300,000. Mr. Drudi argued that this is evidence that GGC has unpaid liabilities at least $300,000, namely well in excess of the security for costs being sought. I struggled with this issue, particularly given the merits discussion above.

[13] After careful consideration, I have come to the conclusion that this also is not adequate evidence of asset insufficiency. The accounting shows that GGC has not received claimed payment from the Defendants for about 2/3 of these subcontractor and supplier accounts. This may explain the nonpayment of at that 2/3. In short, the alleged unpaid liabilities do not pertain to the general affairs of GGC. They pertain to the subject matter of this action, which is in dispute.

[14] Mr. Mitchell also pointed out that there was no evidence in the motion that any of these subcontractors and suppliers pursued their remedies, sued GGC and obtained judgments. In fact, there were no court file searches in this motion. There was no PPSA search. There was no bankruptcy search. There were no credit searches of any kind on this motion. There was no evidence that the Defendants tried to locate any of these subcontractors and suppliers to interview them as to their relationship with GGC. For all I know, none of them sued and all allowed their breach of contract rights to expire, perhaps on an understanding with GGC that the sharing of the proceeds of this action would suffice. Perhaps they all decided to rely of their trust remedies. There was no evidence that these subcontractors and suppliers have ceased carrying on business with GGC. Mr. Drudi argued that the fact that GGC has liened for these unpaid accounts is evidence of unpaid liabilities. That may not be the case where the subcontractors and suppliers have decided to look only to the proceeds of this action to satisfy their claims.

[15] The fifth and final piece of evidence was the statement in Ms. Zuccarini’s affidavit that GGC has refused to produce financial statements and records in this action concerning the costs it has allegedly incurred on the project. The relevance of these refused disclosures is no doubt going to be determined on the companion motion which will now be determined in the future. Suffice it to say here that there is no obligation on the respondent to adduce evidence in relation to the first step of this motion, as the onus here rests on the moving party; see 2254887 Ontario Inc. v. Ziedenberg, 2016 ONSC 6452 (SCJ) at paragraph 23. Also, a refusal to produce financial statements and costing information in discovery where the obligation to do so is yet to be determined is not evidence of corporate instability.

[16] I, therefore, find that the Defendants have not met their initial onus on this motion, and that I must deny it as a result. I do so. However, I do so without prejudice to it being brought again with further and better evidence of asset insufficiency. Due to this determination, I do not have to, and I do not discuss the other issues that were argued at some length.

[17] Concerning the costs of this motion, counsel filed costs outlines. The Defendants Costs Outline shows an amount of $9,115.71. GGC’s Costs Outline shows $10,739.52 for actual costs and $6,563.04 for partial indemnity costs. Costs usually follow the event, and in this motion GGC succeeded in defeating the motion in its entirety. Yet, I have not “closed the door” on this motion in the event further and better evidence is presented.

[18] If the parties cannot agree on costs, GGC has up to and including June 7, 2019 to serve and file written submissions on costs of no more than two pages. In that event, the Defendants have up to and including June 14, 2019 to serve and file responding written submissions on costs of no more than two pages. GGC has until June 18, 2019 to serve and file reply written submissions on costs of no more than one page.

DATE: May 31, 2019

MASTER C. WIEBE