COURT FILE NO.: CV-16-390

DATE: 2019-11-29

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

J.P. GRACI & ASSOCIATES LTD., in its capacity as the Bankruptcy Trustee of Jela Smoljan aka Helen Smoljan

and -

RYSZARD MUSIALA and GRZEGORZ PIETRYKOWSKI

D. Touesnard, Counsel for the Plaintiff

S. Turgeon, Counsel for the Defendant Musiala

No one appearing for Grzegorz Pietrykowski, having been noted in default

HEARD: September 19 and 20, 2019

The Honourable Madam Justice Catrina D. Braid

REASONS ON MOTION

I. OVERVIEW

[1] This is an action arising out of a trust agreement between Ryszard Musiala and Helen Smoljan regarding a residential property. Four years after they entered into the trust agreement, Smoljan was declared bankrupt. The Trustee in Bankruptcy brought an action to secure Smoljan’s beneficial interest in the property on behalf of her creditors. Musiala has now brought a motion seeking an order requiring the Trustee to pay security for costs.

[2] The following issues arise on this motion for security for costs:

A. Does Musiala require leave to bring the motion because he consented to the action being set down for trial?

B. The test for ordering security for costs

C. Should this claim have been dealt with in bankruptcy court?

D. Would an order for security for costs be just?

[3] For the reasons set out below, I find that an order for security for costs would be just, and I order J.P. Graci and Associates to pay $25,000 in security for costs.

II. FACTS

[4] Between 2010 and 2012, Musiala lent Smoljan a total of $175,000, which was secured by way of promissory notes. In May 2012, Smoljan promised to give Musiala a mortgage on a property that she was planning to buy, as security for the debt. In June 2012, Smoljan admitted that she could not complete the purchase because she did not qualify for a mortgage. Fearing the loss of the proposed security, Musiala agreed to take title to the property at 63 Woodhouse Street, in Ancaster, Ontario (“the property”) in his own name, and to apply for the mortgage that was required to finance the purchase.

[5] On June 4, 2012, Musiala signed a Declaration of Trust (the “2012 Agreement”). Under the 2012 Agreement, Musiala was to hold the property in trust for Smoljan. Smoljan agreed to indemnify and save Musiala harmless from any and all demands, claims, charges, debts or actions whatsoever respecting the property and to pay Musiala for the mortgage, taxes, and insurance. Smoljan also acknowledged that she owed Musiala $175,000 and that upon the sale of the property, Musiala would receive the first $175,000 from the net proceeds of sale.

[6] The purchase of the property was completed on October 18, 2012 and was funded in large part by a mortgage in the principal amount of $526,696.78 (the “TD Mortgage”). Musiala has been the sole registered owner of the property since that date.

[7] Smoljan took possession of the property, but failed to make the payments to Musiala as per the 2012 Agreement. Musiala used his own funds to maintain the TD Mortgage and to pay other associated property expenses.

Assignment to Pietrykowski

[8] At some point after the trust agreement was signed, it appears that Smoljan ceased to reside at the property. Instead, the defendant Grzegorz Pietrykowski (who has been noted in default) began to reside at the property.

[9] On November 14, 2012, unbeknownst to Musiala, Smoljan executed a Declaration of Trust, by which Smoljan purported to assign the 2012 Agreement to Pietrykowski. The assignment states that Pietrykowski was assigned Smoljan’s beneficiary rights to the property, together with the $175,000 debt owed to Musiala.

The New Agreement

[10] By April 2013, Smoljan had repaid $15,000 of the $175,000 she owed Musiala, but continued to default on her monthly payments to Musiala. Musiala and Smoljan entered into a second agreement dated June 11, 2013 (the “New Agreement”).

[11] The New Agreement states that its purpose is to amend the terms of the loans advanced by Musiala and evidenced in a promissory note dated May 8, 2012; and to define the terms of occupancy of the Property occupied by Smoljan. The New Agreement makes no reference to the 2012 Agreement.

[12] The New Agreement was not drafted by a lawyer and the parties do not agree on its effect. Musiala asserts that the New Agreement rendered the 2012 Agreement null and void, leaving him the sole legal and beneficial owner of the Property. The Trustee does not accept that position.

[13] In the New Agreement, Smoljan confirmed that her debt to Musiala was $160,000 and that she would now pay interest on it. Smoljan also agreed to pay all costs associated with the Property and that, if she defaulted for three months, she could be required to vacate the Property. The agreement stated that the property was occupied by Smoljan and title registered to Musiala. The New Agreement purported to rescind previous agreements, but made no specific reference to the 2012 agreement.

[14] Paragraph 11 of the New Agreement gave Smoljan the right to buy the Property after completing payment of the mortgage, transaction costs, and $5,000 in costs to Musiala. Paragraph 12 stated that, if Smoljan has not bought the Property after five years, it will be sold, Musiala will be paid what he is owed, and the remaining equity will belong to Smoljan. These paragraphs conflict with Musiala's assertion that he owns the Property outright but are consistent with a finding he has an equitable mortgage on the Property.

Smoljan Defaults and Musiala Takes Possession

[15] Smoljan defaulted on the payments required by the New Agreement. Ultimately, Musiala obtained eviction orders from the Landlord and Tenant Board. Smoljan and/or her tenants vacated the Property on December 22, 2016. In April 2017 Musiala moved into the Property, where he continues to live today. Musiala does not wish to sell the Property.

III. SMOLJAN’S BANKRUPTCY AND HISTORY OF COURT PROCEEDINGS

[16] On January 18, 2016, Smoljan was deemed to have made an assignment in bankruptcy for the general benefit of her creditors. J.P. Graci and Associates was appointed as the bankruptcy trustee. Smoljan did not disclose an interest in the property, nor did she list Musiala as a creditor. Smoljan was evicted from the property after the date of the bankruptcy.

[17] Musiala learned about the bankruptcy in August 2016. Around that same time, the Trustee discovered that Smoljan had an interest in the property; and that there was an ongoing civil action in which Musiala was seeking a declaration that Smoljan had breached the terms of the trust agreement and was entitled to an order for partition and sale of the property.

[18] On December 22, 2016, the Trustee commenced this action, seeking an order declaring that Smoljan is the legal owner of the property and pleading that she has an interest in the property. The claim stated that Smoljan remains the beneficial owner of the property subject to the interests of Musiala as determined by the court; and that the Trustee has an obligation to pursue Smoljan’s interest in the property and to make any value in the property available to her creditors.

[19] In 2017, the Trustee obtained an order granting leave to issue and register a Certificate of Pending Litigation against the property.

[20] Pietrykowski, one of the defendants, was noted in default in February 2017.

[21] In early 2018, Musiala brought a motion for summary judgment in this action. Sheard J.’s ruling on that motion is reported at 2018 ONSC 5277. In its written submissions on that motion, the Trustee acknowledged that there was sufficient evidence for the court to conclude that Musiala has an equitable mortgage against the property for the current value of the loan plus $5,000.

[22] On the motion, the parties raised an issue regarding a lump-sum payment of $100,000 made by Musiala in October 2017 to pay down the TD mortgage. The parties disagree on how this lump sum payment should be treated. Musiala argues that he is entitled to an equitable mortgage equal to the lump-sum payment, and that the discretionary and equitable remedy of subrogation should apply. On the other hand, the Trustee states that this payment should be characterized as a post-bankruptcy extension of credit to Smoljan’s creditors, which increases Smoljan’s equity in the property, to the benefit of Smoljan’s creditors.

[23] At the summary judgment motion, Sheard J. found that Musiala’s conflicting evidence required a credibility finding. She found the evidence on the motion did not allow the court to find Musiala the sole beneficial owner of the property, nor did it permit the court to determine specific amounts owed to Musiala. She also found there were serious questions as to the validity of the assignment of the trust agreement by Smojan. The motion for summary judgment was dismissed. Sheard J. held that the issues at trial will include the effect of Musiala’s $100,000 lump sum mortgage payment, as well as any other issues that might flow from the finding of an equitable mortgage.

[24] On June 10, 2019, Musiala served a notice of change of solicitor. New counsel has now brought the motion for security for costs.

IV. ANALYSIS

A. Does Musiala Require Leave to Bring the Motion Because He Consented to the Action Being Set Down for Trial?

[25] The Trustee submits that Musiala requires leave to bring this motion because he consented to the action being set down for trial. He also argues that leave should not be granted. On the other hand, Musiala argues that the rule requiring leave does not apply.

[26] On December 20, 2018, Musiala’s counsel was asked by plaintiff’s counsel whether he would like to conduct examinations for discovery, or whether he consented to the plaintiff setting the action down for trial. Musiala’s counsel responded, “You may set the matter down for trial.”

[27] Any party who has set an action down for trial and any party who has consented to the action being placed on the trial list shall not initiate any motion without leave of the court: see r. 48.04(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

[28] Rule 48.06 states that a defended action shall be placed on the appropriate trial list by the registrar sixty days after the action is set down for trial, or the parties may file a written consent to place it on the trial list earlier.

[29] By the email of December 20, 2018, Musiala waived any further right of discovery and consented to the plaintiff setting the matter down for trial. He did not formally consent to placing the action on a trial list, nor did he consent to set an action down for trial before 60 days had expired. No trial date has been set, and the defendant has not consented to an actual trial date.

[30] The language in r. 48.04(1) requiring leave has been held to be a reference to written consent under r. 48.06(1), which shortens the 60-day time period before a matter is placed on a trial list. If parties seek to speed up the process of listing a matter for trial by abridging the time requirements under r. 48.06(1), they should not be permitted to undo that time savings by bringing motions and conducting further discovery: see Arunasalem v. State Farm, 2015 ONSC 5235, [2015] O.J. No. 4528; and Ananthamoorthy (Litigation Guardian of) v. Ellison, 2013 ONSC 340, 2013 CarswellOnt 209.

[31] Rule 48.06(1) requires the registrar to place a defended action on a trial list 60 days after the action is set down for trial. Arguably, this rule suggests that consent to an action being set down for trial is equivalent to consent to placing it on the trial list. In this jurisdiction, however, it is the usual practice that the parties agree on a trial date or trial sittings before a matter is placed on a trial list.

[32] I do not accept that consent to setting an action down for trial is the same thing as consent to placing it on a trial list. If the drafters of the rule intended to extend the leave requirement to any party who consented to a matter being set down for trial, they could have easily included language to say exactly that.

[33] Even in the circumstances of the parties agreeing to a particular trial list or trial date, there is a conflicting line of cases regarding whether this constitutes consent to being placed on a trial list under r. 48.04(1): see Maxrelco Immeubles Inc. v. Jim Pattison Industries Ltd., 2017 ONSC 5836, 2017 CarswellOnt 15195; 2116656 Ontario Inc. v. Grant, 2018 ONSC 1080, 2018 CarswellOnt 2433; and Arunasalem v. State Farm, 2015 ONSC 5235, [2015] O.J. No. 4528.

[34] The rules should not be interpreted in a manner that discourages parties from cooperating in the trial process out of fear of losing substantive rights. I find r. 48.04(1) does not apply to the case before the court, and Musiala does not require leave to advance the motion.

B. The Test for Ordering Security for Costs

[35] On motion by the defendant, the court may make such order for security for costs as is just, where the plaintiff is a corporation or nominal plaintiff, and there is good reason to believe that it has insufficient assets in Ontario to pay the costs of the defendant. This is a discretionary order which is guided by the overriding principle that an order may be made “as is just”: see r. 56.01(1)(d) of the Rules of Civil Procedure.

[36] The court must undertake a two-step inquiry on a motion for security for costs:

i. The initial onus is on the defendant to demonstrate that it appears there is good reason to believe that the plaintiff corporation has insufficient assets in Ontario to pay the defendant’s costs, which is a low threshold.

ii. The onus then switches to the plaintiff to either demonstrate that it has sufficient assets in Ontario to satisfy any order for costs; or alternatively, satisfy the Court that an order for security for costs would be unjust.

See Lifestyle Custom Cabinets Inc. v. Nordan Group Inc. 2017 ONSC 4463, 2017 CarswellOnt 11235 at paras. 13-14.

[37] Where the plaintiff has insufficient assets, the defendant is prima facie entitled to an order for security for costs: see Future Health Inc. (Trustee of) v. State Farm (2006), 2006 40228 (ON SC), 26 C.B.R. (5th) 320 (Ont. S.C.).

[38] The onus then shifts to the plaintiff at the second stage. The plaintiff can meet its onus by demonstrating:

i. That it is impecunious and that its claim is not devoid of merit; or

ii. That it would be unjust to require it to post security for other reason, such that its claim has a good chance of success (among other factors): see 2041094 Ontario Inc. v. Peel (Regional Municipality), 2016 ONSC 2175, 2016 CarswellOnt 5013.

[39] In this case, the Trustee is both a corporation and a nominal plaintiff, and there appears to be good reason to believe that it has insufficient assets in Ontario to pay the costs of the defendant. The Trustee has no personal liability for costs, it is only the estate of the bankrupt that is liable. Smoljan’s Statement of Account (prepared by the Trustee) shows a cash balance of $246.92 as of June 13, 2019. The first stage has therefore been met.

[40] I shall therefore move to a consideration of the merits of the case and whether an order for security for costs would be just.

C. Should this Claim Have Been Dealt With in Bankruptcy Court?

[41] Musiala argues that this claim is devoid of merit because the Trustee commenced the action in direct violation of s. 81(5) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. That section states that no proceeding shall be instituted to establish a claim to, or recover any right or interest in, any property in the possession of a bankrupt at the time of bankruptcy, except as provided for in s. 81 of the Act.

[42] Section 81 of the Bankruptcy and Insolvency Act provides the procedure for bankruptcy trustees to investigate and resolve disputes regarding entitlement to property in possession of the bankrupt at the time of bankruptcy. A person who claims an interest in property in the possession of the bankrupt at the time of bankruptcy must file a proof of claim.

[43] Section 81(4) states that the trustee may send notice to any person to prove his claim to property. If that person files a proof of claim, the trustee may either admit the claim or dispute it. If it is disputed, the claimant may appeal that decision to the bankruptcy court. I note that this section is permissive and does not require the trustee to send notice in all cases.

[44] Section 81 of the Act mandates the sole procedure to resolve disputes regarding property in the possession of the bankrupt on the date of bankruptcy. This procedure is more expeditious and less costly than commencing an action: see Bothwell, Re, [2000] O.J. No. 4382 (Ont. S.C. – In Bankruptcy and Insolvency); John Zivanovic Holdings Ltd v. De Cosimo (Trustee of) (1998), 30 C.P.C. (4th) 341 (Ont. Gen. Div.).

[45] In this case, Musiala acknowledges that he knew about the bankruptcy but took the position that he did not have to file a proof of claim because he was already in possession of the property. It is notable that concerns regarding the appropriate forum for this claim were not raised in the pleadings. In addition, Musiala has not brought a motion to have this action stayed for want of jurisdiction or to have the matter transferred to bankruptcy court.

[46] In my view, it is incongruous for Musiala to refuse to file a proof of claim with the Trustee because he has the property in his possession; but also argue that the Trustee brought the claim in the wrong forum because the property was in the possession of the bankrupt.

[47] Musiala has been the sole registered owner of the property since October 18, 2012. It would be absurd to expect him to file a claim for property that he already owns. To suggest that the Trustee should have dealt with this issue pursuant to s. 81 of the Act would mean that a trustee has an obligation to give notice to a landlord in every case where a tenant, in possession of property, goes bankrupt. That cannot be the correct interpretation of the law.

[48] There is no motion before me to determine the issue of whether the action was brought in the wrong forum. To the extent that I have been asked to consider the preliminary merits of this argument, I find that s. 81(5) of the Act does not prevent the Trustee from advancing the claim in civil court.

D. Would an Order for Security for Costs be Just?

[49] The Trustee submits its claim is not devoid of merit; and that it would be unjust to require it to post security for cost.

i. How Does Delay Impact the Security for Costs Motion?

[50] The Trustee argues that there has been unexplained delay in bringing the motion for security for costs.

[51] A defendant is required to bring a motion for security for costs at the earliest opportunity when it becomes aware of the grounds for doing so. This permits the plaintiff to make an informed decision about whether to invest time and money in litigation, knowing that it may have to post security as a condition of proceeding to trial: 1632097 Ontario Limited v. 1338025 Ontario Inc., 2011 ONSC 5909, 2011 CarswellOnt 11513.

[52] This action was commenced in December 2016. The defendant’s motion for summary judgment, heard in April 2018, was dismissed. The matter was set down for trial on consent, in December 2018. The motion for security for costs was brought in June 2019. The parties have not exchanged affidavits of documents, conducted examinations for discovery, attended mediation or scheduled a pretrial conference or trial.

[53] Musiala disagrees with the suggestion that he delayed bringing this motion. He submits that he only received the estate general ledger report on June 13, 2019, and that is when he discovered that there were insufficient assets to cover costs. He served the motion on June 21, 2019.

[54] Since before this action was commenced, Musiala has known that the Trustee stood in the shoes of Smoljan, a bankrupt. Fairly early in the litigation, Musiala received a Statement of Affairs that showed the realizable value of her property was $1,000. Since the outset of the litigation, Musiala knew, or should have known, that the Trustee had limited funds to pay costs.

[55] It is clear that the motion for Security for Costs was brought because of a change in litigation strategy when Musiala retained new counsel. The delay weighs against making an order for security for costs.

ii. Merits of the Claim

[56] In deciding whether the claim has a good chance of success, the standard to be met is less than a balance of probabilities. However, it cannot be as high as required on a summary judgment motion. This is especially true because the court must consider what is just.

[57] Musiala states that he is the sole legal and beneficial owner of the property, while the Trustee states that Musiala is not. On the summary judgment motion, Sheard J. found that, if Musiala is not the sole beneficial owner of the property, he must be a creditor of Smoljan who has a strong claim for an equitable mortgage against the property for the amount of the loan plus $5,000. The defendant has a strong chance of being successful in obtaining at least partial judgment in his favour.

iii. Fairness of Trustee’s Conduct

[58] A Trustee is an officer of the court and must represent all creditors impartially and even-handedly: see Impact Tool & Mould Inc. (Receiver of) v. Impact Tool & Mould Inc. (Trustee of), 2016 ONSC 133, 33 C.B.R. (6th) 80.

[59] Musiala submits that he is a creditor of Smoljan, and that the Trustee owes him a duty of fairness. Musiala states that the Trustee acted unfairly by issuing the claim that seeks to enrich the unsecured creditors to the detriment of Musiala, who is also a creditor.

[60] Musiala also argues that there is an element of commercial immorality in this case. Enriching creditors with a windfall and depriving another of its interest in property, has been held to be an offence to natural justice. In certain circumstances, misconduct can constitute unjust enrichment and impose a constructive trust on the estate’s assets to remedy the injustice: see Credifinance Securities Ltd., Re, 2011 ONCA 160, [2011] O.J. No. 894.

[61] Smoljan borrowed money from Musiala and thereafter induced him to buy the property by misrepresenting that the loan would be repaid quickly from the sale of her own house in Oakville, Ontario. Musiala relied on two fraudulent letters from fake law firms that Smoljan gave to him. He bought the property to secure money that he had already loaned her.

[62] Smoljan’s misconduct, which was the basis upon which the property was obtained, could give the Trustee and Smoljan’s unsecured creditors a windfall. Musiala submits that Smoljan defrauded him, and it would be unfair for other creditors to benefit from her behaviour.

[63] Musiala has been paying the mortgage and other carrying costs, while Smoljan was evicted due to default. Musiala argues that it would be unreasonable for Smoljan’s unsecured creditors to get the benefit of equity increases when he has been paying all the expenses on the property.

[64] At the summary judgment motion, the court heard that Musiala paid down the mortgage on the property (which was in his name) by a $100,000 lump sum payment after Smoljan’s bankruptcy. Musiala did not understand the consequences and the potential arguments that would later be made by the Trustee, to his detriment.

[65] The Trustee now argues that these post-bankruptcy payments were advanced to Smoljan, an undischarged bankrupt, and should be treated as a gift. The Trustee takes the position that the $100,000 should go to the benefit of unsecured creditors and Musiala should pursue Smoljan for those funds in the future. Musiala is a creditor of the Trustee, who arguably is a secured creditor. The position that the Trustee is taking with respect to this $100,000 payment suggests that the unsecured creditors should benefit from this $100,000 payment, to the detriment of Musiala.

[66] I find that equity favours Musiala’s motion for security for costs.

iv. Is the Trustee Impecunious?

[67] The Trustee cannot demonstrate that it is impecunious. It has not gone to the creditors to ask them to fund the litigation and has not shown that the creditors have insufficient funds to do so. If the plaintiff cannot establish that it is impecunious but does not have sufficient assets to meet a costs order, the plaintiff must satisfy the court that its claim has a good chance of success on the merits: see 2311888 Ontario Inc. v. Ross, 2017 ONSC 1295, 69 C.L.R. (4th) 40.

[68] The Trustee argues that the moving party should not be in a better position vis-à-vis the bankrupt simply as a result of her bankruptcy. Rule 56 would not permit the moving party to seek security for costs against an individual who did not have sufficient assets in Ontario to satisfy a costs award. The Trustee submits that it should be treated in the same manner as if it were a non-corporate plaintiff, since it is merely stepping into the shoes of the bankrupt to assert a claim. I do not accept this submission.

[69] The Trustee has access to funds from creditors who may have an interest in pursuing the action for their own gain. It would be patently unjust for unsecured creditors of Smoljan to be permitted to prosecute this case through the Trustee, as against another creditor, while enjoying immunity from any costs order.

[70] If a trustee wishes to rely on impecuniosity to defend against an order for security for costs, it is not sufficient for them to simply argue that they stand in the shoes of the impecunious bankrupt. It is incumbent on the trustee to show impecuniosity by demonstrating that it is not able to raise the security. The trustee must provide evidence, on the motion, that the creditors are unable to advance funds to allow security to be posted. No such evidence was led in this case.

[71] There is no valid reason why the court should not exercise its discretion to make an order that a bankruptcy trustee post security for costs. There is no duty to litigate, only the power to do so. If creditors intend to reap the rewards of litigation, they should also bear the burden of cost consequences: see Future Health Inc. (Trustee of).

[72] Canadian courts have rejected the proposition that simply because the entity pursuing the litigation is a trustee, the trustee need not bear the economic consequences of its decisions. It would be unjust for a party to be successful in litigation and then be denied the fruits thereof because the trustee pursued the litigation without assuming liability to pay the costs. If creditors intend to reap the rewards of litigation, they cannot hide behind impecunious plaintiffs on the issue of security for costs. The trustee can protect his position by resorting to the assets when they prove sufficient, or to the interested creditors whenever they display a sufficient interest in the litigation: see Livent Inc. (Receiver of) v. Deloitte & Touche, 2010 ONSC 2267, [2010] O.J. No. 1919.

v. Would the Order be Just?

[73] Although there has been delay by the defendant in bringing the motion for security for costs, I find that there is merit to Musiala’s position in defence of the claim. In addition, the Trustee has not taken an impartial position in advancing the claim and in positions taken in the action. Finally, the Trustee has not shown that it is impecunious. There is no valid reason why the Trustee and the unsecured creditors should be immune from a costs order. In all of the circumstances, I find that an order for security for costs would be just.

[74] The Trustee estimates that the trial of this action will take 3 to 4 days. Musiala’s counsel has provided a draft Bill of Costs for the steps leading up to, preparation for and attendance at, a four-day trial. Counsel estimated approximately $45,000 actual costs and $29,000 partial indemnity costs, inclusive of disbursements. In my view, these costs appear be reasonable and fair. I therefore order that the plaintiff pay $25,000 in security for costs.

V. CONCLUSION

[75] This court orders that the plaintiff shall post security for costs of the action in the amount of $25,000 Canadian dollars. The funds shall be paid to the accountant of the Superior Court of Justice by December 31, 2019. The plaintiff may not take any steps in this action, other than with respect to any rights of appeal from this order, until such time as the funds have been paid in full.

VI. COSTS

[76] In the event that the parties cannot agree as to costs, they are directed to provide written submissions. The submissions shall be no longer than two typed pages, double-spaced, in addition to any relevant Bill of Costs and written Offers to Settle. Musiala shall provide costs submissions by December 13, 2019; and the plaintiff shall provide any response by December 31, 2019. In the event that submissions are not received from either party by December 31, 2019, costs shall be deemed settled.

Braid, J.

Released: November 29, 2019