COURT FILE NO.: CV-16-566209

DATE: December 4, 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: December 2, 2019.

REASONS FOR DECISION

[1] On May 31, 2019 I rendered my decision on the Defendants' initial motion for security for costs dismissing that motion on the grounds that the Defendants had failed to meet their initial onus of showing under Rule 56.01(d) that the plaintiff corporation has insufficient assets in Ontario to pay the costs of Defendants. But I did so without prejudice to this motion being brought again with further and better evidence of the plaintiff's asset insufficiency.

[2] Since that decision I rendered another motion's decision on June 28, 2019 inter alia ordering that the plaintiff produce its financial statements from 2014 to the present as they relate to the subject project with the potions of those statements not relating to the project to be redacted. Pursuant to this order, GGC has produced three unredacted "Notice to Reader" financial statements. The first is dated August 31, 2015 and contains the balance sheet and statement of operations of GGC for the year ending March 31, 2015. The second is dated February 28, 2019 and contains the balance sheet and statement of loss and deficit of GGC for the year ending March 31, 2018. The third is also dated February 28, 2019 and contains the balance sheet and a statement of loss and deficit of GGC for the year ending March 31, 2017. It is undisputed that GGC did not produce any financial statements for the years ending March 31, 2018 and March 31, 2019. There was no evidence as to why.

[3] The Defendants now bring back their motion for security for costs. Mr. Drudi argued that the disclosed GGC financial statements were the sufficient further and better evidence of GGC's asset insufficiency that enabled the Defendants to meet their initial onus on this motion, namely the onus of showing that there is "good reason to believe" that GGC does not have assets to pay the Defendants' costs. Mr. Mitchell disagreed. I agree with Mr. Drudi for the following reasons:

• The financial statements confirm that for the three years that formed the currency of the project GGC had no assets other than cash, shareholder loans and accounts receivable. There is no real estate or other significant asset. The 2017 financial statement refers to "property and equipment" being worth only $1,039.
• As of March 31, 2017 the only significant asset showing on the balance sheet are accounts receivable totaling $150,660. The cash and shareholder loans shown on the earlier statements are gone. This suggests that the assets of the plaintiff were being depleted. In addition, whether the $150,660 is available to honour a costs order in favour of the Defendants is an open question since these may well be construction accounts receivable on which trust rights exist.
• The financial statements show that for the three years, 2014 to 2017, GGC ran a consistent and significant deficit, and a deficit that increased significantly every year. In short, the company spent more, much more, than it made, and did this more and more each successive year. GGC obtained and retained no assets from year to year, and only increased its debt. This is an indication of insolvency and corporate instability.
• The evidence indicates that for 3 ½ years GGC did not prepare financial statements. I infer this from the fact that the 2016 and 2017 financial statements were prepared at the same time on February 28, 2019, namely 3 ½ years after the financial statement for 2015 was prepared. This absence of financial statements for 3 ½ years (2015 to 2019) suggests strongly to me at minimum that during this time GGC continued not making money and that GGC did not file tax returns as a result, as corporate tax returns would have required financial statements.
• The financial statements for 2016 and 2017 were prepared only after the examination for discovery took place in this action. Presumably the financial statements for 2018 and 2019 (not delivered) were prepared at the same time in February, 2019. The inference to be drawn from this is that these financial statements were prepared not because of a sudden positive balance sheet for GGC, but because of this litigation.

[4] These facts put a different light on the credible evidence in Ms. Zuccarini's affidavits sworn May 6, 2019 and August 30, 2019. This other evidence is as follows: the admission by Mr. Gatti on discovery that GGC continues to owe its subtrades on this project over $300,000; the undisputed fact that GGC has closed its offices and works out of Mr. Gatti's home; the undisputed fact that GGC has no employees. I note as well that GGC did not produce its financial statements for 2018 and 2019 despite my order in this regard, and there was no evidence explaining its failure to do so. There was much discussion by counsel about this issue, but none of that was evidence.

[5] In combination with this evidence, the evidence in the produced financial statements has convinced me that there is indeed "good reason to believe" that GGC does not at present have sufficient assets in Ontario to pay the Defendants, should there be a costs award in favour of the Defendants in the end. Mr. Mitchell argued that without the financial statements for 2018 and 2019 I am only speculating about GGC's present asset insufficiency. I believe that the facts described above are responsive to this position. They show that the real insolvency of GGC as shown in its 2015, 2016 and 2017 financial statements in all probability carried forward to the present day. I need only be satisfied of more than a mere "conjecture, hunch or speculation" of asset insufficiency, not the fact of asset insufficiency; see City Commercial Realty (Canada) Ltd. v. Bakich, [2005] O.J. No. 6443 (Ont. C.A.) at paragraph 8. I find that this low threshold has been met in this motion.

[6] In his written submission, Mr. Mitchell raised the issue of the timing of this motion, namely that it is being brought too late as it is now just three months away from the trial hearing and the plaintiff has spent much to get this far. Mr. Mitchell did not pursue this issue in oral argument. I do not think it has merit in any event. The financial statements that in my view were the key evidence on this motion came out in answer to undertakings given at a discovery that I ordered in this proceeding at the end of last year. The discoveries took place earlier this year. At the first motion for security for cost, I expressly gave leave to have another motion brought with better evidence. There was then a motion on undertakings and refusals that triggered the release of the financial statements. Under the Construction Act the court must authorize discoveries. I do not find this motion to be untimely in light of this history.

[7] The onus then shifts to GGC to show either that it has sufficient assets to pay the Defendants' cost, or that it is impecunious and that it would be unjust to order security thereby denying the plaintiff a chance to prove its case; see Warren Industrial Feldspar Co. v. Union Carbide Canada Ltd. 1986 CanLII 2683 (ON SC), 1986 CarswellOnt 552 at paragraph 25; also see Focal Elements v. TVM, 2018 CarswellOnt 17030 (SCJ) at paragraph 29. As to the first test, GGC has not provided any evidence as to its ability to pay a costs order and did not rely on this ground in argument.

[8] As to the second test, GGC does not claim that it is impecunious, namely that it is unable to pay security for costs. As a result, the issue of the merits of the GGC case is of more marginal importance, as the inference to be drawn is that an order of security for costs will not deprive GGC of its ability to prove its case; see Poxema Ltd. v. Birock Investments Inc., 2016 ONSC 5686 (SCJ) at paragraph 32. There was much discussion in the argument about the merits of the GGC claim. This was probably the result of the comments I made in my last ruling on security for costs. All I am going to say on this matter is that the plaintiff has a case to respond to the Defendants's position on the nature of the contract between the parties.

[9] The question then becomes what would be a "just" order of security for costs. The Defendants claim a total of $128,753.45 in security for costs. This claim has two parts. The first part concerns the costs the Defendants have incurred to date. Mr. Drudi included a summary of these costs that total $104,268.51. To be consistent with the law on these motions, the Defendants claim security for partial indemnity costs, which he says is 70% of actual costs or $72,987.95. I believe that the Court of Appeal has limited partial indemnity costs to 60% of actual costs, which would make the number $62,852.

[10] I note also that a large proportion of these costs (about $38,000) are the legal fees that were paid to Mr. Riteman, Mr. Drudi's predecessor, on this file. The recoverability of all these costs will no doubt be an issue. Mr. Riteman admitted using Mr. Drudi for the section 40 cross-examination. There may be duplicated and unnecessary work here. For instance, I noted in my second set of directions that Mr. Riteman (before discovery) apparently served three requests to admit containing over 450 stated facts and then waived the compliance period.

[11] The second part of the Defendants' claim for security concerns the future costs the Defendants will incur in this action. At present, there is a seven day trial in this action scheduled to take before me on March 3, 4, 5, 6, 10, 11, 12 and 13, 2020. This trial will be a summary trial but with some 20 witnesses in total. The Defendants will be calling 14 witnesses. This means much up-front work in the form of affidavits for evidence in chief. There is an expert witness.

[12] Mr. Drudi submitted an Estimated Bill of Costs of the Defendants which showed a total of $79,665. Mr. Drudi's hourly rate is shown at $530 and his junior at $230, both of which seem reasonable given the experience of these lawyers. Mr. Drudi applied 70% to get the partial indemnity figure of $55,765.50. Again, I believe the partial indemnity proportion is 60%, which would produce a figure of $47,799. I then pointed out to Mr. Drudi that his document presumed a five day trial, not the ordered seven day trial. He conceded this to his surprise and argued that his $55,765.50 was as a result reasonable.

[13] The one issue that Mr. Mitchell raised concerning the quantum of the entire claim was the role of the Defendants' counterclaim on the quantum of security to be ordered. I believe this position has merit. It is well established law that a plaintiff should not have to post security for having to defend a counterclaim from the defendant; see Poxema Limited, op. cit. at paragraph 34.

[14] In reviewing my previous directions, I note that the Defendants' originally pleaded counterclaim ($413,368) is larger than the GGC claim ($343,430), although not by much. I also note that the Defendants pleaded serious issues of overpayment and deficiencies, both of which they will have the onus of proving. They are also calling the greater number of witnesses. Mr. Drudi stated in argument that his clients are prepared to walk away from their counterclaim to enhance their security for costs claim. But Mr. Mitchell is right. The Defendants could have walked away from their counterclaim well before this time and have not done so. I do not accept Mr. Drudi's position as credible. I find that there should be a significant reduction in the claimed security on account of the Defendants' counterclaim.

[15] Mr. Mitchell argued that I should order no security as he said that the issues raised by the counterclaim are the same as the issues raised by plaintiff; see Better Business Bureau v. Tuz, 1999 CarswellOnt 1069 (SCJ) at paragraph 12. There was no evidence to elucidate this point. Furthermore, the issues of overpayment and deficiencies raised by the Defendants do not appear to the same as the issues raised by the plaintiff. The plaintiff will be attempting to show how the contract was essentially cost-plus in nature, and what the plaintiff's costs were. I give this argument no weight.

[16] Mr. Mitchell argued in the alternative that I should consider ordering $50,000 in security for cost. He argued that this would be a "just" result, as $50,000 is what the old provisions of the Construction Act (which apply to this case) require that a party in the Defendants' position must post in security for costs to vacate a claim for lien of this size. I reject this argument. First, this $50,000 limit is a creature of the old provisions of the statute that the legislature found were outdated when it amended the statute about two years ago. The new provisions of the Construction Act include a new limit of security for costs to be posted to vacate claims for lien, namely the lesser of $250,000 or 25% of the amount of the claim for lien. Under these new provisions the security to be posted for the GGC claim would be $85,857.50, namely substantially more than $50,000. Using Mr. Mitchell's logic, this $85,857.50 would be a more "just" reflection of what should be posted. Carrying the argument to its logical conclusion, I note that 25% as applied to the Defendants' originally pleaded counterclaim of $413,368 produces the number $103,342.

[17] Second, I agree with Mr. Drudi that Mr. Mitchell's argument for $50,000 does not in any event reflect what "just" security would be. The plaintiff not only is entitled by statute to future security for costs should the Defendants ever choose to post security to have the plaintiff's claim for lien vacated, but also enjoys the present security of the Defendants' land for its base claim. This security for the base claim is 100% security subject to any mortgages on title. This is security that the Defendants do not enjoy in any way for their either their counterclaim or their costs of defending the plaintiff's claim.

[18] Given all of these factors and in the circumstances, I have decided that the "just" award of security for costs is $95,000. I do so largely by exercising what Justice Healey in Yong Tai Construction v. Unimac Group Ltd., 2015 ONSC 4866 (SCJ) at paragraph 17 called a "rough justice" apportionment of costs as between the claim and counterclaim, and by bearing in mind that the Defendants have significantly underestimated their future costs. I also use the new provisions of the Construction Act as a guide to some degree.

[19] I order that GGC post this security within thirty (30) days. I normally would require a longer payment period, but the trial hearing is only three months away and the security issue must be resolved shortly in order to allow the Defendants' trial preparation work to proceed.

[20] Concerning the costs of this motion, counsel did not file costs outlines on December 3, 2019 as I directed at the end of the argument. I note that in my Costs Decision of June 28, 2019 I awarded GGC net costs on the original Defendants' security for costs motion and the Defendants' motion concerning undertakings and refusals of $4,000 to be paid to GGC in any event of the cause at the end of the trial hearing. As no costs outlines have been delivered in this motion as ordered, I have decided to award the Defendants partial indemnity costs in any event of the cause to be determined and made payable at the end of the trial hearing.

DATE: December 4, 2019

__________________________

MASTER C. WIEBE