SUPERIOR COURT OF JUSTICE - ONTARIO

RE: The Bank of Nova Scotia

v.

George Pappas

2019 ONSC 840

COURT FILE NO.: CV-11-423167

BEFORE: MASTER R. A. MUIR

COUNSEL: Sean Zeitz for the plaintiff Terry Corsianos for the defendants George Pappas, Olympia Pappas, Vlas Pappas and Magnum Windows and Doors Ltd.

HEARD: 2018 12 14

REASONS FOR DECISION

[1] The defendants George Pappas, Olympia Pappas, Vlas Pappas and Magnum Windows and Doors Ltd. (collectively, the “Pappas Defendants”) bring this motion pursuant to Rule 23.05 of the Rules of Civil Procedure, RRO 1990, Reg. 194 (the “Rules”) for an order requiring the plaintiff to pay the Pappas Defendants’ costs of this now discontinued action. The Pappas Defendants ask for full indemnity costs of approximately $65,000.00. The plaintiff is opposed.

BACKGROUND

[2] This action was started on March 28, 2011. The central focus of the plaintiff’s claim against the Pappas Defendants is fraud and conspiracy. The plaintiff alleges that the Pappas Defendants participated in a fraudulent scheme in order to permit a small business known as Arctic Castle Windows Inc. (“Arctic Castle”) to obtain a loan from the plaintiff.

[3] The loan was allegedly needed to finance the purchase of equipment for Arctic Castle. The plaintiff alleges that the Pappas Defendants and others engaged in a scheme whereby the value of the equipment was artificially inflated, used equipment was passed off as new equipment and the defendants received a 50% kickback from the funds advanced by the plaintiff. The Pappas Defendants deny these allegations.

[4] This action proceeded through the pleadings stage and discovery. A mediation session took place on October 30, 2015. At the mediation, the plaintiff offered to settle this action on the basis of a dismissal without costs. The Pappas Defendants declined to accept this offer. The plaintiff repeated its offer to settle in November 2015. No response was received to the November offer. The offer was repeated again in early 2016 with the same result.

[5] The Pappas Defendants’ current lawyer was then retained in late March 2016. The lawyer for the plaintiff contacted the Pappas Defendants’ lawyer in May 2016 repeating the earlier offer to settle once again. The Pappas Defendants responded on May 10, 2016 by offering to settle this claim on the basis of a dismissal along with the payment of $80,000.00 in costs. The plaintiff rejected this counter-offer.

[6] With the parties at an impasse, this action then proceeded through two pre-trials and a judicial settlement conference. The parties remained far apart and unable to resolve this action.

[7] Following the judicial settlement conference on May 7, 2018, the plaintiff made a decision to discontinue this action. The plaintiff did not want to incur the additional legal costs required in order to prepare for and attend at a trial estimated to require three weeks of court time when it was concerned it may never be able to collect on a judgment if successful at trial.

ANALYSIS

[8] The court’s general authority to award costs as between parties to litigation is found in section 131(1) of the Courts of Justice Act, RSO 1990, c C.43 (the “CJA”), which provides that costs are in the discretion of the court. Rule 57.01(1) allows the court to consider the result achieved in the proceeding or motion. This Rule includes a non-exhaustive list of factors the court may consider when awarding costs. Rule 57.01(1) also expressly permits the court to consider any offers to settle made in writing.

[9] When dealing with costs, the overall objective for the court is to fix an amount that is fair and reasonable for the unsuccessful party who generally must pay the costs of the successful party. See Zesta Engineering Ltd. v. Cloutier, 2002 25577 (ON CA), [2002] OJ No. 4495 (CA) at paragraph 4 and Boucher v. Public Accountants Council for the Province of Ontario, 2004 14579 (ON CA), [2004] OJ No. 2634 (CA) at paragraph 26. In Davies v. Clarington (Municipality), 2009 ONCA 722 the Court of Appeal stated as follows at paragraph 52:

Rather than engage in a purely mathematical exercise, the judge awarding costs should reflect on what the court views as a reasonable amount that should be paid by the unsuccessful party rather than any exact measure of the actual costs of the successful litigant.

[10] Apart from the operation of Rule 49.10 (offers to settle), elevated costs should only be awarded on the basis of a clear finding of reprehensible conduct. See Davies at paragraph 40.

[11] Rule 23.05(1) provides as follows:

23.05 (1) If all or part of an action is discontinued, any party to the action may, within thirty days after the action is discontinued, make a motion respecting the costs of the action.

[12] This Rule was amended in 2009. The previous version of the Rule read, in part, as follows:

. . . where a plaintiff discontinues an action against a defendant, the defendant is entitled to the costs of the action . . . unless the court orders otherwise.

[13] The parties disagree on the proper approach the court should take on a motion for costs under Rule 23.05. The Pappas Defendants argue that despite the change in the Rule, where a plaintiff discontinues an action a defendant is entitled to costs of the action unless the court orders otherwise. The Pappas Defendants rely on the decision of Justice Price in 1623242 Ontario Inc. v. Great Lakes Copper Inc., 2016 ONSC 1002 at paragraph 61.

[14] The plaintiff submits that in light of the 2009 amendment to Rule 23.05, there is no longer a prima facie entitlement to costs. The plaintiff relies on Digiuseppe v. Todd, 2012 ONSC 1028 at paragraph 21.

[15] I prefer the approach suggested by the plaintiff. The change to the language of the Rule must mean something. A deliberate decision was made to remove a defendant’s presumptive entitlement to costs. The court should therefore consider any claim for costs pursuant to its general discretion to award costs as set out in the CJA. It should consider the factors under Rule 57.01. It must determine whether there was some justification for the commencement of the action having regard to the conduct of the defendants. However, the court should not speculate about the ultimate merits of the claim or what the result might have been had the claim been adjudicated. See Digiuseppe at paragraphs 22 to 24.

[16] In my view, there was some justification for the plaintiff to commence this action against the Pappas Defendants. The evidence shows that prior to the issuance of the statement of claim, the equipment may have been altered or replaced. Identification plates may have been forged. Equipment that was stated to be new was actually used. A witness had come forward to suggest that the Pappas Defendants were involved in this alleged scheme and may have received a kickback.

[17] Of course, none of this is to suggest that the allegations of fraud would or could be proven at trial. I am not prepared to make any finding with respect to the likely outcome of this moderately complex fraud litigation. Rather, I am simply satisfied that the plaintiff had some justification to commence this fraud action when it did.

[18] Nevertheless, I have concluded in the circumstances of this action that the court should exercise its discretion to award the Pappas Defendants a portion of their costs. When a party commences a legal proceeding, it assumes a risk that it will not succeed in the end and will have to pay a defendant’s costs. A lack of success may arise because of an adverse finding with respect to the merits of the claim but it may also result from the simple economics of the litigation. At some point, a plaintiff may have to abandon a claim before trial because it may not be economical to continue to pursue the claim or because it may never collect on any judgment. Regardless of how an action turns out, a plaintiff always runs the risk of having to pay the costs of any defendant it chooses to sue.

[19] The Pappas Defendants did not ask to be part of this litigation. They were brought into this action by the plaintiff. The plaintiff has not been successful. It has discontinued its action before trial and after the Pappas Defendants incurred legal costs defending themselves. I see nothing in the conduct of the Pappas Defendants that would justify denying them a portion of their costs of this discontinued action.

[20] I am not prepared to award costs on an elevated scale. The Pappas Defendants argued that given the allegations of fraud, substantial indemnity costs are appropriate. I do not agree. As I have found above, I am satisfied that the plaintiff had some justification in commencing this fraud action. I am not prepared to speculate on the outcome of those claims at trial. I see no other reprehensible conduct on the part of the plaintiff that would justify an elevated costs order.

[21] In my view, the Pappas Defendants are entitled to their partial indemnity costs incurred up until the fall of 2015. In October 2015, the plaintiff made an offer to settle this action on the basis of a dismissal of the action against the Pappas Defendants on a without costs basis. I agree that the Pappas Defendants were justified in rejecting that offer. They had some basis for seeking payment of their costs.

[22] However, the Pappas Defendants’ response to this offer to settle from the plaintiff was not reasonable in the circumstances. The Pappas Defendants sought payment $80,000.00 “as partial reimbursement for their legal costs”. The evidence on this motion shows that at the time this counter-offer was made on May 10, 2016, the Pappas Defendants’ actual costs were less than $80,000.00 and their partial indemnity costs were not even close to that amount. As of the end of May 2016, the Pappas Defendants had been billed approximately $61,000.00 by their first lawyer and $11,000.00 by their second lawyer. Of the $61,000.00 billed by their first lawyer, only $42,000.00 had been paid.

[23] The counter-offer contained no element of compromise. Rather than negotiate a reasonable resolution of the costs issue in response to the plaintiff’s repeated settlement overtures, the Pappas Defendants continued to plow ahead with the litigation. They incurred additional costs themselves and forced the plaintiff to incur additional costs. In my view, the costs incurred after the fall of 2015 were unreasonable and unnecessary. They were incurred because the Pappas Defendants decided to make an unreasonable offer to settle that contained no element of compromise.

[24] For these reasons, I have concluded that the Pappas Defendants are entitled to their partial indemnity costs up to the approximate time of the plaintiff’s offer to settle in October 2015. The accounts rendered by the Pappas Defendants’ first lawyer between May 2011 and November 3, 2015 amount to approximately $43,000.00. This amount is fair and reasonable for a claim of this nature. I note that the plaintiff has not provided the court with an outline of its costs of the action.

[25] Some reduction should be made for the motions where no costs were awarded or where the plaintiff was awarded costs. The time spent on the motion before Master Abrams is properly payable to the Pappas Defendants as she awarded costs of $10,000.00 payable in the cause. In my view, partial indemnity costs based on actual costs of $38,000.00 are fair and reasonable in the circumstances. The Pappas Defendants are therefore entitled to 60% of their actual costs of $38,000.00, being $22,800.00.

ORDER

[26] I therefore order as follows:

(a) the plaintiff shall pay the Pappas Defendants their partial indemnity costs of this discontinued action in the amount of $22,800.00, inclusive of HST and disbursements;

(b) these costs shall be paid by March 8, 2019;

(c) this court declares that the plaintiff’s notice of discontinuance was delivered with prejudice to the plaintiff; and,

(d) if the parties are unable to agree on the issue of the costs of this motion, they shall provide the court with brief submissions in writing by March 8, 2019, which may be sent directly to me by email.

Master R. A. Muir

DATE: 2019 02 04