Court File and Parties

COURT FILE NO: CV-16-547366 MOTION HEARD: 2019-11-29 REASONS RELEASED: 2020-02-28

SUPERIOR COURT OF JUSTICE – ONTARIO

BETWEEN:

SEYMOUR MATTHEW LIPSON aka SCOTT LIPSON Plaintiff

- and-

BERTHA LIPSON, JOHN M. ROSENTHAL in his personal capacity and in his capacity as partner of RZN LLP, RZN LLP (previously known or carrying on business as ROSENTHAL ZARETSKY NIMAN & CO., LLP), 1108409 ONTARIO LIMITED, KINGWELL LIMITED, WESTWELL INC., DAILITED GROUP INC. (previously carrying on business as MARAD HOLDINGS INC., LIPFAM HOLDINGS INC., 1752067 ONTARIO INC., and 910810 ONTARIO LIMITED), KINGLIP HOLDINGS INC., 707932 ONTARIO LIMITED, 1121568 ONTARIO LIMITED), MARCIA HONEY LIPSON in her personal capacity and in her capacity as trustee of the SEYMOUR M. LIPSON TRUST and in her capacity as officer and director of 1108409 ONTARIO LIMITED, KINGWELL LIMITED, WESTWELL INC., KINGLIP HOLDINGS INC. 707932 ONTARIO LIMITED, 1121568 ONTARIO LIMITED, and DAILITED GROUP INC., ADRIENNE JOY LIPSON also known as ADRIENNE JOY LIPSON-BLACK, A. JOY LIPSON, JOY LIPSON and JOY KORGUT in her personal capacity and in her capacity as officer and director of 1108409 ONTARIO LIMITED, KINGWELL LIMITED, WESTWELL INC., KINGLIP HOLDINGS INC., 707932 ONTARIO LIMITED, 1121568 ONTARIO LIMITED, and DAILITED GROUP INC. Defendants

BEFORE: MASTER M.P. McGRAW

COUNSEL: J. Leon and J. Bell Email: leonj@bennettjones.com; bellj@bennettjones.com

• Counsel for the Defendants Bertha Lipson, 1108409 Ontario Limited, Kingwell Limited, Westwell Inc., Dailited Group Inc., Marcia Honey Lipson, Adrienne Joy Lipson, Kinglip Holdings Inc., 707932 Ontario Limited and 1121568 Ontario Limited

C. Paliare and M. Fenrick Email: chris.paliare@paliareroland.com; michael.fenrick@paliareroland.com

• Counsel for the Defendants John M. Rosenthal and RZN LLP

C. Abela and M. Allen Email: cabela@weirfoulds.com; mallen@weirfoulds.com

• Counsel for the Plaintiff, Scott Lipson

REASONS RELEASED: February 28, 2020

Reasons for Endorsement

I. Introduction

[1] On this motion the Defendants seek security for costs from the Plaintiff, Scott Lipson (“Scott”). This action arises from a family dispute over trust funds dating back almost 30 years involving numerous complex financial transactions.

[2] Scott alleges that his mother, his 2 sisters and his brother-in-law (who is also his former accountant) acted in conspiracy to willfully conceal and prevent his access to significant assets left to him by his late father and asserted undue influence on him to accept substantially less than their true value. His family members claim that they tried for decades to prevent Scott from recklessly depleting his assets and that he knowingly negotiated and received his full entitlement of approximately $2.7 million and executed numerous releases in their favour.

[3] Scott is a U.S. resident with no assets in Ontario. Ordinarily, this should have narrowed or limited the submissions and disputed issues. However, substantially every issue and fact was vigorously disputed and the parties spent the bulk of the motion arguing the merits of Scott’s claims and his credibility.

II. Background

The Parties and Scott’s Trust

[4] Scott is the 63-year old son of the Defendant Bertha Lipson (“Bertha”) and the late Nathan Lipson (“Nathan”), the co-founder of McGregor Hoisery Mills (McGregor Industries Inc.). Scott has lived in the U.S. since 1984, suffers from Asperberger’s syndrome and a Major Depressive Disorder and has been unemployed for almost 30 years with no source of income other than the funds which are the subject of this action. Scott has a Bachelor of Arts from the University of Western Ontario and attended law school for two years but did not finish.

[5] The Defendants Marcia Lipson (“Marcia”) and Joy Lipson (“Joy”) are Scott’s sisters. The Defendant John Rosenthal (“John”) is an accountant and Scott’s brother in law who has worked with the Lipson family since 1982. John and Marcia were married in 1999. John and his accounting firm, the Defendant RZN LLP and its predecessors (“RZN”, collectively with John, the “Rosenthal Defendants”, the balance of the Defendants being the “Lipson Defendants”) have been the accountants for some of the Lipson Defendants as far back as October 1991. John acted as Scott’s accountant from late 1992 until what appears to be sometime in 2012.

[6] Nathan invested in numerous commercial real estate properties in Toronto. These interests were held by various family-controlled corporations including the Defendants Kingwell Limited (“Kingwell”) and Kinglip Holdings. Nathan also established trusts for Scott, Marcia and Joy. Scott’s trust, the Seymour Matthew Lipson Trust (the “Scott Trust”) was established on January 2, 1959 and held 10 special and 10 common shares in Kingwell. Kingwell in turn held cash, term deposits, marketable securities and real estate investments. As a result of an estate freeze in 1991, the 10 special shares in Kingwell had a fixed redemption price of $87,000 each.

[7] The parties’ filed voluminous materials in support of their divergent characterizations of the facts and the relevant transactions. Not all of the overwhelming detail presented, which included expert evidence, was necessary or helpful. The summary of the facts which follows is sufficient for the purposes of this motion.

The 1992 Wind-Up

[8] Nathan passed away on December 9, 1992. Shortly after, on the recommendation of various accounting and legal professionals, including John and RZN, the 3 Lipson children agreed to wind up their trusts.

[9] On December 17-18, 1992, after returning to Toronto for Nathan’s funeral, Scott executed numerous documents to facilitate the winding up of the Scott Trust (the “Wind Up”). This included documents which terminated the Scott Trust effective December 29, 1992 and an Acknowledgement, Release, Indemnity pursuant to which he released and forever discharged Nathan, Bertha and Marcia as trustees of the Scott Trust (the “1992 Release”). He also consented to the appointment of Bertha as trustee of the Scott Trust and her resignation and the appointment of Marcia as trustee on the same day.

[10] As a result of the Wind-Up, the Kingwell shares held by the Scott Trust were transferred to 910810 Ontario Limited ("910”) in exchange for a corresponding number of shares in 910, which was controlled by Marcia and Joy. Scott alleges that the effect of the Wind-Up was to strip him of assets which his father intended to leave him without his knowledge leaving control of the Scott Trust with his sisters. Scott further claims that because it was immediately after his father’s death and he did not have independent legal advice, he did not understand that he was executing a release or consenting to the appointment of Marcia as the sole trustee of the Scott Trust which occurred before he signed his consent. John claims that Scott would have been subject to substantial income taxes had the Kingwell shares not been transferred in this manner. Scott disputes this, citing a letter dated December 14, 1992 from Lipson family counsel and a memo from RZN dated December 15, 1992 recommending that the Scott Trust be dissolved and the assets distributed directly to him.

[11] In 1992, the shareholdings of another family holding corporation, Lipfam Holdings Inc. (“Lipfam”), were reorganized to freeze the value of Bertha’s shares at $5,675,000 (at the time she was the sole shareholder) while issuing 60 common shares of Lipfam to each of Scott, Marcia and Joy. The effect was that the first $5,675,000 was owned by Bertha with any future growth accruing to the 3 Lipson children. As the equity value of Lipfam never exceeded $5,675,000, the children’s shares had no value.

The 1994 Restructuring

[12] According to the Defendants, in December 1994, Scott requested his withdrawal from any future participation in his family’s investments as he wished to have no further involvement with his family or exposure to the fluctuating Toronto real estate market. Based on advice from RZN and legal counsel, Scott agreed to restructure Lipfam and 910 to freeze the value of his holdings as of that date and move them to 1108409 Ontario Limited (“1108”), a corporation for which he was the sole shareholder (the “1994 Restructuring”). On November 30, 1994 and December 21, 1994, Scott executed 11 documents to facilitate the 1994 Restructuring which were later sent to his home in Washington, DC. Scott denies that he requested to withdraw from family investments or that he had concerns about the real estate market, has no recollection of signing any documents related to the 1994 Restructuring and that if he did, denies that he had independent legal or accounting advice, the documents were not explained to him and he did not understand the nature or consequence of any documents he signed. Scott also claims that he had no knowledge of his interests in 1108 until 2012.

[13] By contrast, the Defendants submit that from 1995 onward, Scott received regular updates regarding 1108 including reporting letters, financial statements and corporate tax returns (which reflected cash distributions to him) and he signed shareholder resolutions, waivers and consents exempting 1108 from auditing requirements and numerous tax documents. Scott alleges that he did not receive any of this documentation as it was sent to Marcia and Joy’s office in Toronto. He also states that John would visit him each year in the U.S. and have him sign documents which he understood were related to his personal tax returns. Conversely, the Defendants point to numerous emails with Scott referring to his monthly dividends, his shares in 1108 and requests for his input on the investment of $1,000,000.

Scott’s Financial Support and The 2012 Transaction

[14] Scott submits that around the time of the Wind-Up in December 1992, his family reduced his monthly financial support to $1,500, his only source of income. Scott received $1,500 per month until 2001-2002 when he applied for welfare in the U.S. and sought treatment for a Major Depressive Disorder. Not long after, his financial support was increased to $5,000 per month. Scott says that he was led to believe that Bertha provided his monthly stipend as a gift, however, he later discovered that she was reimbursed from his interests in 1108 and that 1108 made loans to corporations controlled by Marcia and Joy.

[15] Scott’s family members submit that they provided him with significant support for most of his life. For example, Bertha provided him with exclusive financial support until 2001 (when he was 44) and he lived with her free of cost through the 1980s and intermittently afterwards; his family paid for numerous vehicles and car insurance, made cash gifts and offered to purchase a house for him in Arizona in his 50s; and he communicated with his family, sought their advice, spent time at their homes and they made substantial efforts to curb his excessive spending and destructive behavior.

[16] Scott alleges that Bertha stopped paying his credit card bills in 2012. With no source of income or funds, he says he pleaded with Marcia for money to pay for living expenses. She insisted that she would do so if he signed certain documents. He also claims that it was around the same time that he first learned from John that he owned all of 1108’s common shares.

[17] On April 16, 2012, John sent a letter to 1108’s counsel, copied to Scott, reporting on various ordinary course business matters approved at 1108’s annual general meeting. On March 1, 2012, John received a letter from Robert Birch, a Pennsylvania lawyer retained by Scott to address concerns regarding 1108. Mr. Birch advised that Scott wished to liquidate his shareholdings in 1108 and gain immediate access to the funds. In a letter to John dated June 8, 2012, Mr. Birch stated that he was in the process of retaining local counsel and that if $25,000 requested by Scott was not transferred that day, Scott would seek injunctive relief to have 1108’s bank accounts turned over to him.

[18] As a result of negotiations conducted largely between Mr. Birch (on Scott’s behalf) and John, Bertha purchased Scott’s outstanding shares in 1108 for $1,769,390 pursuant to a Share Purchase Agreement dated July 31, 2012 (the “SPA”) and caused 1108 to pay him $97,181 in retained and declared dividends and share redemptions (the “2012 Transaction”). The Defendants submit that the purchase price represented the fair value of Scott’s shares on a pre-tax basis as of that date for amounts which had not already been paid to him. Mr. Birch agreed to this valuation in an email message dated July 23, 2012. The Defendants say that together with the amount of $893,565 which Scott received from 2001-2012, he ultimately received pre-tax consideration of $2,760,181 from his shares in Lipfam and 910 which had been rolled over into 1108 as a result of the 1994 Restructuring. Scott claims that he received a net amount of $1,327,042 after taxes. In order to give effect to the 2012 Transaction, Scott executed the SPA, a Full and Final Release in favour of 1108, Marcia and Joy (the “2012 Release”) and numerous other documents.

[19] Scott alleges that even though Mr. Birch negotiated the 2012 Transaction on his behalf, he still relied on John who dictated the purchase price and did not recommend that he obtain independent accounting advice. Scott also asserts that John continued to advise him after the 2012 Transaction encouraging him to report himself as a Canadian resident for U.S. tax purposes notwithstanding that he was a U.S. resident. However, Scott acknowledged on cross-examination that John and RZN provided all information and documentation which he or Mr. Birch requested when conducting their due diligence with respect to the 2012 Transaction.

The U.S. Litigation and This Action

[20] In 2013 and 2014, Scott commenced litigation in in the U.S. against Mr. Birch to, among other things, dissolve the irrevocable trust controlled by Mr. Birch into which the net proceeds of the 2012 Transaction were deposited on the basis of fraud, duress, undue influence and that he did not understand the documents he was signing (the “U.S. Litigation”). Scott was successful in having the trust dissolved. However, Mr. Birch subsequently commenced proceedings against Scott and his U.S. counsel which appear to be ongoing.

[21] Scott alleged in the U.S. Litigation that he had been aware for decades that the income he received from his family was from his ownership interests in his father’s corporations and that he met with Mr. Birch in April 2012 to discuss his financial circumstances and evaluate his interests. In support of his claim against Mr. Birch, Scott also stated that Marcia contacted him during the negotiation of the 2012 Transaction and advised him that Mr. Birch’s demands were a “mistake” and not in Scott’s best interests.

[22] Scott commenced this action by Statement of Claim issued on March 29, 2016. He claims general and punitive damages and restitution in an amount to be determined before trial for intentional infliction of mental suffering, unlawful interference with economic interests, intimidation, conspiracy, loss of opportunity, breach of fiduciary duty, unjust enrichment and negligence. Scott alleges that he was intentionally misled by Bertha, Marcia, Joy and John who took advantage of his vulnerability and their close family relationships, acting in conspiracy to injure and fraudulently conceal his personal holdings causing him financial losses and significant emotional, psychological and psychiatric injuries. He also alleges that John and RZN were in a conflict of interest and breached numerous duties they owed to him.

[23] The Defendants deny all of these allegations asserting that Scott agreed to all amounts he received representing his full entitlement of approximately $2.7 million. They state that Scott’s claims are all barred by numerous releases and the operation of the 2-year limitations period.

III. The Law and Analysis

[24] The Defendants initially sought a combined total of security in the range of $846,225-$1,058,426 on a substantial indemnity scale up to but not including trial. The Lipson Defendants initially moved for security in the range of $569,835-$756,540 on a substantial indemnity scale, or alternatively, $379,890-$504,360 on a partial indemnity scale. However, they advised during the motion that they had reduced their request to $270,000 on a partial indemnity scale up to and including their summary judgment motion but excluding documentary and oral discovery. The Rosenthal Defendants continue to seek security for costs of $276,390-$301,886 on a substantial indemnity scale up to but not including trial. Accordingly, in the aggregate, the Defendants now seek a minimum of approximately $546,000 in security.

[25] Rule 56.01(1) states:

“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,

(a) the plaintiff or applicant is ordinarily resident outside Ontario;”

[26] Rule 56.01(1) does not create a prima facie right to security for costs but rather triggers an enquiry whereby the court, using its broad discretion, considers multiple factors to make such order as is just in the circumstances including the merits of the claim, the financial circumstances of the plaintiff and the possibility of an order for security for costs preventing a bona fide claim from proceeding ( Stojanovic v. Bulut, 2011 ONSC 874 at paras. 4-5).

[27] In Yaiguaje v. Chevron Corp., 2017 ONCA 827, the Court of Appeal re-focused the analysis under Rule 56 on the justness of the order:

“23 The Rules explicitly provide that an order for security for costs should only be made where the justness 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.

24 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. See: Hallum v. Canadian Memorial Chiropractic College (1989), 70 O.R. (2d) 119 (H.C.); Morton v. Canada (Attorney General) (2005), 75 O.R. (3d) 63 (S.C.); Cigar500.com Inc. v. Ashton Distributors Inc. (2009), 99 O.R. (3d) 55 (S.C.); Wang v. Li, 2011 ONSC 4477 (S.C.); and Brown v. Hudson's Bay Co., 2014 ONSC 1065, 318 O.A.C. 12 (Div. Ct.).

25 While this 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 already 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.”

[28] The initial onus is on the defendant to show that the plaintiff falls within one of the four enumerated categories in Rule 56.01. If the defendant meets the initial onus, the plaintiff can rebut the onus and avoid security for costs by showing that they have sufficient assets in Ontario or a reciprocating jurisdiction to satisfy a costs order; the order is unjust or unnecessary; or the plaintiff should be permitted to proceed to trial despite its impecuniosity should it fail (Travel Guild Inc. v. Smith, 2014 CarswellOnt 19157 (S.C.J.) at para.16; Coastline Corp. v. Canaccord Capital Corp., [2009] O.J. No. 1790 (ONSC) at para. 7; Cobalt Engineering v. Genivar Inc., 2011 ONSC 4929 at para. 16). This was summarized by Master Glustein (as he then was) at paragraph 7 of Coastline:

(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;

(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";

(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;

(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;”

[29] Since Scott is ordinarily resident in the U.S., it is not disputed that the Defendants have met their initial onus that he falls within Rule 56.01(a). Therefore, the only issue on this motion is whether it is just to order security for costs. The parties also agree that Scott has suffered from a Major Depressive Disorder since 2002 and has been unemployed for almost 30 years. This appears to be the extent of any agreement.

[30] Scott asserts that he is impecunious, therefore, he can avoid an order for security for costs by meeting the low evidentiary threshold that his claim is not entirely devoid of merit (Coastline at para. 7; Baca v. Tatarinov, 2018 ONSC 1307 at para. 39; Yaiguaje at para. 19). Scott also argues that it would be unjust to order security for costs, particularly in the amounts sought by the Defendants, as he would be unable to proceed with his action.

[31] Scott states that his only assets are U.S.$118,356 in cash and CDN$113,645 in an RRSP and that he owes U.S.$323,000 in taxes to the United States Internal Revenue Service (the “IRS”) under its voluntary disclosure program. Scott submits that as he has no source of income, after living expenses and legal fees for this action, he is impecunious.

[32] Having considered the relevant factors and the evidence before me, I cannot conclude that Scott is impecunious. At best, Scott has demonstrated that he is experiencing hardship, however, he has not established that he is impoverished and needy (Royal Windsor Mechanical Inc. v. Devlan Construction Inc., 2014 ONSC 3 at paras. 12-13; Lysko v. Maxbeau Co., 2010 ONSC 6523 at para. 9). I am also unable to conclude that Scott’s liabilities exceed his assets or that his assets are entirely encumbered by liabilities (Montrose Hammond & Co. v. CIBC World Markets Inc., 2012 ONSC 4869 at para. 42).

[33] Based on Scott’s own submissions, whether he is impecunious largely depends on any amounts he owes to the IRS. While I accept that Scott paid $80,000 to the IRS on May 1, 2019, there is no documentary evidence before me that any additional amounts are owing or must be paid in the future, and if so, how much, when any such amounts are due and if they have priority. Scott’s evidence is that his U.S. Counsel advised him of the remaining U.S.$323,000. At best, this may be a contingent liability, however, without sufficient evidence, I cannot draw this conclusion. The absence of any documentary evidence regarding Scott’s alleged IRS debt is significant given his reliance on this liability to demonstrate his impecuniosity. This does not meet the rigorous standard of financial disclosure required on a security for costs motion and reflects the larger insufficiency of his disclosure.

[34] I am not satisfied that Scott has disclosed his finances with the necessary “robust particularity” which requires disclosure of 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 his ability to borrow funds; and details of any assets he has disposed of or encumbered since the cause of action arose (General Products Inc. v. Actiwin Company Limited, 2015 ONSC 6923; Al Masri v. Baberakubona, 2010 ONSC 562 at para. 19). In Montrose, a case relied on by Scott, Perell J. stated at paragraph 34:

"A litigant who relies on impecuniosity bears the onus of proof on this point and must do more than adduce some evidence of impecuniosity and must satisfy the court that it is genuinely impecunious with full and frank disclosure of its financial circumstances."

[35] In concluding that Scott has not made full and frank disclosure, I do not accept the Defendants’ submission that Scott should account for the entire $1.7 million which he received from the 2012 Transaction. At the same time, I disagree with Scott’s assertion that I should limit my analysis to the current, immediate state of his finances. His own position is that he first discovered the cause of action in 2015. Accordingly, it is consistent with the applicable standard of financial disclosure that he provide sufficient evidence of the disposition of his assets since that time. He has not done so.

[36] Scott has provided some evidence and explanation regarding the disposition of his assets including significant amounts he paid for legal fees in the U.S. Litigation, defending Mr. Birch’s proceeding and for other advisors. However, in my view, he has not done so with the required particularity. Justness requires that he provide a more fulsome explanation in these circumstances given that it is not disputed that he received approximately $1.7 million in 2012, a significant amount for an individual. More recently, on September 7, 2018, Scott received a significant refund of $284,000 from the Canada Revenue Agency (“CRA”) and again, has not fully explained how these funds were used. Although Scott estimates his legal fees for these proceedings at $108,000, I am unable to determine the true impact on his finances as a whole without sufficient particulars of his assets, liabilities and disposition of funds.

[37] Scott has also not provided any evidence of his inability to borrow funds including any attempts, applications or requests to obtain credit or any valuations of his car or other items in storage. Scott relies on Montrose (including the original motions decision of Master Hawkins in Montrose Hammond & Co. v. CIBC World Markets Inc., 2012 ONSC 591) in which the principals of a corporate plaintiff were not ordered to post security for costs and were not required to provide evidence of their inability to borrow funds. In my view, Montrose is distinguishable from the present case in numerous respects. In Montrose, the plaintiff was a partnership of 2 corporations and the principals were found to be impecunious as their liabilities exceeded their assets and would be depleted by the proceedings. There were also no issues regarding the sufficiency of the principals’ financial disclosure, including with respect to their indebtedness to the CRA.

[38] The merits are a consideration on every security for costs motion. Master Glustein provided the following guidance at paragraph 7 of Coastline:

“(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;

(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;

(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;” [citations omitted]

[39] The parties spent an inordinate amount of time and effort on the merits. The Defendants submit that Scott cannot satisfy the less onerous test that his claim is not plainly devoid of merit, the threshold which would apply if he was impecunious. Since I have concluded that Scott is not impecunious, the case law generally requires that he must demonstrate that he has a stronger case on the merits (Montrose at para. 36; Coastline at para. 7). The Lipson Defendants submit that this action is plainly devoid of merit because, at a minimum, Scott released any and all claims against 1108, Marcia and Joy by executing the 2012 Release which Mr. Birch negotiated as part of the 2012 Transaction on his behalf. The Rosenthal Defendants submit that they also have the benefit of the 2012 Release which Scott does not appear to dispute. The Defendants assert that the 2012 Release, together with the 1992 Release, is a complete answer to Scott’s claims and demonstrates why security for costs should be ordered. They further argue that Scott’s claims are barred by operation of the 2-year limitation period in the Limitations Act, 2002 (Ontario) which he can only avoid if he is able to establish fraudulent concealment.

[40] Scott submits that the pleadings and the evidence accumulated to date, including the contemporaneous documents, demonstrate that his claim has merit (Shuter v. Toronto Dominion Bank, 2007 ONSC 37475, [2007] O.J. No. 3435 (S.C.J.) at para. 85). He argues that there are significant concerns with the Defendants’ credibility, the Wind-Up was undertaken contrary to legal and accounting advice, the limitation period did not begin to run until 2015 due to the Defendants’ fraudulent concealment of his cause of action and the 2012 Release should be set aside as unconscionable given that his family members took advantage of his vulnerability and financial situation. However, Scott also submits that since credibility plays such a significant role in this action, the merits have a lesser role to play (Shuter at para. 82). Where there are multiple issues of fact and credibility, it is also open for the court to conclude that the merits are a neutral factor which should not affect the outcome of the motion (Sadat v. Westmore Plaza Inc., [2013] O.J. No. 309 (S.C.J.) at paras. 40-43).

[41] The Defendants made substantial submissions in urging me to find that Scott is not credible. They refer to findings of the Courts of Common Pleas of Montgomery County, Pennsylvania in the U.S. Litigation that “the testimony of Scott was completely and totally incredible”, “absurd” and a “tale”. They also rely on Scott’s evidence on this motion including his admissions that he was aware of the Scott Trust as of 1994 and understood the nature of a release and the fact that his signature appears on a large number of documents giving effect to the transactions while at the same time he denies signing documents or that he understood what they were for and denies sending or receiving emails which appear to have been sent to or from his email address.

[42] In Yaiguaje, the Court of Appeal held that the correct approach is to consider the justness of the order holistically, examining all of the circumstances of the case guided by the overriding interests of justice rather than imposing a static list of factors or rigid criteria. In my view, such static or rigid criteria includes any requirement that the merits play a pre-determined role on every security for costs motion depending on whether the plaintiff is impecunious or because some other condition has been met.

[43] Applying this approach, I am unable to draw the conclusions on the merits urged by the parties. Specifically, I decline to conclude, as the Defendants suggest, that Scott’s claims are devoid of merit, frivolous or vexatious, or as Scott submits, that they have merit. There are many disputed issues of credibility and fact, some of them complex, some of them involving significant legal analysis, many dating back decades and involving multiple complex financial transactions. The Defendants’ own submissions demonstrate the extent to which Scott’s credibility is at issue in this action. It is generally inappropriate to make findings of credibility or to draw conclusions regarding the merits unless success or failure appears obvious. Arriving at the conclusions the parties are seeking would require me to embark on an inquiry more akin a summary judgment motion. That is not this Court’s role on this motion.

[44] However, I am also not prepared to conclude that the merits should play no role on this motion. Based on the record before me, I conclude that the merits should play a lesser, limited and non-decisive role on my disposition of this motion. While I cannot find that Scott’s claim is plainly devoid of merit, in my view, the merits favour the granting of security for costs. In arriving at this conclusion, I make no findings regarding Scott’s credibility and I rely only on the pleadings and the documentary evidence before me. I also draw no conclusions regarding whether Scott’s claims are barred by operation of the 2-year limitations period which raises issues of credibility regarding discoverability more properly considered by a judge at trial or on a summary judgment motion. However, on the face of the documents and the pleadings, the 2012 Transaction was negotiated by Scott’s independent legal counsel who agreed to the purchase price of approximately $1.7 million and negotiated numerous documents which Scott executed including the 2012 Release. On their faces, the 2012 Release and the 1992 Release provide the Defendants with a broad release of any and all liability and prevent Scott from advancing many or all of the claims in this action. Therefore, to the limited extent the merits impact my ultimate conclusions, they support the granting of security.

[45] I also reject Scott’s allegations that his impecuniosity and/or insufficient assets have been caused by John and RZN. Scott alleges that by filing his taxes as a Canadian resident and failing to ensure that he had independent U.S. accounting advice, John and RZN have improperly caused or seriously contributed to his alleged liability to the IRS. Scott further claims that John urged Mr. Birch to establish the irrevocable trust which caused Scott to commence the U.S. Litigation thereby incurring significant legal fees which have depleted his assets. The Rosenthal Defendants submit that they were never engaged by Scott to file his U.S. tax returns and that he admitted on cross-examination that he earned minimal income in the U.S. in any event.

[46] To make this finding, I must conclude that the insufficiency of Scott’s assets is a direct result of John’s and RZN’s improper conduct as alleged in this action (Cigar500.com Inc. v. Ashton Distributions Inc., [2009] O.J. No. 3680 (S.C.J.) at para. 40). I decline to do so. Even accepting Scott’s allegations, I am unable to conclude that there is a nexus between the conduct of John and RZN and his alleged IRS debt and fees in the U.S. Litigation which in turn has caused his insufficiency of assets. Further, there are many disputed issues of fact and credibility and numerous possible explanations for Scott’s lack of assets. Overall, this is far from a case where a plaintiff is claiming that a defendant’s failure to pay a liquidated debt is the direct cause of his lack of assets (Cigar500.com at para. 43).

[47] Justness ultimately requires a balancing between ensuring that meritorious claims are allowed to go forward with the consequences of being unable to collect costs where a party pursues an unsuccessful claim and the prospect of an unenforceable costs judgment (Ascent Inc. v. Fox 40 International Inc., [2007] O.J. No. 1800 at para. 3; Rosin v. Dubic, 2016 ONSC 6441 at para. 39). Applying a holistic approach, having considered all of the relevant factors and balanced Scott’s interests to not have his access to the courts blocked with the Defendants’ protection against an unenforceable costs award, I conclude that it is just in the circumstances that security for costs be ordered. In addition to the considerations above, this is private litigation between family members over significant sums of money with no public interest considerations in which Scott is claiming amounts in addition to the approximately $2.7 million he has already received. More importantly, I conclude that security for costs can be ordered without prohibiting Scott from proceeding with this action while affording the Defendants some reasonable and proportionate protection from an unenforceable costs award.

[48] Determining the order which is just does not end with the conclusion that security for costs should be ordered. It extends to the quantum of security. In striking the appropriate balance, it is necessary to determine an amount of security which is just in the circumstances but not so onerous as to block access to the courts. In Rosin, H.J. Pierce J. ordered an impecunious plaintiff on disability benefits to pay security for costs of $30,000 where the defendants collectively sought $60,000, describing the balancing of the parties’ interests as follows:

“38 Citizens are entitled to access to the courts for the purpose of determining disputes. Society's interest is in having disputes determined on their merits. The purpose of security for costs is to protect a defendant from the prospect of an unenforceable judgment for costs; that is a risk in this case if the plaintiff is unsuccessful. However, the amount of security to be posted should not be so onerous as to effectively block access to the courts.

39 While I am persuaded that security for costs is warranted in this case, I am concerned that the amounts claimed by the defendants, both individually and collectively, may have the effect of blocking the plaintiff's access to the court. I am mindful that the plaintiff's family and friends are paying for the litigation on the plaintiff's behalf. In my view, security for costs in a lesser amount is appropriate in this case.” (Rosin at paras. 38-39)

[49] The court has broad discretion to determine a fair and reasonable amount of security which is substantially similar to the exercise of its discretion in fixing costs of a proceeding pursuant to Rule 57.01 (Canadian Metal Buildings Inc. v. 1467344 Ontario Limited, 2019 ONSC 566 at para. 27). The quantum should reflect a number that falls within the reasonable contemplation of the parties and what the successful defendant would likely recover and the factors set out in Rule 57.01 (720441 Ontario Inc. v. The Boiler et al, 2015 ONSC 4841 at para. 56; Marketsure Intermediaries Inc. v. Allianz Insurance Co. of Canada, 2003 CarswellOnt 1906 at paras. 17-20). In most cases, security for costs will be ordered on a partial indemnity scale (Marketsure at paras. 13-18).

[50] In my view, the significant amounts sought by the Defendants are not fair, reasonable, within the reasonable contemplation of the parties, proportionate or consistent with the principles set out in Rule 1.04(1). While I cannot conclude that the Defendants have brought this motion as a litigation tactic to prevent Scott’s action from proceeding, ordering the payment of security in the amounts they seek would have this effect.

[51] As set out in the Lipson Defendants’ Litigation Budget, the $270,000 they now seek is comprised of approximately $135,900 (270-330 hours) for preliminary matters, including pleadings and preparation of this security for costs motion (including the evidentiary record); $69,360 (120-170 hours) for this security for costs motion; and $69,360 (120-170 hours) for their summary judgment motion. I do not accept that $270,000 up to and including their summary judgment motion, excluding documentary or oral discovery, is fair and reasonable.

[52] In my view, the Lipson Defendants are not entitled to security for this security for costs motion. These costs are more properly considered if the parties cannot agree on the costs of this motion at which time written submissions may be made. Further, I am also not satisfied that the significant amount of counsel hours at the rates claimed, including partner time, are warranted or proportionate to the steps in question or that the Lipson Defendants should be indemnified to the extent they seek. There will also be economies of scale, duplication and overlap in light of the central role of the Rosenthal Defendants’ on many issues and the documents filed, cross-examinations conducted and submissions made on this motion will have utility on the summary judgment motion. However, the amount granted must reflect that Scott is advancing multiple serious allegations against a large number of Defendants involving significant documentation related to complex transactions dating back almost 30 years, over 60 years to when the Scott Trust was established.

[53] Similarly, I reject the Rosenthal Defendants’ submission that $276,390-$301,886 on a substantial indemnity scale is fair and reasonable. I am not satisfied that these are exceptional circumstances which justify a departure from the general rule that security for costs should be ordered on a partial indemnity scale. While Scott has made serious allegations, at this stage of the proceedings this should be addressed by quantum, not scale. Further, given their coordination with the Lipson Defendants and inevitable overlap, there is no reason that the Rosenthal Defendants should not receive security for costs in instalments for the same steps as the Lipson Defendants, namely up to and including the summary judgment motion excluding oral and documentary discovery. In their Litigation Budget, on a partial indemnity scale, the Rosenthal Defendants seek $73,847 (267.7 hours) for preliminary matters, pleadings and preparation for this security for costs motion; $25,170-$37,110 (60-90 hours) for the security for costs motion; and $25,170 - $37,110 (60-90 hours) for the summary judgment motion. At a minimum, this is approximately $124,187 on a partial indemnity scale, which, together with the $270,000 sought by the Lipson Defendants, puts the total amount of security requested at approximately $394,187.

[54] Similar to my conclusions above regarding the Lipson Defendants, I am not satisfied that the hours and rates including partner time are proportionate to the steps at issue or that the Rosenthal Defendants should be indemnified for all that they seek. I have also taken into consideration overlap and duplication of efforts with the Lipson Defendants’ counsel and the fact that steps taken to date such as documents and cross-examinations will provide economies of scale moving forward. At the same time, Scott is advancing serious, specific allegations against John and RZN to which they must respond fully and separately, based largely on significant documentation going back decades.

[55] Scott’s counsel acknowledges that there is an amount of security which he could post which would not prevent him from proceeding with this action. Other than insisting that this amount would be minimal, particularly when compared to what the Defendants are seeking, counsel provided no further guidance. Scott’s Litigation Budget provides for $15,550-$24,500 (125-160 hours) on a partial indemnity scale for preliminary matters including preparation for this motion but does not provide for the summary judgment motion.

[56] Having considered the relevant factors and the Litigation Budgets and balanced the parties’ interests, I am satisfied that it is fair and reasonable, within the reasonable contemplation of the parties, reflective of the nature and complexity of the action and the seriousness of the allegations, proportionate and just in all of the circumstances for Scott to post security for costs of $80,000 with respect to the Lipson Defendants and $50,000 with respect to the Rosenthal Defendants up to and including the Defendants’ summary judgment motion but excluding documentary and oral discovery within 60 days. Scott shall not take any further steps in this action until the amounts are posted and proof of same is provided to Defendants’ counsel.

IV. Disposition and Costs

[57] Order to go on the terms set out above. If the parties cannot agree on the costs of this motion, they may file written costs submissions not to exceed 4 pages (excluding Costs Outlines) with me through the Masters’ Administration Office on a timetable to be agreed upon by counsel. If counsel cannot agree, they may schedule a telephone case conference to speak to a timetable and any other issues.

Released: February 28, 2020

Master M.P. McGraw