Court File and Parties

COURT FILE NO.: CV-15-52140 DATE: 20200320 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Lancaster Group Inc., Plaintiff AND: Kenaidan Contacting Ltd., Bouygues Building Canada Inc. et al., Defendants

BEFORE: Master P. Tamara Sugunasiri

COUNSEL: R. Cohen, Counsel for the Kenaidan and Bouygues Defendants/Moving Party (rcohen@casselsbrock.com) J. Ng, Counsel for the Plaintiff/Responding Party (jng@tmlegal.ca)

HEARD: November 18, 2019

Reasons for Decision

Overview

[1] Kenaidan Contracting Limited and Bouygues Building Canada Inc. (“BKJV”) acted as the general contractor for the construction of the Tim Horton’s Field in Hamilton. BKJV hired Lancaster Group Inc. to supply sheet metal and HVAC services. This was one of three PanAm Games projects involving Lancaster. In early 2015 Lancaster commenced two actions under the Construction Lien Act claiming both lien entitlements and damages for delay. Justice Pareyeski consolidated those Hamilton actions into one and discharged two of three liens filed. What remains in Hamilton is a single action against BKJV for a lien amount of $613,734.01 and an additional $2,620,681.68 for damages for delay. BKJV has paid $663,734.01 into court to vacate the lien and $50,000 as security for costs. Lancaster has brought similar actions with respect to PanAm projects in Milton and Toronto that remain ongoing.

[2] BKJV seeks security for costs in this action. Section 67(2) of the CLA prohibits motions in construction lien actions without leave of the court. Our court has established that it will grant leave if a defendant satisfies the court that there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay costs. If BKJV meets this threshold, the burden shifts to Lancaster to demonstrate with evidence that it has sufficient assets and that it is unjust to make an order. For the reasons that follow, I allow the motion and order Lancaster to pay security for costs in the amount of $60,000 up to the end of discovery.

Law and Analysis

[3] The CLA is a comprehensive code that governs construction lien matters such as this. Section 67 confirms that construction lien actions should be summary in character having regard to the amount and nature of the liens. Parties may not take any interlocutory steps, such as motions, without the consent of the court upon proof that the motion is necessary or would expedite the resolution of the issues.

[4] The parties agree that to obtain leave for this motion, BKJV must demonstrate that there is good reason to believe that Lancaster has insufficient assets in Ontario to pay BKJV’s costs as stated in r. 56.01(1)(d). [1] If BKJV meets its burden, the onus shifts to Lancaster to show that it has sufficient assets or that the order is unjust. The court is to consider all the circumstances of the case and look at the overall justness of the order. [2]

[5] The four issues in this motion are:

a. Has BKJV demonstrated that there is good reason to believe that Lancaster lacks sufficient assets in Ontario to pay an adverse costs award? Yes, BKJV has met this threshold. b. If BKJV has so demonstrated, has Lancaster shown that it has sufficient assets? No, Lancaster has not shown with clear and convincing evidence that it has sufficient assets. c. Does the overall justice of the case warrant a security for costs order? Even if Lancaster has demonstrated that it can pay, the overall justice of the case favours a security for costs order. d. What is the appropriate quantum of security for costs? A staged order is appropriate. Lancaster shall pay $60,000 up to the end of discoveries without prejudice to BKJV seeking a further order for security for costs.

A. Has BKJV demonstrated that there is good reason to believe that Lancaster lacks sufficient assets in Ontario to pay an adverse costs award?

The “indicia of insolvency or instability” test

[6] In non-lien actions, a moving defendant does not have to establish that the plaintiff has insufficient assets, only that it appears there is reason to so believe. The rationale is stated by Philp J. in 737071 Ontario Inc. v. Min-A-Mart Ltd., [1996] OJ No 1173 (Gen Div) at para. 5: "This lighter onus is based on the belief that it would be unfair to insist that the defendant prove something that is within the knowledge of the plaintiff." Some have described this as a low threshold. [3] In 671122 Ontario Ltd. v. Canadian Tire Corp. Morden A.C.J.O. stated that the general purpose of security for costs is to afford "defendants a reasonable measure of protection for their costs but also with regard to their potential impact on plaintiffs." He went on to note that r. 56.01(1)(d) "is clearly intended to place corporate plaintiffs in a more vulnerable position than plaintiffs who are individuals". [4]

[7] In Yuanda, Master Wiebe concluded that a moving defendant must show more than this low threshold. It must show “indicia of insolvency” and corporate “instability” to meet its burden. [5] He does so on the force of Justice Lang’s comments in City Commercial Realty (Canada) Ltd. v Bakich, [6] an Ontario Court of Appeal decision applying r. 56.01(1)(d) in a non-CLA context. He not only felt that he was bound by her decision, but also believed her approach to be appropriate in the construction sector where business is notoriously uneven. Both parties apply this approach to the case at bar.

[8] Before I apply the test, I make a few observations. In my view, Justice Lang did not mandate that the court must apply the “indicia of insolvency and instability test” to all motions for security for costs against corporate plaintiffs. I believe the tenure of her ruling was that a defendant must show more than mere conjecture, hunch or speculation. I set out the relevant passages below:

7 Under rule 56.01(1)(d), the moving party is not required to establish that a corporation has insufficient assets to pay costs, but only to establish that there is good reason to believe that the corporation has insufficient assets to pay the costs…

8 Even though the onus is a reduced one, the moving party must still provide enough information about the corporation to raise a belief of insufficiency that goes beyond mere conjecture, hunch, or speculation…

9 To support an insufficiency of assets, it has been said that the moving party must raise a reasonable belief that the corporation is without "real, substantial and exigible" assets: Pocklington Foods Inc. v. Alberta (Provincial Treasurer), [1994] A.J. No. 313 (Alta. Q.B.). In 671122 Ontario Ltd., supra, this court quoted with approval the Divisional Court's reasons holding that it is proper "to consider critically the quality as well as the sufficiency of the assets presently held and whether or not they are bona fide assets of the company". To be sufficient, the corporation's assets may be tangible or intangible but must be of such a nature that their realizable net value is sufficient can meet the amount of costs to be secured.

10 In support of their motion, the moving parties rely on Mr. Chan's affidavit in which he alleges a belief that City Commercial, a privately-held corporation, is a mere shell. In part, he bases this statement on an electronic title search indicating that City Commercial owns no real property in the Toronto area. Further, he says, as a commercial real estate broker, City Commercial would likely have no physical assets or cash-on-hand sufficient to meet any liability for costs. By the nature of its business, he continues, a broker's earnings or commissions are distributed out of the company upon receipt. Hence, those earnings would not be retained as an available source to satisfy an order for costs.

11 The trial judge's reasons confirm City Commercial's business as being one of charging commission for facilitating real estate transactions. As such, its business may fit within the moving parties' description of the type of business that would not necessarily have tangible assets. When questioned on cross examination, however, Mr. Chan acknowledged that he was not knowledgeable about the particulars of City Commercial's employees, assets, sales, credit, or its distribution of commissions. To a great extent, the statements in Mr. Chan's affidavit are no more than inferences drawn from the nature of City Commercial's business. Apart from the search results about ownership of land in Toronto, the moving parties provide no material information specific to City Commercial.

12 Moreover, the moving parties have not alleged that City Commercial has failed to meet its liabilities, that it has shown any other indicia of insolvency, or that it has demonstrated any instability, such as a temporary dissolution or failure to make appropriate corporate filings. Such indicia have been present in other cases where security for costs has been ordered.

[9] These passages suggest that in some cases that have ordered security for costs against a corporate plaintiff, there have been indicia of insolvency or evidence of instability.

[10] I add that the historically lower threshold applied to r. 56.01(1)(d) arises from the fact that it is unfair to insist that a defendant prove something that is within the knowledge of the plaintiff (Philp, J. supra). If on every occasion a defendant seeking security for costs is required to show indicia of insolvency or instability, few would succeed without access to a corporate plaintiff’s books and records unless there are publicly available indicia like temporary dissolution, failure to make appropriate corporate filings, or insolvency applications.

[11] Having said that, I defer to Master Wiebe’s expertise as the senior construction lien master of our court. Even if Lang, J’s decision does not strictly bind us to apply an “indicia of insolvency or instability test”, Master Wiebe has concluded that it is an appropriate approach in construction lien matters. I adopt his approach, with two caveats. One is that the moving defendant must show indicia of insolvency or instability that leads to reasonable belief that the plaintiff lacks sufficient assets to pay adverse costs; not both (see City Commercial, supra at para. 12 of the quotation). Second, the court must give some leeway to the quality of the moving defendant’s evidence because its evidence will only be as good as what is publicly available and what the plaintiff chooses to disclose in response to the motion. Otherwise the playing field will be not be level, a goal that Master Wiebe wanted to achieve when he made the section 67 and r. 56.01 test coextensive. He stated in Yuanda:

My reason for drawing this parallel was the necessity to achieve procedural fairness in lien cases where the lien claimant corporation has the security of the land and, in some cases, the further security of posted security for costs should the claim for lien be vacated, while the defendant has no security for costs of defending the claim. This imbalance becomes acute when there is evidence that the plaintiff corporation does not have sufficient assets to pay the defendant’s costs, and where the defendant has posted security (including security for costs) for the plaintiff’s claim.

BKJV has met its threshold of demonstrating instability

[12] BKJV has made significant efforts to gather evidence of Lancaster’s financial health. It conducted an Equifax search, property searches in three regions and Personal Property Security Act searches. It also asked Lancaster for evidence that it can pay an adverse costs award. Lancaster did not present any argument to foreclose the court’s reliance on any of these reports. Equifax, whose business is to provide an independent assessment of an entity’s creditworthiness, reports that Lancaster is likely to be severely delinquent in meeting its obligations and is 4/5 likely to cease business. This in and of itself, demonstrates instability.

[13] The only way to test Equifax’s conclusion is to assess Lancaster’s actual financial documents. Lancaster argues, however, that this threshold is for BKJV to meet and that it does not have any obligation to provide evidence of its financial health at this stage of the inquiry. If I accept Lancaster’s argument, then BKJV can do nothing more than rely on the Equifax report. The court should also do nothing more than rely on this report to conclude that the report indicates financial instability.

[14] I need not comment on the other searches other than to say that they are not as persuasive. Many companies do not own property. Many companies have secured creditors who provide loans and revolving lines of credit. PPSA registrations do not trouble me, per se or indicate insolvency or instability. Action taken on the security is a better indicator. I see no such activity here.

[15] I also give little weight to the media articles in which Lancaster’s Vice-President is alleged to have said in 2017 that the company was under financial strain. This is hearsay evidence and not needed other than to say that if true, his anecdotal comment corroborates the Equifax report.

B. If BKJV has so demonstrated, has Lancaster shown that it has sufficient assets?

[16] Lancaster has not persuaded me that it has sufficient appropriate assets to satisfy and adverse costs order. Lancaster presented evidence from its President, Mr. Hubber. He admits that Lancaster was under financial strain from 2017 due to issues with the PanAm games projects and the ensuing litigation including a defamation suit brought by Kenaidan for alleged remarks Lancaster made to the City of Hamilton. Nevertheless, he attests that the company is an ongoing concern with the following assets:

a. Two properties located in Hamilton – one owned through a related entity 368769 Ontario Limited and the other directly; b. Cash assets totalling $339,838.00 held by 368769; and c. Current contracts totalling over $29.9 million with anticipated receivables through 2019 to 2020.

[17] Lancaster continues to employ 130 people with yearly wages totalling over $8 million, an amount Lancaster pays using its credit facility. Mr. Hubber supported his statements by attaching title abstracts, financial statements from 2018, financial statements of 368769 Ontario Limited, and a chart that he prepared of the contracts.

[18] On cross-examination, a different picture emerged. The title abstract shows that 368769 owns both properties as both the legal and beneficial owner. Lancaster does not own shares of 368. In fact, its shares are held by a family trust with Mr. Hubber as the sole beneficiary. The property was likely purposely put in 368’s name to keep it out of the hands of creditors if Lancaster ran into financial difficulties. This is not an unusual arrangement, but it confirms that neither property is available to satisfy an adverse costs award.

[19] Elsewhere BKJV confirmed that 369 is a separate corporate entity with separate financial records with no actual link to Lancaster other than through Mr. Hubber. Its financial statements showing cash assets totalling $339,838 are irrelevant to Lancaster’s financial health unless Lancaster’s position is that it can borrow funds from 368. Mr. Hubber does not however expressly state this.

[20] With respect to the contracts and receivables, they include existing and proposed contracts and:

a. the projected revenues are pre-tax figures; b. Mr. Hubber anticipates a 15% gross profit on the $29.9 million over the next two years which is then reduced by its operating costs; c. In 2018 Lancaster earned $220,000 after paying operating costs and expects the same in 2019; and d. Lancaster needs to earn income between $20 million to $25 million in 2019 to operate profitably.

[21] Mr. Hubber refused to provide any contracts in support of is contract figures. He did attest however that he prepared the chart to obtain a new consolidated credit facility from the Bank of Montreal, a facility that is now in place. BMO appears to have a general security agreement over all Lancaster assets with a second lender taking overlapping collateral in the second position. It also is indebted to 368 in the amount of $1.121 million and outstanding rent for 2017 and 2018 (Lancaster leases its head office from 368).

[22] Two things concern me. First, Lancaster has not provided financial evidence with the robust particularity one would expect to support its position. Second, its evidence was misleading. Without cross-examination, Lancaster’s evidence was self-serving and incomplete. It has not demonstrated that it has sufficient appropriate assets to satisfy even a modest costs award. As noted by Master Jolley, “appropriate assets” are assets that are both sufficient to answer for the costs and are of a kind that can be conveniently realized. “The assets must be readily exigible and marketable so that they can be easily transformed to cash and generate the funds needed to meet a costs order.” [7]

[23] I agree that the Bank of Montreal’s willingness to extend credit is a testament to Lancaster’s overall financial health. However, this does not assist the court as Lancaster has not provided detailed information of appropriate assets. As far as the evidence reveals, all its assets are encumbered by the Bank of Montreal. Even if those assets are not fully encumbered, Lancaster has not explained what of those assets would be available to satisfy an adverse costs award. This was Lancaster’s burden to prove.

C. Does the overall justice of the case warrant a security for costs order?

[24] As noted by the Ontario Court of Appeal in Yaiguaje, supra, the court should move away from applying rigid tests to determine security for costs. Instead, it should consider the rules, all the circumstances of the case, and the overall justice of an order. Even if I am incorrect in my analysis above, I find that it is just in the circumstances to order Lancaster to pay security for costs. I discuss the most relevant circumstances below.

No finding that financial strain caused by BKJV

[25] As stated in my analysis of the Yuanda test, I am mindful that the construction sector’s business is notoriously uneven and a company’s financial health will fluctuate as contracts are won and lost, paid or not paid. In this case, Lancaster has attributed its financial downturn to lack of payment from the PanAm projects and their delay. Lancaster argues that its circumstances were caused at least in part by BKJV and it would be unjust to reward them with a security for costs order.

[26] The merits of a case have a role in security for costs motions where the success or failure of an action is obvious. If it is not, a motion court should leave a merits determination to the trier of fact. In this case, there are triable issues on the veracity and quantum of the lien and the damages claim. I decline to make a finding that BKJV failed to make the appropriate payments or delayed the Project. In any event, even if I should assess the merits of the case more deeply, Lancaster has not tendered any evidence to allow me to do so.

[27] Lancaster’s other argument is that Kenaidan’s unmeritorious libel action which Justice Lieper summarily dismissed under the anti-SLAPP provision has caused Lancaster financial hardship. Kenaidan should not be rewarded for its conduct with an order for security for costs. Kenaidan also has an outstanding costs payment of $190,000 which has been stayed by appealing Justice Lieper’s decision.

[28] The libel action is still in progress. I do consider Justice Lieper’s comment in her costs decision that Kenaidan’s litigation against Lancaster may have been intended to punish Lancaster for its statements to the City of Hamilton. I have no evidence in this action, however, the BKJV is misusing its security for costs motion to further punish Lancaster or force the litigation to an end. As discussed below, Lancaster did not raise impecuniosity nor has it argued that if required to pay security for costs, it could not proceed with its action.

No claim of impecuniosity

[29] By its own statements Lancaster presents itself as an ongoing and fully operational sheet metal and HVAC company. It does not use impecuniosity as a defence to the motion. As such there is no prejudice to Lancaster in paying security for costs.

BKJV’s counterclaim is not the primary driver

[30] Lancaster argues that BKJV has brought a counterclaim for $500,000 in damages for Lancaster’s delay and grossly excessive lien claim. It states that because this counterclaim overlaps with the delay and lien claim that it has raised, BKJV should not be entitled to security for costs. This is based on the well-established principle that a defendant by counterclaim acts as a plaintiff and should not be secured for the cost of prosecuting its own claim.

[31] I agree with BKJV that its counterclaim in the action is “soft”, and not the primary driver. It claims damages for Lancaster’s delay and for its grossly excessive lien. It is a small fraction of the amounts that Lancaster claims. At best the counterclaim might reduce the quantum of security for costs, not foreclose entitlement entirely.

The other actions

[32] Lancaster has brought two other actions on PanAm Games projects: one in Milton and one as a construction lien reference in Toronto. The defendants in the other actions may be relying on the decision in this action to bring motions for security for costs. The fact that Lancaster may be ordered to pay security for costs in other concurrent actions does not deter payment here. At the moment Lancaster has no outstanding costs to pay as security, or otherwise. The justness of the order cannot be based on speculation but on the present circumstances of the case. However, I do take the other actions and the recent COVID19 pandemic into account in fashioning the order. I discuss that below.

[33] In the circumstances of this case, it is just to order Lancaster to post security for costs.

D. What is the appropriate quantum of security for costs?

[34] BKJV seeks $200,000 in security for costs to ensure that the court is not “weak-kneed” in its order. Lancaster suggests staged costs totalling $100,000 with $25,000 due immediately, $25,000 due after discoveries, $25,000 at pre-trial and $25,000 before trial. A security for costs award should take into account the factors in r. 57.01 like the complexity of the case, the quantum at issue, the importance of the issues and the anticipated length of the hearing. [8]

[35] The onus is on BKJV to persuade me as to quantum and the relevance of any of the factors. They seek “at least” $200,000 paid upfront. They have provided a draft bill of costs totalling $256,883.23 of partial indemnity costs. This includes a two-week trial. What I do not have is evidence or argument of the complexity of the case, the importance of the issues, or the basis of the trial length estimate.

[36] The action is also in its procedure infancy. I disagree with BKJV that Lancaster should pay the entire security for costs amount upfront. I prefer Lancaster’s suggestion to “pay-as-you-go”. Not only does a pay as you go plan recognize the volatility of the construction sector and the possibility that Lancaster may have to pay costs in other concurrent actions, but it also considers the unknown impact on Lancaster of the COVID19 pandemic now running its course in Ontario.

[37] I find it appropriate and just to order Lancaster to pay $60,000 to the end of oral discoveries. This considers BKJV’s unchallenged partial indemnity costs to date as well as its anticipated discovery costs.

Disposition

[38] For the foregoing reasons, I allow BKJV’s motion and order as follows:

a. I grant leave to BKJV to bring its motion pursuant to section 67(2) of the Construction Lien Act; b. I order Lancaster Group Inc. to pay into court security for costs in the amount of $60,000 representing partial indemnity costs up to and including completion of examinations for discovery of all parties including answering undertakings; and c. BKJV may move for further security for any remaining steps but not before answering all of their undertakings.

Costs

[39] The Superior Court of Justice is currently closed due to the COVID19 pandemic and only urgent matters are being heard. I strongly urge the parties to agree on costs of the motion. If they cannot, I adjourn the issue of costs to me in writing. I will advise the parties of timing and delivery method once those processes are firmly in place.

Master Sugunasiri Date: March 20, 2020