Court File and Parties

COURT FILE NO: CV-19-629030 DATE: 20200528 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

HAZELTON HOMES CORPORATION Plaintiff – and – MORTEZA KATEBIAN, PAYAM KATEBIAN, HOME TRUST COMPANY, IVAN TERZIEV, ELENA MECHTCHERIAKOVA Defendants

Counsel: Matthew Stroh & Peter Neufeld, for the Plaintiff Peter Smiley, for the Defendants, Morteza Katebian and Payam Katebian Jeffrey Kukla, for Home Trust Company F. Scott Turton, for the Defendants, Ivan Terziev and Elena Mechtcheriakova

HEARD: January 9, 2020

M.D. Faieta J.

Reasons for Decision

[1] The Respondent Morteza Katebian (“Katebian”) is the registered owner of two residential properties, 133 Boake Trail, Richmond Hill (“the Boake Property”) and 11 King High Drive, Vaughan (“the King High Property”), collectively referred to as “the Properties”. The Applicant, Hazelton Homes Corporation (“Hazelton”), claims that Katebian holds the properties in trust for Hazelton. The Respondent Home Trust Corporation (“Home Trust”) held the first mortgage on both properties and the Respondents, Ivan Terziev (“Terziev”) and Elena Mechtcheriakova (“Mechtcheriakova”), collectively the “Second Mortgagees”, held the second mortgage on both properties.

[2] Katebian defaulted on the mortgages. In November, 2018, Home Trust obtained default judgment against Katebian that required him to deliver possession of the Properties to Home Trust. held by the Second Mortgagees on the Properties. In December, 2018, the Second Mortgagees obtained default judgment against Katebian that required him to pay the amounts owed under the second mortgages and that he deliver possession of the Properties.

[3] On February 4, 2019, at Hazelton’s request, Justice Bale stayed the two writs of possession obtained by the Second Mortgagees on certain conditions, including the payment of certain arrears owed to Home Trust and the Second Mortgagees.

[4] On May 24, 2019, Hazelton was ordered to pay security for costs to Katebian in respect of Application (Court File #CV-18-606723) by Justice O’Brien in the amount of $30,000. Hazelton paid the required $30,000 into court as security for costs on July 31, 2019.

[5] On July 3, 2019, I ordered that the two Applications brought by Hazelton (Court File Nos. CV18-606723 and CV-19-612626) be converted into a single action. I am now case managing this action: See Hazelton Homes Corporation v. Katebian, 2019 ONSC 4015.

[6] On July 19, 2019 Hazelton was ordered by Justice Bale to pay costs of $22,600 to the Second Mortgagees and costs of $9,330.75 to Home Trust in relation to motions heard on February 4, 2019 and March 14, 2019.

[7] Hazelton commenced the converted action by Statement of Claim (Court File No. 19-629030), on October 11, 2019 (“the Claim”).

[8] The Boake Property was sold under power of sale on November 28, 2019 and the sum of $129,613.73 was paid into Court. The sum of $30,000 was withheld from the proceeds of sale by Home Trust in respect of the continuing litigation and $5,170.00 was held back in respect of an unpaid costs order granted by Justice Bale on July 19, 2019 in respect of the Boake Property. Both amounts are held in trust by Mr. Turton. By email dated November 29, 2019, Mr. Turton advised the other parties that he also held back $30,000 for the Second Mortgagees from the proceeds of sale. His email states:

As did Home Trust, I am also holding back $30,000 for costs of the action by Hazelton against the second mortgagees regarding their mortgage. Costs reasonably incurred to protect or enforce the mortgage are normally recoverable as part of the mortgage debt, however in this case, the proceeds of sale replaces the land as the security for the debt. This $30,000 will be held in trust pending further order of the court. If, in January, Justice Faieta orders security for costs against Hazelton in favour of the second mortgagees, and that security is paid, that may impact this $30,000 holdback

[9] The King High Property was sold under power of sale on January 7, 2020. Home Trust’s mortgage was discharged however there was a shortfall of about $200,000 on the amount owed to the Second Mortgagees. Home Trust’s mortgage payout statement provides a line item of $30,000 for “Holdback for legal costs of defending new action commenced by Hazelton”. It also included a line item of $56,46.98 for “Legal fees to date”.

[10] Various motions have been brought.

[11] Katebian and Payam seek an Order:

• dismissing Application CV-18-606723 and dismissing Application CV-19-612626 on the basis that another action is pending in Ontario between the same parties in respect of the same subject matter;
• pursuant to Rule 49.07(7) paying out the sum of $30,000 held by the Accountant of the Superior Court of Justice to the credit of the Application to counsel for Katebian;

[12] Katebian, Payam, Home Trust and the Second Mortgagees and Home Trust seek an order requiring Hazelton to post security for costs.

SHOULD SECURITY FOR COSTS BE GRANTED?

[13] Rule 56.01 of the Rules of Civil Procedure states:

WHERE AVAILABLE

56.01 (1) 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;

(b) the plaintiff or applicant has another proceeding for the same relief pending in Ontario or elsewhere;

(c) the defendant or respondent has an order against the plaintiff or applicant for costs in the same or another proceeding that remain unpaid in whole or in part;

(d) the plaintiff or applicant is a corporation or a nominal plaintiff or applicant, and there is good reason to believe that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent;

(e) there is good reason to believe that the action or application is frivolous and vexatious and that the plaintiff or applicant has insufficient assets in Ontario to pay the costs of the defendant or respondent; or

(f) a statute entitles the defendant or respondent to security for costs. R.R.O. 1990, Reg. 194, r. 56.01 (1).

(2) Subrule (1) applies with necessary modifications to a party to a garnishment, interpleader or other issue who is an active claimant and would, if a plaintiff, be liable to give security for costs. R.R.O. 1990, Reg. 194, r. 56.01 (2). [Emphasis added]

MOTION FOR SECURITY

Rule 56.03 (1) In an action, a motion for security for costs may be made only after the defendant has delivered a defence and shall be made on notice to the plaintiff and every other defendant who has delivered a defence or notice of intent to defend. R.R.O. 1990, Reg. 194, r. 56.03 (1). [Emphasis added]

[14] The principles governing the determination of a motion for security for costs were described by Justice Glustein in Coastline Corp. v. Canaccord Capital Corp., 2009 ONSC 21758, [2009] O.J. No. 1790, para. 7.

[15] In determining whether to grant security for costs, the court must make a two-step inquiry:

(1) The first step requires the moving party to show that it appears that the factor that it relies on as the basis for the motion exists;

(2) If the first step is satisfied, then the court must make an order that is just: Shuter v. Toronto Dominion Bank, 2007 ONSC 37475, [2007] O.J. No. 3435, paras. 63-64.

[16] The general purpose of security for costs is to provide a defendant with a reasonable measure of protection for their costs: City Commercial Realty (Canada) Ltd. v. Bakich, [2005] O.J. No. 6443 (C.A.), para. 5.

[17] Under Rule 56(1)(d) the moving party need not establish that the corporation has insufficient assets to pay costs but only that there is good reason to believe that the corporation has insufficient assets to pay costs. Nevertheless, 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. In other words, the moving party must raise a reasonable belief that the corporation is without real, substantial and exigible assets who realizable net value is sufficient to meet the amount of costs to be secured: City Commercial Realty (Canada) Ltd., paras. 5-9.

[18] Similarly, under Rule 56(1)(e) the moving party need not establish that the action is frivolous or vexatious but merely that there is good reason to believe that the action is frivolous or vexatious. A full inquiry into the merits of the action is not required in order to reach such conclusion: Schmidt v. Toronto-Dominion Bank, 1995 ONCA 3502, [1995] O.J. No. 1604 (C.A.), paras. 16-17.

[19] More recently, the Ontario Court of Appeal in Yaiguaje v. Chevron Corporation, 2017 ONCA 827, paras. 23-25 stated:

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.

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. …

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.

Positions of the Parties

[20] In its Claim, Hazelton alleges that it entered into two identical and revocable trust agreements with Katebian as trustee in respect of the Properties. Katebian and Payam have not filed a Statement of Defence. On this motion Katebian maintains, as he did in responding to the Applications, that he never signed the trust agreements and that he never agreed to hold the Properties in trust for Hazelton. The claim against Payam is premised on the theory that, amongst other things, he conspired with his father, Katebian, to unlawfully or fraudulently steal $1 million in equity from the Properties through the registration of fraudulent mortgages.

[21] In its Claim, Hazelton states that in the event that Hazelton is not determined to be the sole beneficial owner of the Properties, it seeks a declaration that:

• Home Trust holds the following sums on an express, implied, constructive or resulting trust in favour of Hazelton:
  • $102,790.16 with respect to all amounts paid to Home Trust by Hazelton on or about March 6, 2019 on Home Trust’s first mortgage on the Boake Property;
  • $85,852.35 with respect to all amounts paid by Hazelton to Home Trust on or about March 6, 2019 on Home Trust’s first mortgage on the King High Property;
• the Second Mortgagees hold the following sums on an express, implied, constructive or resulting trust in favour of Hazelton:
  • $64,362.13 with respect to all amounts paid to the Second Mortgagees by Hazelton on their second mortgage on the Boake Property on March 1, 2019;
  • $64,469.75 with respect to all amounts paid to the Second Mortgagees by Hazelton on their second mortgage on the King High Property on March 1, 2019
• certain fees paid to the Second Mortgagees that total $14,800 for each of Boake Property and the King High Property violate the Interest Act;

[22] The basis for Hazelton’s claim against Home Trust and the Second Mortgagees is two-fold. First, Hazelton claims that in the event that it is determined that Hazelton is found not to be the beneficial owner of the Properties, then they would be unjustly enriched by Hazelton in respect of the payments that it made on the mortgages with no juristic reason for the enrichment and, as a result, Hazelton seeks restitution for such payments. Second, Hazelton submits that the impugned fees violate the Interest Act.

[23] Both Home Trust and the Second Mortgagees have delivered a Statement of Defence. They submit that there is good reason to believe that the Claim is frivolous and vexatious as against them. They submit that the payments made by Hazelton to Home Trust and the Second Mortgagees were made as a condition of the stay of the writs of possession, which were sought by Hazelton, and granted by Justice Bale, as noted above. They further submit that the Claim is a collateral attack on the Order of Justice Bale which has not been appealed or otherwise set aside. Hazelton submits that its claim is meritorious and submits that the mortgagees’ position “… presupposes that Justice Bale intended to find Hazelton owed Home Trust the amounts for the outstanding principal and interest on the first mortgages, even if a Court later finds that Hazelton was not the owner of those Trust Properties”.

[24] They also submit that there is good reason to believe that Hazelton has insufficient assets in Ontario to pay their costs of defending this action:

• Hazelton is a shell corporation;
• According to an affidavit sworn September 11, 2019 by Laila Alizadeh, who states that she is its sole shareholder, Hazelton is a “holding company” with no assets, no income and no bank account;
• The funds claimed by Hazelton in this action were made by bank drafts that identified Skymark Capital Corporation, not Hazelton, as the remitter;
• Hazelton has failed to pay costs of $9,330.75 ordered by Justice Bale on July 19, 2019;
• As noted, Hazelton was required to post security for costs by Justice O’Brien in 2019;
• Master Jolley ordered Hazelton to post security for costs in another action, where it is also alleged that the defendant held a property in trust for Hazelton, in the amount of $56,000 (See Hazelton Homes Corporation v. Rakesh Mehta, 2019 ONSC 6344)
• A search on Teraview conducted on December 28, 2019 shows that there were no lands registered in Hazelton’s name in the counties of Brant, Ottawa-Carleton, Dufferin, Dundas, Elgin, Essex, Frontenac, Grey, Haldimand, Haliburton, Hastings, Kenora, Leeds, Niagara North, Middlesex, Muskoka, Northumberland, Durham, Oxford, Peel, Peterborough, Prince Edward, Simcoe, Sudbury, Thunder Bay, Victoria, Waterloo, Niagara South, Wellington, Hamilton-Wentworth, York and Toronto;

[25] Hazelton does not dispute the above evidence.

[26] Katebian states that it has incurred costs of the Applications that exceed $30,000 being the amount posted as security for costs. Its draft bill of costs estimates that its costs of this action will range from $69,517.04 on a partial indemnity basis to $97,226.22 on a substantial indemnity basis in addition to $11,271.11 in disbursements.

[27] Home Trust’s draft bill of costs estimates their cost of defending this action, assuming an eight day trial, will be $94,791.21 on a partial indemnity basis and $142,329.15 on a substantial indemnity basis.

[28] The Second Mortgagees’ draft bill of costs estimates that their cost of defending this action, assuming an eight day trial will be $87,525.33 on a partial indemnity basis and $129,193.00 on a substantial indemnity basis, inclusive of disbursements. I note that Mr. Turton’s email dated November 29, 2019 seems to suggest that a much lesser amount of security for costs may be appropriate.

[29] Hazelton submits that Katebian should not receive further security for costs:

• Katebian has not delivered a Statement of Defence;
• Katebian and Payam were found by the Ontario Securities Commission to have contravened the Securities Act, R.S.O. 1990, c. S.5 in, amongst other things, having contravened the Act by perpetrating frauds on the investors of a mortgage investment company in their capacity as directors of that company: See Money Gate Mortgage Investment Corporation (Re), 2019 ONSEC 40, paras. 311-316.
• Hazelton submits: “To permit Katebian to receive further security for costs would overlook the clear scope of Justice O’Brien’s order for security for costs and would also now overlook the finding of criminal wrongdoing against the Katebians concerning the Trust Properties”
• However, Hazelton did not refer to that part of the OSC’s decision that implicates the Properties. Further the OSC decision notes that Arash Missaghi is an undischarged bankrupt and an undisclosed principal of Money Gate Investment Mortgage Corporation. As noted in my earlier decision, both Katebian and Arash Missaghi (whose wife Laila Missaghi aka Laila Alizadeh is Hazelton’s sole officer and director) have had a long relationship and each notes the other’s criminal past: See Hazelton v Katebian, 2019 ONSC 4015, para. 15; See Money Gate Mortgage Investment Corporation (Re), 2019 ONSEC 40, paras. 25-27.
• The relief sought against Home Trust and the Second Mortgagees is primarily declaratory relief in the event that Hazelton is not found to be the sole beneficial owner of the Properties;
• Home Trust and the Second Mortgagees have unilaterally retained portions of the proceeds of sale of the Properties to cover their anticipated costs of this action;

[30] Hazelton submits that Home Trust should not be granted security for costs as it alleges that Home Trust has already secured most of its past and future legal fees by virtue of taking those costs from the sale of the Properties:

• Home Trust has claimed $30,000 as a hold back from the proceeds of sale as a costs holdback for the continuing litigation with Hazelton which is being held by Gowling WLG (Canada) LLP in trust;
• $56,486.98 from the sale of the King High Property for legal fees to date;
• $102,790.16 for Home Trust’s first mortgage on the Boake Property;
• $85,852.35 for Home Trust’s first mortgage on the King High Property.

[31] Hazelton also submits that Home Trust’s claim for security for costs is excessive because its exposure only arises if it is determines that the Katebian is the beneficial owner of the Properties.

Analysis

[32] I am not satisfied that the costs Order granted on July 19, 2019 by Justice Bale remains unpaid given that that the hold backs held by Mr. Turton and Gowlings. Accordingly, the mortgagees have not established that grounds under Rule 56.01(1)(c) exist.

[33] I have good reason to believe that the claim against Home Trust and the Second Mortgagees is frivolous and vexatious. At Hazelton’s request, the enforcement of the writs of possession was stayed on conditions. One condition required Hazelton to pay all arrears of principal and interest under the two mortgages within 20 days. Had Hazelton chosen not to pay the arrears, the stay would have lapsed. Hazelton chose to pay the arrears because it wanted the benefit of the stay, not because it was legally compelled to do so. I find that the mortgagees have established that grounds under Rule 56.01(1)(e) exist.

[34] I also have good reason to believe that Hazelton, a corporation, has insufficient assets in Ontario to pay the costs of the defendants. The evidence regarding Hazelton’s lack of any financial means is undisputed – it is a shell company without assets and income.

[35] In respect of the submission that Rule 56.03 bars the request for security for costs by Katebian and Payam since they have not delivered a Statement of Defence, However the respective positions of Hazelton and Katebian are well known given that this action was proceeded by Hazelton’s two Applications to which Katebian responded. However, Payam was not a party to those proceedings. Further, the language of Rule 56.03 is very clear in requiring a Statement of Defence to be delivered as pre-condition of bringing such motion. Accordingly, I adjourn Katebian’s and Payam’s motion for security for costs pending their delivery of a Statement of Defence to a date to be determined at the teleconference described below.

[36] Further, in considering the justice of this order for security for costs from the findings made by the OSC regarding Katebian’s and Payam’s fraudulent conduct, given that Arash Missaghi appears to be an undisclosed principal of Hazelton, in addition to his past activities, it does not rest with Hazelton to argue that it stands on a higher moral ground that Katebian and Payam. In any event, Hazelton has not adequately explained how Katebian’s and Payam’s conduct with Money Gate is relevant to these Properties and why Hazelton should benefit.

[37] In making the following orders for security for costs, I acknowledge that:

• In respect of the Applications, the sum of $30,000 has been paid into Court for Katebian’s benefit pursuant to Justice O’Brien’s Order. I order that such amount shall be credited to Katebian for purposes of this action.
• Home Trust has, on the closing of the sale of the Properties, withheld the total amount of $60,000 for this litigation.
• The Second Mortgagees, on the closing of the sale of the Boake Property, withheld $30,000 for this litigation.

[38] The $60,000 holdback held by Home Trust and the $30,000 holdback held by the Second Mortgagees as security for their costs of this action shall be paid into court as security for costs to their respective credit.

[39] No additional amount as security for costs shall be made in respect of Home Trust given that it has withheld $60,000.00 for purposes of responding to this litigation.

[40] Given that the Second Mortgagees have already withheld $30,000, I order Hazelton to post security for costs of $30,000 for the benefit of the Second Mortgagees as follows:

• $15,000 within 60 days;
• $10,000 within 30 days of the commencement of examinations for discovery;
• The balance to be paid 60 days before the start of trial.

[41] I find that the above amounts ($60,000 for each of Home Trust and the Second Mortgagees) are just in the circumstances. Given the contingent nature of the claim against them, I expect that Home Trust and the Second Mortgagees will cooperate in their efforts in defending this action given their common positions.

[42] I direct the parties to attend a teleconference on June 3, 2020 at 3:00 pm for the purpose of receiving their costs submissions in respect of this motion. I direct the parties to exchange their costs outline by June 1, 2020 and to deliver a copy to my assistant at christine.cappadocia@ontario.ca.

Mr. Justice M. D. Faieta Released: May 28, 2020