Court File and Parties

COURT FILE NO.: CV-18-0178-00 DATE: July 31, 2020 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 1324789 ONTARIO INC, Plaintiff

AND:

GAVIN MARSHALL, MAGENTA WATERFRONT DEVELOPMENT CORPORATION, HELIOTROPE INVESMENT CORPORATION, MAGENTA CAPITAL CORPORATION, MAGENTA MORTGAGE INVESTMENT CORPORATION, MAGENTA II MORTGAGE INVESTMENT CORPORATION, and MAGENTA III MORTGAGE INVESTMENT CORPORATION, Defendants

BEFORE: Justice Patrick Hurley

COUNSEL: Charles Hammond, for the Plaintiff Adam Stikuts and Denise Sayer, for the Defendants

HEARD: December 12, 2019 (in person) and July 14, 2020 (by telephone)

Endorsement

[1] The defendants are seeking an order for security for costs. Their motion is based primarily on two unpaid costs awards. The first is in the amount of $120,000 and was made on March 29, 2019 following the dismissal of the plaintiff’s motion for an interlocutory injunction and appointment of a receiver. The second was for $5,000 and was awarded by the Divisional Court on November 29, 2019 after it dismissed the plaintiff’s motion for leave to appeal this decision. The plaintiff has not voluntarily paid anything towards these costs, but the amount has been reduced to $120,603.06 because of the defendants’ garnishment of funds owed to the plaintiff by a third party.

[2] Rule 56.01 of the Rules of Civil Procedure provides:

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) .

[3] In Yaiguaje v. Chevron Corporation, 2017 ONCA 827, the Court stated the overriding legal considerations in a motion for security for costs at paras. 19 and 23 – 25:

In determining whether an order should be made for security for costs, the “overarching principle to be applied to all the circumstances is the justness of the order sought”: Pickard, at para. 17 and Ravenda Homes Ltd. v. 1372708 Ontario Inc., 2017 ONCA 556, at para. 4.

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. 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.).

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.

[4] Master Glustein (as he then was) summarized the proper approach in this type of motion in Coastline Corp. v. Cannacord Capital Corp. at para. 7:

I apply the following legal principles:

(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 56.01.

(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.

(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.

(viii) The evidentiary threshold for impecuniosity is high, and “bald statements unsupported by detail” are not sufficient. The threshold can only be reached by “tendering complete and accurate disclosure of the plaintiff’s income, assets, expenses, liabilities and borrowing ability, with full supporting documentation for each category where available or an explanation where not available”.

(ix) To meet the onus to establish impecuniosity, “at the very least, this would require an individual plaintiff to submit his most recent tax return, complete banking records and records attesting to income and expenses”

(x) A corporate plaintiff who claims impecuniosity must demonstrate that it cannot raise security for costs from its shareholders and associates, i.e. it must demonstrate that its principals do not have sufficient assets. Evidence as to the “personal means” of the principals of the corporation is required to meet this onus. A corporate plaintiff must provide “substantial evidence about the ability of its shareholders or others with an interest in the litigation to post security”. “A bare assertion that no funds are available” will not suffice.

(xi) Consequently, full financial disclosure requires the plaintiff to establish 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 the ability of the plaintiffs to borrow funds, and details of any assets disposed of or encumbered since the cause of action arose

(xii) Because the plaintiff has the onus to establish impecuniosity, a defendant “can choose not to cross-examine if the plaintiff fails to lead sufficient evidence”. The decision not to cross-examine does not convert insufficient evidence into sufficient evidence; and

(xiii) When an action is in its early stages, an installment (also known as “pay-as-you-go”) order for security for costs is usually the most appropriate. [Citations omitted]

[5] The defendants have satisfied their onus on at least one of the grounds enumerated in Rule 56.01 because of the unpaid costs awards.

[6] I have concluded that an order for security for costs would be just for the following reasons:

a. This is a commercial dispute which both sides have chosen to litigate through multiple interlocutory motions. It was within their reasonable expectations that, if complicated motions were brought which took up several days in court, the unsuccessful party would face a large costs award that, if unpaid, would have an impact on their ability to continue with the litigation.

b. There is evidence that the principals of the plaintiff, Gary and Martha Beach, have sold assets and mortgaged properties, receiving funds which could have been applied to the costs awards but instead they chose to pay other creditors, none of whom had a court order against the plaintiff or them.

c. While the first costs award was outstanding, the plaintiff brought a motion which was described by the presiding Justice as “reprehensible litigation conduct”, warranting an award of substantial indemnity costs: Canadian Western Trust Company v. 1324789 Ontario Inc., 2019 ONSC 5948.

d. Mr. Beach has not been completely forthcoming in the production of financial records which would establish how much money he and his wife have received through the sale and mortgaging of their assets. In addition to not producing documents which would identify the funds which they received and to whom they were paid, Mr. Beach took under advisement the production of relevant financial records which, because of the passage of time from his cross-examination, now constitute refusals.

e. The plaintiff has not voluntarily paid anything towards the costs awards. The only proposals have been to either assert that the costs could be offset against costs that have not (and may not be) awarded to it for other interlocutory motions or to agree to the release of funds currently held in trust which the defendants claim belong solely to them.

f. I heard a series of motions in December 2019. Of these, the defendants were successful in five of them, including three summary judgment motions. I dismissed two motions brought by the defendants. I reserved on the issue of costs until all of the motions, including this security for costs motion, were heard. I permitted the plaintiff to bring their motions despite the nonpayment of the past costs awards. The plaintiff is now facing further costs awards which may also not be paid, especially given the claim that neither it nor the Beaches have sufficient liquid assets to pay the current outstanding costs awards.

g. The plaintiff has been dilatory in advancing the litigation as a whole. The lawsuit was started in May 2018 and remains at the pleadings stage. The plaintiff has not delivered an affidavit of documents nor proposed or agreed to a discovery plan.

h. In prior decisions, I have expressed my view that the plaintiff does not have a strong claim: 1324789 Ontario Inc. v. Marshall, 2019 ONSC 517; Canadian Western Trust Company v. 1324789 Ontario Inc, 2020 ONSC 810.

i. The plaintiff has the protection of two joint venture agreements which were negotiated at arm’s length with the benefit of legal advice. These agreements set out the rights and obligations of the parties. Neither side has repudiated these agreements and the plaintiff is at liberty to commence another lawsuit should the defendant Magenta Waterfront Development Corporation default in any of its obligations under the agreements. This is not a case where, if security for costs is granted and the plaintiff is unable to continue the lawsuit, it will be without a remedy.

j. This motion deals only with the plaintiff’s action. It has raised many of the claims made in this lawsuit in its statements of defence and counterclaim in the actions commenced by one or more of the defendants against it. Thus, it will still be able to litigate those claims.

[7] The plaintiff contends that Mr. Marshall improperly interfered with the sale of assets by it in order to impede the payment of the costs awards and that the defendants are bringing this motion as a litigation tactic, designed to prevent the case from being heard on the merits.

[8] With respect to the first allegation, while Mr. Marshall’s contact with third parties might have been ill advised, he has provided a plausible explanation for his conduct. In any event, the purported interference did not prevent the transaction from proceeding and none of the money received by the plaintiff went to pay the outstanding costs awards.

[9] The second allegation has no merit. If the plaintiff had paid the costs awards, this motion would not likely have been brought and, even if it was, there would not have been a reasonable prospect of success because both parties would be on an equal footing – corporate litigants who have incurred and paid the substantial costs of multiple interlocutory proceedings. There would be no reason in those circumstances for either party to obtain an order for security for costs.

[10] The plaintiff also submits that I should exercise my discretion and not order security for costs because the defendants have been unreasonable in refusing the proposals to pay the outstanding costs awards by offsetting the amount against possible future costs awards in its favour or the release of trust funds that would satisfy the costs awards. I have not decided the costs for the other motions and it would be speculative, at best, to conclude that the plaintiff would receive sufficient costs to extinguish its current obligation to the defendants. As I previously stated, the defendants claim that all the proceeds in trust belong to it. Whether that is true or not cannot be determined without either a motion or a trial which would not take place for many months, if not longer. This security for costs motion has been outstanding since May 2019 and should not be postponed any longer pending the resolution of the dispute over the ownership of those funds.

[11] The plaintiff cites the decision in European Flooring Contractor Services Limited v. Toddglen Ilofts Limited, 2013 ONSC 6445 as authority for the position that the defendants’ counterclaim should preclude an order for security for costs. This case is distinguishable as the counterclaim is not the “real driver of the action”: European at para. 33.

[12] Finally, Mr. Hammond advised me at the hearing of the motion that he expects that the plaintiff will be able to pay the outstanding costs with accrued interest within 45 days because of a pending sale or mortgaging of assets owned by the Beaches. As a result, he requested that any decision on this motion be delayed for that period of time because, if the costs are paid, there would be no reason to grant the motion. Mr. Hammond is relying on information provided to him by his clients and there was no affidavit filed by Mr. Beach which provided details of this pending transaction. There was no reasonable explanation for why this information was not filed in sworn form nor was leave requested to deliver a supplementary affidavit outlining the pending transaction.

[13] The parties are substantially apart on the appropriate amount should I order security for costs. The defendants submit that it should be $200,000 but did not explain with sufficient detail how this amount was calculated. The plaintiff says that it should be only be $10,000 because that would be a reasonable amount for the defendants’ costs with respect to documentary discovery and examinations for discovery.

Disposition

[14] The motion is granted. Approaching the matter in a holistic manner as Yaiguaje directs, I find that it would be just to order that the plaintiff post security for costs on the following terms:

1. Payment of $150,000 within 90 days of the date of this decision.
2. If the plaintiff pays the outstanding costs awards plus accrued interest under the Courts of Justice Act to the defendants within 60 days of the hearing of the motion, the amount payable by it as security for costs would be reduced to $20,000 payable within six months of the date of this decision.

[15] I have substantially reduced the amount from what it might otherwise be in a case of this nature because the parties have already produced voluminous documents and conducted extensive cross examinations. They should be able to reach an agreement on what further documents need to be produced as well as an agreement that the cross examinations can be used at trial in the same manner as an examination for discovery and that the examinations for discovery be limited to issues that have not already been canvassed during the cross examinations. This order is intended to apply only to the completion of the examinations for discovery and the defendants can, if so advised, bring a further motion for security for costs relating to the trial.

[16] The defendants are the successful parties and are presumptively entitled to costs. I will release an endorsement shortly addressed to all counsel setting out what material I require to fix the costs for all of the motions.

Hurley, J Date: July 31, 2020