Court File and Parties

COURT FILE NO.: CV-19-10 DATE: 2020-08-04

ONTARIO

SUPERIOR COURT OF JUSTICE

B E T W E E N:

1022403 Ontario Ltd, c.o.b. as Mirmil Products C. Skipper, for the Plaintiff/Moving Party on Motion for Security for Costs, Respondent on Motion to Add M Builds Plaintiff

- and -

M Builds (NWO) Limited Partnership and Man-Shield (NWO) Construction Inc. R. Johansen, for the Defendants on Motion for Security for Costs. Moving Party on Motion to Add M Builds Defendants

HEARD: July 14, 2020, at Thunder Bay, Ontario Mr. Justice F.B. Fitzpatrick

Judgment On Motions

[1] There are two motions before the Court in this garnishment proceeding. Presently, the parties to this matter and their respective status is as noted in the style of cause above. The City of Thunder Bay (the “City”) will be a party on the ultimate garnishment hearing. They have filed materials on the main matter. The City took no position on any of the motions before the Court. As counsel for the parties appearing today argued the motions together, it warranted a single judgment.

[2] The first motion, brought relatively recently in this proceeding, is by M Builds (NWO) Limited Partnership (“M Builds”) seeking to either be added as a co-defendant to the garnishment proceeding or for an order joining M Builds as a necessary party to the proceeding. Rule 60.08(16)(b) allows the court on motion by an “interested person” to determine the rights and liabilities of the garnishee, the debtor, any co-owner of the debt and any assignee or encumbrancer. 1022403 Ontario Ltd, c.o.b. as Mirmil Products (“Mirmil”) admits that based on the material filed, M Builds appears to be an interested person as it asserts that it owns the funds which have been paid in to court and are now subject of this proceeding. Mirmil does not admit that M Builds owns the funds at issue.

[3] While it may have been more technically correct for M Builds to have framed its motion as a specific request for the court to adjudicate on its claim to the garnished funds, rather than be added as a party to the proceeding as initiated by Man-Shield, the practical result is the same. It is therefore ordered that M Builds will be entitled to file material and make submissions on the garnishment hearing. M Builds will be treated as a party for the purposes of any costs that may be awarded for or against it depending on the ultimate disposition of the garnishment proceeding. There will be no costs awarded to M Builds or against Mirmil in respect of M Builds motion heard today.

[4] The second motion is by Mirmil seeking an order for security for costs against Man-Shield (NWO) Construction Inc. (“MS”).

Background

[5] Mirmil is a judgment creditor of MS pursuant to a trial judgment of Madam Justice Pierce dated January 8, 2018, and a further Judgment for Costs of the Divisional Court sitting at Thunder Bay, dated June 25, 2019. In November 2019 with the judgment and the order for costs, totaling almost $400,000, unpaid and unaddressed by MS, Mirmil caused a garnishment to be issued and served upon the City. The City responded by garnishing funds it believed were owed by the City to MS. In affidavit materials filed for the garnishment hearing, the deponent on behalf of the City stated the City honoured the garnishment because it believed it owed these monies to MS further to a construction contract for a major project in the City. The City and MS have identified the project as being governed by an agreement they have called the T-14 contract. The T-14 contract was entered into in 2014 and was valued at some 3.2 million dollars. Work on the project was continuing into late 2019.

[6] In December 2019, MS served a notice of motion to Mirmil and the City and a subsequent motion record, claiming, at that time, the garnished funds were not owing to MS, but were being claimed by Man-Shield Construction Inc., a company related to MS. In January of 2020, I directed that the garnished funds of $391,634.57 were to be paid by the City to the Sheriff for the Northwest Region, pending determination by this Court under Rule 60.08(16) as to who is ultimately to receive these funds.

[7] Subsequent notices of motion and affidavits, filed by MS have changed the party that MS says are entitled to the garnished funds from the City. MS now takes the position that the funds were actually owed by the City to M Builds. MS is one of ten limited partners of M Builds.

[8] The question of who is entitled to the garnished funds will be answered on another day. To date, the materials filed in this proceeding, which Rule 60.08(16)(d) says may be conducted in a summary way, consist of 13 affidavits.

[9] To date, no cross-examinations have been conducted on any of the affidavits filed.

The Governing Rule

[10] The provisions of Rule 56 govern a motion for security for costs. Rule 56.01(2) provides that Rule 56 applies to garnishment proceedings. Mirmil is a respondent in the garnishment proceeding. It is trite law that a respondent moving for security for costs must first establish that the case falls within one of the branches of Rule 56.01. MS concedes that Mirmil has two unpaid orders for costs in this proceeding. Mirmil satisfies a test under Rule 56.01(1)(c) as having a prima facie entitlement to an order for security for costs. The settled authorities under Rule 56 provide that the onus now shifts to MS to prove either:

1. it has sufficient assets in Ontario or a reciprocating jurisdiction to satisfy any costs award; or
2. it is impecunious and its claim is not plainly devoid of merit; or
3. it is neither impecunious nor has sufficient assets to post security but does have a good chance of success on the merits.

Positions of the Parties

[11] It is admitted that Mirmil is entitled to an order for security for costs pursuant to the provisions of Rule 56.01(c). MS asserts it has assets sufficient to satisfy any award of costs in the garnishment proceeding. It does not assert it is impecunious. MS also argues it has a good chance of success on the merits.

[12] Mirmil argues the shift of onus mandated by the case law has not been met by the materials filed by MS. It submits the affidavit evidence does not adequately demonstrate that MS has sufficient assets to satisfy an award of costs in this proceeding. Mirmil further argues that MS’s position that ultimately it is not entitled to the funds is devoid of merit.

Has MS demonstrated it has sufficient assets to satisfy any costs award?

[13] I agree with the submission of Mirmil that MS has not sufficiently demonstrated in the material that has been placed before the Court, that MS has assets sufficient to satisfy any award of cost in the garnishment proceeding. The only asset that is mentioned in the affidavit material of MS is a vague reference to trust funds held in an arbitration proceeding unrelated to the initial construction contract that gave rise to Mirmil’s claim or the T-14 contact. I am aware of this arbitration proceeding as the result of my acting as case management judge in respect of a major piece of construction litigation involving MS.

[14] In any event, the evidence tendered by MS is not sufficient to establish that MS can satisfy any award of costs in the garnishment proceedings. There are no particulars of the amount held in trust, who holds the funds or why MS reasonably thinks they will be successful in the arbitration. It seems to me that disclosure of where funds in the arbitration are being held would be a good start in the “full disclosure” obligation MS has on a motion of this sort. The affidavit evidence falls well short of this. Counsel for MS was plain during submissions that MS “has no cash”.

[15] MS does not take the position that it is impecunious.

Does MS have a good chance of success on the merits?

[16] Based on the submissions of counsel for MS and taking all of its materials together, it seems to me that success for MS on the garnishment hearing would be a finding that the funds garnished did not belong to it. At first blush this strikes me as an unusual position for a party on a garnishment hearing. Why bother wasting time and money on lawyers and preparing materials if some other party to whom you admittedly owe a lot of money by virtue of a judgment in the Ontario Superior Court of Justice, has found a way to obtain funds necessary to satisfy that judgment from a source that really belongs to another party? One would expect the party to whom the monies were properly owed to be the first off the mark in asserting the funds were wrongfully garnished. This is not how events have unfolded in this case.

[17] Initially, MS pointed the Court to another, albeit somehow related entity, as the proper owner of the funds. Counsel for Mirmil in submissions ask why that entity did not bring the motion first. This submission was not addressed by counsel for MS.

[18] In fact, it took almost two months after garnishment was levied before M Builds came forward to assert that in fact it is owed the money. The subsequent affidavit material filed by MS, and specifically the second affidavit of Peter Belluz sworn January 27, 2020, paragraph 3 stated that Mr. Belluz has conducted “further investigations”. Later in his affidavit, at paragraph 8, a purchase order is referred to, and exhibited, which Mr. Belluz testifies shows that the City issued a Purchase Order for the T-14 contract to M Builds. Unfortunately, Mr. Belluz’s affidavit does not state when this particular purchase order was issued.

[19] It is important to note, the affidavit evidence of the City in answer to the garnishment proceeding initiated by MS, indicates that at all material times the T-14 contract was between the City and MS. This affidavit evidence was given on February 14, 2020, after the second affidavit of Mr. Belluz of January 27, 2020 was sworn. The affidavit was sworn by an employee of the City, Brian Newman, the lead project engineer in respect of the T-14 contract. At paragraph 3 of his affidavit he indicates that in June 2014 Man-Shield (NWO) Construction Inc. (“Man-shield”) (his short form my emphasis) was the successful bidder for the T-14 contract. At paragraph 11 of his affidavit Mr. Newman states “at no point during the course of T-14 did the City receive a request from Man-shield to assign the T-14 Contact to a new entity, nor did the City at any point during the T-14 Contract consent to such an assignment.”

[20] It seems to me that during submissions on the actual garnishment hearing, I will be called upon to make a credibility assessment between the varied evidence as to whom the City owes the funds now paid in to Court. At this point there have been no cross examinations. Courts are often at times reluctant to make credibility assessments on motions. However, the jurisprudence made concerning Rule 56 requires me to make a determination if MS has a good chance for success on the ultimate case, which for this matter is a garnishment motion, in order for me to avoid making MS post security for costs.

[21] I think that if the “chance of success” test is to be taken at all seriously, some degree of weighing of the evidence has to be undertaken at this point despite the fact that no party decided to do cross examinations on the affidavit material filed to date. Counsel for the parties have indicated cross examinations will be undertaken following the release of this decision.

[22] Given the changes in position by MS, the relatively late assertion that the funds belong to M Builds, and the position of the City that the funds were in fact owed to MS and not M Builds, it does not seem to me that MS has a good chance for success on the ultimate motion. The position of the disinterested third party, the City, that it owed the money to MS and not M Builds seems most persuasive to me on the issue of whether or ultimately MS will persuade me that in fact these funds were not owed to it.

[23] MS also relies on an argument that the funds at issue are not garnishable at all because they were impressed with a trust pursuant to the trust provisions of the Construction Act, R.S.O. 1990 c. C-30 sections 7, 8 and 11. These sections are as follows:

Owner’s trust Amounts received for financing a trust

7 (1) All amounts received by an owner, other than the Crown or a municipality, that are to be used in the financing of the improvement, including any amount that is to be used in the payment of the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 7 (1).

Amounts certified as payable

(2) Where amounts become payable under a contract to a contractor by the owner on a certificate of a payment certifier, an amount that is equal to an amount so certified that is in the owner’s hands or received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 7 (2).

Where substantial performance certified

(3) Where the substantial performance of a contract has been certified, or has been declared by the court, an amount that is equal to the unpaid price of the substantially performed portion of the contract that is in the owner’s hands or is received by the owner at any time thereafter constitutes a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 7 (3).

Obligations as trustee

(4) The owner is the trustee of the trust fund created by subsection (1), (2) or (3), and the owner shall not appropriate or convert any part of a fund to the owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to the contractor by the owner. R.S.O. 1990, c. C.30, s. 7 (4).

Contractor’s and subcontractor’s trust Amounts received a trust

8 (1) All amounts,

(a) owing to a contractor or subcontractor, whether or not due or payable; or

(b) received by a contractor or subcontractor, on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor. R.S.O. 1990, c. C.30, s. 8 (1); 2017, c. 24, s. 66.

Obligations as trustee

(2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor. R.S.O. 1990, c. C.30, s. 8 (2); 2017, c. 24, s. 66.

Contractor’s, subcontractor’s duties re trust funds

8.1 (1) Every person who is a trustee under section 8 shall comply with the following requirements respecting the trust funds of which he or she is trustee:

1. The trust funds shall be deposited into a bank account in the trustee’s name. If there is more than one trustee of the trust funds, the funds shall be deposited into a bank account in all of the trustees’ names.
2. The trustee shall maintain written records respecting the trust funds, detailing the amounts that are received into and paid out of the funds, any transfers made for the purposes of the trust, and any other prescribed information.
3. If the person is a trustee of more than one trust under section 8, the trust funds may be deposited together into a single bank account, as long as the trustee maintains the records required under paragraph 2 separately in respect of each trust. 2017, c. 24, s. 8.

Multiple trust funds in single account

(2) Trust funds from separate trusts that are deposited together into a single bank account in accordance with subsection (1) are deemed to be traceable, and the depositing of trust funds in accordance with that subsection does not constitute a breach of trust. 2017, c. 24, s. 8 …

Where trust funds may be reduced

11 (1) Subject to Part IV, a trustee who pays in whole or in part for the supply of services or materials to an improvement out of money that is not subject to a trust under this Part may retain from trust funds an amount equal to that paid by the trustee without being in breach of the trust. R.S.O. 1990, c. C.30, s. 11 (1); 2017, c. 24, s. 66.

Application of trust funds to discharge loan

(2) Subject to Part IV, where a trustee pays in whole or in part for the supply of services or materials to an improvement out of money that is loaned to the trustee, trust funds may be applied to discharge the loan to the extent that the lender’s money was so used by the trustee, and the application of trust money does not constitute a breach of the trust. R.S.O. 1990, c. C.30, s. 11 (2).

[24] Mr. Belluz deposed in his June 25, 2020 affidavit, at paragraphs 24 to 26 that M Builds paid all the sub-contractors to the T-14 contract in 2019. MS therefore submits that these payments put M Builds in the position of a trust beneficiary pursuant to the provisions of section 7 and 11 of the Construction Act.

[25] I am not persuaded by MS’s argument that the trust provisions of the Construction Act will apply therefore giving it a good chance of success on the garnishment motion. There is no evidence before me that any sub trades of the T-14 contract were unpaid at the time the funds were garnished. In fact, Mr. Belluz deposes they were paid by M Builds. This eliminates any concerns the Court would have that the statutory trust under section 8 will be engaged to protect third party sub-contractors. As to MS argument that M Builds is a statutory beneficiary pursuant to section 7, I observe that section 7 expressly does not impose trust obligations on a municipality. Therefore, it seems to me unlikely that MS’s trust argument will prevail.

[26] Based on the material before me, and in particular the evidence of what I view as a completely disinterested third party, it is my view that MS does not have a good chance for success on the motion. The evidence of the City is persuasive at this point as to whom the money belongs. It belongs to MS. The City did not consent to an assignment to M Builds as Mr. Belluz asserts. It also seems incredible that where the sum of some $300,000 was at issue, that a party would not really be sure to whom the money was owed when it got garnished by a judgment creditor. Yet this is the essence of Mr. Belluz’s evidence on this motion. He asserts he needed to do further investigations. This is not a particularly persuasive assertion.

[27] MS also relies on a decision of Nieckarz J. of January 2019 where she declined to order security for costs against MS for the Divisional Court appeal. In my view, this decision is distinguishable because it was dealing with a different test for security for costs in the face of any appeal. Also at the time, Mirmil did not have an unpaid cost award pending against MS because that very order was under appeal. The situation that presents to me is very different than that presented to Nieckarz J.

[28] It is my decision that MS is ordered to post security for costs on the garnishment motion it has placed before the Court.

[29] Mirmil asks for a partial indemnity sum of $46,879.10 (inclusive of HST and disbursements) to be posted within 30 days of this decision by MS. The bill of costs in support of this request was put together pre pandemic. It was not of great assistance to the Court. For example, it included disbursements for travel. It included “clerk time.” It included costs for cross examinations anticipating they will be done in person. I find these will not likely be incurred for the garnishment hearing. I also find the costs, even on a partial indemnity basis to be extremely high for what I would expect to be awarded against MS if Mirmil is ultimately successful.

[30] Any order for costs or security for costs must be made with a view as to what might ultimately be owed by the responding party, as opposed to what the moving party can decide to charge its own client.

[31] MS argues the quantum of security for costs on a motion of this degree of complexity should be in the range of $12,000.00 to $15,000.00. I agree with this submission.

[32] I order MS to post the sum of $6,000.00 within 30 days of the release of these reasons. A further $6,000.00 is to be posted by MS 30 days following the date cross examinations are completed. These sums are to be paid to the accountant for the Superior Court of Justice on account of this action.

[33] Based on my decision, Mirmil would normally be entitled to costs for its motion for security for costs. I will entertain submissions in respect of these costs at the end of the hearing of the garnishment motion.

[34] The next step in this proceeding is for the parties to conduct any cross examinations they see fit to do on the affidavits at issue. These cross examinations are to be conducted virtually unless all counsel and parties agree to do them in person. Once cross examinations are complete, the parties will schedule a teleconference with me to determine a date to hear the garnishment motion.

[35] If there are any other matters the parties need to address in the interim, I am prepared to do further teleconferences with counsel.

“original signed by” The Hon. Mr. Justice F.B. Fitzpatrick

Released: August 4, 2020