McArthur v. Neumann, 2020 ONSC 66

COURT FILE NO.: 56646/16 (St. Catharines)

DATE: 20200109

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

SAMUEL MCARTHUR also known as SAM MCARTHUR

Plaintiff

– and –

GARY NEUMANN and NIAGARA REGIONAL MORTGAGE SERVICES INC.

Defendants

Luigi De Lisio, for the Plaintiff (Responding Party)

Frederick Caplan, for the Defendants (Moving Parties)

HEARD: December 16, 2019

R. A. Lococo, J.

REASONS FOR DECISION

I. Introduction

1The Defendants bring a motion to require the Plaintiff to provide security for costs. For the reasons below, I am dismissing the motion.

2The Plaintiff Samuel McArthur has brought an action against the Defendants Gary Neumann and Niagara Regional Mortgage Services Inc., alleging financial loss arising from breach of fiduciary duty and breach of trust. According to the Plaintiff, the following is the factual basis for his claim.

3In 2003, the Plaintiff received a lump sum pay-out of his pension from his former employer in the amount of $723,000. The Plaintiff invested those funds in mortgages arranged through the Defendants, who carried on business as mortgage brokers. The funds were invested in a total of 18 mortgages secured by 12 properties. The mortgages were generally second or third mortgages. The funds were invested in the period from 2003 to 2006. The Plaintiff says that in making those investments, he relied on the Defendants’ representations with respect to the value of the mortgaged properties and the amounts to be loaned under the mortgages. The Plaintiff’s return from the mortgages declined over time as mortgagees defaulted and properties were sold under power of sale. The proceeds of sale were generally not sufficient to repay the amounts owing to the Plaintiff under the mortgages. In about 2009, the Plaintiff consulted a lawyer with respect to his concerns about declining return from the mortgages. No action was taken against the Defendants at that time. By 2014, the Plaintiff was receiving no return from his mortgage investments. He commenced his action against the Defendants in 2016, claiming damages for breach of fiduciary duty and breach of trust.

4The Plaintiff says that as a result of his losses arising from the Defendants’ conduct and other financial setbacks, he now has no assets and little or no income other than entitlements under Old Age Security, Canada Pension Plan and limited provincial tax credits.

5With that background, the Defendants have brought a motion to require the Plaintiff to provide security for costs in the amount of $60,000 plus HST, for a total of $67,800. That amount is based on the Defendants’ estimate of costs they expect to incur in defending the Plaintiff’s action. The Defendants submit that a security for costs order is justified in all the circumstances, including the lack of merit of the Plaintiff’s action, his inability to satisfy a costs award, and his delay in bringing his action. In response, the Plaintiff disputes that the Defendants have established the required basis for a security for costs order. He also disputes the justness of making such an order since, among other things, it would reward the Defendants for their wrongful acts that led to his dire financial position and would prevent the Plaintiff from pursuing his action.

II. Legal principles – security for costs

6Pursuant to rule 56.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, the court has the discretion to “make such order for security for costs as is just” where it appears that one or more of six specified circumstances set out in clauses (a) to (f) of that rule are present. When applying r. 56.01(1), the case law indicates that the court undertakes a two-step process. The initial onus is on the defendants to show that it appears one or more of the circumstances set out in the rule are present (Hallum v. Canadian Chiropractic College (1989), 1989 4354 (ON SC), 70 O.R. (2d) 119 (H.C.), at p. 123). If the defendant discharges this burden, the onus then shifts to the plaintiff to establish that an order for security for costs would not be just in all the circumstances (Coastline Corp. v. Canaccord Capital Corp., 2009 21758 (ON SC), [2009] O.J. No. 1790 (S.C.), at para. 7). The second stage inquiry requires the exercise of judicial discretion, taking into account a multitude of factors that may assist in determining the justice of the case (Chachula v. Baillie (2004), 2004 27934 (ON SC), 69 O.R. (3d) 175 (S.C.), at para. 12).

7The case law also indicates that at the second stage, the plaintiff can satisfy its onus by demonstrating either that:

a. The plaintiff has sufficient assets in Ontario to satisfy a costs order, or

b. The plaintiff is impecunious, and the claim is not plainly devoid of merit, or

c. If the plaintiff is not able to establish impecuniosity but does not have sufficient assets to meet a costs order, the action has a good chance of success (see Coastline, at para. 7, and Zeitoun v. Economical Insurance Group (2008), 2008 20996 (ON SCDC), 91 O.R. (3d) 131 (Div. Ct.), at paras. 49-50, aff’d 2009 ONCA 415, 96 O.R. (3d) 639).

8Further guidance relating to security for costs is provided by the Ontario Court of Appeal in two more recent cases, Yaiguaje v. Chevron Corp., 2017 ONCA 827, 138 O.R. (3d) 1, and Novak v. St. Demetrius (Ukrainian Catholic) Development Corporation, 2018 ONCA 219, 25 C.P.C. (8th) 225. In each of those cases, the Court of Appeal reviewed a security for costs decision of a single justice of that court under r. 61.06(1), which governs security for costs motions when a matter is under appeal to the Court of Appeal. The same principles apply with respect to security for costs motions under r. 56.01(1) (subject to the caveat discussed later in these reasons with respect to r. 61.06(1)(c), which has no counterpart in r. 56.01(1)).

9In Chevron, the Court of Appeal vacated the motion judge’s previous order that required the plaintiffs to provide security for costs. The plaintiffs represented 30,000 indigenous Ecuadorian villagers affected by environmental pollution, who had obtained a substantial judgment in Ecuador against Chevron Corporation. The plaintiffs then commenced an action in Ontario against Chevron Corporation and its indirect Canadian subsidiary for the recognition and enforcement of the Ecuadorian judgment.

10In Chevron, at para. 18, the Court of Appeal confirms that the requirements relating to a security for costs order are “permissive, not mandatory…. Even where the requirements of the rule are met, a motion judge has discretion to refuse to make the order”, citing Pickard v London Police Services Board, 2010 ONCA 643, 268 O.A.C. 153 (In Chambers), at para. 17. In Chevron, at para. 22, the court goes on to state as follows:

In deciding motions for security for costs, judges are obliged to first consider the specific provisions of the Rules governing those motions and then effectively to take a step back and consider the justness of the order sought in all the circumstances of the case, with the interests of justice at the forefront. While the motion judge concluded that an order for security for costs would be just, with respect, she failed to undertake the second part of that analysis. The failure to consider all the circumstances of the case and conduct a holistic analysis of the critical overarching principle on the motion before her constitutes an error in principle.

11At para. 24, the court identifies factors that Ontario courts have considered in determining the justness of a security for costs order as including “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.” At para. 25, the court also indicates that it is “neither helpful nor just to compose a static list of factors”, the correct approach being “to consider the justness of the order holistically, examining all the circumstances of the case and guided by the overriding interest of justice to determine whether it is just that the order be made.”

12At para. 26, the court sets out several of the “unique factual circumstances” that led to its conclusion that the interests of justice require that no order for security of costs be made in that case. Among other things, those circumstances included the following: (i) the plaintiffs were seeking to enforce a judgment in which they had no direct economic interest arising from pubic interest litigation; (ii) any costs award against the plaintiffs would constitute a miniscule fraction of the annual revenues of the defendants who are part of a global conglomerate; and (iii) the defendants’ course of conduct in the litigation over a 25 year period made it clear they would use all available means to resist enforcement of the Ecuadorian judgment, leading to the conclusion that the security for costs motion was a litigation tactic intended to bring the litigation to an end.

13In Novak, at para. 7, the Court of Appeal upheld a security for costs order by the same motion judge, clarifying that Chevron should not be read as “altering the established test for ordering security for costs. The established test requires a judge, after analysing the specific factors spelled out in the rules, to consider the overall justness of the order sought.” In Novak, at para. 8, the court finds that the motion judge did not err in determining a security for costs to be just in that case, noting (among other things) the absence of the unique circumstances that were present in Chevron.

14To support their request for a security for costs order in the present case, the Defendants rely on r. 56.01(1)(e), which applies where it appears that there is good reason to believe that (i) the Plaintiff’s action is frivolous and vexatious, and (ii) the Plaintiff has insufficient assets in Ontario to pay the Defendants’ costs. If the Defendants establish that both these factors are satisfied, the court may in its discretion make a security for costs order after considering the overall justness of doing so in all the circumstances.

15It is common ground between the parties that the second of the two first-stage considerations has been established in this case, that is, it appears that there is good reason to believe that the Plaintiff has insufficient assets in Ontario to pay the Defendants’ costs. Therefore, the issues to be determined on this motion are as follows:

a. Frivolous and vexatious: Does it appear that there is good reason to believe that the Plaintiff’s action is frivolous and vexatious?

b. Justness of ordering security for costs: If the answer to the first question is yes, should the court exercise its discretion to make a security for costs order, after considering the overall justness of doing so in all the circumstances?

III. Frivolous and vexatious

16Does it appear that there is good reason to believe that the Plaintiff’s action is frivolous and vexatious?

17As previously noted, the onus is on the Defendants to establish that it appears there is good reason to believe the Plaintiff’s action is frivolous and vexatious. Notably, the Defendants are not required to establish the Plaintiff’s action is in fact frivolous and vexatious. Rather, for r. 56.01(1)(e) to apply, the first stage requirement is that it appears that there is good reason to believe that the Plaintiff’s action is frivolous and vexatious.

18In Pickard, Watt, J.A., sitting as a single Court of Appeal justice on a security for costs motion under r. 61.06(1), considers the interpretation of r. 61.06(1)(a), the wording of which corresponds to r. 56.01(1)(e). As the court notes in Pickard, at para. 18, the standard imposed by the rules “does not demand that the motion judge reach a definitive conclusion, make an affirmative finding or actually determine that the appeal is frivolous and vexatious”. Instead, it “suggests a tentative conclusion of absence of merit”. At para. 19, the court went on explore the meaning of “frivolous and vexatious”, as follows:

A frivolous appeal is one readily recognizable as devoid of merit, as one having little prospect of success. The reasons may vary. A vexatious appeal is one taken to annoy or embarrass the opposite party, sometimes fuelled by the hope of financial recovery to relieve the respondent's aggravation.

19In Pickard, the court ordered security for costs, finding at the first stage of the analysis that it appeared that there was good reason to believe that the appeal was frivolous and vexatious. Among the factors the court cites are findings in the decision under appeal (amply supported by the evidence) that the claim was statute barred and disclosed no reasonable cause of action. At para. 23, the court describes one aspect of the plaintiff’s claim as being “incapable of definition, let alone proof.” At paras. 25-26, the court goes on to conclude that it was just in the circumstances of that case to require security for costs, even if the result was that the appellant would not pursue his appeal. At para. 25, the court states as follows: “To deny meritless claims is not to curtail access to justice, rather to facilitate access to justice by making room for legitimate claims.”

20The analysis in Pickard is cited with approval by Epstein, J.A. in York University v. Markicevic, 2017 ONCA 651 (In Chambers), sitting as a single justice on a security for costs motion under r. 61.06(1). In York University, at para. 32, the court adopts the definitions in Pickard for “frivolous” and “vexatious”, and at para. 33, goes on to state as follows:

Rule 61.06(1)(a) requires that [it appear there is good reason to believe] the appeal is both frivolous and vexatious. Given the way the rule is worded, the mere fact that an appeal appears to be devoid of merit, i.e. appears to be frivolous, is insufficient. Pickard suggested distinct requirements for "frivolous" and "vexatious". Likewise, Sharpe J.A. in Perron v. Perron, 2011 ONCA 776, 286 O.A.C. 178 (In Chambers), found that the appeal had "a very low prospect of success", and that it was "very unlikely" the panel hearing the appeal would intervene. However, he declined to label the appeal as appearing "frivolous and vexatious", finding that the appellant sincerely believed in the importance and merits of the appeal.

21In York University, at para. 34, the court rejects the argument that it would be open to the court to find that that an appeal was so devoid of merit to be both frivolous and vexatious. In those circumstances, the proceedings may well be frivolous, but without something more, they would not be frivolous and vexatious. At para. 35, the court states as follows:

An appeal that appears to rise even to the level of "low prospect of success" or "unlikely to succeed" is not "frivolous and vexatious". To find that an appeal is "frivolous and vexatious" there must be something that supports the conclusion that the appeal is "vexatious" in order for security for costs to be available under r. 61.06(1)(a).

22In York University, at paras. 36-37, the court goes on to find that the record did not support a finding that there appeared to be good reason to believe the appeal was vexatious, with the result that the test under r. 61.06(1)(a) was not met. Among other things, the court notes that there was no evidence that the plaintiff was “pursuing his appeal for reasons other then he believes it has merit.” Nevertheless, the court goes on to make a security for costs order, relying on r. 61.06(1)(c). Under that provision (which has no counterpart in r. 56.01(1)), the Court of Appeal may make such security for costs order as is just where it appears that “for other good reason, security for costs should be ordered.” In York University, the court determines it is just to so do in all the circumstances, including the trial judge’s findings relating to the plaintiff’s fraudulent conduct that the plaintiff did not challenge on appeal (at para. 68).

23In the matter before me, the Plaintiff argues that the Defendants’ motion for security for costs fails at the first stage of the analysis. According to the Plaintiff, the Defendants have not established there appears to be good reason to believe the Plaintiff’s action is frivolous and vexatious, as provided for in that r. 56.01(1)(e).

24Based on the Defendants’ submissions, it is clear they are relying on r. 56.01(1)(e) as the basis for their security for costs motion. It is common ground that the circumstances set out in the other clauses of r. 56.01(1) are not present. Unlike in York University, there is no “basket” clause equivalent to r. 61.06(1)(c) upon which the Defendants may rely.

25To support their position that it appears there is good reason to believe the Plaintiff’s action is frivolous and vexatious, the Defendants rely, among other things, on the fact that in the Statement of Claim, the Plaintiff alleges a fiduciary relationship between the Defendants and the Plaintiff without pleading the factors necessary to create that relationship. The Defendants say that the Plaintiff is effectively asking that the Defendants be treated as guarantors for any loss the Plaintiff suffered without providing a legal basis for doing so. In support of their position, Defendants’ counsel (in his factum and oral submissions) quotes at length from the transcript of the Plaintiff’s cross-examination on his affidavit, in which the Plaintiff states repeatedly that he relied on the Defendants’ representations as to value of the mortgaged properties and the amounts to be loaned under the mortgage. In his evidence, the Plaintiff acknowledges that appraisals had been provided for most of the mortgaged properties, but he continues to insist that he relied on the Defendants’ advice rather than the opinion of the appraisers or advice from counsel who represented him at that time. The Defendants argue that there was no basis for taking that position, the convenient result of which would be that blame for the Plaintiff’s loss would fall solely on the Defendants.

26To support the Defendants’ position as to action’s appearing to be frivolous and vexatious, the Defendants also rely on the Plaintiff’s delay in bringing the action, which they say prejudices their ability to respond to the action. The Defendants again cite the Plaintiff’s evidence on cross-examination, in which the Plaintiff conveniently blames his lawyer for failing to bring an action after the Plaintiff originally brought his concerns to his lawyer’s attention in about 2009. In that regard, Defendants’ counsel acknowledges that at this stage, he is not relying on the limitation defence raised in his pleadings, given (among other things) the Plaintiff’s legal position that the applicable limitation period is ten years, not two years. On that point, the Plaintiff’s position is that he brought his action in time whether the limitation period was two years or ten years, since it was commenced within two years once he was no longer receiving any return from the mortgages. In any case, it is common ground between the parties that the limitation issue would be more appropriately addressed at trial or on a summary judgment motion.

27Having considered counsel’s submissions, I have concluded that the Defendants have not established that it appears that there is good reason to believe that the Plaintiff’s action is frivolous and vexatious, as provided for in r. 56.01(1)(e). Therefore, the Defendants’ motion for security for costs fails at the first stage of the analysis.

28In particular, I am not satisfied that there appears to be good reason to believe that the Plaintiff’s action is “one readily recognizable as devoid of merit, as one having little prospect of success”, adopting the interpretation of “frivolous” set out in Pickard, at para. 19. During oral submissions, counsel raised the question of whether a higher standard would apply when assessing the merits of the action, that is, whether the action has a “good chance of success”. However, as indicated above, the case law indicates that a higher standard may apply at the second stage of the analysis, when considering the justness of making a security for costs order in circumstances in which the plaintiff does not have sufficient assets to meet a costs order but is not able to establish impecuniosity (Zeitoun, at para. 50; Coastline, at para. 7). When considering whether an action is frivolous, a lower standard (plainly devoid of merit) clearly applies.

29While the Statement of Claim could have been more fulsome in delineating the basis for the Defendants’ duty to the Plaintiff, I do not agree that the claim is one that can be said at this stage to be devoid of merit on its face. (I am putting aside consideration of the possible limitation defence, which the parties agree should not be addressed on this motion.) As Plaintiff’s counsel noted during his submissions, the action is still at an early, pre-discovery stage. As noted in Coastline, at subparagraph 7(vi), the analysis on a security for costs motion is more limited than on summary judgment motion, being based “primarily on the pleadings”. While the court also has “recourse … to evidence filed on the motion”, the additional evidence the Defendants rely on in this case gives rise to credibility issues that I do not consider it appropriate to resolve in the context of a security for costs motion (see Coastline, at subpara. 7(vii)).

30As well, consistent with the conclusions in York University and Peron, I am not persuaded that there are additional factors (beyond the action’s alleged lack of merit) that would justify the conclusion that it appears there is good reason to believe the action is both frivolous and vexatious. As in York University, there is no evidence that the Plaintiff is pursuing the action for reasons other than his belief in its merits, however misguided the Defendants may consider that belief to be. As well, while the Plaintiff’s delay in bringing the action would be a relevant factor in determining whether the action is vexatious, I do not consider the delay to be a determining factor in this case. The Plaintiff has provided an explanation for his delay. I am not persuaded it should be rejected at this stage.

31Accordingly, I have concluded that it does not appear that there is good reason to believe that the Plaintiff’s action is frivolous and vexatious, one of the two requirements that must be present for r. 56.01(1)(e) to apply. The Defendants motion for security for costs therefore fails at the first stage of the analysis. As a result, it is unnecessary to move to the second stage of the analysis to consider the overall justness of making a security for costs order.

IV. Disposition and costs

32For the foregoing reasons, the Defendants’ motion for security for costs is dismissed.

33My expectation is that the parties will settle the issue of costs between them. If they do so, I request that counsel promptly notify the trial coordinator.

34If the parties are unable to agree on costs, the Plaintiff may serve and file brief written submissions (not to exceed three pages) together with a costs outline within 21 days. The Defendants may respond by brief written submissions within 14 days. If no submissions are received within the specified timeframe, the parties will be deemed to have settled costs.

The Honourable Mr. Justice R. A. Lococo